INVESTOR INFORMATION
2013 Cash Dividend Data
Quarter
1
2
3
4
Record Date
April 9, 2013
July 9, 2013
October 8, 2013
December 10, 2013
Payment Date
April 18, 2013
July 18, 2013
October 17, 2013
December 19, 2013
Share Amount
$0.14
$0.15
$0.15
$0.16
2014 Anticipated Dividend Dates 1
2014 Anticipated Earnings 1
Quarter
1
2
3
4
Record Date
April 8, 2014
July 8, 2014
October 7, 2014
December 9, 2014
Payment Date
April 17, 2014
July 17, 2014
October 16, 2014
December 18, 2014
Quarter
1
2
3
4
Announcement Date
April 17, 2014
July 24, 2014
October 23, 2014
January 22, 2015
Common Stock Price
2013
$30.87
$15.19
$29.79
2012
$16.17
$12.43
$14.71
2011
$15.94
$9.09
$12.03
2010
$18.88
$13.00
$15.11
2009
$19.36
$11.92
$13.72
Ten-year Dividend History
Cash Dividends
Declared 2
$0.36
$0.40
$0.45
$0.50
$0.52
$0.52
$0.52
$0.52
$0.53
$0.60
Stock
Dividends/Splits
5 for 4 stock split
5 for 4 stock split
3 for 2 stock split
None
None
None
None
None
None
None
Distribution Date of
Stock Dividends/Splits
May 20, 2004
May 26, 2005
December 14, 2006
None
None
None
None
None
None
None
High close
Low close
Close
Year
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
__________
1 Subject to approval by the Board of Directors
2 Restated for stock dividends and stock splits
Stock Listing
Glacier Bancorp, Inc.'s common stock trades on the
NASDAQ Global Select Market under the symbol
GBCI. There are approximately 1,789 shareholders
of record of Glacier Bancorp, Inc. stock.
Stock Transfer Agent
American Stock Transfer & Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
(800) 937-5449
www.amstock.com
Automatic Dividend Reinvestment Plan
Shareholders may reinvest their dividends and make
additional cash purchases of common stock by
participating in the Company's dividend
reinvestment plan. Call American Stock Transfer
& Trust Company at (877) 390-3076 for more
information and to request a prospectus.
Corporate Headquarters
49 Commons Loop
Kalispell, MT 59901
(406) 756-4200
www.glacierbancorp.com
Independent Registered Public Accountants
BKD, LLP
1700 Lincoln Street Suite 1400
Denver, CO 80203
Legal Counsel
Moore, Cockrell, Goicoechea & Axelberg, P.C.
145 Commons Loop, Suite 200
Kalispell, MT 59901
Graham & Dunn PC
Pier 70, Suite 300
2801 Alaskan Way
Seattle, WA 98121
Dear Shareholder,
LETTER TO SHAREHOLDERS
2013 was an exceptional year for your Company as Glacier Bancorp recorded all-time record earnings of $96 million, a
27 percent increase over the prior year. For the year we generated $1.31 in diluted earnings per share, or 25 percent
above the $1.05 earned in 2012. Last year we increased our cash dividend twice, resulting in a 14 percent increase
over 2012. The dividend has now been increased 36 times, and 115 consecutive quarterly dividends have been paid to
our shareholders. When we became a public company thirty years ago, one goal we laid out for ourselves was to strive
to grow the dividend by 10 percent annually. Although there were some years when that was not possible, I am proud
to report that over this thirty year period we have produced an annual dividend growth rate of 12.9 percent for our
shareholders. Even more impressive was the movement in the price of Glacier Bancorp’s stock which gained 103
percent last year, by far one of its best performances since we have been a public company and one of the top
performances among all bank stocks in the country in 2013. Adding the dividends paid out last year, the total return
delivered to our shareholders was 108 percent.
For sixteen years I have had the good fortune of writing this letter communicating not only our successes, but also our
disappointments, the things we got right as well as our missteps. It’s my job to clearly lay out where we’ve been and
where we’re going. This past year, even though the operating environment remained challenging, I thought our banks
and staff did a stellar job of taking advantage of the opportunities they were afforded. As they say: it’s not the cards
you’re dealt, it’s how you play them. This year our people made good decisions, showed their resiliency and delivered
a solid year of performance. In addition, far more things went in our favor, something we couldn’t have said three or
four years ago. Some of these things we expected and planned for, others our people made happen. Their commitment
to this Company and its success has been unwavering through the good times and bad, and thanks to their hard work
and dedication, 2013 will be a year we will not soon forget. Collectively, they should be very proud of all they
accomplished.
2013 - A SPECIAL YEAR FOR GLACIER BANCORP
2013 was one more year in a string of years when interest rates have remained incredibly low, negatively impacting
both our margins and yields. It was a year dominated by staggering amounts of new compliance and regulatory rules
that continue to add to operating costs. In addition, a number of our traditional fee revenue sources saw declines
throughout the year. Nevertheless, through it all we found ways to produce solid results that would rival some of our
best years of the past.
In 2012 our earnings were rocked hard by a sizable increase in premium amortization expense to our investment
portfolio due to refinancing of mortgages in our mortgage-backed securities portfolio. Entering 2013 we were
convinced that mortgage refinance volume was due to slow down significantly after two very strong years. Although
that meant lower mortgage origination fee income, it also meant that accompanying this decline would be a noticeable
reduction in premium amortization expense. In fact, we calculated that the earnings increase from lower premium
amortization expense would far exceed the loss of fee revenue. We got this one right. Refinance volume dropped
dramatically, especially in the second half of last year and along with it premium amortization expense. Our mortgage
origination fee income did see a sizable decrease during the year, but it was more than offset by the reduction in
premium amortization expense. As a result, we benefitted from a noticeable increase to the yield on our investment
portfolio, especially in the second half of the year. In addition, at the current run-rate, lower premium amortization
should continue to more than offset declines in mortgage origination fee income in 2014.
The staff at the banks and the holding company did a terrific job of lowering our interest expense last year. We
lowered our cost of funds by 19 percent from the prior year and that played a big role in improving the overall net
interest income which experienced its biggest increase in the past four years. We were not only successful in shifting
more of our higher cost deposits into non-interest bearing accounts, but once again had another exceptional year of
generating new low-cost transaction accounts.
We recognize that all the hard work and expense that go into attracting these transaction accounts may not necessarily
pay-off in the short term, but our motto is “We want them all” because when interest rates do start to rise, as they
inevitably will, the true value of our franchise will reside in this base of non-interest bearing accounts.
i
We hoped at the beginning of the year that lower credit costs would once again drive earnings higher. We were not
disappointed as credit expenses decreased for the third straight year. The benefit came from a lower loan loss
provision and reduced expenses in Other Real Estate Owned (“OREO”). Combined, the two were 65 percent lower
than last year’s totals. Our loan loss provision was down again this past year primarily due to lower net charge offs.
We set a goal at the beginning of the year to strive for net charge offs not to exceed one half of one percent of total
loans, a level far below what we charged off each of the past three years. We not only met this goal, but the banks did
a terrific job, substantially surpassing what we hoped to achieve in this area. Net charge offs for the year were only 18
basis points. Overall, we had a great year controlling our credit costs. Probably the only asset quality target we set for
ourselves at the beginning of the year that wasn’t attained was the reduction of our non-performing assets below $100
million. Unfortunately, we didn’t quite get it done and came up $9 million short of our goal.
Certainly the biggest surprise of the year and one that gave our earnings a major boost was the 8 percent increase in
organic loan growth. After five consecutive years of declining loan balances, we were determined to turn that trend
around and post a positive number in 2013. However, we did not expect to generate over four times our initial budget
estimate of 2 percent loan growth for the year. In addition, by including the two banks we acquired last year, loans
grew by 20 percent. This sizeable increase in higher-yielding earning assets helped to not only turn our net interest
margin around, but it also greatly reduced our reliance on our investment portfolio to generate revenue growth.
In May and July, First State Bank of Wheatland, Wyoming and North Cascades Bank of Chelan, Washington,
respectively, were the first acquisitions completed since 2009, and we feel extremely fortunate to partner with these
two highly respected organizations. Combined they added $631 million in assets, $387 million in loans, $550 million
in deposits and a talented group of bankers to our Company. Our approach to mergers and acquisitions over the past
twenty years has always centered around one thing: can we get quality people to join our Company. We believe that
acquiring talent trumps all the other benefits of doing a deal and after more than twenty successful acquisitions; we are
more convinced than ever that the people make the difference. In the case of First State Bank and North Cascades
Bank, we definitely added some very talented people. But there were other benefits aside from the quality workforce.
The new banks further diversified our Company geographically. In Wyoming, First State Bank gained us access to a
whole new section of the state with three offices located in southeastern Wyoming. North Cascades Bank is our first
significant presence in the state of Washington and gives us a branch network that covers most of north central
Washington with nine offices. They further diversified our Company economically and allowed us to change the mix
of our loan portfolio away from one with a heavy dependence on real estate to one that offers more of a link to
agriculture. As an added bonus, North Cascades Bank brought further diversification to our loan portfolio by bringing
a different type of agricultural lending, one centered around the fruit growing business which is the dominant industry
in that part of the state. Already in the second half of last year both banks brought significant amounts of new business
to our Company and we are excited that 2014 will hold more of the same. We are thrilled with both of our new
additions.
HEADWINDS WE FACED LAST YEAR
Although we certainly had a number of things provide a nice tailwind last year to both our earnings and our overall
performance, nothing is ever perfect and last year was no exception. At a time when all banks, especially community
banks like ourselves, need regulatory relief we got just the opposite. Last year was probably the toughest year we have
ever faced for new regulations. In 2013 alone there were 16,000 pages of new regulations written which represented a
22 percent increase over the prior year. This is above and beyond all the rules and regulations in effect prior to last
year. Unfortunately, it’s not just the sheer volume of new rules, but the complexity of them that is so troublesome. It
is difficult to quantify how many millions of dollars we spend each year on additional staff, new systems, internal and
external audits, ongoing training for new and existing compliance laws, as well as all the measuring and monitoring
required to stay compliant. Suffice it to say the dollar amount is huge. What this industry needs is a one or two year
moratorium on new rules so that banks can catch their breath and try to get their arms around this tsunami of regulatory
burden that has swamped them the past three years. Regrettably, I realize the likelihood of that occurring is probably
next to nil, with still more regulations to come under the Dodd-Frank Act. So without much relief in sight, we will
continue to do whatever is necessary to assure we maintain total compliance with all mandates, rules and regulations by
continuing to provide whatever resources are necessary in the form of people, education and programs. We have a
great team of very competent compliance experts throughout the Company. We made changes to the structure of this
department over the past two years that I believe have already paid dividends. We are now more efficient, better
organized and have delegated certain responsibilities to individuals who possess specific compliance skills and
ii
training. While none of this will reduce the overall regulatory burden, it will help assure our compliance and control
our costs.
During the last five years we have spent millions of dollars on new computer architecture, hired some of the best
engineers and consultants available, purchased sophisticated security equipment and systems, and provided outreach
training for our customer base in the fight to mitigate cyber fraud. I’m convinced all of these efforts and resources
have deterred most of the attempts to defraud both the Company and our customers. However, in spite of the time and
money that have been allocated to confront this threat, these cyber attacks are becoming more innovative and prevalent
as these criminals search out weaknesses in the financial and payment systems. I wish I could report that with all the
dollars we have invested that we have entirely eliminated our losses but that has not been the case. As financial
institutions have locked down their systems and infrastructure making them extremely difficult to penetrate, the bad
guys have only moved on. They discovered a new path to wreak havoc through retailers and individual consumers
who have not had the same level of regulatory oversight or chose not to expend the necessary resources to safeguard
their systems.
Our losses from cyber fraud were up dramatically in 2013, not because our systems were compromised, but other
businesses with access to the payment system did not adequately maintain and protect their own security.
Unfortunately, in the end these failures are paid for and absorbed by the banking industry, ourselves included. As new
technologies in the form of mobile banking, social media and cloud computing continue to place more capability and
information in the hands of consumers, this problem is only going to become more prolific. If one of our customers
lose money as a result of a breach or hack to one of our systems, we should be held accountable. However, it is not fair
to us or our shareholders to have to reach into our pockets and pay for the incompetence of others. This has become a
major problem for our industry and these cyber criminals are not going to stop. Unless there is more cooperation
among the government, retailers and banks, this problem will cause even more financial damage in the future. We paid
our customers whose identity was stolen or their account was compromised a lot of money last year. In most cases it
was not their fault or ours. It’s time we put the liability and responsibility for these losses on those businesses whose
systems failed or were not adequately protected. We can’t continue to always expect the banks to make everyone
whole.
With the addition of two banks and thousands of new customers, we recognized the need to further expand our
computing capacity in order to effectively support the increased volumes to our systems both now and in the future.
This came in the form of four major initiatives last year: a new main frame computer to handle our main platform
system, upgraded servers to run the growing number of ancillary programs, an entirely new e-mail system, and new
expanded bandwidth circuits throughout the organization. It’s been my experience over thirty-six years that no matter
how much time and planning goes into these projects, there are always glitches, unforeseen problems and service
lapses. Unfortunately, last year we were impacted by some of these issues as we carried out one of the most aggressive
infrastructure upgrades in our history. Although we are still working through some clean up issues, we now have the
capability to grow significantly and add more banks to our asset base with the upgrades and capacity increases we
implemented this past year. As we look for additional acquisition candidates we are in great shape knowing we have
the infrastructure in place and have already absorbed some of the system costs to bring them on to our data center.
WHAT WE HOPE TO ACCOMPLISH IN 2014
There is no doubt we begin 2014 with more momentum than we’ve had in any year since 2006. With the addition of
$665 million in higher-yielding loans last year, our balance sheet is now less reliant on investment securities and more
resilient to changes in interest rate. We have fewer borrowings and high-cost deposits and more core transaction
accounts funding this higher loan balance. Our capital levels are as strong as ever and afford us the opportunity to add
significantly to our asset base. Our net interest margin begins the year almost one percent higher than at this same time
last year and should be a significant catalyst for greater income, especially if we continue to grow our base of earning
assets. Nevertheless, if we expect to accomplish many of the goals that we have laid out for this year, it’s going to take
a great deal of hard work and commitment on the part of our entire staff, an economy that doesn’t back track, a
regulatory environment that doesn’t get even more burdensome than it already is, and both businesses and consumers
to want and need to borrow money.
The ability to grow the loan portfolio will be pivotal if we hope to achieve the level of success expected of ourselves
this year. Our goal for the year is to generate a 5 percent increase in loans excluding any potential acquisitions that
iii
may occur. In this brutally competitive environment where banks are waging hand to hand combat for loans this is
going to be a real challenge. Nonetheless, we think it’s doable and feel we have two things working for us again this
year. One, the economy in the six states we currently operate within continues to be some of the best markets in the
country. Unemployment is below the national average in each of these six states. Tourism continues to experience
phenomenal growth as we attract more people each year to this pristine and beautiful part of the country. Overall, we
really like how we have positioned ourselves in this Rocky Mountain footprint and continue to see more lending
opportunities as a result of a strong economy. Two, we believe the private sector deleveraging is over and loan
demand is posed to pick up. It appears we are carrying far more loan volume into the new year than any year since the
“Great Recession.” In addition, the reorganization of our operating model in 2012 allowed more time for our bank
presidents, senior credit officers and other loan officers to do what they are good at and enjoy and that is generating
new business.
Removing a significant portion of the regulatory burden from the banks has now freed up more time for them to
strengthen their existing relationships and seek out new customers. There have been numerous occasions this past year
when having one of our bank presidents involved with a loan transaction helped get the deal done. Last year we set the
mold for what we hope will be another strong year of loan growth. It is the single most important goal we have laid out
for ourselves this year. It will be very difficult to reach our earnings potential if we do not find a way to add at least 5
percent growth to our loan portfolio.
An exciting project we have been working diligently on for the past two years that has the potential to change the way
we do business is our new Synergy initiative. This involves all aspects of our enterprise as we move to take the
Company paperless. Once fully implemented, it will help us manage content and improve our business processes. Our
initial focus as we begin the rollout this year will be our major business lines of loans and deposits. This initiative will
continue into 2015 and ultimately include tools and efficiencies such as eSign, document tracking and automated
workflow. While the main intent is to move all of our documents to an electronic format, we clearly plan on taking
advantage of all the added opportunities it affords us to make our front line and back office far more efficient.
Besides Synergy, this year we will have put in place a new loan origination system for our banks’ real estate loan
departments. Once the system is completed, we should gain improved efficiency and productivity throughout our real
estate lending organization by automating many of the functions currently done manually. In addition, with all the
emphasis currently placed on mortgage compliance, this new system will standardize our processes, and make it easier
to adapt to the constant wave of new compliance rules and regulations.
There is no doubt that banking in the future will be something you do, not some place you go. Knowing this, we
continue to add to our suite of online and mobile products and services. Like all other banks in the country, we see a
widespread shift in customer preferences as transactions are increasingly being performed on smart phones, iPads and
online instead of the traditional branch. We expect this trend to continue and want to assure our electronic banking
experience is secure, dependable and provides our customers with state-of-the-art access to their accounts. Last year
we rolled out exciting new products such as Remote Deposit Anywhere, and developed new apps for our smart phones
and iPads. This year we are working on Picture Pay, person-to-person transfers and enhanced bill-pay. In addition, we
spend a great deal of time and money educating our electronic banking customers on how to best use these products
and services so they can take full advantage of these tools.
It appears merger and acquisition activity is showing promise after five years of lackluster volume. So far in early
2014 the numbers suggest this could be the year we see a breakout in M&A. Sellers are reviewing their options and
considering potential strategic partnerships for a variety of reasons: age of management, regulatory and compliance
burden, and a challenging operating environment to name a few. We expect to be part of these conversations as we
look for banks with solid management teams, a strong core deposit base, attractive market demographics and sound
credit quality. We believe our strong currency, healthy capital and operating model make us a prime candidate for
consideration by potential sellers.
It makes sense to continue to diversify our franchise geographically with a focus on enhancing our presence in
Washington, Utah and Colorado. Thus, we will look intently for opportunities in those states. In addition, we would
like to add to our market share in a couple of key regions where we currently operate. We believe we have the capacity
to effectively complete two transactions a year at the approximate size of the two we closed in 2013. Bank targets in
iv
the asset range of between $200 and $500 million tend to best fit our needs and provide the greatest number of
opportunities in our six state footprint. M&A will continue to be a core line of business for us as it has been the past
twenty years. We dedicated substantial time and effort the past two years working on acquisitions and were rewarded
with the addition of two quality banks to the organization. Our plan this year is to dedicate the necessary resources and
continue to reach out to perspective sellers, hoping to attract other franchises to Glacier Bancorp.
After three years of declining credit costs, we are at an inflection point and do not expect much further benefit this
year. Much of our earnings growth the past few years has been driven by credit leverage which for the most part is
now behind us. And although we don’t anticipate these costs to increase this year, our focus must transition to revenue
growth if we hope to continue to increase our earnings stream. With that said, we still have a couple of positives going
for us as we enter the new year. Our loan loss reserve remains at an appropriate and conservative level, charge offs are
back to historical low levels, and as real estate values continue to improve we expect further reduction in OREO
expense this year. We have established a goal to further reduce our non-performing assets to less than $90 million.
With hard work and a little luck that should be attainable.
Obviously duplicating 2013’s performance will be no easy task and the expectation of our stock price doubling again
this year is unlikely. Yet, “knock on wood” we’re confident that 2014 will be another profitable and rewarding year
for our shareholders. We know that mortgage origination fee income is going to be less; we know the regulatory
burden to operate this Company is going to be greater and we suspect that interest rates are going to remain at historical
lows. On the other hand, with lower mortgage origination volume comes lower operating costs, our new banks will be
part of our Company for all of 2014, we have 20 percent more loans on our balance sheet earning better yields than the
securities they replaced, a very strong loan loss reserve enabling us to reduce our loan loss provision and, although we
will not see another 100 basis point rise in our net interest margin, we expect further incremental improvement this
year. All told we believe we can produce another record year of earnings and will strive to continue to safely grow
your Company in a manner and spirit of doing so in the best interest of the customers, communities and shareholders
we serve.
AN END OF AN ERA
At our upcoming annual shareholder meeting in April, Everit A. Sliter, who has been a part of this Company for forty-
one years, and L. Peter Larson, who has been with us for twenty-nine years, will be retiring from Glacier Bancorp’s
board of directors. It’s hard to put into words the impact these two men have had and the tremendous contributions
they have made to this Company over their combined seventy years of service, but suffice it to say it’s been
immeasurable. Everit and Pete have been the moral compass that guided us in times that had its challenges as well as
the many successes we’ve enjoyed over the years. As shareholders you could not have asked for two better stewards to
guard and protect the hard-earned dollars you entrusted with us. It was a responsibility they took very seriously. For
all of us who have had the good fortune of knowing and working with Everit and Pete their guidance will be missed,
their conscientiousness will be difficult to replace, and we will not find two individuals with more integrity and
character. They have provided unwavering support to management over the years and generously given their time
whenever needed. We have truly been blessed by their long-term association with our Company. Thank you, Everit
and Pete for your endless contributions. We wish you the very best.
You are only as good as your people and we have a great caring staff of people that can be counted on every day to
deliver results. As shareholders I’m sure you agree, what our people produced this past year was extraordinary. I
know they are committed to doing everything in their power to improve upon this performance and make 2014 an even
better and more rewarding year for you our shareholders. All 1,900 of us who make up Glacier Bancorp and its
thirteen bank divisions want to thank you for your support this past year and hope that we in some small way helped
you achieve your investment goals.
Sincerely,
Michael J. Blodnick
President and Chief Executive Officer
v
FINANCIAL HIGHLIGHTS
At or for the Years ended December 31,
2013
2012
2011
2010
2009
Compounded Annual
Growth Rate
1-Year
2013/2012
5-Year
2013/2009
1.8 %
(12.5)%
20.4 %
(0.4)%
24.0 %
4.0 %
(15.7)%
7.4 %
6.9 %
3.4 %
5.1 %
3.9 %
(19.5)%
7.7 %
(68.0)%
1.7 %
1.0 %
32.8 %
57.3 %
26.7 %
24.8 %
24.8 %
13.2 %
7.3 %
28.2 %
(0.3)%
11.2 %
(2.7)%
11.3 %
19.9 %
(21.9)%
7.3 %
3.2 %
—%
(2.7)%
(20.5)%
2.0 %
(24.7)%
8.8 %
6.0 %
4.8 %
(2.2)%
7.8 %
1.8 %
1.9 %
2.9 %
Equity as a percentage of total assets
12.22 %
11.63 %
11.83 %
12.40 %
11.08 %
(Dollars in thousands, except per share data)
Selected Statement of Financial
Condition Information
Total assets
Investment securities, available-for-sale
Loans receivable, net
Allowance for loan and lease losses
Goodwill and intangibles
Deposits
Federal Home Loan Bank advances
Securities sold under agreements to repurchase
and other borrowed funds
Stockholders’ equity
Equity per share
Summary Statements of Operations
Interest income
Interest expense
Net interest income
Provision for loan losses
Non-interest income
Non-interest expense 1
Income before income taxes 1
Income tax expense 1
Net income 1
Basic earnings per share 1
Diluted earnings per share 1
Dividends declared per share
Selected Ratios and Other Data
Return on average assets 1
Return on average equity 1
Dividend payout ratio 1
Average equity to average asset ratio
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Tier 1 capital (to average assets)
Net interest margin on average earning
assets (tax-equivalent)
Efficiency ratio 2
Allowance for loan and lease losses as a
percent of loans
Allowance for loan and lease losses as a
percent of nonperforming loans
Non-performing assets as a percentage of
subsidiary assets
Loans originated and acquired
$
Number of full time equivalent employees
Number of locations
__________
1
$
7,884,350
3,222,829
3,932,487
(130,351)
139,218
5,579,967
840,182
321,781
963,250
12.95
7,747,440
3,683,005
3,266,571
(130,854)
112,274
5,364,461
997,013
299,540
900,949
12.52
7,187,906
3,126,743
3,328,619
(137,516)
114,384
4,821,213
1,069,046
268,638
850,227
11.82
6,759,287
2,395,847
3,612,182
(137,107)
157,016
4,521,902
965,141
269,408
838,204
11.66
6,191,795
1,443,817
3,920,988
(142,927)
160,196
4,100,152
790,367
451,251
685,890
11.13
$
263,576
28,758
234,818
6,887
93,047
195,317
125,661
30,017
95,644
1.31
1.31
0.60
1.23 %
10.22 %
45.80 %
11.99 %
18.97 %
17.70 %
12.11 %
3.48 %
54.51 %
253,757
35,714
218,043
21,525
91,496
193,421
94,593
19,077
75,516
1.05
1.05
0.53
1.01 %
8.54 %
50.48 %
11.84 %
20.09 %
18.82 %
11.31 %
3.37 %
54.02 %
280,109
44,494
235,615
64,500
78,199
191,965
57,349
7,265
50,084
0.70
0.70
0.52
0.72 %
5.78 %
74.29 %
12.39 %
20.27 %
18.99 %
11.81 %
3.89 %
51.34 %
288,402
53,634
234,768
84,693
87,546
187,948
49,673
7,343
42,330
0.61
0.61
0.52
0.67 %
5.18 %
85.25 %
12.96 %
19.51 %
18.24 %
12.71 %
4.21 %
51.35 %
302,494
57,167
245,327
124,618
86,474
168,818
38,365
3,991
34,374
0.56
0.56
0.52
0.60 %
4.97 %
92.86 %
12.16 %
15.29 %
14.02 %
11.20 %
4.82 %
47.47 %
3.21 %
3.85 %
3.97 %
3.66 %
3.52 %
158 %
133 %
102 %
70 %
70 %
1.39 %
1.87 %
2.92 %
3.91 %
4.13 %
2,478
1,837
118
2,238
1,677
108
1,650
1,653
106
1,935
1,674
105
2,431
1,643
106
Excludes 2011 goodwill impairment charge of $32.6 million ($40.2 million pre-tax). For additional information on the goodwill impairment charge see the Non-GAAP Financial Measures section
in "Item 6. Selected Financial Data."
2
Non-interest expense before other real estate owned 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, other real estate owned income, and non-recurring income items.
vi 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, 2013 or
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from __________ to __________
Commission file number 000-18911
______________________________________________________________________
GLACIER BANCORP, INC.
(Exact name of registrant as specified in its charter)
______________________________________________________________________
MONTANA
(State or other jurisdiction of
incorporation or organization)
49 Commons Loop, Kalispell, Montana
(Address of principal executive offices)
81-0519541
(IRS Employer
Identification No.)
59901
(Zip Code)
(406) 756-4200
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value per share
(Title of each class)
NASDAQ Global Select Market
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: NONE
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 and posted on its corporate Website, if any, every Interactive
No
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months.
Yes
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, or a smaller reporting
company.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
No
The aggregate market value of the voting common equity held by non-affiliates of the Registrant at June 30, 2013 (the last business day
of the most recent second quarter), was $1,582,440,108 (based on the average bid and ask price as quoted on the NASDAQ Global Select
Market at the close of business on that date).
The number of shares of Registrant’s common stock outstanding on February 13, 2014 was 74,426,962. No preferred shares are issued
or outstanding.
Document Incorporated by Reference
Portions of the 2014 Annual Meeting Proxy Statement dated March 24, 2014 are incorporated by reference into Part III of this
Form 10-K.
1
TABLE OF CONTENTS
PART I
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
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
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosure about Market Risk
Financial Statements and Supplementary Data
Reports of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 15
Exhibits, Financial Statement Schedules
SIGNATURES
Page
3
9
14
15
15
15
16
18
20
53
55
56
59
60
61
62
63
65
108
108
108
109
109
109
109
109
110
111
2
Item 1. Business
PART I
Glacier Bancorp, Inc. (“Company”), headquartered in Kalispell, Montana, is a Montana corporation incorporated in 2004 as a successor
corporation to the Delaware corporation originally incorporated in 1990. The Company is a publicly-traded company and its common
stock trades on the NASDAQ Global Select Market under the symbol GBCI. The Company provides commercial banking services from
118 locations in Montana, Idaho, Wyoming, Colorado, Utah and Washington through thirteen divisions of its wholly-owned bank
subsidiary, Glacier Bank (“Bank”). The Company offers a wide range of banking products and services, including transaction and savings
deposits, real estate, commercial, agriculture, and consumer loans and mortgage origination services. The Company serves individuals,
small to medium-sized businesses, community organizations and public entities. For information regarding the Company’s lending,
investment and funding activities, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Subsidiaries
The Company includes the parent holding company and nine wholly-owned subsidiaries which consist of the Bank and eight non-bank
subsidiaries. The eight non-bank subsidiaries include GBCI Other Real Estate Owned (“GORE”) and seven trust subsidiaries. The
Company formed GORE to isolate certain bank foreclosed properties for legal protection and administrative purposes and the remaining
properties are currently held for sale. GORE is included in the Bank operating segment due to its insignificant activity. The Company
owns the following trust subsidiaries, each of which issued trust preferred securities as Tier 1 capital instruments: Glacier Capital Trust
II, Glacier Capital Trust III, Glacier Capital Trust IV, Citizens (ID) Statutory Trust I, Bank of the San Juans Bancorporation Trust I, First
Company Statutory Trust 2001 and First Company Statutory Trust 2003. The trust subsidiaries are not included in the Company’s
consolidated financial statements. As of December 31, 2013, none of the Company’s subsidiaries were engaged in any operations in
foreign countries.
On April 30, 2012, the Company combined its multiple bank subsidiaries into a single bank subsidiary, Glacier Bank. Subsequently, the
bank subsidiaries operate as separate bank divisions within the Bank, using the same names and management teams as before the
combination. Prior to the combination of the bank subsidiaries, the Company considered each of its bank subsidiaries, GORE, and the
parent holding company to be its operating segments. Subsequent to the combination of the bank subsidiaries, the Company considered
the Bank to be its sole operating segment.
The Company provides full service brokerage services (selling products such as stocks, bonds, mutual funds, limited partnerships, annuities
and other insurance products) through Raymond James Financial Services, a non-affiliated company. The Company shares in the
commissions generated, without devoting significant employee time to this portion of the business.
Recent Acquisitions
The Company’s strategy is to profitably grow its business through internal growth and selective acquisitions. The Company continues
to look for profitable expansion opportunities in existing markets and new markets in the Rocky Mountain states. During the last five
years, the Company has completed the following acquisitions:
• North Cascades Bancshares, Inc. (“NCBI”) and its subsidiary, North Cascades National Bank, on July 31, 2013
• Wheatland Bankshares, Inc. (“Wheatland”) and its subsidiary, First State Bank, on May 31, 2013
•
First Company and its subsidiary, First Bank of Wyoming, formerly First National Bank & Trust, on October 2, 2009
Market Area
The Company has 118 locations, of which 8 are loan or administration offices, in 41 counties within 6 states including Montana, Idaho,
Wyoming, Colorado, Utah, and Washington. The Company has 55 locations in Montana, 27 locations in Idaho, 17 locations in Wyoming,
3 locations in Colorado, 4 locations in Utah and 12 locations in Washington.
The market area’s economic base primarily focuses on tourism, energy, construction, mining, manufacturing, agriculture, service industry,
and health care. The tourism industry is highly influenced by two national parks, several ski resorts, significant lakes, and rural scenic
areas.
Competition
Based on the Federal Deposit Insurance Corporation (“FDIC”) summary of deposits survey as of June 30, 2013, the Company has
approximately 23 percent of the total FDIC insured deposits in the 13 counties that it services in Montana. In Idaho, the Company has
approximately 6 percent of the deposits in the 9 counties that it services. In Wyoming, the Company has 26 percent of the deposits in the
8 counties it services. In Colorado, the Company has 10 percent of the deposits in the 2 counties it services. In Utah, the Company has
12 percent of the deposits in the 3 counties it services. In Washington, the Company has 4 percent of the deposits in the 6 counties it
services.
3
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 the Company has offices.
Non-depository financial service institutions, primarily in the securities and insurance industries, have also become competitors for retail
savings and investment funds. 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 to borrowers and brokers.
Employees
As of December 31, 2013, the Company employed 1,919 persons, 1,706 of whom were employed full time, none of whom were represented
by a collective bargaining group. The Company provides its employees with a comprehensive benefit program, including health and
dental insurance, life and accident insurance, long-term disability coverage, sick leave, 401(k) plan, profit sharing plan and a stock-based
compensation plan. The Company considers its employee relations to be excellent. See Note 16 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 full 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, 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 2014
Annual Meeting Proxy Statement and is incorporated herein by reference.
Website Access
Copies of the Company’s 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 the Company’s website (www.glacierbancorp.com) as soon as reasonably practicable after the Company has 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
The following discussion provides an overview of certain elements of the extensive regulatory framework applicable to the Company
and the Bank. This regulatory framework is primarily designed for the protection of depositors, the federal Deposit Insurance Fund
(“DIF”) and the banking system as a whole, rather than specifically for the protection of shareholders. Due to the breadth and growth
of this regulatory framework, the costs of compliance continue to increase in order to monitor and satisfy these requirements.
To the extent that this section describes statutory and regulatory provisions, it is qualified by reference to those provisions. These statutes
and regulations, as well as related policies, are subject to change by Congress, state legislatures and federal and state banking regulators.
Changes in statutes, regulations or regulatory policies applicable to the Company, including the interpretation or implementation thereof,
could have a material effect on the Company’s business or operations. Numerous changes to the statutes, regulations or regulatory policies
applicable to the Company have been made or proposed in recent years. The full extent to which these changes will impact the Company
is not yet known. However, continued efforts to monitor and comply with new regulatory requirements add to the complexity and cost
of the Company’s business.
The Bank is subject to regulation and supervision by the Montana Department of Administration's Banking and Financial Institutions
Division, the FDIC, and, with respect to branches of the Bank outside of Montana, applicable state regulators.
Federal Bank Holding Company Regulation
General. The Company is a bank holding company as defined in the Bank Holding Company Act of 1956, as amended (“BHCA”), due
to its ownership of the Bank. As a bank holding company, the Company is subject to regulation, supervision and examination by the
Federal Reserve. In general, the BHCA limits the business of bank holding companies to owning or controlling banks and engaging in
other activities closely related to banking. The Company must also file reports with and provide additional information to the Federal
Reserve. Under the Financial Services Modernization Act of 1999, a bank holding company may apply to the Federal Reserve to become
a financial holding company, and thereby engage (directly or through a subsidiary) in certain expanded activities deemed financial in
nature, such as securities and insurance underwriting.
4
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 Nonbanks. With some exceptions, the BHCA also 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 of 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. These regulations and restrictions may limit the Company’s ability to obtain funds from the Bank for its cash
needs, including funds for payment of dividends, interest and operational expenses.
Tying Arrangements. The Company is 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, neither the Company nor the Bank may condition
an extension of credit to a customer on either 1) a requirement that the customer obtain additional services provided by the Company or
the Bank 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 Wall Street Reform and Consumer Protection Act
(“Dodd-Frank Act”), the Company is expected to act as a source of financial and managerial strength to the Bank. This means that the
Company is required to commit, as necessary, resources to support the Bank. 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. As a Montana corporation, the Company is subject to certain limitations and restrictions under applicable Montana
corporate law. For example, state law restrictions in Montana include 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.
Federal and State Regulation of the Bank
General. Deposits in the Bank, a Montana state-chartered bank with branches in Montana, Colorado, Idaho, Utah, Washington and
Wyoming, are insured by the FDIC. The Bank is subject to regulation and supervision by the Montana Department of Administration's
Banking and Financial Institutions Division and the FDIC. In addition, with respect to branches of the Bank outside of Montana, Glacier
is subject to regulation and supervision by the applicable state banking regulators. 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, amount of, and collateral for loans. Federal laws also regulate community reinvestment and insider credit transactions
and impose safety and soundness standards.
Consumer Protection. The Bank is subject to a variety of federal and state consumer protection laws and regulations that govern its
relationship with consumers including laws and regulations that impose certain disclosure requirements and regulate the manner in which
the Bank takes deposits, make and collect loans, and provide other services. 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 liability, criminal penalties,
punitive damages, and the loss of certain contractual rights.
Community Reinvestment. The Community Reinvestment Act of 1977 ("CRA") requires that, in connection with examinations of financial
institutions within their jurisdiction, federal bank regulators must evaluate the record of financial institutions in meeting the credit needs
of its local communities, including low and moderate-income neighborhoods, consistent with the safe and sound operation of those banks.
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.
Insider Credit Transactions. Banks are also subject to certain restrictions on extensions of credit to executive officers, directors, principal
shareholders, and their related interests. 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.
5
Regulation of Management. Federal law 1) sets forth circumstances under which officers or directors of a bank may be removed by the
institution’s federal supervisory agency; 2) 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. An institution that fails to meet these standards
may be subject to regulatory sanctions.
Interstate Banking and Branching
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (“Interstate Act”) together with the Dodd-Frank Act, relaxed
prior interstate branching restrictions under federal law by permitting, subject to regulatory approval, state and federally chartered
commercial banks to establish branches in states where the laws permit banks chartered in such states to establish branches. 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 parent holding company’s cash is from dividends received from the Bank, which are subject to government
regulation and limitation. Regulatory authorities may prohibit banks and bank holding companies from paying dividends in a manner
that would constitute an unsafe or unsound banking practice. 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. The Bank is subject to
Montana state law and cannot declare a dividend greater than the previous two years' net earnings without providing notice to the state.
Additionally, 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. The third installment of the Basel
Accords (the “Basel III”) introduces additional limitations on banks’ ability to issue dividends by imposing a capital conservation buffer
requirement.
Capital Adequacy
Regulatory Capital Guidelines. Federal bank regulatory agencies use capital adequacy guidelines in the examination and regulation of
bank holding companies and banks. The guidelines are “risk-based,” meaning that they are designed to make capital requirements more
sensitive to differences in risk profiles among banks and bank holding companies.
Tier I and Tier II Capital. Under the guidelines, an institution’s capital is divided into two broad categories, Tier I capital and Tier II
capital. Tier I capital generally consists of common shareholders’ equity (including surplus and undivided profits), qualifying non-
cumulative perpetual preferred stock, and qualified minority interests in the equity accounts of consolidated subsidiaries. Tier II capital
generally consists of the allowance for loan and lease losses, hybrid capital instruments, and qualifying subordinated debt. The sum of
Tier I capital and Tier II capital represents an institution’s total capital. The guidelines require that at least 50 percent of an institution’s
total capital consist of Tier I capital.
Risk-based Capital Ratios. The adequacy of an institution’s capital is gauged primarily with reference to the institution’s risk-weighted
assets. The guidelines assign risk weightings to an institution’s assets in an effort to quantify the relative risk of each asset and to determine
the minimum capital required to support that risk. An institution’s risk-weighted assets are then compared with its Tier I capital and total
capital to arrive at a Tier I risk-based capital ratio and a Total risk-based capital ratio, respectively. The guidelines provide that an
institution must have a minimum Tier I risk-based capital ratio of 4 percent and a minimum Total risk-based capital ratio of 8 percent.
Leverage Ratio. The guidelines also employ a leverage ratio, which is Tier I capital as a percentage of average total assets, less intangibles.
The principal objective of the leverage ratio is to constrain the maximum degree to which banks may leverage its equity capital base.
The minimum leverage ratio is 3 percent; however, for all but the most highly rated bank holding companies and for bank holding
companies seeking to expand, regulators expect an additional cushion of at least 1 to 2 percent.
Prompt Corrective Action. Under the guidelines, an institution is assigned to one of five capital categories depending on its Total risk-
based capital ratio, Tier I risk-based capital ratio, and leverage ratio, together with certain subjective factors. The categories range from
“well capitalized” to “critically undercapitalized.” Institutions that are “undercapitalized” or lower are subject to certain mandatory
supervisory corrective actions. At each successively lower capital category, an insured bank is subject to increased restrictions on its
operations. During these challenging economic times, the federal banking regulators have actively enforced these provisions.
6
Basel III. Basel III updates and revises significantly the current international bank capital accords (so-called “Basel I” and “Basel II”).
Basel III is intended to be implemented by participating countries for large, internationally active banks. However, standards consistent
with Basel III will be formally implemented in the United States through a series of regulations, some of which may apply to other banks.
In addition to the standards agreed to by the Basel III Committee, the U.S. implementing rules also incorporate certain provisions of the
Dodd-Frank Act. Among other things, Basel III:
• Creates “Tier 1 Common Equity,” a new measure of regulatory capital closer to pure tangible common equity than the present
Tier 1 definition;
• Establishes a required minimum risk-based capital ratio for Tier 1 Common Equity at 4.5 percent and adds a 2.5 percent capital
conservation buffer;
Increases the required Tier 1 risk-based capital ratio to 6.0 percent and the required Total risk-based capital ratio to 8.0 percent;
Increases the required leverage ratio to 4 percent; and
•
•
• Allows for permanent grandfathering of non-qualifying instruments, such as trust preferred securities, issued prior to May 19,
2010 for depository institution holding companies with less than $15 billion in total assets as of year-end 2009, subject to a
limit of 25 percent of Tier 1 capital.
The full impact of the Basel III rules cannot be determined at this time as many regulations are still being written and the implementation
of currently released regulations for banks not subject to the advanced approach rule, such as the Company and the Bank, will not begin
until January 1, 2015. Certain aspects of the Basel III will be phased over a period of time after January 1, 2015.
Regulatory Oversight and Examination
The Federal Reserve conducts periodic inspections of bank holding companies, which are performed both onsite and offsite. The
supervisory objectives of the 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. For bank holding companies under $10 billion in assets, the inspection type and frequency varies
depending on asset size, complexity of the organization, and the bank holding company’s rating at its last inspection.
Banks are subject to periodic examinations by their primary regulators. Bank examinations have evolved from reliance on transaction
testing in assessing a bank’s condition to a risk-focused approach. These examinations are extensive and cover the entire breadth of
operations of a bank. Generally, safety and soundness examinations occur on an 18-month cycle for banks under $500 million in total
assets that are well capitalized and without regulatory issues, and 12-months otherwise. Examinations alternate between the federal and
state bank regulatory agency or 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 banks as frequently as deemed necessary based on the
condition of the bank or as a result of certain triggering events.
Corporate Governance and Accounting
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 (“Act”) addresses, among other things, corporate governance, auditing
and accounting, enhanced and timely disclosure of corporate information, and penalties for non-compliance. Generally, the Act 1) requires
chief executive officers and chief financial officers to certify to the accuracy of periodic reports filed with the SEC; 2) imposes specific
and enhanced corporate disclosure requirements; 3) accelerates the time frame for reporting of 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 Act and related rules and regulations issued by the
SEC and NASDAQ. After enactment, the Company updated its policies and procedures to comply with the Act’s requirements and has
found that such compliance, including compliance with Section 404 of the Act relating to the Company’s internal control over financial
reporting, has resulted in significant additional expense for the Company. The Company will continue to incur additional expense in its
ongoing compliance.
7
Anti-Terrorism
USA Patriot Act of 2001. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism Act of 2001, intended to combat terrorism, was renewed with certain amendments in 2006 (“Patriot Act”). The Patriot Act, in
relevant part, 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.
Financial Services Modernization
Gramm-Leach-Bliley Act of 1999. The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (“GLB Act”) brought about
significant changes to the laws affecting banks and bank holding companies. Generally, the GLB Act 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. Bank holding companies that qualify and elect to become financial holding companies can engage
in a wider variety of financial activities than permitted under previous law, particularly with respect to insurance and securities underwriting
activities.
The Emergency Economic Stabilization Act of 2008
In response to market turmoil and financial crises affecting the overall banking system and financial markets in the United States, the
Emergency Economic Stabilization Act of 2008 (“EESA”) was enacted on October 3, 2008. EESA provides the U.S. Department of the
Treasury (“Treasury”) with broad authority to implement certain actions intended to help restore stability and liquidity to the U.S. financial
markets.
Deposit Insurance
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 designed to tie what banks pay for deposit insurance to the risks they pose. The Dodd-Frank Act broadened the
base for FDIC insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital
of a financial institution. In addition, the Dodd-Frank Act 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; requires that the DIF meet that minimum ratio of insured deposits
by 2020; and eliminates the requirement that the FDIC pay dividends to insured depository institutions when the reserve ratio exceeds
certain thresholds. The FDIC has established a higher reserve ratio of 2 percent as a long-term goal beyond what is required by statute.
The deposit insurance assessments to be paid by the Bank could increase as a result.
Insurance of Deposit Accounts. The EESA included a provision for a temporary increase from $100,000 to $250,000 per depositor in
deposit insurance. The temporary increase was made permanent under the Dodd-Frank Act. The FDIC insurance coverage limit applies
per depositor, per insured depository institution for each account ownership category. EESA also temporarily raised the limit on federal
deposit insurance coverage to an unlimited amount for non-interest or low-interest bearing demand deposits. Unlimited coverage for
non-interest transaction accounts expired December 31, 2012.
The Dodd-Frank Wall Street Reform and Consumer Protection Act
As a result of the financial crises, on July 21, 2010 the Dodd-Frank Act was signed into law. The Dodd-Frank Act significantly changed
the bank regulatory structure and is affecting the lending, deposit, investment, trading and operating activities of financial institutions
and their holding companies, including the Company and the Bank. The full impact of the Dodd-Frank Act may not be known for years.
Some of the provisions of the Dodd-Frank Act that may impact the Company's business are summarized below.
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. Except with respect to “smaller reporting companies” and participants in the Capital
Purchase Program, the new rules applied to proxy statements relating to annual meetings of shareholders held after January 20, 2011.
“Smaller reporting companies,” those with a public float of less than $75 million, are required to include the non-binding shareholder
votes on executive compensation and the frequency thereof in proxy statements relating to annual meetings occurring on or after January 21,
2013.
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 regulator and complies with specified
procedures to ensure compliance with the enforcement action.
8
The Dodd-Frank Act created a new, independent federal agency called the Bureau of Consumer Financial Protection (“CFPB”). The
CFPB has broad rulemaking, supervision and enforcement authority for a wide range of consumer protection laws applicable to banks
with greater than $10 billion in assets. Smaller institutions are subject to certain rules promulgated by the CFPB but will continue to be
examined and supervised by their federal banking regulators for compliance purposes. The CFPB has issued numerous regulations
amending the Truth in Lending Act that will increase the compliance burden of the Bank.
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.
Proposed Legislation
General. Proposed legislation is introduced in almost every federal, state or local legislative session. Certain of such legislation could
dramatically affect the regulation of the banking industry. The Company cannot predict if any such legislation will be adopted or if it is
adopted how it would affect the business of the Company or the Bank. Recent history has demonstrated that new legislation or changes
to existing laws or regulations usually results in a greater compliance burden and, therefore, generally increases the cost of doing business.
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 for such purposes
as curbing inflation and combating recession, but its open market operations in U.S. government securities, control of the discount rate
applicable to borrowings from the Federal Reserve, and establishment of reserve requirements against certain deposits, influence the
growth of bank loans, investments and deposits, and also affect interest rates charged on loans or paid on deposits. The nature and impact
of future changes in monetary policies and their impact on the Company or the Bank cannot be predicted with certainty.
Item 1A. Risk Factors
An investment in the Company’s common stock involves certain risks. The following is a discussion of the most significant risks and
uncertainties that may affect the Company’s business, financial condition and future results.
The slowly recovering economic environment could have an adverse effect on the Company’s future results of operations or the market
price of its stock.
The national economy, and the financial services sector in particular, are still facing significant challenges. Substantially all of the
Company’s loans are to businesses and individuals in Montana, Idaho, Wyoming, Utah, Colorado and Washington markets facing many
of the same challenges as the national economy, including continued unemployment and slow recovery in commercial and residential
real estate. Although some economic indicators are improving both nationally and in the Company’s markets, there remains substantial
uncertainty regarding when and how strongly a sustained economic recovery will occur, and whether there will be another recession.
These economic conditions can cause borrowers to be unable to pay their loans. The inability of borrowers to repay loans can erode
earnings by reducing net interest income and by requiring the Company to add to its allowance for loan and lease losses (“ALLL” or
“allowance”). While the Company cannot accurately predict how long these conditions may exist, the challenging economy could
continue to present risks for some time for the industry and the Company. A further deterioration in economic conditions in the nation
as a whole or in the Company’s markets could result in the following consequences, any of which could have an adverse impact, which
may be material, on the Company’s business, financial condition, results of operations and prospects, and could also cause the market
price of the Company’s stock to decline:
•
•
•
•
•
loan delinquencies may increase;
problem assets and foreclosures may increase;
collateral for loans made may decline in value, in turn reducing customers’ borrowing power, reducing the value of assets and
collateral associated with existing loans and increasing the potential severity of loss in the event of loan defaults;
demand for banking products and services may decline; and
low cost or non-interest bearing deposits may decrease.
9
The allowance for loan and lease losses may not be adequate to cover actual loan losses, which could adversely affect earnings.
The Company maintains an allowance in an amount that it believes is adequate to provide for losses in the loan portfolio. While the
Company 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 Company
can be required to recognize significant declines in the value of the underlying real estate collateral or OREO 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
Company’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 Company will suffer losses on defaulted loans beyond the amounts provided for in
the ALLL. This, in turn, could require material increases in the Company’s provision for loan losses and ALLL. By closely monitoring
credit quality, the Company 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 continue or worsen, 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.
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 Company’s loan portfolio
and the adequacy of the ALLL. These regulatory authorities may require the Company to recognize further loan loss provisions or charge-
offs based upon their judgments, which may be different from the Company’s judgments. Any increase in the ALLL could have an
adverse effect, which could be material, on the Company’s financial condition and results of operations.
The Company has a high concentration of loans secured by real estate, so any deterioration in the real estate markets could require
material increases in the ALLL and adversely affect the Company’s financial condition and results of operations.
The Company has a high degree of concentration in loans secured by real estate. A slower recovery 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 Company’s ability to recover on these loans by selling or disposing of the underlying
real estate collateral is adversely impacted by declining real estate values, which increases the likelihood that the Company 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 the Company’s financial condition and results of operations.
There can be no assurance the Company will be able to continue paying dividends on the common stock at recent levels.
The Company declared dividends of $0.60 per share and $0.53 per share in 2013 and 2012, respectively. The Company may not be able
to continue paying quarterly dividends commensurate with recent levels given that the ability to pay dividends on the Company’s 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. 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. The Bank is also subject to Montana state law and cannot declare a dividend greater than the
previous two years’ net earnings without providing notice to the state. As a result, future dividends will generally depend on the sufficiency
of earnings.
The Company may not be able to continue to grow organically or through acquisitions.
Historically, the Company has expanded through a combination of organic growth and acquisitions. If market and regulatory conditions
remain challenging, the Company may be unable to grow organically or successfully complete or integrate potential future acquisitions.
Furthermore, there can be no assurance that the Company can successfully complete such transactions, since they are subject to regulatory
review and approval.
The FDIC has adopted a plan to increase the federal Deposit Insurance Fund, including additional future premium increases and special
assessments.
The Dodd-Frank Act broadened the base for FDIC insurance assessments and assessments are now based on the average consolidated
total assets less tangible equity capital of a financial institution. In addition, the Dodd-Frank Act established 1.35 percent as the minimum
Deposit Insurance Fund reserve ratio. The FDIC has determined that the fund reserve ratio should be 2.0 percent 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 requires the FDIC to offset the effect on institutions with assets less than $10 billion of the increase in the statutory
minimum fund reserve ratio to 1.35 percent from the former statutory minimum of 1.15 percent. As a result, the deposit insurance
assessments to be paid by the Company could increase.
10
Despite the FDIC’s actions to restore the Deposit Insurance Fund, the fund will suffer additional losses in the future due to failures of
insured institutions. There could be additional significant deposit insurance premium increases, special assessments or prepayments in
order to restore the insurance fund’s reserve ratio. Any significant premium increases or special assessments could have a material adverse
effect on the Company’s financial condition and results of operations.
The Company’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 Company’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 loan charge-offs, which could have a material adverse impact on results of operations and
financial condition.
Non-performing assets could increase, which could adversely affect the Company’s results of operations and financial condition.
The Company may experience increases in non-performing assets in the future. Non-performing assets (which include OREO) adversely
affect the Company’s net income and financial condition in various ways. The Company does not record interest income on non-accrual
loans or OREO, thereby adversely affecting its income. When the Company 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 Company to increase the provision for loan losses. An increase in the level of non-performing assets
also increases the Company’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 Company’s control, could adversely affect the Company’s 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 Company’s loan administration costs generally, and requires significant commitments of time from
management and the Company’s directors, which reduces the time they have to focus on profitably growing the Company’s business.
A decline in the fair value of the Company’s investment portfolio could adversely affect earnings.
The fair value of the Company’s investment securities could decline as a result of factors including changes in market interest rates, credit
quality and credit ratings, lack of market liquidity and other economic conditions. An investment security is impaired if the fair value
of the security is less than the carrying value. When a security is impaired, the Company 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 the Company’s results of operations
and financial condition, including its capital.
With relatively soft loan demand and increased market liquidity, the investment securities portfolio has grown significantly over the past
seven years. However, the Company experienced loan growth during the current year and the investment securities portfolio decreased
from 48 percent of total assets at December 31, 2012 to 41 percent of total assets at December 31, 2013. While the Company believes
that the terms of such investments have been kept relatively short, the Company is subject to elevated interest rate risk exposure if rates
were to increase sharply. Further, the change in the mix of the Company’s assets to more investment securities presents a different type
of asset quality risk than the loan portfolio. In addition, in connection with the ongoing monitoring of its investment securities portfolio,
the Company reclassified obligations of state and local government securities with a fair value of approximately $485 million, inclusive
of a net unrealized gain of $4.6 million, from available-for-sale (“AFS”) classification to held-to-maturity (“HTM”) classification. The
reclassification occurred on January 1, 2014 and changed the allocation of the Company’s entire investment securities portfolio from 100
percent AFS to approximately 85 percent AFS and 15 percent/ HTM. The future impact of this reclassification, if any, on the Company’s
financial condition and results of operations will depend on interest rate environments and other factors which are not estimable at this
time. While the Company believes a relatively conservative management approach has been applied to the investment portfolio, there
is always potential loss exposure under changing economic conditions.
11
Recent and/or future U.S. federal government credit downgrades or changes in outlook by major credit rating agencies may have an
adverse effect on financial markets, including financial institutions and the financial industry.
On June 10, 2013, Standard and Poor's reaffirmed its AA+ rating of U.S. government long-term debt but with an improved outlook of
stable from negative. On July 18, 2013, Moody's also upgraded its outlook to stable from negative while maintaining its Aaa rating on
U.S. government long-term debt. However, on October 15, 2013 Fitch placed its AAA long-term debt rating of the U.S. on rating watch
negative due to the U.S. government’s inability to raise the federal debt ceiling in a timely manner. It is difficult to predict the effect of
any future downgrades or changes in outlook by the three major credit rating agencies. However, these events could impact the trading
market for U.S. government securities, including U.S. agency securities, and the securities markets more broadly, and consequently could
impact the value and liquidity of financial assets, including assets in the Company’s investment portfolio. These actions could also create
broader financial turmoil and uncertainty, which may negatively affect the global banking system and limit the availability of funding,
including borrowing under securities sold under agreements to repurchase (“repurchase agreements”), at reasonable terms. In turn, this
could have a material adverse effect on the Company’s liquidity, financial condition and results of operations.
Fluctuating interest rates can adversely affect profitability.
The Company’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 Company’s interest rate spread,
and, in turn, profitability. The Company seeks to manage its interest rate risk within well established policies and guidelines. Generally,
the Company seeks an asset and liability structure that insulates net interest income from large deviations attributable to changes in market
rates. However, the Company’s structures and practices to manage interest rate risk may not be effective in a highly volatile rate
environment.
Interest rate swaps expose the Company to certain risks, and may not be effective in mitigating exposure to changes in interest rates.
The Company has entered into interest rate swap agreements in order to manage a portion of the interest rate volatility risk. The Company
anticipates that it may enter into additional interest rate swaps. These swap agreements involve other risks, such as the risk that the
counterparty may fail to honor its obligations under these arrangements, leaving the Company vulnerable to interest rate movements.
The Company’s current interest rate swap agreements include bilateral collateral agreements whereby the net fair value position is
collateralized by the party in a net liability position. The bilateral collateral agreements reduce the Company’s counterparty risk exposure.
There can be no assurance that these arrangements will be effective in reducing the Company’s exposure to changes in interest rates.
If goodwill recorded in connection with acquisitions becomes additionally impaired, it could have an adverse impact on earnings and
capital.
Accounting standards require the Company 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. The Company's goodwill was not considered impaired as of December 31, 2013 and 2012. The
Company maintains $130 million in goodwill on its statements of financial condition as of December 31, 2013 and there can be no
assurance that future evaluations of goodwill will not result in findings of additional impairment and write-downs, which could be material.
While a non-cash item, additional impairment of goodwill could have a material adverse effect on the Company’s business, financial
condition and results of operations. Furthermore, additional impairment of goodwill could subject the Company to regulatory limitations,
including the ability to pay dividends on its common stock.
Growth through future acquisitions could, in some circumstances, adversely affect profitability or other performance measures.
During 2013 and in prior years, the Company has 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 the Company’s operations, and being unable to profitably deploy
funds acquired in an acquisition. The Company may not be able to continue to grow through acquisitions, and if it does, there is a risk
of negative impacts of such acquisitions on the Company’s operating results and financial condition.
The Company anticipates that it might issue capital stock in connection with future acquisitions. Acquisitions and related issuances of
stock may have a dilutive effect on earnings per share and the percentage ownership of current shareholders.
12
A tightening of the credit markets may make it difficult to obtain adequate funding for loan growth, which could adversely affect earnings.
A tightening of the credit markets and the inability to obtain or retain adequate funds for continued loan growth at an acceptable cost
may negatively affect the Company’s asset growth and liquidity position and, therefore, earnings capability. In addition to core deposit
growth, maturity of investment securities and loan payments, the Company also relies on alternative funding sources through correspondent
banking and borrowings with the Federal Home Loan Bank (“FHLB”) to fund loan growth. In the event the economy continues to see
a slow recovery, particularly in the housing market, these resources could be negatively affected, both as to price and availability, which
would limit and or raise the cost of the funds available to the Company.
The Company may pursue additional capital in the future, which could dilute the holders of the Company’s outstanding common stock
and may adversely affect the market price of common stock.
In the current economic environment, the Company believes it is prudent to consider alternatives for raising capital when opportunities
to raise capital at attractive prices present themselves, in order to further strengthen the Company’s capital and better position itself to
take advantage of opportunities that may arise in the future. Such alternatives may include issuance and sale of common or preferred
stock or borrowings by the parent holding company, with proceeds contributed to the Bank. Any such capital raising alternatives could
dilute the holders of the Company’s outstanding common stock, and may adversely affect the market price of the Company’s common
stock and performance measures such as earnings per share.
Business would be harmed if the Company lost the services of any members of the senior management team.
The Company believes its success to date has been substantially dependent on its Chief Executive Officer (“CEO”) and other members
of the executive management team, and on the Presidents of its Bank divisions. The unexpected loss of any of these persons could have
an adverse effect on the Company’s business and future growth prospects.
Competition in the Company’s market areas may limit future success.
Commercial banking is a highly competitive business and a consolidating industry. The Company competes with other commercial
banks, savings and loans, credit unions, finance, insurance and other non-depository companies operating in its market areas. The
Company 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 Company. Some of the Company’s competitors have greater financial
resources than the Company. If the Company is unable to effectively compete in its market areas, the Company’s business, results of
operations and prospects could be adversely affected.
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
the Company’s reputation, increase costs and cause losses.
The Company’s operations rely heavily on the secure processing, storage and transmission of confidential and other information on the
its computer systems and networks. Any failure, interruption or breach in security or operational integrity of these systems could result
in failures or disruptions in the Company’s online banking system, customer relationship management, general ledger, deposit and loan
servicing and other systems. The security and integrity of the Company’s systems could be threatened by a variety of interruptions or
information security breaches, including those caused by computer hacking, cyber attacks, electronic fraudulent activity or attempted
theft of financial assets. The Company cannot assure that any such failures, interruption or security breaches will not occur, or if they
do occur, that they will be adequately addressed. While the Company has certain protective policies and procedures in place, the nature
and sophistication of the threats continue to evolve. The Company may be required to expend significant additional resources in the
future to modify and enhance its protective measures.
Additionally, the Company 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 Company’s operational systems.
Any failures, interruptions or security breaches in the Company’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 the Company to civil litigation, regulatory fines or losses not
covered by insurance.
13
The Company operates 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 the Company.
The Company is subject to extensive regulation, supervision and examination by federal and state banking regulators. In addition, as a
publicly-traded company, the Company is 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 the Company and its 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 the Company’s
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 the Company’s reputation, all of which could adversely affect the Company’s business,
financial condition or results of operations.
In that regard, sweeping financial regulatory reform legislation was enacted in July 2010. Among other provisions, the new legislation
1) creates a new CFPB with broad powers to regulate consumer financial products such as credit cards and mortgages; 2) creates a
Financial Stability Oversight Council comprised of the heads of other regulatory agencies; 3) will lead to new capital requirements from
federal banking regulatory agencies; 4) places new limits on electronic debt card interchange fees; and 5) requires the SEC and national
stock exchanges to adopt significant new corporate governance and executive compensation reforms. The new legislation and regulations
are expected to increase the overall costs of regulatory compliance.
Basel III for U.S. financial institutions is expected to be phased in between 2013 and 2019. Basel III sets forth more robust global
regulatory standards on capital adequacy, qualifying capital instruments, leverage ratios, market liquidity risk, and stress testing, which
may be stricter than standards currently in place. The implementation of these new standards could potentially have an adverse impact
on the Company’s financial position and future earnings due to, among other things, the increased minimum Tier 1 capital ratio requirements
that will be implemented.
Further, 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. Recently,
these powers have been utilized more frequently due to the challenging national, regional and local economic conditions. The exercise
of regulatory authority may have a negative impact on the Company’s financial condition and results of operations. Additionally, the
Company’s business is affected significantly by the fiscal and monetary policies of the federal government and its agencies, including
the Federal Reserve.
The Company 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 the Company. 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 the Company’s business, financial condition,
results of operations, and the trading price of the Company’s common stock.
The Company has various anti-takeover measures that could impede a takeover.
The Company’s articles of incorporation include certain provisions that could make more difficult the acquisition of the Company 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 the Company’s 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 the Company. These provisions may have the effect of
lengthening the time required to acquire control of the Company through a tender offer, proxy contest or otherwise, and may deter any
potentially unfriendly offers or other efforts to obtain control of the Company. This could deprive the Company’s shareholders of
opportunities to realize a premium for their Glacier Bancorp, Inc. common stock, even in circumstances where such action is favored by
a majority of the Company’s shareholders.
Item 1B. Unresolved Staff Comments
None
14
Item 2. Properties
The following schedule provides information on the Company’s 118 properties as of December 31, 2013:
(Dollars in thousands)
Properties
Leased
Properties
Owned
Net Book
Value
Montana
Idaho
Wyoming
Colorado
Utah
Washington
6
10
2
1
1
2
22
49
17
15
2
3
10
96
$
$
76,419
22,210
18,428
2,825
2,431
5,869
128,182
The Company believes that all of its facilities are well maintained, generally adequate and suitable for the current operations of its 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 5 to the Consolidated
Financial Statements in “Item 8. Financial Statements and Supplementary Data.”
Item 3. Legal Proceedings
The Company and its subsidiaries are parties to various claims, legal actions and complaints in the ordinary course of their businesses.
In the Company’s opinion, all such matters are adequately covered by insurance, are without merit or are of such kind, or involve such
amounts, that unfavorable disposition would not have a material adverse effect on the financial position or results of operations of the
Company.
Item 4. Mine Safety Disclosures
Not Applicable
15
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
PART II
The Company’s stock trades on the NASDAQ Global Select Market under the symbol: GBCI. As of December 31, 2013, there were
approximately 1,789 shareholders of record for the Company’s common stock. The market range of high and low closing prices for the
Company’s common stock for the periods indicated are shown below:
First quarter
Second quarter
Third quarter
Fourth quarter
2013
2012
High
Low
High
Low
$
18.98
22.43
25.05
30.87
15.19
17.44
22.59
24.23
15.50
15.46
16.17
15.53
The following table summarizes the Company’s dividends declared per quarter for the periods indicated:
First quarter
Second quarter
Third quarter
Fourth quarter
Total
2013
2012
$
$
0.14
0.15
0.15
0.16
0.60
12.43
13.66
14.93
13.43
0.13
0.13
0.13
0.14
0.53
Future cash dividends will depend on a variety of factors, including net income, capital, asset quality, general economic conditions and
regulatory considerations.
Unregistered Securities
There have been no securities of the Company sold within the last three years which were not registered under the Securities Act.
Issuer Stock Purchases
The Company made no stock repurchases during 2013.
Equity Compensation Plan Information
The Company currently maintains the 2005 Employee Stock Incentive Plan which was approved by the shareholders and provides for
the issuance of stock-based compensation to officers, other employees and directors. Although the 1994 Director Stock Option Plan
expired in March 2009, there are issued options outstanding that have not been exercised as of December 31, 2013.
The following table sets forth information regarding outstanding options and shares reserved for future issuance under the following
plans as of December 31, 2013:
Number of Shares to be
Issued Upon Exercise of
Outstanding Options,
Warrants and Rights
(a)
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
(b)
Number of Shares Remaining
Available for Future
Issuance Under Equity
Compensation Plans
(Excluding Shares
Reflected in Column (a))
(c)
58,810
$
15.47
4,116,931
Plan Category
Equity compensation plans
approved by the shareholders
16
Stock Performance Graphs
The following graphs compare the yearly cumulative total return of the Company’s common stock over both a five-year and ten-year
measurement period with the yearly cumulative total return on the stocks included in 1) the Russell 2000 Index, and 2) the SNL Bank
Index comprised of banks and bank holding companies with total assets between $5 billion and $10 billion. Each of the cumulative total
returns are computed assuming the reinvestment of dividends at the frequency with which dividends were paid during the applicable
years.
17
Item 6. 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 report.
(Dollars in thousands, except per share data)
Selected Statements of Financial
Condition Information
Total assets
Investment securities, available-for-sale
Loans receivable, net
Allowance for loan and lease losses
Goodwill and intangibles
Deposits
Federal Home Loan Bank advances
Repurchase agreements and other
borrowed funds
Stockholders’ equity
Equity per share
Equity as a percentage of total assets
2013
2012
December 31,
2011
2010
2009
Compounded Annual
Growth Rate
1-Year
2013/2012
5-Year
2013/2009
$7,884,350
3,222,829
3,932,487
(130,351)
139,218
5,579,967
840,182
7,747,440
3,683,005
3,266,571
(130,854)
112,274
5,364,461
997,013
7,187,906
3,126,743
3,328,619
(137,516)
114,384
4,821,213
1,069,046
6,759,287
2,395,847
3,612,182
(137,107)
157,016
4,521,902
965,141
6,191,795
1,443,817
3,920,988
(142,927)
160,196
4,100,152
790,367
321,781
963,250
12.95
12.22%
299,540
900,949
12.52
11.63%
268,638
850,227
11.82
11.83%
269,408
838,204
11.66
12.40%
451,251
685,890
11.13
11.08%
1.8 %
(12.5)%
20.4 %
(0.4)%
24.0 %
4.0 %
(15.7)%
7.4 %
6.9 %
3.4 %
5.1 %
7.3 %
28.2 %
(0.3)%
11.2 %
(2.7)%
11.3 %
19.9 %
(21.9)%
7.3 %
3.2 %
— %
Compounded Annual
Growth Rate
1-Year
2013/2012
5-Year
2013/2009
3.9 %
(19.5)%
7.7 %
(68.0)%
1.7 %
1.0 %
32.8 %
57.3 %
26.7 %
24.8 %
24.8 %
13.2 %
(2.7)%
(20.5)%
2.0 %
(24.7)%
8.8 %
6.0 %
4.8 %
(2.2)%
7.8 %
1.8 %
1.9 %
2.9 %
2009
302,494
57,167
245,327
124,618
86,474
168,818
38,365
3,991
34,374
0.56
0.56
0.52
(Dollars in thousands, except per share data)
Summary Statements of Operations
2013
Years ended December 31,
2011
2010
2012
Interest income
Interest expense
Net interest income
Provision for loan losses
Non-interest income
Non-interest expense 1
Income before income taxes 1
Income tax expense 1
Net income 1
Basic earnings per share 1
Diluted earnings per share 1
Dividends declared per share
$
$
$
$
$
263,576
28,758
234,818
6,887
93,047
195,317
125,661
30,017
95,644
1.31
1.31
0.60
253,757
35,714
218,043
21,525
91,496
193,421
94,593
19,077
75,516
1.05
1.05
0.53
280,109
44,494
235,615
64,500
78,199
191,965
57,349
7,265
50,084
0.70
0.70
0.52
288,402
53,634
234,768
84,693
87,546
187,948
49,673
7,343
42,330
0.61
0.61
0.52
18
(Dollars in thousands)
Selected Ratios and Other Data
2013
At or for the Years ended December 31,
2011
2012
2010
Return on average assets 1
Return on average equity 1
Dividend payout ratio 1
Average equity to average asset ratio
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Tier 1 capital (to average assets)
Net interest margin on average earning
assets (tax-equivalent)
Efficiency ratio 2
Allowance for loan and lease losses as a
percent of loans
Allowance for loan and lease losses as a
percent of nonperforming loans
Non-performing assets as a percentage of
subsidiary assets
Loans originated and acquired
Number of full time equivalent employees
Number of locations
$
1.23%
10.22%
45.80%
11.99%
18.97%
17.70%
12.11%
3.48%
54.51%
1.01%
8.54%
50.48%
11.84%
20.09%
18.82%
11.31%
3.37%
54.02%
0.72%
5.78%
74.29%
12.39%
20.27%
18.99%
11.81%
3.89%
51.34%
0.67%
5.18%
85.25%
12.96%
19.51%
18.24%
12.71%
4.21%
51.35%
2009
0.60%
4.97%
92.86%
12.16%
15.29%
14.02%
11.20%
4.82%
47.47%
3.21%
3.85%
3.97%
3.66%
3.52%
158%
133%
102%
70%
70%
1.39%
2,478
1,837
118
1.87%
2,238
1,677
108
2.92%
1,650
1,653
106
3.91%
1,935
1,674
105
4.13%
2,431
1,643
106
__________
1 Excludes 2011 goodwill impairment charge of $32.6 million ($40.2 million pre-tax). For additional information on the goodwill impairment charge
see the “Non-GAAP Financial Measures” section below.
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.
Non-GAAP Financial Measures
In addition to the results presented in accordance with GAAP, this 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 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.
(Dollars in thousands, except per share data)
Non-interest expense
Income before income taxes
Income tax (benefit) expense
Net income
Basic earnings per share
Diluted earnings per share
Return on average assets
Return on average equity
Dividend payout ratio
Year ended December 31, 2011
Goodwill
Impairment Charge,
Net of Tax
Non-GAAP
GAAP
$
$
$
$
$
$
232,124
17,190
(281)
17,471
0.24
0.24
0.25%
2.04%
(40,159)
40,159
7,546
32,613
0.46
0.46
0.47 %
3.74 %
216.67%
(142.38)%
191,965
57,349
7,265
50,084
0.70
0.70
0.72%
5.78%
74.29%
19
The reconciling item between the GAAP and non-GAAP financial measures was the third quarter of 2011 goodwill impairment charge
(net of tax) of $32.6 million.
• The goodwill impairment charge was $40.2 million with an income tax benefit of $7.6 million which resulted in a goodwill
impairment charge (net of tax) of $32.6 million. The income tax benefit applied only to the $19.4 million of goodwill associated
with taxable acquisitions and was determined based on the Company’s marginal income tax rate of 38.9 percent.
• The basic and diluted earnings per share reconciling items were determined based on the goodwill impairment charge (net of
tax) divided by the weighted-average diluted shares of 71,915,073.
• The goodwill impairment charge (net of tax) was included in determining earnings for both the GAAP return on average assets
and GAAP return on average equity. The average assets used in the GAAP and non-GAAP return on average assets ratios were
$6.923 billion and $6.931 billion for the year ended December 31, 2011, respectively. The average equity used in the GAAP
and non-GAAP return on average equity ratios were $858 million and $866 million for the year ended December 31, 2011,
respectively.
• 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.
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.”
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 management’s plans, objectives,
expectations and intentions that are not historical facts, and other statements identified by words such as “expects,” “anticipates,” “intends,”
“plans,” “believes,” “should,” “projects,” “seeks,” “estimates” or words of similar meaning. These forward-looking statements are based
on current beliefs and expectations of management and are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond the Company’s control. In addition, these forward-looking statements are
subject to assumptions with respect to future business strategies and decisions that are subject to change. The following factors, among
others, could cause actual results to differ materially from the anticipated results 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, including
as a result of a slow recovery in the housing and real estate markets in its geographic areas;
increased loan delinquency rates;
the risks presented by a slow economic recovery which could adversely affect credit quality, loan collateral values, OREO values,
investment values, liquidity and capital levels, dividends and loan originations;
changes in market interest rates, which could adversely affect the Company’s net interest income and profitability;
legislative or regulatory changes that adversely affect the Company’s business, ability to complete pending or prospective future
acquisitions, limit certain sources of revenue, or increase cost of operations;
costs or difficulties related to the completion and integration of acquisitions;
the goodwill the Company has recorded in connection with acquisitions could become additionally impaired, which may have
an adverse impact on earnings and capital;
reduced demand for banking products and services;
the risks presented by public stock market volatility, which could adversely affect the market price of the Company’s common
stock and the ability to raise additional capital in the future;
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 the Bank divisions;
potential interruption or breach in security of the Company’s systems; and
the Company’s success in managing risks involved in 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). The Company does not undertake any obligation to publicly correct
or update any forward-looking statement if it later becomes aware that actual results are likely to differ materially from those expressed
in such forward-looking statement.
20
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2013 COMPARED TO DECEMBER 31, 2012
Highlights and Overview
During the current year, the Company completed the acquisition of Wheatland and its subsidiary, First State Bank, and completed the
acquisition of NCBI and its subsidiary, North Cascades National Bank. As a result of the Wheatland acquisition, the Company has
increased its presence in the State of Wyoming and further diversified the Company’s customer base with Wheatland’s strong commitment
to agriculture. The NCBI acquisition expanded the Company’s presence into central Washington and further diversified the Company’s
customer base with NCBI’s strong economic mix of agriculture, fruit processing and tourism.
The Company had all time record earnings of $95.6 million for 2013, which was an increase of $20.1 million, or 27 percent over the
2012 net income of $75.5 million. Diluted earnings per share for 2013 was $1.31, an increase of $0.26, or 25 percent, from the prior
year diluted earnings per share of $1.05. The net income improvement for 2013 over 2012 was principally due to an increase in net
interest income and the continued decrease in credit quality expenses.
The current year increase in net interest income resulted from a $9.8 million increase in interest income and a $7.0 million decrease in
interest expense. The increase in interest income was primarily attributable to an increase in volume of commercial loans and an increase
in yields on investment securities. The increased yields on investment securities was primarily driven by the slowdown of refinance
activity that occurred during 2013 and the resulting decrease in premium amortization (net of discount accretion) on the investment
securities portfolio (“premium amortization”).
The Company experienced an increase in its net interest margin as a percentage of earning assets, on a tax-equivalent basis, during each
of the prior four quarters, which ultimately resulted in the current year net interest margin of 3.48 percent which was an 11 basis points
increase over the prior year net interest margin of 3.37 percent. The increase was the result of a combination of factors including a
decrease in borrowing and deposit interest rates, higher yielding investment securities, and a shift in earning assets to the higher yielding
loan portfolio.
For the third consecutive year, the Company decreased its non-performing assets. During the current year, the Company’s non-performing
assets of $109 million decreased $34.1 million or, 24 percent, from the prior year end. The decrease in non-performing assets was the
result of the Company’s continued patience and focus on actively managing the disposal of non-performing assets. The improvement in
credit quality was reflected in a decrease in credit quality expenses of $26.4 million during 2013 compared to 2012 from the combined
decrease in the provision for loan losses and the in OREO expense. Provision for loan losses of $6.9 million during the current year
decreased $14.6 million, or 68 percent, over the prior year. OREO expenses of $7.2 million during the current year decreased $11.8
million, or 62 percent, over the prior year.
The Company was pleased with its organic loan growth during the current year which was the first annual increase since 2008. Excluding
acquisitions, loans receivable increased $278 million, or 8 percent, during the current year, with the primary increase in commercial loans
which increased $294 million from the prior year end. The increase in the loan portfolio allowed the Company to decrease the lower
yielding investment securities portfolio during the current year. Excluding the acquisitions and wholesale deposits, the Company’s non-
interest bearing deposits increased $75.6 million, or 6 percent, during the year while interest bearing deposits remained stable with a
small increase of $18.4 million, or less than 1 percent, during the current year. Tangible stockholders’ equity increased $35.5 million, or
$0.12 per share, as a result of stock issued in connection with the acquisitions and earnings retention which were offset by the decrease
in accumulated other comprehensive income. The Company increased its quarterly dividend twice during 2013 from $0.14 per share to
$0.16 per share for a record dividend of $0.60 per share for 2013 compared to $0.53 per share for 2012.
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 regulatory burden.
21
Acquisitions
On May 31, 2013, the Company completed the acquisition of Wheatland and its subsidiary, First State Bank, and on July 31, 2013, the
Company completed the acquisition of NCBI and its subsidiary, North Cascades National Bank. The Company incurred $1.5 million of
expense in connection with the acquisitions for the year ended December 31, 2013. The Company’s results of operations and financial
condition include the acquisitions of Wheatland and NCBI from the acquisition dates. The following table provides information on the
fair value of selected classifications of assets and liabilities acquired:
(Dollars in thousands)
Total assets
Investment securities, available-for-sale
Loans receivable
Non-interest bearing deposits
Interest bearing deposits
FHLB advances
Wheatland
May 31,
2013
NCBI
July 31,
2013
$
300,541
75,643
171,199
30,758
224,439
5,467
330,028
48,058
215,986
76,105
218,875
—
Total
630,569
123,701
387,185
106,863
443,314
5,467
Assets
The following table summarizes the asset balances as of the dates indicated, and the amount of change from December 31, 2012:
Financial Condition Analysis
(Dollars in thousands)
Cash and cash equivalents
Investment securities, available-for-sale
Loans receivable
Residential real estate
Commercial
Consumer and other
Loans receivable
Allowance for loan and lease losses
Loans receivable, net
December 31,
2013
December 31,
2012
$ Change
% Change
$
155,657
$
187,040
$
3,222,829
3,683,005
(31,383)
(460,176)
577,589
2,901,283
583,966
4,062,838
(130,351)
3,932,487
516,467
2,278,905
602,053
3,397,425
(130,854)
3,266,571
61,122
622,378
(18,087)
665,413
503
665,916
(37,447)
136,910
(17)%
(12)%
12 %
27 %
(3)%
20 %
— %
20 %
(6)%
2 %
Other assets
Total assets
573,377
610,824
$
7,884,350
$
7,747,440
$
Investment securities decreased $460 million, or 12 percent, from December 31, 2012 as the Company implemented a strategy to reduce
the overall size of the investment securities portfolio as the higher yielding loan portfolio increased. The Company continued to purchase
investment securities during the year, although at a much smaller pace than the principal paydowns. The growth in the loan portfolio
provided the Company the opportunity to retain higher yielding loans than what the Company could achieve with investment securities.
At December 31, 2013, investment securities represented 41 percent of total assets, down from 48 percent at December 31, 2012.
A positive trend for the four consecutive quarters during the current year has been the organic loan growth. Excluding the loans receivable
from the acquisitions, the loan portfolio increased $278 million, or 8 percent, during the current year with increases in both residential
real estate and commercial loans. Excluding the acquisitions, the largest dollar increase during the current year was in commercial loans
which increased $294 million, or 13 percent, of which $200 million of the increase was in commercial real estate loans. The decreases
in consumer and other loans was primarily attributable to customers paying off home equity lines of credit as they refinanced their first
mortgage.
22
Liabilities
The following table summarizes the liability balances as of the dates indicated, and the amount of change from December 31, 2012:
(Dollars in thousands)
Non-interest bearing deposits
Interest bearing deposits
Repurchase agreements
FHLB advances
Other borrowed funds
Subordinated debentures
Other liabilities
Total liabilities
December 31,
2013
December 31,
2012
$ Change
% Change
$
1,374,419
$
1,191,933
$
4,205,548
4,172,528
313,394
840,182
8,387
125,562
53,608
289,508
997,013
10,032
125,418
60,059
$
6,921,100
$
6,846,491
$
182,486
33,020
23,886
(156,831)
(1,645)
144
(6,451)
74,609
15 %
1 %
8 %
(16)%
(16)%
— %
(11)%
1 %
Excluding the acquisitions, non-interest bearing deposits of $1.374 billion at December 31, 2013 increased $75.6 million, or 6 percent,
during the current year. Interest bearing deposits of $4.206 billion at December 31, 2013 included $205 million of wholesale deposits
(i.e., brokered deposits classified as NOW, money market deposit and certificate accounts). Excluding the acquisitions, interest bearing
deposits at December 31, 2013 decreased $410 million, or 10 percent, from December 31, 2012 primarily the result of a decrease of $429
million in wholesale deposits. FHLB advances of $840 million at December 31, 2013 decreased $157 million, or 16 percent, from the
prior year end and will continue to fluctuate as the need for funding changes.
Stockholders’ Equity
The following table summarizes the stockholders’ equity balances as of the dates indicated and the amount of change from December 31,
2012:
(Dollars in thousands, except per share data)
December 31,
2013
December 31,
2012
$ Change
% Change
Common equity
$
953,605
$
852,987
$
Accumulated other comprehensive income
Total stockholders’ equity
Goodwill and core deposit intangible, net
Tangible stockholders’ equity
Stockholders’ equity to total assets
Tangible stockholders’ equity to total tangible assets
Book value per common share
Tangible book value per common share
Market price per share at end of period
9,645
963,250
(139,218)
824,032
12.22%
10.64%
12.95
11.08
29.79
$
$
$
$
47,962
900,949
(112,274)
788,675
11.63%
10.33%
12.52
10.96
14.71
$
$
$
$
$
$
$
$
100,618
(38,317)
62,301
(26,944)
35,357
0.43
0.12
15.08
12 %
(80)%
7 %
24 %
4 %
5 %
3 %
3 %
1 %
103 %
Tangible stockholders’ equity of $824 million at year end increased $35.4 million, or 4 percent, from the prior year end. The higher
capital levels were the result of $45.0 million of Company stock issued in connection with the acquisitions and an increase in earnings
retention of $51.4 million which were offset by the decrease in accumulated other comprehensive income of $38.3 million. Tangible
book value per common share of $11.08 increased $0.12 per share from the prior year end.
23
Results of Operations
Performance Summary
(Dollars in thousands, except per share data)
Net income
Diluted earnings per share
Return on average assets (annualized)
Return on average equity (annualized)
Years ended
December 31,
2013
December 31,
2012
$
$
95,644
1.31
1.23%
10.22%
75,516
1.05
1.01%
8.54%
Net income for the year ended December 31, 2013 was $95.6 million, an increase of $20.1 million, or 27 percent, from the $75.5 million
of net income for the prior year. Diluted earnings per share for the current year was $1.31 per share, an increase of $0.26, or 25 percent,
from the diluted earnings per share in the prior year.
Income Summary
The following table summarizes revenue for the periods indicated, including the amount and percentage change from December 31, 2012:
(Dollars in thousands)
Net interest income
Interest income
Interest expense
Total net interest income
Non-interest income
Service charges, loan fees, and other fees
Gain on sale of loans
Loss on sale of investments
Other income
Total non-interest income
Years ended
December 31,
2013
December 31,
2012
$ Change
% Change
$
263,576
$
253,757
$
28,758
234,818
35,714
218,043
54,460
28,517
(299)
10,369
93,047
49,706
32,227
—
9,563
91,496
9,819
(6,956)
16,775
4,754
(3,710)
(299)
806
1,551
$
327,865
$
309,539
$
18,326
4 %
(19)%
8 %
10 %
(12)%
n/m
8 %
2 %
6 %
Net interest margin (tax-equivalent)
3.48%
3.37%
_______
n/m - not measurable
Net Interest Income
Net interest income for 2013 increased $16.8 million, or 8 percent, over last year. Interest income for the current year increased $9.8
million, or 4 percent, from the prior year and was principally due to the increased volume of commercial loans in addition to the decrease
in premium amortization on investment securities, which were partially reduced by a decrease in yields within the loan portfolio. During
2013, the Company experienced four consecutive quarters of decreases in premium amortization, compared to significant increases
experienced during the preceding seven quarters. Interest income was reduced by $64.1 million in premium amortization on investment
securities during the current year which was a decrease of $7.9 million from the prior year. Interest expense for 2013 decreased $7.0
million, or 19 percent, from the prior year and was primarily attributable to the decreases in interest rates on interest bearing deposits
and borrowings. The funding cost (including non-interest bearing deposits) for the current year was 42 basis points compared to 55 basis
points for the prior year.
24
The net interest margin, on a tax-equivalent basis, for 2013 was 3.48 percent, an 11 basis points increase from the net interest margin of
3.37 percent for 2012. The net interest margin was benefited by the decreased interest rates on deposits and borrowings. The net interest
margin was further supported by the continued shift in earning assets from investment securities to the higher yielding loan portfolio and
the increased yield on the investment securities portfolio. The increased yields on investment securities was driven by lower premium
amortization on investment securities. The premium amortization for 2013 accounted for a 90 basis points reduction in the net interest
margin, which was a decrease of 14 basis points compared to the 104 basis points reduction in the net interest margin for last year.
Non-interest Income
Non-interest income of $93.0 million for 2013 increased $1.6 million, or 2 percent, over last year. Service charge fee income increased
$4.8 million, or 10 percent, from the prior year which was driven by increases in the number of deposit accounts and changes in internal
deposit processing. Gains of $28.5 million on the sale of loans for the current year decreased $3.7 million, or 12 percent, from the prior
year. The Company experienced a slowdown in refinance during the current year as mortgage rates moved up, although, the decrease in
gain on sale of loans was more than offset by the decrease in premium amortization on investment securities, both of which were attributable
to the continuing slowdown of refinance activity. Other income for the current year increased $806 thousand, or 8 percent, over the the
prior year. Included in other income was operating revenue of $400 thousand from OREO and gains of $3.1 million on the sale of OREO,
which combined totaled $3.5 million for the current year compared to $2.4 million for the prior year.
Non-interest Expense
The following table summarizes non-interest expense for the periods indicated, including the amount and percentage change from
December 31, 2012:
(Dollars in thousands)
Compensation and employee benefits
Occupancy and equipment
Advertising and promotions
Outsourced data processing
Other real estate owned
Regulatory assessments and insurance
Core deposit intangible amortization
Other expense
Total non-interest expense
Years ended
December 31,
2013
December 31,
2012
$
104,221
$
95,373
$
24,875
6,913
4,493
7,196
6,362
2,401
38,856
23,837
6,413
3,324
18,964
7,313
2,110
36,087
$
195,317
$
193,421
$
$ Change
% Change
8,848
1,038
500
1,169
(11,768)
(951)
291
2,769
1,896
9 %
4 %
8 %
35 %
(62)%
(13)%
14 %
8 %
1 %
Compensation and employee benefits for 2013 increased $8.8 million, or 9 percent, from the same period last year. The increase in
compensation and employee benefits from the prior year was primarily due to the acquisitions of Wheatland and NCBI and increases in
benefit expense and annual merit raises. Outsourced data processing expense increased $1.2 million, or 35 percent, from the prior year
primarily from the acquired banks outsourced data processing expense. OREO expense of $7.2 million in the current year decreased
$11.8 million, or 62 percent, from the prior year. The OREO expense for the current year included $2.7 million of operating expenses,
$3.6 million of fair value write-downs, and $880 thousand of loss on sale of OREO. Other expense for the current year increased by
$2.8 million, or 8 percent, from the prior year and was attributable to the legal and professional expenses associated with the acquisitions,
debit card fraud losses and deposit account losses.
Efficiency Ratio
The Company calculates the efficiency ratio as 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. The efficiency ratio was 55
percent for 2013 and 54 percent for 2012. Although there was an increase net interest income during the current year over the prior year,
it was not enough to offset the increase in non-interest expense, excluding OREO expense, resulting in the increased efficiency ratio.
25
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)
Fourth quarter 2013
Third quarter 2013
Second quarter 2013
First quarter 2013
Fourth quarter 2012
Third quarter 2012
Second quarter 2012
First quarter 2012
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
$
1,802
$
1,907
1,078
2,100
2,275
2,700
7,925
8,625
2,216
2,025
1,030
2,119
8,081
3,499
7,052
9,555
3.21%
3.27%
3.56%
3.84%
3.85%
4.01%
3.99%
3.98%
0.79%
0.66%
0.60%
0.95%
0.80%
0.83%
1.41%
1.24%
1.39%
1.56%
1.64%
1.79%
1.87%
2.33%
2.69%
2.91%
The provision for loan losses was $6.9 million for 2013, a decrease of $14.6 million, or 68 percent, from the same period in the prior
year. Net charged-off loans during the current year were $7.4 million, a decrease of $20.8 million from the prior year. Such provision
and net-charge off decreases were driven by the continued increase in credit quality that has continued over the prior three years.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF THE RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2012 COMPARED TO DECEMBER 31, 2011
Income Summary
The following table summarizes revenue for the periods indicated, including the amount and percentage change from December 31, 2011:
(Dollars in thousands)
Net interest income
Interest income
Interest expense
Total net interest income
Non-interest income
Service charges, loan fees, and other fees
Gain on sale of loans
Loss on sale of investments
Other income
Total non-interest income
Years ended
December 31,
2012
December 31,
2011
$ Change
% Change
$
253,757
$
280,109
$
35,714
218,043
44,494
235,615
49,706
32,227
—
9,563
91,496
48,113
21,132
346
8,608
78,199
(26,352)
(8,780)
(17,572)
1,593
11,095
(346)
955
13,297
$
309,539
$
313,814
$
(4,275)
(9)%
(20)%
(7)%
3 %
53 %
(100)%
11 %
17 %
(1)%
Net interest margin (tax-equivalent)
3.37%
3.89%
26
Net Interest Income
Net interest income for 2012 decreased $17.6 million, or 7 percent, over the same period the prior year. Interest income decreased $26.4
million, or 9 percent, while interest expense decreased $8.8 million, or 20 percent from 2011. The decrease in interest income from the
prior year was principally due to the increase in premium amortization on investment securities and the reduction in balances and yields
on loans, the combination of which put further pressure on earning asset yields. Interest income was reduced by $72.0 million in premium
amortization on investment securities which was an increase of $33.9 million from the prior year. This increase in premium amortization
was the result of both the increased purchases of investment securities combined with the continued refinance activity. The decrease in
interest expense during 2012 was primarily attributable to the decreases in rates on interest bearing deposits and borrowings. The funding
cost (including non-interest bearing deposits) for 2012 was 55 basis points compared to 74 basis points for 2011.
The net interest margin, on a tax-equivalent basis, for 2012 was 3.37 percent, a 52 basis points reduction from the net interest margin of
3.89 percent for 2011. The reduction was attributable to a lower yield and volume of loans coupled with an increase in lower yielding
investment securities and higher premium amortization on investment securities, both of which outpaced the reduction in funding cost.
The premium amortization in 2012 accounted for a 104 basis points reduction in the net interest margin which was an increase of 44
basis points compared to the 60 basis points reduction in the net interest margin for the same period in the prior year.
Non-interest Income
Non-interest income of $91.5 million for 2012 increased $13.3 million, or 17 percent, over non-interest income of $78.2 million for
2011. Service charge fee income increased $1.6 million, or 3 percent, the majority of which was from higher debit card income driven
by the increased number of deposit accounts. Gain on sale of loans for 2012 increased $11.1 million, or 53 percent, from 2011 due to
greater refinance and loan origination activity. Included in other income was operating revenue of $355 thousand from OREO and gains
of $2.0 million on the sale of OREO, which totaled $2.4 million for 2012 compared to $2.7 million for the same period in the prior year.
Non-interest Expense
The following table summarizes non-interest expense for the periods indicated, including the amount and percentage change from
December 31, 2011:
(Dollars in thousands)
Compensation and employee benefits
Occupancy and equipment
Advertising and promotions
Outsourced data processing
Other real estate owned
Regulatory assessments and insurance
Core deposit intangible amortization
Other expense
Total non-interest expense before
goodwill impairment charge
Goodwill impairment charge
Total non-interest expense
Years ended
December 31,
2012
December 31,
2011
$
95,373
$
85,691
$
23,837
6,413
3,324
18,964
7,313
2,110
36,087
193,421
—
23,599
6,469
3,153
27,255
8,169
2,473
35,156
191,965
40,159
$
193,421
$
232,124
$
$ Change
% Change
9,682
238
(56)
171
(8,291)
(856)
(363)
931
1,456
(40,159)
(38,703)
11 %
1 %
(1)%
5 %
(30)%
(10)%
(15)%
3 %
1 %
(100)%
(17)%
Compensation and employee benefits for 2012 increased $9.7 million, or 11 percent, and was attributable to an increase in commissions
on residential real estate loan originations, a revised Company incentive program and the restoration in 2012 of certain compensation
cuts made in 2011. OREO expense of $19.0 million for 2012 decreased $8.3 million, or 30 percent, from the prior year. The OREO
expense for 2012 included $3.6 million of operating expenses, $13.3 million of fair value write-downs, and $2.1 million of loss on sale
of OREO.
Provision for Loan Losses
The provision for loan losses was $21.5 million for 2012, a decrease of $43.0 million, or 67 percent, from the same period in the prior
year. Net charged-off loans during the 2012 was $28.2 million, a decrease of $35.9 million from 2011. The largest category of net charge-
offs was in land, lot and other construction loans which had net charge-offs of $9.8 million, or 35 percent of total net charged-off loans.
Net charge-offs totaled $31.3 million in this loan category in 2011.
27
ADDITIONAL MANAGEMENT’S DISCUSSION AND ANALYSIS
Lending Activity and Practices
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 that concentrates on targeted businesses, and 3) installment
lending for consumer purposes (e.g., automobile, home equity, 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 “Item 7. 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 “Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations” is based on the Company’s loan segments and classes which is 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:
(Dollars in thousands)
Residential real estate
loans
Commercial loans
Real estate
Other commercial
Total
Consumer and other loans
Home equity
Other consumer
Total
Loans receivable
Allowance for loan and
lease losses
December 31, 2013
December 31, 2012
December 31, 2011
December 31, 2010
December 31, 2009
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
$
577,589
15.00 % $
516,467
16.00 % $
516,807
16.00 % $
632,877
18.00 % $
743,147
19.00 %
2,049,247
52.00 % 1,655,508
51.00 %
1,672,059
50.00 %
1,796,503
50.00 % 1,894,690
48.00 %
852,036
22.00 %
623,397
19.00 %
623,868
19.00 %
654,588
18.00 %
724,579
19.00 %
2,901,283
74.00 % 2,278,905
70.00 %
2,295,927
69.00 %
2,451,091
68.00 % 2,619,269
67.00 %
366,465
217,501
9.00 %
5.00 %
403,925
12.00 %
440,569
13.00 %
483,137
13.00 %
501,866
13.00 %
198,128
6.00 %
212,832
6.00 %
182,184
5.00 %
199,633
5.00 %
583,966
14.00 %
602,053
18.00 %
653,401
19.00 %
665,321
18.00 %
701,499
18.00 %
4,062,838
103.00 % 3,397,425
104.00 %
3,466,135
104.00 %
3,749,289
104.00 % 4,063,915
104.00 %
(130,351)
(3.00)%
(130,854)
(4.00)%
(137,516)
(4.00)%
(137,107)
(4.00)%
(142,927)
(4.00)%
Loans receivable, net
$ 3,932,487
100.00 % $ 3,266,571
100.00 % $ 3,328,619
100.00 % $ 3,612,182
100.00 % $ 3,920,988
100.00 %
The stated maturities or first repricing term (if applicable) for the loan portfolio at December 31, 2013 was as follows:
(Dollars in thousands)
Variable rate maturing or repricing in
One year or less
One to five years
Thereafter
Fixed rate maturing in
One year or less
One to five years
Thereafter
Totals
Residential
Real Estate
Commercial
Consumer
and Other
Totals
$
$
191,372
105,217
15,759
113,589
106,898
44,754
577,589
903,333
926,407
164,222
348,215
418,829
140,277
2,901,283
231,051
24,967
3,714
123,619
183,973
16,642
583,966
1,325,756
1,056,591
183,695
585,423
709,700
201,673
4,062,838
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 the loan-to-value to be above 80 percent
of the loan when insured by a private mortgage insurance company. The Company also provides interim construction financing for
single-family dwellings. These loans are supported by a term take-out commitment.
28
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 during the past five years, 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.
Commercial Real Estate Loans
Loans are made to purchase, construct and finance commercial real estate properties. These loans are generally made to borrowers who
own and will occupy the property and 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. Loans to finance investment or income properties are made,
but require additional equity and generally have a loan-to-value up to the lesser of 70 percent of appraised value or 70 percent of cost
and require a higher debt service coverage margin commensurate with the specific property and projected income.
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.
Home Equity Loans
The Company’s $366 million of home equity loans as of December 31, 2013 consist of 1-4 family junior lien mortgages and first and
junior lien lines of credit secured by residential real estate. The home equity loan portfolio consists of 62 percent variable interest rate
and 38 percent fixed interest rate loans. Approximately 49 percent of the home equity loans are in a first lien status with the remaining
51 percent in junior lien status. Approximately 20 percent of the home equity loans are closed-end amortizing loans and 80 percent are
open-end, revolving home equity lines of credit.
Home equity lines of credit are generally originated with maturity terms from 10 to 15 years. At origination, borrowers can choose a
variable interest rate or fixed interest rate for the full term of the line of credit, or a fixed interest rate for the first 3 or 5 years from
origination which then converts to a variable interest rate for the remaining term of the home equity lines of credit. The draw period
usually exists from origination to the maturity of the home equity lines of credit. During the draw period, a borrower with a variable
interest rate term has the option of converting to a fixed interest rate for all or a portion of the remaining term 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.
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.
29
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. Each
bank division has an Officer Loan Committee consisting of senior lenders and members of senior management. Each of the Bank divisions’
Officer Loan Committees have loan approval authority between $250,000 and $1,000,000. Each of the Bank divisions’ Advisory Boards
have loan approval authority up to $2,000,000. Loans exceeding these limits and up to $10,000,000 are subject to approval by the
Company’s Executive Loan Committee consisting of the Bank divisions’ senior loan officers and the Company’s Credit Administrator.
Loans greater than $10,000,000 are subject to approval by the 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.
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 $56.7 million and $52.2 million of loans with interest reserves with remaining reserves of $385 thousand and $945
thousand as of December 31, 2013 and 2012, respectively. During 2013, the Company extended, renewed or restructured 27 loans with
interest reserves, such loans having an aggregate outstanding principal balance of $13.2 million as of December 31, 2013. During 2012,
the Company extended, renewed or restructured 20 loans with interest reserves, such loans having an aggregate outstanding principal
balance of $16.2 million as of December 31, 2012. Such actions were based on prudent underwriting standards and not to keep the loans
current. As of December 31, 2013, the Company had 3 construction loans totaling $480 thousand with interest reserves that are currently
non-performing or which are potential problem loans.
30
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, FHA and VA 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 rates. In connection with conventional loan
sales, the Company typically sells the majority of mortgage loans originated with servicing released. The Company has also been very
active in generating commercial SBA 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 securities that were 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 percent to 1.5 percent on residential mortgages and 0.5 percent to 1.5 percent on commercial loans. Consumer
loans require a fixed fee amount as well as a minimum interest 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 requirements of the
Interagency Appraisal and Evaluation Guidelines (and the Interagency Guidelines for Real Estate Lending Policies in Appendix A to Part
365 of Title 12, CFR) (collectively, the “Guidelines”) and the Uniform Standards of Professional Appraisal Practice (“USPAP”) as
established and amended by the Appraisal Standards Board. The Company’s Loan Policy establishes criteria for obtaining appraisals or
evaluations (new or updated), including transactions that are otherwise exempt from the appraisal requirements set forth within the
Guidelines.
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 three weeks for residential
property 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).
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, the Guidelines and USPAP standards. 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 the Bank’s Board of Directors and prompt
corrective action is taken.
31
Non-performing Assets
The following table summarizes information regarding non-performing assets at the dates indicated:
(Dollars in thousands)
December 31,
2013
December 31,
2012
December 31,
2011
December 31,
2010
December 31,
2009
At or for the Years ended
Other real estate owned
$
26,860
45,115
78,354
73,485
57,320
Accruing loans 90 days or more past due
Residential real estate
Commercial
Consumer and other
Total
Non-accrual loans
Residential real estate
Commercial
Consumer and other
Total
429
160
15
604
10,702
61,577
9,677
81,956
451
791
237
1,479
14,237
68,887
13,809
96,933
59
1,168
186
1,413
11,881
109,641
12,167
133,689
506
3,051
974
4,531
23,095
161,136
8,274
192,505
1,965
1,311
2,261
5,537
20,093
168,328
9,860
198,281
Total non-performing assets 1
$
109,420
143,527
213,456
270,521
261,138
Non-performing assets as a percentage of
subsidiary assets
Allowance for loan and lease losses as a
percentage of non-performing loans
Accruing loans 30-89 days past due
Troubled debt restructurings not included in
non-performing assets
Interest income 2
$
$
$
1.39%
1.87%
2.92%
3.91%
4.13%
158%
133%
102%
70%
70%
32,116
27,097
49,086
45,497
87,491
81,110
100,151
98,859
4,122
5,161
7,441
26,475
10,987
13,829
11,730
__________
1 As of December 31, 2013, non-performing assets have not been reduced by U.S. government guarantees of $5.4 million.
2 Amounts represent estimated interest income that would have been recognized on loans accounted for on a non-accrual basis as of the end of each
period had such loans performed pursuant to contractual terms.
Non-performing assets at December 31, 2013 were $109 million, a decrease of $34.1 million, or 24 percent, from a year ago. The largest
category of non-performing assets was the land, lot and other construction category (i.e., regulatory classification) which was $51.6
million, or 47 percent, of the non-performing assets at December 31, 2013. Included in this category was $25.1 million of land development
loans and $13.6 million in unimproved land loans at December 31, 2013. The Company has continued to reduce its exposure to land,
lot and other construction category over each of the prior two years. The Company’s early stage delinquencies (accruing loans 30-89
days past due) of $32.1 million at December 31, 2013 increased $5.0 million, or 19 percent, from the prior year.
32
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 loss to the Company. The Company evaluates the level of its non-performing
assets, the values of the underlying real estate and other collateral, and related trends in 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. Throughout the past year, the Company has
maintained an adequate allowance while working to reduce non-performing assets. The improvement in the credit quality ratios over the
past year is a product of this effort.
For non-performing construction loans involving residential structures, the percentage of completion exceeds 95 percent at December 31,
2013. For non-performing construction loans involving commercial structures, the percentage of completion ranges from projects not
started to projects completed at December 31, 2013. 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. With
very limited exception, the Company does not disburse additional funds on non-performing loans. Instead, the Company has proceeded
to collection and foreclosure actions in order to reduce the Company’s exposure to loss on such loans.
Construction loans, a regulatory classification. accounted for 40 percent of the Company’s non-accrual loans as of December 31, 2013.
Land, lot and other construction loans, a regulatory classification, were 95 percent of the non-accrual construction loans. Of the Company’s
$32.8 million of non-accrual construction loans at December 31, 2013, 94 percent of such loans had collateral properties securing the
loans in Western Montana and Idaho. With locations and operations in the contiguous northern Rocky Mountain states of Idaho and
Montana, the geography and economies of each of these geographic areas are predominantly tied to real estate development given the
sprawling abundance of timbered valleys and mountainous terrain with significant lakes, streams and watershed areas. Consistent with
the general economic downturn, the market for upscale primary, secondary and other housing as well as the associated construction and
building industries remains stalled after years of significant growth. As the housing market (rental and owner-occupied) and related
industries continue to recover from the downturn, the Company continues to reduce its exposure to loss in the land, lot and other construction
loan portfolio.
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 $200 million and $202 million as of December 31, 2013 and 2012, respectively. The ALLL includes specific valuation
allowances of $11.9 million and $15.5 million of impaired loans as of December 31, 2013 and 2012, respectively. Of the total impaired
loans at December 31, 2013, there were 26 significant commercial real estate and other commercial loans that accounted for $80.3 million,
or 40 percent, of the impaired loans. The 26 loans were collateralized by 139 percent of the loan value, the majority of which had
appraisals or evaluations (new or updated) during the last year, such appraisals reviewed at least quarterly taking into account current
market conditions. Of the total impaired loans at December 31, 2013, there were 168 loans aggregating $101 million, or 51 percent,
whereby the borrowers had more than one impaired loan. The amount of impaired loans that have had partial charge-offs during the year
for which the Company continues to have concern about the collectability of the remaining loan balance was $6.5 million. Of these
loans, there were charge-offs of $2.1 million during 2013.
33
Restructured Loans
A restructured loan is considered a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s
financial difficulties, grants a concession to the debtor that it would not otherwise consider. The Company had TDR loans of $124 million
and $151 million as of December 31, 2013 and 2012, respectively. The Company’s TDR loans are considered impaired loans of which
$42.5 million and $50.9 million as of December 31, 2013 and 2012, respectively, are designated as non-accrual.
Each restructured debt is separately negotiated with the borrower and includes terms and conditions that reflect the borrower’s prospective
ability to service the debt as modified. The Company discourages the use of the multiple loan strategy when restructuring loans regardless
of whether or not the notes are TDR loans. The Company does not have any commercial TDR loans as of December 31, 2013 that have
repayment dates extended at or near the original maturity date for which the Company has not classified as impaired. At December 31,
2013, the Company has TDR loans of $21.2 million that are in non-accrual status or that have had partial charge-offs during the year, the
borrowers of which continue to have $31.4 million in other loans that are on accrual status.
Other Real Estate Owned
The loan book value prior to the acquisition and transfer of the loan into OREO during 2013 was $18.3 million of which $5.4 million
was residential real estate, $9.1 million was commercial, and $3.8 million was consumer loans. The fair value of the loan collateral
acquired in foreclosure during 2013 was $15.3 million of which $4.5 million was residential real estate, $8.1 million was commercial,
and $2.7 million was consumer loans. The following table sets forth the changes in OREO for the periods indicated:
(Dollars in thousands)
Balance at beginning of period
Acquisitions
Additions
Capital improvements
Write-downs
Sales
Balance at end of period
December 31,
2013
Years ended
December 31,
2012
December 31,
2011
$
$
45,115
1,203
15,266
79
(3,639)
(31,164)
26,860
78,354
—
27,536
—
(13,258)
(47,517)
45,115
73,485
—
79,295
669
(16,246)
(58,849)
78,354
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, changes in collateral values, delinquencies, non-performing
assets and net charge-offs.
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 prior loss experience, adjusted for changes in trends
and conditions of qualitative or environmental factors.
34
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
and reviews and approves the overall ALLL for the Company. 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 unimpaired loan portfolio 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 of thirteen Bank divisions with separate management teams provides substantial local oversight to the lending
and credit management function. The Company’s business model affords multiple reviews of larger loans before credit is extended, a
significant benefit in mitigating and managing the Company’s credit risk. The geographic dispersion of the market areas in which the
Company operates further mitigates the risk of credit loss. While this process is intended to limit credit exposure, there can be no assurance
that further problem credits will not arise and additional loan losses incurred, particularly in periods of rapid economic downturns.
The primary responsibility for credit risk assessment and identification of problem loans rests with the loan officer of the account. This
continuous process of identifying impaired loans is necessary to support management’s evaluation of the ALLL adequacy. An independent
loan review function verifying credit risk ratings evaluates the loan officer and management’s evaluation of the loan portfolio credit
quality. The loan review function also assesses the evaluation process and provides an independent analysis of the adequacy of the ALLL.
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.”
The following table summarizes the allocation of the ALLL as of the dates indicated:
(Dollars in
thousands)
Residential
real estate
Commercial
real estate
Other
commercial
Home equity
Other
consumer
December 31, 2013
Percent
of Loans
in
Category
ALLL
December 31, 2012
Percent
of Loans
in
Category
ALLL
December 31, 2011
Percent
of Loans
in
Category
ALLL
December 31, 2010
Percent
of Loans
in
Category
ALLL
December 31, 2009
Percent
of Loans
in
Category
ALLL
18%
47%
18%
12%
5%
100%
$ 14,067
14% $ 15,482
15% $ 17,227
15% $ 20,957
17% $ 13,496
70,332
51%
74,398
49%
76,920
48%
76,147
48%
66,791
28,630
9,299
21%
9%
21,567
10,659
18%
12%
20,833
13,616
18%
13%
19,932
13,334
17%
13%
39,558
13,419
8,023
5%
8,748
6%
8,920
6%
6,737
5%
9,663
Totals
$130,351
100% $130,854
100% $137,516
100% $137,107
100% $142,927
35
The following table summarizes the ALLL experience for the periods indicated:
(Dollars in thousands)
December 31,
2013
December 31,
2012
Years ended
December 31,
2011
December 31,
2010
December 31,
2009
Balance at beginning of period
Provision for loan losses
$
130,854
6,887
137,516
21,525
137,107
64,500
142,927
84,693
76,739
124,618
Charge-offs
Residential real estate
Commercial loans
Consumer and other loans
Total charge-offs
Recoveries
Residential real estate
Commercial loans
Consumer and other loans
Total recoveries
(793)
(8,407)
(4,443)
(13,643)
299
4,803
1,151
6,253
(5,267)
(21,578)
(7,827)
(34,672)
643
4,088
1,754
6,485
(5,671)
(52,428)
(11,267)
(69,366)
486
3,830
959
5,275
(16,575)
(69,595)
(7,780)
(93,950)
749
2,203
485
3,437
(18,854)
(35,077)
(6,965)
(60,896)
423
1,636
407
2,466
Charge-offs, net of recoveries
(7,390)
(28,187)
(64,091)
(90,513)
(58,430)
Balance at end of period
$
130,351
130,854
137,516
137,107
142,927
Allowance for loan and lease losses as a
percentage of total loans
Net charge-offs as a percentage of average
loans
3.21%
0.20%
3.85%
0.80%
3.97%
1.77%
3.66%
2.26%
3.52%
1.41%
At December 31, 2013, the allowance was $130 million, a decrease of $503 thousand, or less than 1 percent from a year ago. The
allowance was 3.21 percent of total loans outstanding at December 31, 2013, a decrease of 64 basis points from 3.85 percent at December
31, 2012. Such difference was primarily attributable to no allowance carried over from the acquisitions as a result of the acquired loans
recorded at fair value. Excluding the acquired banks, the allowance was 3.54 percent of total loans outstanding at December 31, 2013,
a 31 basis points decrease from the 3.85 percent at December 31, 2012. The allowance was 158 percent of non-performing loans at
December 31, 2013, an increase from 133 percent at December 31, 2012.
The Company’s allowance of $130 million is considered adequate to absorb losses from any class of its loan portfolio. For the periods
ended December 31, 2013 and 2012, the Company believes the allowance is commensurate with the risk in the Company’s loan portfolio
and is directionally consistent with the change in the quality of the Company’s loan portfolio.
When applied to the Company’s historical loss experience, the qualitative or environmental factors result in the provision for loan losses
being recorded in the period in which the loss has probably occurred. When the loss is confirmed at a later date, a charge-off is recorded.
During 2013, loan charge-offs, net of recoveries, exceeded the provision for loan losses by $503 thousand. During the same period in
2012, loan charge-offs, net of recoveries, exceeded the provision for loan losses by $6.7 million.
The Company provides commercial services to individuals, small to medium size businesses, community organizations and public entities
from 118 locations, including 110 branches, across Montana, Idaho, Wyoming, Colorado, Utah, and Washington. The Rocky Mountain
states in which the Company operates has 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.
36
Although there continues to be heightened uncertainty in the economic environment, there was notable improvements during the last
year compared to the past several years. There was steady growth in the housing permits, housing starts, and completions for new privately
owned units during the last year in Montana, Idaho, Colorado and Utah in relation to the US national statistics. There was improvement
in single family residential real estate construction and sales for all of the Company’s market areas. Single family residential collateral
values in Idaho, Wyoming and Montana stabilized (with some improvement in isolated markets in which the Company operates) compared
to the prior year and prior 5 year historical trends. In the states in which the Company operates, foreclosures have been on a steady
decline the past several years and the state unemployment rates were lower than the national unemployment rate at December 2013. The
national unemployment rate increased steadily from 5.0 percent in the first part of 2008 to a range of 7.8 percent to 10.0 percent during
2009 through 2012 and has declined to 6.7 percent in December of 2013. Agricultural price declines in livestock and grain in 2009 have
recovered significantly and remain strong. While prices for oil have held strong, prices for natural gas continue to remain weak (due to
excess supply) especially when compared to the exceptionally high price levels of natural gas during 2008. The tourism industry and
related lodging continues to be a source of strength for the locations where the Company’s market areas have national parks and similar
recreational areas in the market areas served.
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 11 percent and 12 percent of the Company’s total loan portfolio and accounted for 40 percent
and 40 percent of the Company’s non-accrual loans at December 31, 2013 and 2012, respectively. Collateral securing construction loans
includes residential buildings (e.g., single/multi-family and condominiums), commercial buildings, and associated land (multi-acre parcels
and individual lots, with and without shorelines).
The Company’s allowance consisted of the following components as of the dates indicated:
(Dollars in thousands)
Specific valuation allowance
General valuation allowance
Total ALLL
December 31,
2013
December 31,
2012
$
$
11,949
118,402
130,351
15,534
115,320
130,854
During 2013, the ALLL decreased by $503 thousand, the net result of a $3.6 million decrease in the specific valuation allowance and a
$3.1 million increase in the general valuation allowance. The loans individually reviewed for impairment remained stable with a decrease
of $2.1 million from the prior year end. The remaining decrease of the specific valuation allowance was the result of increased fair
values of collateral-dependent loans or the present value of the loans expected future cash flows of the individual impaired loans. The
increase in the general valuation allowance was due to an increase of $667 million in loans collectively evaluated for impairment, although,
the acquired loan portfolios of $387 million were recorded at fair value with no allowance carried over. Although there was organic loan
growth of $278 million, or 8 percent, during the current year, the following trends further support a stable ALLL balance:
• Non-accrual construction loans (i.e., residential construction and land, lot and other construction, each a regulatory classification)
were $32.8 million, or 40 percent, of the $82.0 million of non-accrual loans at December 31, 2013, a decrease of $6.4 million
from the prior year end. Non-accrual construction loans were $39.2 million, or 40 percent, of the $96.9 million of non-accrual
loans at year end 2012.
• Non-performing loans as a percent of total loans decreased to 2.03 percent at December 31, 2013 as compared to 2.90 percent at
•
December 31, 2012.
Impaired loans as a percent of total loans decreased to 4.91 percent at December 31, 2013 as compared to 5.94 percent at December
31, 2012.
• Charge-offs, net of recoveries, in 2013 were $7.4 million, a $20.8 million decrease from 2012.
For additional information regarding the ALLL, its relation to the provision for loan losses and risk related to asset quality, see Note 4
to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.”
37
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,
2013
December 31,
2012
$ Change
% Change
Custom and owner occupied construction
$
50,352
$
40,327
$
Pre-sold and spec construction
Total residential construction
Land development
Consumer land or lots
Unimproved land
Developed lots for operative builders
Commercial lots
Other construction
34,217
84,569
73,132
109,175
50,422
15,951
12,585
103,807
34,970
75,297
80,132
104,229
53,459
16,675
19,654
56,109
10,025
(753)
9,272
(7,000)
4,946
(3,037)
(724)
(7,069)
47,698
Total land, lot, and other construction
365,072
330,258
34,814
Owner occupied
Non-owner occupied
Total commercial real estate
811,479
588,114
710,161
452,966
1,399,593
1,163,127
101,318
135,148
236,466
Commercial and industrial
523,354
420,459
102,895
Agriculture
1st lien
Junior lien
Total 1-4 family
Multifamily residential
Home equity lines of credit
Other consumer
Total consumer
Other
279,959
145,890
134,069
733,406
73,348
806,754
738,854
82,083
820,937
(5,448)
(8,735)
(14,183)
123,154
93,328
29,826
298,119
130,758
428,877
98,244
319,779
109,019
428,798
64,832
(21,660)
21,739
79
33,412
566,650
98,763
Total loans receivable, including loans held for sale
Less loans held for sale 1
4,109,576
(46,738)
3,542,926
(145,501)
Total loans receivable
$
4,062,838
$
3,397,425
$
665,413
__________
1 Loans held for sale are primarily 1st lien 1-4 family loans.
38
25 %
(2)%
12 %
(9)%
5 %
(6)%
(4)%
(36)%
85 %
11 %
14 %
30 %
20 %
24 %
92 %
(1)%
(11)%
(2)%
32 %
(7)%
20 %
— %
52 %
16 %
(68)%
20 %
The following tables summarize selected information identified by regulatory classification on the Company’s non-performing assets.
(Dollars in thousands)
Custom and owner occupied construction
Pre-sold and spec construction
Total residential construction
Land development
Consumer land or lots
Unimproved land
Developed lots for operative builders
Commercial lots
Other construction
Total land, lot and other construction
Owner occupied
Non-owner occupied
Total commercial real estate
Commercial and industrial
Agriculture
1st lien
Junior lien
Total 1-4 family
Multifamily residential
Home equity lines of credit
Other consumer
Total consumer
Non-performing Assets,
by Loan Type
December 31,
2013
December 31,
2012
Non-
Accruing
Loans
December 31,
2013
Accruing
Loans 90
Days
or More Past
Due
December 31,
2013
Other
Real Estate
Owned
December 31,
2013
$
1,248
828
2,076
25,062
2,588
13,630
2,215
2,899
5,167
51,561
14,270
4,301
18,571
6,400
3,529
17,630
4,767
22,397
—
4,544
342
4,886
1,343
1,603
2,946
31,471
6,459
19,121
2,393
1,959
5,105
66,508
15,662
4,621
20,283
5,970
6,686
25,739
6,660
32,399
253
8,041
441
8,482
1,248
403
1,651
15,213
1,759
12,194
1,504
300
178
31,148
12,426
2,908
15,334
6,238
3,064
14,983
4,767
19,750
—
4,469
302
4,771
—
—
—
—
—
—
—
—
—
—
—
—
—
160
—
434
—
434
—
—
10
10
—
425
425
9,849
829
1,436
711
2,599
4,989
20,413
1,844
1,393
3,237
2
465
2,213
—
2,213
—
75
30
105
Total
$
109,420
143,527
81,956
604
26,860
39
(Dollars in thousands)
Custom and owner occupied construction
Pre-sold and spec construction
Total residential construction
Land development
Consumer land or lots
Unimproved land
Developed lots for operative builders
Commercial lots
Total land, lot and other construction
Owner occupied
Non-owner occupied
Total commercial real estate
Commercial and industrial
Agriculture
1st lien
Junior lien
Total 1-4 family
Multifamily residential
Home equity lines of credit
Other consumer
Total consumer
Total
__________
n/m - not measurable
$ Change
% Change
3,940 %
(100)%
(78)%
(100)%
125 %
46 %
(98)%
(100)%
29 %
(4)%
(17)%
(8)%
86 %
50 %
68 %
(34)%
59 %
n/m
(52)%
6 %
(41)%
19 %
Accruing 30-89 Days Delinquent
Loans, by Loan Type
December 31,
2013
December 31,
2012
$
202
$
5
$
—
202
—
1,716
615
8
—
2,339
5,321
2,338
7,659
3,542
1,366
12,386
482
12,868
1,075
1,999
1,066
3,065
893
898
191
762
422
422
11
1,808
5,523
2,802
8,325
1,905
912
7,352
732
8,084
—
4,164
1,001
5,165
197
(893)
(696)
(191)
954
193
(414)
(11)
531
(202)
(464)
(666)
1,637
454
5,034
(250)
4,784
1,075
(2,165)
65
(2,100)
$
32,116
$
27,097
$
5,019
40
The following table summarizes net charge-offs at the dates indicated, including identification by regulatory classification:
(Dollars in thousands)
Custom and owner occupied construction
Pre-sold and spec construction
Total residential construction
Land development
Consumer land or lots
Unimproved land
Developed lots for operative builders
Commercial lots
Other construction
Total land, lot and other construction
Owner occupied
Non-owner occupied
Total commercial real estate
Commercial and industrial
Agriculture
1st lien
Junior lien
Total 1-4 family
Multifamily residential
Home equity lines of credit
Other consumer
Total consumer
Other
Total
Net Charge-Offs (Recoveries),
Years ended, By Loan Type
December 31,
2013
December 31,
2012
Charge-Offs
December 31,
2013
Recoveries
December 31,
2013
24
2,489
2,513
3,035
4,003
636
1,802
362
—
9,838
1,312
597
1,909
2,651
125
5,257
3,464
8,721
43
2,124
262
2,386
1
—
187
187
664
1,232
770
74
254
—
2,994
1,513
516
2,029
4,386
53
980
352
1,332
—
1,918
731
2,649
13
51
197
248
1,047
389
55
155
6
473
2,125
1,163
119
1,282
1,290
—
299
246
545
39
312
407
719
5
28,187
13,643
6,253
(51)
(10)
(61)
(383)
843
715
(81)
248
(473)
869
350
397
747
3,096
53
681
106
787
(39)
1,606
324
1,930
8
7,390
$
$
41
Investment Activity
For all years presented, all of the Company’s investment securities were classified as available-for-sale and were carried at estimated fair
value with unrealized gains or losses, net of tax, reflected as an adjustment to other comprehensive income. Investment securities
designated as available-for-sale are summarized below:
(Dollars in thousands)
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
December 31, 2013
December 31, 2012
December 31, 2011
December 31, 2010
December 31, 2009
U.S. government and
federal agency
U.S. government
sponsored enterprises
State and local
governments
Corporate bonds
Collateralized debt
obligations
Residential mortgage-
backed securities
Total investment
securities,
available-for-sale
$
—
—% $
202
—% $
208
—% $
211
—% $
211
—%
10,628
—%
17,480
—%
31,155
1%
41,518
2%
41,518
2%
1,385,078
43% 1,214,518
33% 1,064,655
442,501
14%
288,795
8%
62,237
34%
2%
657,421
—
27%
—%
657,421
—
27%
—%
—
—%
1,708
—%
5,366
—%
6,595
—%
6,595
—%
1,384,622
43% 2,160,302
59% 1,963,122
63% 1,690,102
71% 1,690,102
71%
$3,222,829
100% $3,683,005
100% $3,126,743
100% $2,395,847
100% $2,395,847
100%
The Company’s investment portfolio is primarily comprised of residential mortgage-backed securities and state and local government
securities which are largely exempt from federal income tax. During 2013, as the Company received payments on its residential mortgage-
backed securities, holdings of state and local government securities and corporate bonds were increased such that the volatility of
prepayments and the associated premium amortization on its residential mortgage-backed securities was reduced. The residential
mortgage-backed securities are typically short, weighted-average life U.S. agency collateralized mortgage obligations that provide the
Company with ongoing liquidity as scheduled and pre-paid principal is received on the securities. The maximum federal statutory rate
of 35 percent is used in calculating the Company’s tax-equivalent yields on tax-exempt state and local government securities.
Interest income from investment securities consisted of the following:
(Dollars in thousands)
Taxable interest
Tax-exempt interest
Total interest income
December 31,
2013
$
$
31,591
42,921
74,512
Years ended
December 31,
2012
December 31,
2011
28,687
37,699
66,386
44,842
31,420
76,262
On January 1, 2014, the Company reclassified obligations of state and local government securities with a fair value of approximately
$485 million, inclusive of a net unrealized gain of $4.6 million, from available-for-sale classification to held-to-maturity classification.
For additional investment activity information, see Notes 3 and 23 to the Consolidated Financial Statements in “Item 8. Financial Statements
and Supplementary Data.”
42
Other-Than-Temporary Impairment on Securities Analysis
Of the non-marketable equity securities owned at December 31, 2013, 98 percent consisted of capital stock issued by FHLB of Seattle.
Non-marketable equity securities are evaluated for impairment whenever events or circumstances suggest the carrying value may not be
recoverable.
The Company’s investment in FHLB stock has limited marketability and is carried at cost, which approximates fair value. With respect
to FHLB stock, the Company evaluates such stock for other-than-temporary impairment. Such evaluation takes into consideration 1)
FHLB deficiency, if any, in meeting applicable regulatory capital targets, including risk-based capital requirements, 2) the significance
of any decline in net assets of FHLB as compared to the capital stock amount for FHLB and the time period for any such decline, 3)
commitments by FHLB to make payments required by law or regulation and the level of such payments in relation to the operating
performance of FHLB, 4) the impact of legislative and regulatory changes on FHLB, and 5) the liquidity position of FHLB. In September
2012, the Federal Housing Finance Agency (“FHFA”) upgraded FHLB’s regulatory capital classification to “adequately capitalized” and
granted FHLB authority to repurchase up to $25 million of excess stock per quarter at par, provided FHLB receives a non-objection from
the FHFA for each quarter’s repurchase. In July 2013, FHLB of Seattle declared a $0.025 per share cash dividend which was the first
cash dividend paid since 2008.
Based on the Company’s evaluation of its investments in non-marketable equity securities as of December 31, 2013, the Company
determined that none of such securities had other-than-temporary impairment.
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 Nationally Recognized Statistical Rating Organizations
("NRSRO" entities such as Moody's, Standard and Poor's, and Fitch). In connection with changing macroeconomic conditions affecting
the U.S. economy, on June 10, 2013, Standard and Poor's reaffirmed its AA+ rating of U.S. government long-term debt but with an
improved outlook of stable from negative. On July 18, 2013, Moody's also upgraded its outlook to stable from negative while maintaining
its Aaa rating on U.S. government long-term debt. However, on October 15, 2013 Fitch placed its AAA long-term debt rating of the U.S.
on rating watch negative due to the U.S. government’s potential inability to raise the federal debt ceiling in a timely manner. Standard
and Poor's, Moody's and Fitch have similar credit ratings and outlooks with respect to certain long-term debt instruments issued by Federal
National Mortgage Association (“Fannie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”) and other U.S. government
agencies linked to the long-term U.S. debt.
43
The following table separates investments with an unrealized loss position at December 31, 2013 into two categories: investments
purchased prior to 2013 and those purchased during 2013. Of those investments purchased prior to 2013, the fair market value and
unrealized gain or loss at December 31, 2012 is also presented.
December 31, 2013
December 31, 2012
Fair Value
Unrealized
Loss
Unrealized
Loss as a
Percent of
Fair Value
Fair Value
Unrealized
Gain
Unrealized
Gain as a
Percent of
Fair Value
(Dollars in thousands)
Temporarily impaired securities purchased
prior to 2013
U.S. government sponsored enterprises $
State and local governments
Corporate bonds
Residential mortgage-backed securities
3
$
256,026
21,101
43,411
Total
$
320,541
$
Temporarily impaired securities purchased
during 2013
State and local governments
$
226,947
$
Corporate bonds
Residential mortgage-backed securities
Total
110,116
416,193
$
753,256
$
Temporarily impaired securities
U.S. government sponsored enterprises $
State and local governments
Corporate bonds
Residential mortgage-backed securities
3
$
482,973
131,217
459,604
Total
$ 1,073,797
$
—
(11,521)
(290)
(677)
(12,488)
(12,369)
(1,468)
(9,588)
(23,425)
—
(23,890)
(1,758)
(10,265)
(35,913)
— % $
4
$
(4)%
(1)%
(2)%
274,498
22,137
127,269
—
5,481
115
513
(4)% $
423,908
$
6,109
—%
2%
1%
—%
1%
(5)%
(1)%
(2)%
(3)%
— %
(5)%
(1)%
(2)%
(3)%
With respect to severity, the following table provides the number of securities and amount of unrealized loss in the various ranges of
unrealized loss as a percent of book value at December 31, 2013:
(Dollars in thousands)
10.1% to 15.0%
5.1% to 10.0%
0.1% to 5.0%
Total
Number of
Debt
Securities
Unrealized
Loss
11
$
128
379
518
$
(3,458)
(18,049)
(14,406)
(35,913)
With respect to the duration of the impaired debt securities, the Company identified 70 securities which have been continuously impaired
for the twelve months ending December 31, 2013. The valuation history of such securities in the prior year(s) was also reviewed to
determine the number of months in prior year(s) in which the identified securities was in an unrealized loss position.
44
The following table provides details of the 70 securities which have been continuously impaired for the twelve months ended December
31, 2013, including the most notable loss for any one bond in each category.
(Dollars in thousands)
State and local governments
Corporate bonds
Residential mortgage-backed securities
Total
Number of
Debt
Securities
Unrealized
Loss for
12 Months
Or More
Most
Notable
Loss
68
$
1
1
70
$
(6,052) $
(86)
(39)
(6,177)
(1,289)
(86)
(39)
Based on the Company's analysis of its impaired debt securities as of December 31, 2013, 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 investment securities with unrealized losses at December 31, 2013 were
issued by Freddie Mac, Fannie Mae, Government National Mortgage Association 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, 2013 have been determined by the Company to be investment grade.
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
has a number of different deposit programs designed to attract both short-term and long-term deposits from the general public by providing
a wide selection of accounts and rates. These programs include non-interest bearing demand accounts, interest bearing checking, regular
statement savings, money market deposit accounts, and fixed rate certificates of deposit with maturities ranging from three months to
five years, negotiated-rate jumbo certificates, and individual retirement accounts. In addition, the Company obtains wholesale deposits
through various programs and are classified as NOW accounts, money market deposit accounts and certificate accounts.
The Company also obtains funds from repayment of loans and investment securities, repurchase agreements, 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 and to match maturities of longer-term assets.
Deposits
Deposits are obtained primarily from individual and business residents of the Bank’s market areas. The Bank issues negotiated-rate
certificate of deposits accounts and has paid a limited amount of fees to brokers to obtain deposits. The following table illustrates the
amounts outstanding at December 31, 2013 for deposits of $100,000 and greater, according to the time remaining to maturity. Included
in certificates of deposit are brokered certificates of deposit of $50.9 million. Included in Demand Deposits are brokered deposits of
$153 million.
(Dollars in thousands)
Within three months
Three months to six months
Seven months to twelve months
Over twelve months
Total
Certificates
of Deposit
Demand
Deposits
$
$
207,241
149,605
145,110
159,968
661,924
2,685,577
—
—
—
2,685,577
Total
2,892,818
149,605
145,110
159,968
3,347,501
For additional deposit information, see Note 7 to the Consolidated Financial Statements in “Item 8. Financial Statements and
Supplementary Data.”
45
Repurchase Agreements, FHLB 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 enters into an agreement to “repurchase” that same security at an agreed upon
later date, typically overnight. A rate of interest is paid for the agreed period of time. Through a policy adopted by the Bank’s Board of
Directors, the Bank enters into repurchase agreements with local municipalities, and certain customers, and have adopted procedures
designed to ensure proper transfer of title and safekeeping of the underlying securities. In addition to retail repurchase agreements, the
Company enters into wholesale repurchase agreements as additional funding sources. The Company has not entered into reverse repurchase
agreements.
The Bank is a member of FHLB of Seattle which is one of twelve banks that comprise the FHLB System. As a member of FHLB, the
Bank may borrow from FHLB on the security of FHLB stock, which the Bank is required to own as a member. The borrowings are
collateralized by eligible categories of loans and investment securities (principally, securities which are obligations of, or guaranteed by,
the U.S. government and its agencies), provided certain standards related to credit-worthiness have been met. Advances are made pursuant
to several different credit programs, each of which has its own interest rate and range of maturities. Depending on the program, limitations
on the amount of advances are based either on a fixed percentage of an institution’s total assets or on FHLB’s assessment of the institution’s
credit-worthiness. FHLB advances fluctuate to meet seasonal and other withdrawals of deposits and to expand lending or investment
opportunities. 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 and repurchase agreements, see Notes 8 and 9 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 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 extended 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 short-term borrowings which consists of borrowings that mature within one year of
period end:
(Dollars in thousands)
Repurchase agreements
Amount outstanding at end of period
Weighted interest rate on outstanding amount
Maximum outstanding at any month-end
Average balance
Weighted-average interest rate
FHLB advances
Amount outstanding at end of period
Weighted interest rate on outstanding amount
Maximum outstanding at any month-end
Average balance
Weighted-average interest rate
December 31,
2013
At or for the Years ended
December 31,
2012
December 31,
2011
$
$
$
$
$
$
313,394
289,508
258,643
0.28%
0.32%
0.42%
326,184
295,004
466,784
354,324
338,352
267,058
0.29%
0.37%
0.51%
559,084
720,000
792,000
0.24%
0.28%
0.68%
939,109
693,225
792,018
719,762
877,017
721,226
0.25%
0.50%
0.76%
46
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 shareholder to receive cumulative cash distributions from payments thereon. The
subordinated debentures outstanding as of December 31, 2013 were $126 million, including fair value adjustments from prior acquisitions.
For additional information regarding the subordinated debentures, see Note 10 to the Consolidated Financial Statements “Item 8. Financial
Statements and Supplementary Data.”
Contractual Obligations and Off-Balance Sheet Arrangements
The Company has outstanding debt obligations, the largest aggregate amount of which were FHLB advances. 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. For the schedules of outstanding commitments, see Note 21 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, 2013:
(Dollars in thousands)
Total
Deposits
Repurchase agreements
FHLB advances
Other borrowed funds
Subordinated debentures
Capital lease obligations
Operating lease
obligations
$ 5,579,967
313,394
840,182
6,697
125,562
2,169
Indeter-
minate
Maturity 1
4,411,365
—
—
—
—
—
12,148
$ 6,880,119
—
4,411,365
2,297
1,740,656
Payments Due by Period
2014
2015
2016
2017
2018
Thereafter
864,633
313,394
559,084
420
—
828
164,104
—
77,979
—
—
195
2,120
244,398
79,425
—
45,042
4
—
197
1,879
126,547
33,976
—
—
147
—
200
1,577
35,900
19,244
—
20,250
197
—
203
1,375
41,269
7,220
—
137,827
5,929
125,562
546
2,900
279,984
__________
1 Represents non-interest bearing deposits and NOW, savings, and money market accounts.
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.
3. Balancing the benefits between providing for adequate liquidity to mitigate potential adverse events and the cost of that liquidity.
47
The Company has a wide range of versatility in managing the liquidity and asset/liability mix. The Company’s ALCO meets regularly
to assess liquidity risk, among other matters. The Company monitors liquidity and contingency funding alternatives through management
reports of liquid assets (e.g., investment securities), both unencumbered and pledged, as well as borrowing capacity, both secured and
unsecured, including off-balance sheet funding sources. The Company evaluates its potential funding needs across alternative scenarios
and maintains contingency funding plans consistent with the Company’s access to diversified sources of contingent funding.
The following table identifies certain liquidity sources and capacity available to the Company at December 31, 2013:
(Dollars in thousands)
FHLB advances
Borrowing capacity
Amount utilized
Amount available
FRB discount window
Borrowing capacity
Amount utilized
Amount available
Unsecured lines of credit available
Unencumbered investment securities
U.S. government sponsored enterprises
State and local governments
Corporate bonds
Residential mortgage-backed securities
Total unencumbered securities
$
$
$
$
$
$
December 31,
2013
1,603,143
(840,182)
762,961
661,148
—
661,148
255,000
1,494
934,096
442,501
209,422
$
1,587,513
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 74,373,296 has been issued as of December 31, 2013. The Company also has the capacity
to issue 1,000,000 shares of preferred stock of which none has been issued as of December 31, 2013. 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 Company and the Bank were considered well capitalized by their respective regulators as of December 31, 2013 and 2012.
There are no conditions or events after December 31, 2013 that management believes have changed the Company’s or the Bank’s risk-
based capital category.
48
The following table illustrates the Federal Reserve’s capital adequacy guidelines and the Company’s compliance with those guidelines
as of December 31, 2013.
(Dollars in thousands)
Total stockholders’ equity
Less:
Goodwill and intangibles
Net unrealized gains on investment securities and change in
fair value of derivatives used for cash flow hedges
Plus:
Allowance for loan and lease losses
Subordinated debentures
Total regulatory capital
Risk-weighted assets
Total adjusted average assets
Capital ratio
Regulatory “well capitalized” requirement
Excess over “well capitalized” requirement
Tier 1
Capital
Total
Capital
Tier 1 Leverage
Capital
$
963,250
963,250
963,250
(139,218)
(139,218)
(139,218)
(9,645)
(9,645)
(9,645)
—
124,500
938,887
67,093
124,500
1,005,980
—
124,500
938,887
5,304,019
5,304,019
$
$
$
7,752,039
12.11%
17.70%
6.00%
11.70%
18.97%
10.00%
8.97%
For additional information regarding regulatory capital, see Note 12 to the Consolidated Financial Statements in “Item 8. Financial
Statements and Supplementary Data.”
Federal and State Income Taxes
The Company files a consolidated federal income tax return, using the accrual method of accounting. All required tax returns have been
timely filed. Financial institutions are subject to the provisions of the Internal Revenue Code of 1986, as amended, in the same general
manner as other corporations.
Under Montana, Idaho, Colorado and Utah law, financial institutions are subject to a corporation income tax, which incorporates or is
substantially similar to applicable provisions of the Internal Revenue Code. The corporation income tax is imposed on federal taxable
income, subject to certain adjustments. State taxes are incurred at the rate of 6.75 percent in Montana, 7.4 percent in Idaho, 5 percent in
Utah and 4.63 percent in Colorado. Wyoming and Washington do not impose a corporate income tax.
Income tax expense for the years ended December 31, 2013 and 2012 was $30.0 million and $19.1 million, respectively. The Company’s
effective tax rate for the years ended December 31, 2013 and 2012 was 23.9 percent and 20.2 percent, respectively. The primary reason
for the current and prior years’ low effective tax rate is the amount of tax-exempt investment income and federal income tax credits. The
tax-exempt income was $42.9 million and $37.7 million for the years ended December 31, 2013 and 2012, respectively. The federal
income tax credit benefits were $3.9 million for each of the years ended December 31, 2013 and 2012.
49
The Company has equity investments in Certified Development Entities which have received allocations of New Markets Tax Credits
(“NMTC”). Administered by the Community Development Financial Institutions 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 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
in Qualified Zone Academy and Qualified School Construction bonds whereby the Company receives quarterly federal income tax credits
in lieu of taxable interest income until the bonds mature. The federal income tax credits on these bonds 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)
2014
2015
2016
2017
2018
Thereafter
New
Markets
Tax Credits
Low-Income
Housing
Tax Credits
Investment
Securities
Tax Credits
Total
$
2,850
2,850
1,014
450
—
—
$
7,164
1,270
1,175
1,175
1,060
1,060
2,021
7,761
910
885
861
784
707
3,759
7,906
5,030
4,910
3,050
2,294
1,767
5,780
22,831
See Note 14 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” for additional information.
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).
50
5.68%
5.51%
5.96%
5.62%
6.42%
2.19%
4.58%
—%
0.25%
0.13%
0.42%
1.50%
0.46%
1.35%
December 31, 2013
Years ended
December 31, 2012
December 31, 2011
Average
Balance
Interest &
Dividends
Average
Yield/
Rate
Average
Balance
Interest &
Dividends
Average
Yield/
Rate
Average
Balance
Interest &
Dividends
Average
Yield/
Rate
(Dollars in thousands)
Assets
Residential real estate loans
Commercial loans
Consumer and other loans
$ 623,433
2,542,255
586,649
$ 29,525
127,450
32,089
4.74% $ 611,910
5.01% 2,274,128
620,584
5.47%
$ 30,850
121,425
35,096
5.04% $ 581,644
5.32% 2,364,115
680,032
5.64%
$ 33,060
130,249
40,538
Total loans 1
3,752,337
189,064
5.04% 3,506,622
187,371
5.33% 3,625,791
203,847
Tax-exempt investment
securities 2
Taxable investment securities 3
Total earning assets
Goodwill and intangibles
Non-earning assets
Total assets
Liabilities
Non-interest bearing deposits
NOW accounts
Savings accounts
Money market deposit accounts
Certificate accounts
Wholesale deposits 4
FHLB advances
Repurchase agreements, federal
funds purchased and other
borrowed funds
Total interest bearing
liabilities
Other liabilities
Total liabilities
Stockholders’ Equity
Common stock
Paid-in capital
Retained earnings
Accumulated other
comprehensive income
Total stockholders’ equity
Total liabilities and
stockholders’ equity
Net interest income
(tax-equivalent)
Net interest spread
(tax-equivalent)
Net interest margin
(tax-equivalent)
1,064,457
61,924
5.82%
888,839
54,389
6.12%
705,548
33,112
284,100
2,525,317
7,342,111
125,315
338,866
$7,806,292
30,231
271,991
1.31% 2,598,589
3.87% 6,994,050
113,321
365,408
$7,472,779
1.16% 2,115,779
3.88% 6,447,118
145,623
330,075
$6,922,816
45,331
46,410
295,588
$1,244,332
999,288
540,495
1,075,625
1,114,010
434,249
971,554
$
—
1,217
276
2,169
9,039
1,169
10,610
—% $1,080,854
872,529
450,940
0.12%
0.05%
888,620
0.20%
0.81% 1,049,752
0.27%
1.09%
693,463
996,766
$
—
1,370
342
2,221
11,633
2,617
12,566
—% $ 923,039
775,383
387,921
0.16%
0.08%
875,127
0.25%
1.11% 1,085,293
0.38%
1.26%
622,808
942,651
$
—
1,906
511
3,667
16,332
2,853
12,687
431,046
4,278
0.99%
495,871
4,965
1.00%
418,626
6,538
1.56%
6,810,599
59,497
6,870,096
28,758
0.42% 6,528,795
59,571
6,588,366
35,714
0.55% 6,030,848
34,343
6,065,191
44,494
0.74%
732
667,107
239,138
29,219
936,196
719
642,009
194,413
47,272
884,413
719
643,140
195,301
18,465
857,625
$7,806,292
$7,472,779
$6,922,816
$ 255,342
$ 236,277
$ 251,094
3.45%
3.48%
3.33%
3.37%
3.84%
3.89%
__________
1 Total loans are gross of the allowance for loan and lease losses, net of unearned income and include loans held for sale. Non-accrual loans were
2
3
included in the average volume for the entire period.
Includes tax effect of $19.0 million, $16.7 million and $13.9 million on tax-exempt investment security income for the years ended December 31,
2013, 2012 and 2011, respectively.
Includes tax effect of $1.5 million, $1.5 million and $1.6 million on investment security income tax credits for the years ended December 31, 2013,
2012 and 2011, respectively.
4 Wholesale deposits include brokered deposits classified as NOW, money market deposit and certificate accounts.
51
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 rates 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.
(Dollars in thousands)
Interest income
Year ended December 31,
2013 vs. 2012
Increase (Decrease) Due to:
Rate
Volume
Year ended December 31,
2012 vs. 2011
Increase (Decrease) Due to:
Rate
Net
Net
Volume
Residential real estate loans
Commercial loans
Consumer and other loans
Investment securities (tax-equivalent)
Total interest income
$
581
14,316
(1,919)
2,483
15,461
Interest expense
NOW accounts
Savings accounts
Money market deposit accounts
Certificate accounts
Wholesale deposits
FHLB advances
Repurchase agreements,
federal funds purchased and
other borrowed funds
Total interest expense
Net interest income (tax-
equivalent)
(1,906)
(8,291)
(1,088)
7,933
(3,352)
(352)
(134)
(519)
(3,306)
(470)
(1,638)
(38)
(6,457)
(1,325)
6,025
(3,007)
10,416
12,109
(153)
(66)
(52)
(2,594)
(1,448)
(1,956)
(687)
(6,956)
1,720
(4,958)
(3,544)
21,659
14,877
239
83
56
(535)
324
728
(3,930)
(3,866)
(1,898)
(28,780)
(38,474)
(774)
(253)
(1,502)
(4,164)
(560)
(849)
1,206
2,101
(2,779)
(10,881)
(2,210)
(8,824)
(5,442)
(7,121)
(23,597)
(535)
(170)
(1,446)
(4,699)
(236)
(121)
(1,573)
(8,780)
199
68
467
712
(978)
(318)
(649)
(499)
$
15,960
3,105
19,065
12,776
(27,593)
(14,817)
Net interest income (tax-equivalent) increased $19.1 million for the year ended December 31, 2013 compared to the same period in 2012.
The increase in interest income was driven by the increased yields and volume on investment securities and increased volume on
commercial loans. Additionally, the Company was able to lower interest expense by continuing to reduce deposit and borrowing interest
rates.
Net interest income (tax-equivalent) decreased $14.8 million for the year ended December 31, 2012 compared to the same period in 2011.
The decrease in interest income was driven by reduced yields on investment securities and reduced yields on the loan portfolio which
outpaced the increased volume of commercial loans and increased volume of investment securities. Although, the Company was able
to lower interest expense by reducing deposit and borrowing interest rates, it was not enough to offset the reduction in interest income.
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.
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, fair value measurements and
determination of whether an investment security is temporarily or other-than-temporarily impaired to be critical accounting policies.
52
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 4 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.”
Goodwill
For information on goodwill, see Notes 1 and 6 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.”
Other-Than-Temporary Impairment on Securities
For information regarding the accounting policy and analysis of other-than-temporary impairment on securities, see the section captioned
“Investment Activity” included in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and
Note 1 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.”
Impact of Recently Issued Accounting Standards
New authoritative accounting guidance that has either been issued or is effective during 2013 or 2014 and may possibly have a material
impact on the Company includes amendments to: Financial Accounting Standards Board (“FASB”) Accounting Standards Codification™
(“ASC”) Subtopic 310-40, Receivables - Troubled Debt Restructurings by Creditors, FASB ASC Topic 323, Investments - Equity Method
and Joint Ventures and FASB ASC Topic 220, Comprehensive Income. 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.”
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 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. Managing interest rate risk is not an exact science. The interval between repricing of interest rates of assets and liabilities
changes from day to day as the assets and liabilities change.
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.
In addition to the risk management practices previously described, the Company has entered into forecasted interest rate swap derivative
financial instruments to hedge various interest rate exposures. For more information on the Company’s interest rate swaps, see Note 11
to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.”
53
GAP analysis
The GAP table below estimates the repricing and maturities of the contractual characteristics of the assets and liabilities, based upon the
Company’s assessment of the repricing characteristics of the various instruments. NOW and savings accounts are included in the categories
that reflect the interest rate sensitivity of the individual programs and if the deposits are not clearly rate sensitive, the deposits are included
in the more than 5 years category. Money market deposit accounts are included in the 0-6 months category. Residential mortgage-backed
securities are categorized based on the anticipated payments.
The following table gives a description of the Company’s GAP position for various time periods. As of December 31, 2013, the Company
had a negative GAP position at six months and at twelve months. The cumulative GAP as a percentage of total assets for six months is
negative 16.39 percent which compares to negative 13.85 percent at December 31, 2012 and negative 13.54 percent at December 31,
2011.
(Dollars in thousands)
Assets
Interest bearing cash deposits
and federal funds sold
Residential mortgage-backed securities
Other investment securities
Variable rate loans
Fixed rate loans
Non-marketable equity securities
Total interest bearing assets
Liabilities
Interest bearing deposits
FHLB advances
Repurchase agreements and
other borrowed funds
Subordinated debentures
Projected Maturity or Repricing
0-6
Months
6-12
Months
1 - 5
Years
More than
5 Years
Total
$
45,662
291,194
103,484
997,469
344,379
—
—
230,045
73,226
328,287
241,045
—
—
682,846
822,353
1,056,591
709,699
—
—
180,537
839,144
183,695
201,673
52,192
$ 1,782,188
872,603
3,271,489
1,457,241
$ 2,166,402
512,000
283,219
46,983
284,418
143,343
1,471,509
137,856
314,228
—
414
—
1,143
—
6,475
125,562
45,662
1,384,622
1,838,207
2,566,042
1,496,796
52,192
7,383,521
4,205,548
840,182
322,260
125,562
Total interest bearing liabilities
$ 2,992,630
330,616
428,904
1,741,402
5,493,552
Repricing GAP
Cumulative repricing GAP
Cumulative GAP as a % of
interest bearing assets
$ (1,210,442)
$ (1,210,442)
541,987
(668,455)
2,842,585
2,174,130
(284,161)
1,889,969
1,889,969
(16.39)%
(9.05)%
29.45%
25.60%
Net interest income simulation
The traditional one-dimensional view of GAP is not sufficient to show a bank’s ability to withstand interest rate changes. Because of
limitations in GAP modeling, the ALCO of 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. 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 shift in interest rates for a 200 basis point (“bp”), 400bp, and 300bp scenario. The 200bp and 400bp rate
scenarios include parallel and pro rata shifts in interest rates over a 12-month period and 24-month period, respectively. The 300bp rate
scenario is a shock scenario with instantaneous and parallel changes in interest rates. Given the historically low rate environment, a
downward shift in interest rates of only 100bp is modeled. Since the model assumes that interest rates will not be negative, the 100bp
scenario represents a flattening of market yield curves. 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 provides ALCO
additional interest rate risk monitoring tools to evaluate current market conditions.
54
The following is indicative of the Company’s overall NII sensitivity analysis as of December 31, 2013 and 2012 as compared to the policy
limits approved by the Company’s Board. The Company’s interest sensitivity remained within policy limits at December 31, 2013.
Rate Scenarios
-100 bp Rate ramp
+200 bp Rate ramp
+400 bp Rate ramp
+300 bp Rate shock
Year 1
Year 2
Policy
Limits
Estimated
Sensitivity
Policy
Limits
Estimated
Sensitivity
N/A
(10.0)%
(10.0)%
(20.0)%
(1.5)%
(0.4)%
— %
(4.8)%
N/A
(15.0)%
(25.0)%
(20.0)%
(6.9)%
(0.6)%
(4.8)%
3.1 %
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 yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/
replacement of assets and liability cash flows, and others. 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
change 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 GAP and 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, 2013:
Rate Scenarios
-100 bp Rate shock
+100 bp Rate shock
+200 bp Rate shock
+300 bp Rate shock
Item 8. Financial Statements and Supplementary Data
Policy
Limits
Post
Shock Ratio
(15)%
(15)%
(25)%
(35)%
(2.1)%
(6.7)%
(15.8)%
(23.9)%
55
Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors and Stockholders
Glacier Bancorp, Inc.
Kalispell, Montana
We have audited the accompanying consolidated statements of financial condition of Glacier Bancorp,
Inc. as of December 31, 2013 and 2012, and 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, 2013. The Company's management is responsible for these financial
statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement. Our audits included
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management and evaluating
the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of Glacier Bancorp, Inc. as of December 31, 2013, and 2012, and the
results of its operations and its cash flows for each of the years in the three-year period ended December
31, 2013, 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), Glacier Bancorp, Inc.'s internal control over financial reporting as of December 31,
2013, based on criteria established in the 1992 Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated
February 28, 2014, expressed an unqualified opinion on the effectiveness of the Company's internal
control over financial reporting.
Denver, Colorado
February 28, 2014
56
Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors and Stockholders
Glacier Bancorp, Inc.
Kalispell, Montana
We have audited Glacier Bancorp, Inc.'s internal control over financial reporting as of December 31,
2013, based on criteria established in the 1992 Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). 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 conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). 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.
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 in accordance with accounting principles generally accepted in the United States of America.
Because management's assessment and our audit were conducted to meet the reporting requirements of
Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA), our examination
of Glacier Bancorp, Inc.'s internal control over financial reporting included controls over the preparation
of financial statements in accordance with accounting principles generally accepted in the United States
of America and with the instructions to the Consolidated Financial Statements for Bank Holding
Companies (Form FR Y-9C). 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 accounting principles generally accepted in the United States of America, 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 and correction 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
57
Audit Committee, Board of Directors and Stockholders
Glacier Bancorp, Inc.
risk that controls may become inadequate because of changes in conditions or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, Glacier Bancorp, Inc. maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2013, based on criteria established in the 1992 Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated financial statements of Glacier Bancorp, Inc. and our report dated
February 28, 2014, expressed an unqualified opinion thereon.
Denver, Colorado
February 28, 2014
58
GLACIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except per share data)
Assets
Cash on hand and in banks
Federal funds sold
Interest bearing cash deposits
Cash and cash equivalents
Investment securities, available-for-sale
Loans held for sale
Loans receivable
Allowance for loan and lease losses
Loans receivable, net
Premises and equipment, net
Other real estate owned
Accrued interest receivable
Deferred tax asset
Core deposit intangible, net
Goodwill
Non-marketable equity securities
Other assets
Total assets
Liabilities
Non-interest bearing deposits
Interest bearing deposits
Securities sold under agreements to repurchase
Federal Home Loan Bank advances
Other borrowed funds
Subordinated debentures
Accrued interest payable
Other liabilities
Total 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 authorized
Paid-in capital
Retained earnings - substantially restricted
Accumulated other comprehensive income
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
$
$
December 31,
2013
December 31,
2012
109,995
10,527
35,135
155,657
123,270
—
63,770
187,040
3,222,829
3,683,005
46,738
145,501
4,062,838
(130,351)
3,932,487
3,397,425
(130,854)
3,266,571
167,671
26,860
41,898
43,549
9,512
129,706
52,192
55,251
158,989
45,115
37,770
20,394
6,174
106,100
48,812
41,969
7,884,350
7,747,440
1,374,419
4,205,548
313,394
840,182
8,387
125,562
3,505
50,103
6,921,100
—
744
690,918
261,943
9,645
963,250
1,191,933
4,172,528
289,508
997,013
10,032
125,418
4,675
55,384
6,846,491
—
719
641,737
210,531
47,962
900,949
$
7,884,350
7,747,440
Number of common stock shares issued and outstanding
74,373,296
71,937,222
See accompanying notes to consolidated financial statements.
59
GLACIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
Interest Income
Residential real estate loans
Commercial loans
Consumer and other loans
Investment securities
Total interest income
Interest Expense
Deposits
Securities sold under agreements to repurchase
Federal Home Loan Bank advances
Federal funds purchased and other borrowed funds
Subordinated debentures
Total interest expense
Net Interest Income
Provision for loan losses
Net interest income after provision for loan losses
Non-Interest Income
Service charges and other fees
Miscellaneous loan fees and charges
Gain on sale of loans
(Loss) gain on sale of investments
Other income
Total non-interest income
Non-Interest Expense
Compensation and employee benefits
Occupancy and equipment
Advertising and promotions
Outsourced data processing
Other real estate owned
Regulatory assessments and insurance
Core deposit intangible amortization
Goodwill impairment charge
Other expense
Total non-interest expense
Income Before Income Taxes
Federal and state income tax expense (benefit)
Net Income
Basic earnings per share
Diluted earnings per share
Dividends declared per share
Average outstanding shares - basic
Average outstanding shares - diluted
December 31,
2013
Years ended
December 31,
2012
December 31,
2011
$
$
$
$
$
29,525
127,450
32,089
74,512
263,576
13,870
867
10,610
206
3,205
28,758
234,818
6,887
227,931
49,478
4,982
28,517
(299)
10,369
93,047
104,221
24,875
6,913
4,493
7,196
6,362
2,401
—
38,856
195,317
125,661
30,017
95,644
30,850
121,425
35,096
66,386
253,757
18,183
1,308
12,566
229
3,428
35,714
218,043
21,525
196,518
45,343
4,363
32,227
—
9,563
91,496
95,373
23,837
6,413
3,324
18,964
7,313
2,110
—
36,087
193,421
94,593
19,077
75,516
33,060
130,249
40,538
76,262
280,109
25,269
1,353
12,687
224
4,961
44,494
235,615
64,500
171,115
44,194
3,919
21,132
346
8,608
78,199
85,691
23,599
6,469
3,153
27,255
9,583
2,473
40,159
33,742
232,124
17,190
(281)
17,471
1.31
1.31
0.60
73,191,713
73,260,278
1.05
1.05
0.53
71,928,570
71,928,656
0.24
0.24
0.52
71,915,073
71,915,073
See accompanying notes to consolidated financial statements.
60
GLACIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
Net Income
December 31,
2013
Years ended
December 31,
2012
December 31,
2011
$
95,644
75,516
17,471
Other Comprehensive (Loss) Income, Net of Tax
Unrealized (losses) gains on available-for-sale securities
Reclassification adjustment for losses (gains) included in net income
Net unrealized (losses) gains on securities
Tax effect
Net of tax amount
Unrealized gains (losses) on derivatives used for cash flow hedges
Tax effect
Net of tax amount
Total other comprehensive (loss) income, net of tax
(81,739)
299
(81,440)
31,680
(49,760)
18,728
(7,285)
11,443
(38,317)
Total Comprehensive Income
$
57,327
31,617
—
31,617
(12,300)
19,317
(7,926)
3,084
(4,842)
14,475
89,991
63,190
(346)
62,844
(24,444)
38,400
(8,906)
3,465
(5,441)
32,959
50,430
See accompanying notes to consolidated financial statements.
61
GLACIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Years ended December 31, 2013, 2012 and 2011
(Dollars in thousands, except per share data)
Common Stock
Shares
Amount
Paid-in
Capital
Retained
Earnings
Substantially
Restricted
Accumulated
Other Comp-
rehensive
Income
Total
Balance at December 31, 2010
71,915,073
$
719
643,894
193,063
528
838,204
Comprehensive income
Cash dividends declared ($0.52 per share)
Stock-based compensation and related taxes
Balance at December 31, 2011
—
—
—
71,915,073
$
Comprehensive income
Cash dividends declared ($0.53 per share)
Stock issuances under stock incentive plans
Stock-based compensation and related taxes
Balance at December 31, 2012
—
—
22,149
—
71,937,222
$
719
Comprehensive income (loss)
Cash dividends declared ($0.60 per share)
—
—
Stock issuances under stock incentive plans
292,942
Stock issued in connection with acquisitions
2,143,132
Stock-based compensation and related taxes
Balance at December 31, 2013
—
74,373,296
$
744
—
—
—
719
—
—
—
—
—
—
3
22
—
—
—
(1,012)
642,882
—
—
323
(1,468)
641,737
—
—
4,504
45,012
(335)
690,918
17,471
(37,395)
—
173,139
75,516
(38,124)
—
—
32,959
—
—
50,430
(37,395)
(1,012)
33,487
850,227
14,475
—
—
—
89,991
(38,124)
323
(1,468)
210,531
47,962
900,949
95,644
(44,232)
—
—
—
(38,317)
—
—
—
—
57,327
(44,232)
4,507
45,034
(335)
261,943
9,645
963,250
See accompanying notes to consolidated financial statements.
62
GLACIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses
Net amortization of investment securities premiums and discounts
Federal Home Loan Bank stock dividends
Loans held for sale originated or acquired
Proceeds from sales of loans held for sale
Gain on sale of loans
Loss (gain) on sale of investments
Stock-based compensation expense, net of tax benefits
Excess tax deficiencies from stock-based compensation
Depreciation of premises and equipment
Loss on sale of other real estate owned and writedowns, net
Amortization of core deposit intangibles
Goodwill impairment charge
Deferred tax expense (benefit)
Net increase in accrued interest receivable
Net decrease (increase) in other assets
Net decrease in accrued interest payable
Net (decrease) increase in other liabilities
Net cash provided by operating activities
Investing Activities
Proceeds from sales, maturities and prepayments of investment securities,
available-for-sale
Purchases of investment securities, available-for-sale
Principal collected on loans
Loans originated or acquired
Net addition of premises and equipment and other real estate owned
Proceeds from sale of other real estate owned
Net sale of non-marketable equity securities
Net cash received from acquisitions
Net cash provided by (used in) investment activities
Financing Activities
Net (decrease) increase in deposits
Net increase in securities sold under agreements to repurchase
Net (decrease) increase in Federal Home Loan Bank advances
Net (decrease) increase in federal funds purchased
and other borrowed funds
Cash dividends paid
Excess tax deficiencies from stock-based compensation
Proceeds from stock options exercised
Net cash (used in) provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
December 31,
2013
Years ended
December 31,
2012
December 31,
2011
$
95,644
75,516
17,471
6,887
64,066
—
(918,451)
1,084,799
(28,517)
299
1,011
223
10,485
1,450
2,401
—
4,633
(265)
19,881
(1,354)
(9,097)
334,095
21,525
71,992
(5)
(1,188,632)
1,204,431
(32,227)
—
254
8
10,615
13,311
2,110
—
837
(2,809)
(3,286)
(1,150)
11,303
183,793
64,500
38,035
(17)
(824,089)
842,337
(21,132)
(346)
45
—
10,443
19,727
2,473
40,159
(13,308)
(4,715)
12,464
(1,420)
4,216
186,843
1,864,334
2,041,416
1,024,508
(1,426,262)
1,224,222
(1,559,353)
(8,977)
28,535
583
26,155
149,237
(334,672)
23,886
(162,298)
(1,502)
(44,232)
(223)
4,326
(514,715)
(31,383)
187,040
155,657
$
(2,638,054)
1,034,374
(1,049,344)
(10,730)
41,804
888
—
(579,646)
543,248
30,865
(72,033)
180
(47,472)
(8)
81
454,861
59,008
128,032
187,040
(1,730,244)
958,401
(826,329)
(17,492)
46,703
15,357
—
(529,096)
299,311
9,240
103,905
(9,867)
(37,395)
—
—
365,194
22,941
105,091
128,032
See accompanying notes to consolidated financial statements.
63
GLACIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for interest
Cash paid during the period for income taxes
Supplemental Disclosure of Non-Cash Investing Activities
Sale and refinancing of other real estate owned
Transfer of loans to other real estate owned
Acquisitions
Fair value of common stock shares issued
Cash consideration for outstanding shares
Fair value of assets acquired
Liabilities assumed
December 31,
2013
Years ended
December 31,
2012
December 31,
2011
$
$
30,111
23,576
4,819
15,266
45,033
24,858
630,569
560,678
36,865
21,257
5,659
27,536
—
—
—
—
45,913
7,925
8,665
79,295
—
—
—
—
See accompanying notes to consolidated financial statements.
64
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 individual and corporate customers in Montana, Idaho, Wyoming, Colorado, Utah and Washington through thirteen
divisions of its wholly-owned bank subsidiary, Glacier Bank (“Bank”). The Company offers a wide range of banking products and
services, including transaction and savings deposits, real estate, commercial, agriculture and consumer loans and mortgage origination
services. The Company serves individuals, small to medium-sized businesses, community organizations and public entities.
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 valuations related to investments and real estate acquired in connection with foreclosures or in
satisfaction of loans, and 3) the evaluation of goodwill impairment. For the determination of the ALLL and real estate valuation estimates,
management obtains independent appraisals (new or updated) for significant items. Estimates relating to investment valuations are
obtained from independent third parties. Estimates relating to the evaluation of goodwill for impairment are determined based on internal
calculations using significant independent party inputs.
Principles of Consolidation
The consolidated financial statements of the Company include the parent holding company and the Bank. The Bank consists of thirteen
bank divisions, a treasury division and an information technology division. The treasury division was formed on January 1, 2013 to
efficiently manage the Bank’s investment security portfolio and wholesale borrowings. The information technology division was formed
on January 1, 2013 and includes the Bank’s internal data processing and information technology expenses that previously were included
with the parent holding company. Each of the bank divisions operate under separate names, management teams and directors. The
Company considers the Bank to be its sole operating segment as the Bank 1) engages in similar bank business activity from which it
earns revenues and incurs expenses, 2) the operating results of the Bank are regularly reviewed by the Chief Executive Officer (i.e., the
chief operating decision maker) who makes decisions about resources to be allocated to the Bank, and 3) financial information is available
for the Bank. All significant inter-company transactions have been eliminated in consolidation.
On May 31, 2013, the Company completed its acquisition of Wheatland Bankshares, Inc. (“Wheatland”) and its wholly-owned subsidiary,
First State Bank, a community bank based in Wheatland, Wyoming. On July 31, 2013, the Company completed its acquisition of North
Cascades Bancshares, Inc. (“NCBI”) and its wholly-owned subsidiary, North Cascades National Bank, a community bank based in Chelan,
Washington. Both transactions were accounted for using the acquisition method, and their results of operations have been included in
the Company’s consolidated financial statements as of the acquisition dates.
The Company formed GBCI Other Real Estate (“GORE”) to isolate certain bank foreclosed properties for legal protection and
administrative purposes and the remaining properties are currently held for sale. GORE is included in the Bank operating segment due
to its insignificant activity.
The Company owns the following trust subsidiaries, each of which issued trust preferred securities as Tier 1 capital instruments: Glacier
Capital Trust II, Glacier Capital Trust III, Glacier Capital Trust IV, Citizens (ID) Statutory Trust I, Bank of the San Juans Bancorporation
Trust I, First Company Statutory Trust 2001 and First Company Statutory Trust 2003. The trust subsidiaries are not included in the
Company’s consolidated financial statements.
Variable Interest Entities
A variable interest entity (“VIE”) exists when either 1) the entity’s total equity investment at risk is not sufficient to permit the entity to
finance its activities without additional subordinated financial support from other parties, or 2) the entity has equity investors that cannot
make significant decisions about the entity’s operations or that do not absorb their proportionate share of the expected losses or receive
the expected returns of the entity. In addition, a VIE must be consolidated by the Company if it is deemed to be the primary beneficiary
of the VIE, which is the party involved with the VIE that has the power to direct the VIE’s significant activities and will absorb a majority
of the expected losses, receive a majority of the expected residual returns, or both. The Company’s VIEs are regularly monitored to
determine if any reconsideration events have occurred that could cause the primary beneficiary status to change.
65
Note 1. Nature of Operations and Summary of Significant Accounting Policies (continued)
The Company has equity investments in Certified Development Entities (“CDE”) which have received allocations of New Markets Tax
Credits (“NMTC”). The Company also has equity investments in Low-Income Housing Tax Credit (“LIHTC”) partnerships. The CDEs
and the LIHTC partnerships are VIEs. The underlying activities of the VIEs are community development projects designed primarily to
promote community welfare, such as economic rehabilitation and development of low-income areas by providing housing, services, or
jobs for residents. 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
primary activities of the VIEs are recognized in commercial loans interest income, other non-interest income and other borrowed funds
interest expense on the Company’s statements of operations. Such related cash flows are recognized in loans originated, principal collected
on loans and change in other borrowed funds. The Company has evaluated the variable interests held by the Company in each CDE
(NMTC) and LIHTC partnership investment and determined that the Company continues to be the primary beneficiary of such VIEs.
As the primary beneficiary, the VIEs’ assets, liabilities, and results of operations are included in the Company’s consolidated financial
statements.
The following table summarizes the carrying amounts of the VIEs’ assets and liabilities included in the Company’s consolidated financial
statements at December 31, 2013 and 2012:
(Dollars in thousands)
Assets
Loans receivable
Premises and equipment, net
Accrued interest receivable
Other assets
Total assets
Liabilities
Other borrowed funds
Accrued interest payable
Other liabilities
Total liabilities
December 31, 2013
December 31, 2012
CDE (NMTC)
LIHTC
CDE (NMTC)
LIHTC
$
$
$
$
36,039
—
117
843
36,999
4,555
4
151
4,710
—
13,536
—
153
13,689
1,723
5
189
1,917
35,480
—
117
1,114
36,711
4,555
4
182
4,741
—
16,066
—
143
16,209
3,639
6
136
3,781
Amounts presented in the table above 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.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, cash held as demand deposits at various banks and regulatory agencies, interest bearing
deposits, federal funds sold and liquid investments with original maturities of three months or less.
Investment Securities
Debt securities for which the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity (“HTM”)
and are carried at amortized cost. Debt and equity securities held primarily for the purpose of selling in the near term are classified as
trading securities and are reported at fair market value, with unrealized gains and losses included in income. Debt and equity securities
not classified as HTM or trading are classified as available-for-sale (“AFS”) and are reported at fair value with unrealized gains and
losses, net of income taxes, as a separate component of other comprehensive income. Premiums and discounts on investment 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.
66
Note 1. Nature of Operations and Summary of Significant Accounting Policies (continued)
The Company reviews and analyzes the various risks that may be present within the investment securities 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 securities as well as the investment securities portfolio as a whole. Credit risk, broadly defined, is the risk
that an issuer or counterparty will fail to perform on an obligation. A 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 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 securities 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 investment securities, see Note 3.
Temporary versus Other-Than-Temporary Impairment
The Company assesses individual securities in its investment securities portfolio for impairment at least on a quarterly basis, and more
frequently when economic or market conditions warrant. An investment 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.
For fair value estimates provided by third party vendors, management also considered the models and methodology for appropriate
consideration of both observable and unobservable inputs, including appropriately adjusted discount rates and credit spreads for securities
with limited or inactive markets, and whether the quoted prices reflect orderly transactions. For certain securities, the Company obtained
independent estimates of inputs, including cash flows, in supplement to third party vendor provided information. The Company also
reviewed financial statements of select issuers, with follow up discussions with issuers’ management for clarification and verification of
information relevant to the Company’s impairment analysis.
In evaluating impaired securities for other-than-temporary impairment losses, management considers 1) the severity and duration of the
impairment, 2) the credit ratings of the security, 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.
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 other comprehensive income, net of tax. For held-to-
maturity debt securities, the amount of an other-than-temporary impairment recorded in other comprehensive income 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.
67
Note 1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Loans Held for Sale
Loans held for sale generally consist of long-term, fixed rate, conforming, single-family residential real estate loans and are carried at
the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized by charges to non-interest income.
A sale is recognized when the Company surrenders control of the loan and consideration, is received in exchange. A gain is recognized
in non-interest income to the extent the sales price exceeds the carrying value of the sold loan.
Loans Receivable
Loans that are intended to be held-to-maturity are reported at the unpaid principal balance less net charge-offs and adjusted for deferred
fees and costs on originated loans and unamortized premiums or discounts on acquired loans. Fees and costs on originated loans and
premiums or discounts on acquired loans are deferred and subsequently amortized or accreted as a yield adjustment over the expected
life of the loan utilizing the interest method. The objective of the interest method is to calculate periodic interest income at a constant
effective yield. When a loan is paid off prior to maturity, the remaining fees and costs on originated loans and premiums or discounts
on acquired loans are immediately recognized into interest income.
The Company’s loan segments, which are based on the purpose of the loan, include residential real estate, commercial, and consumer
loans. The Company’s loan classes, a further disaggregation of segments, include residential real estate loans (residential real estate
segment), commercial real estate and other commercial loans (commercial segment), and home equity and other consumer loans (consumer
segment).
Loans that are thirty days or more past due based on payments received and applied to the loan are considered delinquent. Loans are
designated non-accrual and the accrual of interest is discontinued when the collection of the contractual principal or interest is unlikely.
A loan is typically placed on non-accrual when principal or interest is due and has remained unpaid for ninety days or more. When a
loan is placed on non-accrual status, interest previously accrued but not collected is reversed against current period interest income.
Subsequent payments on non-accrual loans are applied to the outstanding principal balance if doubt remains as to the ultimate collectability
of the loan. Interest accruals are not resumed on partially charged-off impaired loans. For other loans on nonaccrual, interest accruals
are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of
management, the loans are estimated to be fully collectible as to both principal and interest.
The Company considers impaired loans to be the primary credit quality indicator for monitoring the credit quality of the loan portfolio.
Loans are designated impaired when, based upon current information and events, it is probable that the Company will be unable to collect
the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement and therefore, the
Company has serious doubts as to the ability of such borrowers to fulfill the contractual obligation. Impaired loans include non-performing
loans (i.e., non-accrual loans and accruing loans ninety days or more past due) and accruing loans under ninety days past due where it is
probable payments will not be received according to the loan agreement (e.g., troubled debt restructuring). Interest income on accruing
impaired loans is recognized using the interest method. The Company measures impairment on a loan-by-loan basis in the same manner
for each class within the loan portfolio. An insignificant delay or shortfall in the amounts of payments would not cause a loan or lease
to be considered impaired. The Company determines the significance of payment delays and shortfalls on a case-by-case basis, taking
into consideration all of the facts and circumstances surrounding the loan and the borrower, including the length and reasons for the delay,
the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest due.
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. 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.
68
Note 1. Nature of Operations and Summary of Significant Accounting Policies (continued)
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 4.
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 all known relevant internal and external
environmental factors that affect loan losses. The balance of the ALLL is highly dependent upon management’s evaluations of borrowers’
current and prospective performance, appraisals and other variables affecting the quality of the loan portfolio. Individually significant
loans and major lending areas are reviewed periodically to determine potential problems at an early date. Changes in management’s
estimates and assumptions are reasonably possible and may have a material impact upon the Company’s consolidated financial statements,
results of operations or capital.
Risk characteristics considered in the ALLL analysis applicable to each loan class within the Company's loan portfolio are as follows:
Residential Real Estate. Residential real estate loans are secured by owner-occupied 1-4 family residences. Repayment of these loans
is primarily dependent on the personal income and credit rating of the borrowers. Credit risk in these loans is impacted by economic
conditions within the Company’s market areas that affect the value of the property securing the loans and affect the borrowers' personal
incomes. Mitigating risk factors for this loan class include a large number of borrowers, geographic dispersion of market areas and the
loans are originated for relatively smaller amounts.
Commercial Real Estate. Commercial real estate loans typically involve larger principal amounts, and repayment of these loans is
generally dependent on the successful operation of the property securing the loan and / or the business conducted on the property securing
the loan. Credit risk in these loans is impacted by the creditworthiness of a borrower, valuation of the property securing the loan and
conditions within the local economies in the Company’s diverse, geographic market areas.
Commercial. Commercial loans consist of loans to commercial customers for use in financing working capital needs, equipment purchases
and business expansions. The loans in this category are repaid primarily from the cash flow of a borrower’s principal business operation.
Credit risk in these loans is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow stability
from business operations across the Company’s diverse, geographic market areas.
Home Equity. Home equity loans consist of junior lien mortgages and first and junior lien lines of credit (revolving open-end and
amortizing closed-end) secured by owner-occupied 1-4 family residences. Repayment of these loans is primarily dependent on the
personal income and credit rating of the borrowers. Credit risk in these loans is impacted by economic conditions within the Company’s
market areas that affect the value of the residential property securing the loans and affect the borrowers' personal incomes. Mitigating
risk factors for this loan class are a large number of borrowers, geographic dispersion of market areas and the loans are originated for
terms that range from 10 years to 15 years.
Other Consumer. The other consumer loan portfolio consists of various short-term loans such as automobile loans and loans for other
personal purposes. Repayment of these loans is primarily dependent on the personal income of the borrowers. Credit risk is driven by
consumer economic factors (such as unemployment and general economic conditions in the Company’s diverse, geographic market area)
and the creditworthiness of a borrower.
69
Note 1. Nature of Operations and Summary of Significant Accounting Policies (continued)
The ALLL consists of a specific valuation allowance component and a general valuation allowance component. The specific component
relates to loans that are determined to be impaired and individually evaluated for impairment. The Company measures impairment on a
loan-by-loan basis based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except when
it is determined that repayment of the loan is expected to be provided solely by the underlying collateral. For impairment based on
expected future cash flows, the Company considers all information available as of a measurement date, including past events, current
conditions, potential prepayments, and estimated cost to sell when such costs are expected to reduce the cash flows available to repay or
otherwise satisfy the loan. For alternative ranges of cash flows, the likelihood of the possible outcomes is considered in determining the
best estimate of expected future cash flows. The effective interest rate for a loan restructured in a TDR is based on the original contractual
rate. For collateral-dependent loans and real estate loans for which foreclosure or a deed-in-lieu of foreclosure is probable, impairment
is measured by the fair value of the collateral, less estimated cost to sell. The fair value of the collateral is determined primarily based
upon appraisal or evaluation of the underlying real property value.
The general valuation allowance component relates to probable credit losses inherent in the balance of the loan portfolio based on historical
loss experience, adjusted for changes in trends and conditions of qualitative or environmental factors. The historical loss experience is
based on the previous twelve quarters loss experience by loan class adjusted for risk characteristics in the existing loan portfolio. The
same trends and conditions are evaluated for each class within the loan portfolio; however, the risk characteristics are weighted separately
at the individual class level based on the Company’s judgment and experience.
The changes in trends and conditions of certain items 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 international, national, regional, and local economic and business conditions and developments that affect the
collectability of the portfolio, including the condition of various market segments;
• Changes in the nature and volume of the portfolio and in the terms of loans;
• Changes in experience, ability, and depth of lending management and other relevant staff;
• Changes in the volume and severity of past due and nonaccrual loans;
• Changes in the quality of the Company’s loan review system;
• Changes in the value of underlying collateral for collateral-dependent loans;
• The existence and effect of any concentrations of credit, and changes in the level of such concentrations; and
• The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit
losses in the Company’s existing portfolio.
The ALLL is increased by provisions for loan losses which are charged to expense. The portions of loan balances determined by
management to be uncollectible are charged-off as a reduction of the ALLL and recoveries of amounts previously charged-off are credited
as an increase to the ALLL. The Company’s charge-off policy is consistent with bank regulatory standards. Consumer loans generally
are charged off when the loan becomes over 120 days delinquent. Real estate acquired as a result of foreclosure or by deed-in-lieu of
foreclosure is classified as real estate owned until such time as it is sold.
At acquisition date, the assets and liabilities of acquired banks are recorded at their estimated fair values which results in no ALLL carried
over from acquired banks. Subsequent to acquisition, an allowance will be recorded on the acquired loan portfolios for further credit
deterioration, if any.
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 - 40 years and the estimated useful life
for furniture, fixtures, and equipment is 3 - 10 years. Interest is capitalized for any significant building projects. For additional information
relating to premises and equipment, see Note 5.
Leases
The Company leases certain land, premises and equipment from third parties under operating and capital leases. The lease payments for
operating lease agreements are recognized on a straight-line basis. The present value of the future minimum rental payments for capital
leases is recognized as an asset when the lease is formed. 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. For additional information relating to leases, see Note 5.
70
Note 1. Nature of Operations and Summary of Significant Accounting Policies (continued)
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). 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 other real estate owned (“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, 2013 and 2012, no long-lived assets were considered 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 6.
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 units 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.
71
Note 1. Nature of Operations and Summary of Significant Accounting Policies (continued)
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 2013 and 2012 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 6.
Non-Marketable Equity Securities
Non-marketable equity securities primarily consists 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 market value,
FHLB stock is carried at cost. 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 are jointly and severally liable for repayment of each other’s debt.
Derivatives and Hedging Activities
For asset and liability management purposes, the Company has entered into interest rate swap agreements to hedge against changes in
forecasted cash flows due to interest rate exposures. The interest rate swaps are recognized as assets or liabilities on the Company’s
statements of financial condition and measured at fair value. Fair value estimates are obtained from third parties and are based on pricing
models. The Company does not enter into interest rate swap agreements for trading or speculative purposes.
The Company takes into account the impact of bilateral collateral and master netting agreements that allows 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.
Interest rate swaps are contracts in which a series of interest payments are exchanged over a prescribed period. The notional amount
upon which the interest payments are based is not exchanged. The swap agreements are derivative instruments and convert a portion of
the Company’s forecasted variable rate debt to a fixed rate (i.e., cash flow hedge). The effective portion of the gain or loss on the cash
flow hedging instruments is initially reported as a component of other comprehensive income and subsequently reclassified into earnings
in the same period during which the transaction affects earnings. The ineffective portion of the gain or loss on derivative instruments, if
any, is recognized in earnings. The Company currently has cash flow hedges of which no portion is ineffective.
Interest rate derivative financial instruments receive hedge accounting treatment only if they are designated as a hedge and are expected
to be, and are, effective in substantially reducing interest rate risk arising from the assets and liabilities identified as exposing the Company
to risk. Derivative financial instruments that do not meet specified hedging criteria are recorded at fair value with changes in fair value
recorded in income. The Company’s interest rate swaps are considered highly effective and currently meet the hedging accounting criteria.
Cash flows resulting from the interest rate derivative financial instruments that are accounted for as hedges of assets and liabilities are
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 11.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains
and losses, net of tax effect, on available-for-sale securities and unrealized gains and losses, net of tax effect, on derivatives used for cash
flow hedges.
Advertising and Promotion
Advertising and promotion costs are recognized in the period incurred.
72
Note 1. Nature of Operations and Summary of Significant Accounting Policies (continued)
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.
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.
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 fifty
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 14.
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, using the treasury stock method. For additional information relating to earnings per share, see Note 15.
Stock-based Compensation
Stock-based compensation awards granted, comprised of stock options and restricted stock awards, are valued at fair value and
compensation cost is recognized on a straight-line basis, net of estimated forfeitures, over the requisite service period of each award. For
additional information relating to stock-based compensation, see Note 17.
Reclassifications
Certain reclassifications have been made to the 2012 and 2011 financial statements to conform to the 2013 presentation.
Impact of Recent Authoritative Accounting Guidance
The Accounting Standards Codification™ (“ASC”) is the Financial Accounting Standards Board’s (“FASB”) officially recognized source
of authoritative GAAP applicable to all public and non-public non-governmental entities. Rules and interpretive releases of the Securities
and Exchange Commission (“SEC”) under the authority of the federal securities laws are also sources of authoritative GAAP for the
Company as an SEC registrant. All other accounting literature is non-authoritative.
In January 2014, FASB amended FASB ASC Subtopic 310-40, Receivables - Troubled Debt Restructurings by Creditors. The amendment
clarifies that an in substance repossession foreclosure occurs when a creditor is considered to have received physical possession of
residential real estate property collateralizing a consumer mortgage loan, upon either 1) the creditor obtaining legal title to the residential
real estate property upon completion of a foreclosure or 2) the borrower conveying all interest in the residential real estate property to
the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally,
the amendment requires interim and annual disclosure of both 1) the amount of foreclosed residential real estate property held by the
creditor and 2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process
of foreclosure according to local requirements of the applicable jurisdiction. The amendment is effective for public business entities for
interim and annual periods beginning after December 15, 2014. An entity can elect to adopt the amendments using either a modified
retrospective transition method or a prospective transition method as defined in the amendment. The Company is currently evaluating
the impact of the adoption of this amendment, but does not expect it to have a material effect on the Company’s financial position or
results of operations.
In January 2014, FASB amended FASB ASC Topic 323, Investments - Equity Method and Joint Ventures. The amendments permit entities
to make an accounting policy election for their investments in qualified affordable housing projects using the proportional amortization
method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment
in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement
as a component of income tax expense. The amendments should be applied retrospectively to all periods presented and are effective for
public business entities for annual periods and interim periods within those annual periods, beginning after December 15, 2014. The
Company is currently evaluating the impact of the adoption of the amendments, but does not expect them to have a material effect on
the Company’s financial position or results of operations.
73
Note 1. Nature of Operations and Summary of Significant Accounting Policies (continued)
In June 2011, FASB amended FASB ASC Topic 220, Comprehensive Income. The amendment provides an entity the option to present
the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single
continuous statement or in two separate but consecutive statements. Accounting Standards Update (“ASU”) No. 2011-12, Comprehensive
Income (Topic 220) deferred the specific requirement of the amendment to present items that are reclassified from accumulated other
comprehensive income to net income separately with their respective components of net income and other comprehensive income. The
amendments were effective retrospectively during interim and annual periods beginning after December 15, 2011. ASU No. 2013-2,
Comprehensive Income (Topic 220) reversed the deferment of ASU 2011-12 and will be effective prospectively for reporting periods
beginning after December 15, 2012 and early adoption is permitted. The Company early adopted ASU No. 2013-2 as of December 31,
2012. The Company has evaluated the impact of the adoption of these amendments and determined there was not a material effect on
the Company’s financial position or results of operations.
Note 2. Cash on Hand and in Banks
At December 31, 2013 and 2012, cash on hand and in banks primarily consisted of cash on hand and cash items in process. The Bank
is required to maintain an average reserve balance with either the Federal Reserve Bank (“FRB”) or in the form of cash on hand. The
required reserve balance at December 31, 2013 was $20,011,000.
Note 3. Investment Securities, Available-for-Sale
A comparison of the amortized cost and estimated fair value of the Company’s investment securities designated as available-for-sale is
presented below.
(Dollars in thousands)
U.S. government sponsored enterprises
Maturing after one year through five years
Maturing after five years through ten years
State and local governments
Maturing within one year
Maturing after one year through five years
Maturing after five years through ten years
Maturing after ten years
Corporate bonds
Maturing within one year
Maturing after one year through five years
Maturing after five years through ten years
Residential mortgage-backed securities
Total investment securities
December 31, 2013
Weighted
Amortized
Gross Unrealized
Yield
Cost
Gains
Losses
Fair
Value
2.32% $
10,405
2.00%
2.32%
2.22%
2.06%
3.21%
36
10,441
5,964
174,826
58,835
4.41% 1,137,722
4.06% 1,377,347
2.17%
2.09%
2.23%
2.11%
91,687
341,799
6,851
440,337
2.48% 1,380,816
3.10% $ 3,208,941
187
—
187
57
3,486
831
27,247
31,621
719
3,203
—
3,922
14,071
49,801
—
—
—
10,592
36
10,628
—
(448)
(1,040)
(22,402)
(23,890)
—
(1,676)
(82)
(1,758)
6,021
177,864
58,626
1,142,567
1,385,078
92,406
343,326
6,769
442,501
(10,265)
(35,913)
1,384,622
3,222,829
74
Note 3. Investment Securities, Available-for-Sale (continued)
(Dollars in thousands)
U.S. government and federal agency
Maturing within one year
U.S. government sponsored enterprises
Maturing after one year through five years
Maturing after five years through ten years
State and local governments
Maturing within one year
Maturing after one year through five years
Maturing after five years through ten years
Maturing after ten years
Corporate bonds
Maturing within one year
Maturing after one year through five years
Maturing after five years through ten years
Collateralized debt obligations
Maturing after ten years
December 31, 2012
Weighted
Amortized
Gross Unrealized
Yield
Cost
Gains
Losses
Fair
Value
1.62% $
201
1
2.30%
2.03%
2.29%
2.01%
2.11%
2.95%
4.70%
17,064
44
17,108
4,288
149,497
38,346
935,897
4.29% 1,128,028
1.73%
2.22%
2.23%
2.19%
18,412
250,027
16,144
284,583
371
1
372
28
4,142
1,102
82,823
88,095
51
4,018
381
4,450
—
—
—
—
(2)
(142)
(99)
(1,362)
(1,605)
—
(238)
—
(238)
202
17,435
45
17,480
4,314
153,497
39,349
1,017,358
1,214,518
18,463
253,807
16,525
288,795
8.03%
1,708
—
—
1,708
Residential mortgage-backed securities
Total investment securities
1.95% 2,156,049
2.71% $ 3,587,677
8,860
101,778
(4,607)
(6,450)
2,160,302
3,683,005
Included in the residential mortgage-backed securities are $2,602,000 and $46,733,000 as of December 31, 2013 and 2012, respectively,
of non-guaranteed private label whole loan mortgage-backed securities of which none of the underlying collateral is considered “subprime.”
Maturities of securities do not reflect repricing opportunities present in adjustable rate securities, nor do they reflect expected shorter
maturities based upon early prepayment of principal. Weighted-average yields are based on the interest method taking into account
premium amortization, discount accretion and mortgage-backed securities’ prepayment provisions. Weighted-average yields on tax-
exempt investment securities exclude the federal income tax benefit.
Effective January 1, 2014, the Company reclassified obligations of state and local government securities with a fair value of approximately
$484,583,000, inclusive of a net unrealized gain of $4,624,000, from AFS classification to HTM classification. The reclassification
changed the allocation of the Company’s entire investment securities portfolio from 100 percent AFS to approximately 85 percent AFS
and 15 percent HTM.
75
Note 3. Investment Securities, Available-for-Sale (continued)
The cost of each investment sold is determined by specific identification. Gain or loss on sale of investments consists of the following:
(Dollars in thousands)
Gross proceeds
Less amortized cost
Net (loss) gain on sale of investments
Gross gain on sale of investments
Gross loss on sale of investments
Net (loss) gain on sale of investments
December 31,
2013
Years ended
December 31,
2012
December 31,
2011
$
$
$
$
181,971
(182,270)
(299)
3,723
(4,022)
(299)
—
—
—
—
—
—
18,916
(18,570)
346
1,048
(702)
346
At December 31, 2013 and 2012, the Company had investment securities with fair values of $1,635,316,000 and $1,525,400,000,
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.
Investments with an unrealized loss position are summarized as follows:
(Dollars in thousands)
Less than 12 Months
Fair
Value
Unrealized
Loss
December 31, 2013
12 Months or More
Fair
Value
Unrealized
Loss
Total
Fair
Value
Unrealized
Loss
U.S. government sponsored enterprises
$
3
State and local governments
Corporate bonds
Residential mortgage-backed securities
408,812
129,515
457,611
Total temporarily impaired securities
$
995,941
—
(17,838)
(1,672)
(10,226)
(29,736)
—
74,161
1,702
1,993
77,856
—
(6,052)
(86)
(39)
(6,177)
3
482,973
131,217
459,604
1,073,797
—
(23,890)
(1,758)
(10,265)
(35,913)
(Dollars in thousands)
Less than 12 Months
Fair
Value
Unrealized
Loss
December 31, 2012
12 Months or More
Fair
Value
Unrealized
Loss
Total
Fair
Value
Unrealized
Loss
State and local governments
Corporate bonds
Residential mortgage-backed securities
$
102,896
41,856
955,235
Total temporarily impaired securities
$ 1,099,987
(1,531)
(238)
(4,041)
(5,810)
4,533
—
62,905
67,438
(74)
—
(566)
(640)
107,429
41,856
1,018,140
1,167,425
(1,605)
(238)
(4,607)
(6,450)
Based on an analysis of its investment securities with unrealized losses as of December 31, 2013 and 2012, 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, 2013, management determined that it did not intend to sell investment securities
with unrealized losses, and there was no expected requirement to sell any of its investment securities with unrealized losses before recovery
of their amortized cost.
76
Note 4. Loans Receivable, Net
The Company’s loan portfolio is comprised of three segments: residential real estate, commercial and consumer and other loans. The
loan portfolio is managed at the class level which is comprised of the following classes: residential real estate, commercial real estate,
other commercial, home equity and other consumer loans. The following tables are presented for each portfolio class of loans receivable
and provide information about the ALLL, loans receivable, impaired loans and TDRs.
The following schedules summarize the activity in the ALLL:
(Dollars in thousands)
Allowance for loan and lease losses
Year ended December 31, 2013
Total
Residential
Real Estate
Commercial
Real Estate
Other
Commercial
Home
Equity
Other
Consumer
Balance at beginning of period
$
130,854
Provision for loan losses
Charge-offs
Recoveries
6,887
(13,643)
6,253
Balance at end of period
$
130,351
15,482
(921)
(793)
299
14,067
74,398
(3,670)
(3,736)
3,340
70,332
21,567
10,271
(4,671)
1,463
28,630
10,659
868
(2,594)
366
9,299
8,748
339
(1,849)
785
8,023
(Dollars in thousands)
Allowance for loan and lease losses
Year ended December 31, 2012
Total
Residential
Real Estate
Commercial
Real Estate
Other
Commercial
Home
Equity
Other
Consumer
Balance at beginning of period
$
137,516
Provision for loan losses
Charge-offs
Recoveries
21,525
(34,672)
6,485
Balance at end of period
$
130,854
17,227
2,879
(5,267)
643
15,482
76,920
11,012
(16,339)
2,805
74,398
20,833
4,690
(5,239)
1,283
21,567
13,616
324
(4,369)
1,088
10,659
8,920
2,620
(3,458)
666
8,748
(Dollars in thousands)
Allowance for loan and lease losses
Year ended December 31, 2011
Total
Residential
Real Estate
Commercial
Real Estate
Other
Commercial
Home
Equity
Other
Consumer
Balance at beginning of period
$
137,107
Provision for loan losses
Charge-offs
Recoveries
64,500
(69,366)
5,275
Balance at end of period
$
137,516
20,957
1,455
(5,671)
486
17,227
76,147
39,563
(42,042)
3,252
76,920
19,932
10,709
(10,386)
578
20,833
13,334
4,450
(4,644)
476
13,616
6,737
8,323
(6,623)
483
8,920
77
(Dollars in thousands)
Allowance for loan and lease losses
Individually evaluated for impairment
Collectively evaluated for impairment
Total allowance for loan
and lease losses
Loans receivable
Individually evaluated for impairment
Collectively evaluated for impairment
$
$
$
(Dollars in thousands)
Allowance for loan and lease losses
Individually evaluated for impairment
Collectively evaluated for impairment
Total allowance for loan
and lease losses
Loans receivable
Individually evaluated for impairment
Collectively evaluated for impairment
$
$
$
Note 4. Loans Receivable, Net (continued)
The following schedules disclose the ALLL and loans receivable:
Total
Residential
Real Estate
December 31, 2013
Other
Commercial
Commercial
Real Estate
Home
Equity
Other
Consumer
11,949
118,402
990
13,077
3,763
66,569
6,155
22,475
130,351
14,067
70,332
28,630
265
9,034
9,299
776
7,247
8,023
Total loans receivable
$ 4,062,838
199,680
3,863,158
24,070
553,519
577,589
119,526
1,929,721
2,049,247
41,504
810,532
852,036
9,039
357,426
366,465
5,541
211,960
217,501
Total
Residential
Real Estate
December 31, 2012
Other
Commercial
Commercial
Real Estate
Home
Equity
Other
Consumer
15,534
115,320
1,680
13,802
7,716
66,682
3,859
17,708
870
9,789
130,854
15,482
74,398
21,567
10,659
1,409
7,339
8,748
Total loans receivable
$ 3,397,425
201,735
3,195,690
25,862
490,605
516,467
125,282
1,530,226
1,655,508
33,593
589,804
623,397
11,074
392,851
403,925
5,924
192,204
198,128
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. 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, 2013 and 2012. No borrower had outstanding loans
or commitments exceeding 10 percent of the Company’s consolidated stockholders’ equity as of December 31, 2013.
Net deferred fees, costs, premiums and discounts of $10,662,000 and $1,379,000 were included in the loans receivable balance at
December 31, 2013 and 2012, respectively. The increase in net deferred fees, costs, premiums and discounts from the prior year was
primarily due to the acquisitions of Wheatland and NCBI. For additional information relating to acquisitions, see Note 22. At December 31,
2013, the Company had $2,566,042,000 in variable rate loans and $1,496,796,000 in fixed rate loans. The weighted-average interest rate
on loans was 5.04 percent and 5.33 percent at December 31, 2013 and 2012, respectively. At December 31, 2013, 2012, and 2011, loans
sold and serviced for others were $148,376,000, $116,439,000, and $160,465,000, respectively. At December 31, 2013, the Company
had loans of $2,579,874,000 pledged as collateral for FHLB advances and FRB discount window. There were no significant purchases
or sales of loans designated held-to-maturity during 2013 and 2012.
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, 2013 and 2012 was $35,224,000 and $33,869,000, respectively. During 2013, new
loans to such related parties were $4,311,000 and repayments were $2,956,000. 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.
78
Note 4. Loans Receivable, Net (continued)
The following schedules disclose the impaired loans:
(Dollars in thousands)
Loans with a specific valuation allowance
Recorded balance
Unpaid principal balance
Specific valuation allowance
Average balance
Loans without a specific valuation
allowance
Recorded balance
Unpaid principal balance
Average balance
Totals
Recorded balance
Unpaid principal balance
Specific valuation allowance
Average balance
At or for the Year ended December 31, 2013
Total
Residential
Real Estate
Commercial
Real Estate
Other
Commercial
Home
Equity
Other
Consumer
$
61,503
63,406
11,949
59,823
$
138,177
169,082
139,129
$
199,680
232,488
11,949
198,952
7,233
7,394
990
7,237
16,837
18,033
18,103
24,070
25,427
990
25,340
23,917
25,331
3,763
26,105
95,609
119,017
95,808
119,526
144,348
3,763
121,913
27,015
27,238
6,155
22,460
14,489
19,156
14,106
41,504
46,394
6,155
36,566
886
949
265
767
8,153
9,631
8,844
9,039
10,580
265
9,611
2,452
2,494
776
3,254
3,089
3,245
2,268
5,541
5,739
776
5,522
(Dollars in thousands)
Loans with a specific valuation allowance
Recorded balance
Unpaid principal balance
Specific valuation allowance
Average balance
Loans without a specific valuation
allowance
Recorded balance
Unpaid principal balance
Average balance
Totals
Recorded balance
Unpaid principal balance
Specific valuation allowance
Average balance
At or for the Year ended December 31, 2012
Total
Residential
Real Estate
Commercial
Real Estate
Other
Commercial
Home
Equity
Other
Consumer
$
62,759
70,261
15,534
76,656
$
138,976
149,412
162,505
$
201,735
219,673
15,534
239,161
7,334
7,459
1,680
12,797
18,528
19,613
16,034
25,862
27,072
1,680
28,831
29,595
36,887
7,716
36,164
95,687
102,798
111,554
125,282
139,685
7,716
147,718
21,205
21,278
3,859
22,665
12,388
14,318
19,733
33,593
35,596
3,859
42,398
1,354
1,362
870
1,390
9,720
9,965
11,993
11,074
11,327
870
13,383
3,271
3,275
1,409
3,640
2,653
2,718
3,191
5,924
5,993
1,409
6,831
Interest income recognized on impaired loans for the years ended December 31, 2013, 2012, and 2011 was not significant.
79
Note 4. Loans Receivable, Net (continued)
The following is a loans receivable aging analysis:
(Dollars in thousands)
Total
Residential
Real Estate
December 31, 2013
Other
Commercial
Commercial
Real Estate
Home
Equity
Other
Consumer
Accruing loans 30-59 days past due
Accruing loans 60-89 days past due
Accruing loans 90 days or more past due
Non-accrual loans
Total past due and non-accrual loans
$
25,761
6,355
604
81,956
114,676
10,367
1,055
429
10,702
22,553
7,016
2,709
—
51,438
61,163
Current loans receivable
Total loans receivable
3,948,162
$ 4,062,838
555,036
577,589
1,988,084
2,049,247
3,673
1,421
160
10,139
15,393
836,643
852,036
2,432
668
5
7,950
11,055
355,410
366,465
2,273
502
10
1,727
4,512
212,989
217,501
(Dollars in thousands)
Total
Residential
Real Estate
December 31, 2012
Other
Commercial
Commercial
Real Estate
Home
Equity
Other
Consumer
Accruing loans 30-59 days past due
Accruing loans 60-89 days past due
Accruing loans 90 days or more past due
Non-accrual loans
Total past due and non-accrual loans
Current loans receivable
Total loans receivable
$
17,454
9,643
1,479
96,933
125,509
3,271,916
$ 3,397,425
3,897
1,870
451
14,237
20,455
496,012
516,467
7,424
3,745
594
55,687
67,450
1,588,058
1,655,508
2,020
645
197
13,200
16,062
607,335
623,397
2,872
2,980
188
11,241
17,281
386,644
403,925
1,241
403
49
2,568
4,261
193,867
198,128
Interest income that would have been recorded on non-accrual loans if such loans had been current for the entire period would have been
approximately $4,122,000, $5,161,000, and $7,441,000 for the years ended December 31, 2013, 2012, and 2011, respectively.
The following is a summary of the TDRs that occurred during the periods presented and the TDRs that occurred within the previous
twelve months that subsequently defaulted during the periods presented:
(Dollars in thousands)
Troubled debt restructurings
Number of loans
Pre-modification recorded balance
Post-modification recorded balance
Troubled debt restructurings that
subsequently defaulted
Number of loans
Recorded balance
Year ended December 31, 2013
Total
Residential
Real Estate
Commercial
Real Estate
Other
Commercial
Home
Equity
Other
Consumer
63
29,046
29,359
5
849
$
$
$
9
1,907
2,293
1
265
21
20,334
20,334
1
79
23
6,087
6,087
3
505
2
147
147
—
—
8
571
498
—
—
80
Note 4. Loans Receivable, Net (continued)
(Dollars in thousands)
Troubled debt restructurings
Number of loans
Pre-modification recorded balance
Post-modification recorded balance
Troubled debt restructurings that
subsequently defaulted
Number of loans
Recorded balance
(Dollars in thousands)
Troubled debt restructurings
Number of loans
Pre-modification recorded balance
Post-modification recorded balance
Troubled debt restructurings that
subsequently defaulted
Number of loans
Recorded balance
Year ended December 31, 2012
Total
Residential
Real Estate
Commercial
Real Estate
Other
Commercial
Home
Equity
Other
Consumer
198
90,747
89,558
$
$
11
2,280
2,281
85
57,382
56,120
75
28,639
28,711
10
1,358
1,358
17
1,088
1,088
14
$
8,304
—
—
4
6,192
6
1,753
3
301
1
58
Year ended December 31, 2011
Total
Residential
Real Estate
Commercial
Real Estate
Other
Commercial
Home
Equity
Other
Consumer
338
$
$
158,295
155,827
20
13,500
13,452
120
109,593
107,778
149
20,446
20,434
22
9,198
9,200
27
5,558
4,963
66
$
41,236
4
2,291
29
32,615
22
2,718
7
3,202
4
410
For the years ended December 31, 2013, 2012 and 2011 the majority of TDRs occurring in most loan classes was a result of an extension
of the maturity date which aggregated 71 percent, 49 percent and 58 percent, respectively, of total TDRs. For commercial real estate,
the class with the largest dollar amount of TDRs, approximately 87 percent, 36 percent and 56 percent, respectively, was a result of an
extension of the maturity date and 9 percent, 30 percent and 31 percent, respectively, was due to a combination of an interest rate reduction,
extension of the maturity date, or reduction in the face amount.
In addition to the TDRs that occurred during the period provided in the preceding table, the Company had TDRs with pre-modification
loan balances of $18,345,000, $39,769,000 and $96,528,000 for the years ended December 31, 2013, 2012 and 2011, respectively, for
which OREO was received in full or partial satisfaction of the loans. The majority of such TDRs for all years was in commercial real
estate.
There were $2,024,000 and $4,534,000 of additional unfunded commitments on TDRs outstanding at December 31, 2013 and 2012,
respectively. The amount of charge-offs on TDRs during 2013, 2012 and 2011 was $1,945,000, $6,271,000 and $8,792,000, respectively.
81
Note 5. Premises and Equipment
Premises and equipment, net of accumulated depreciation, consist of the following at:
(Dollars in thousands)
Land
Office buildings and construction in progress
Furniture, fixtures and equipment
Leasehold improvements
Accumulated depreciation
Net premises and equipment
December 31,
2013
December 31,
2012
$
$
27,260
159,391
66,375
7,589
(92,944)
167,671
25,027
153,340
63,467
7,393
(90,238)
158,989
Depreciation expense for the years ended December 31, 2013, 2012, and 2011 was $10,485,000, $10,615,000, and $10,443,000,
respectively.
The Company leases certain land, premises and equipment from third parties under operating and capital leases. Total rent expense for
the years ended December 31, 2013, 2012, and 2011 was $2,912,000, $2,868,000, and $3,239,000, respectively. Amortization of building
capital lease assets is included in depreciation. The Company has entered into lease transactions with related parties. Rent expense with
such related parties for the years ended December 31, 2013, 2012, and 2011 was $142,000, $410,000, and $937,000. The decrease in
the related party rent expense from the prior years was due to combining the bank subsidiaries in 2012, which resulted in a decrease in
the number of related parties.
The total future minimum rental commitments required under operating and capital leases that have initial or remaining noncancelable
lease terms in excess of one year at December 31, 2013 are as follows:
(Dollars in thousands)
Years ending December 31,
2014
2015
2016
2017
2018
Thereafter
Total minimum lease payments
Less: Amount representing interest
Present value of minimum lease payments
Less: Current portion of obligations under capital leases
Long-term portion of obligations under capital leases
Capital
Leases
Operating
Leases
Total
2,297
2,120
1,879
1,577
1,375
2,900
3,125
2,315
2,076
1,777
1,578
3,446
12,148
14,317
$
$
828
195
197
200
203
546
2,169
479
1,690
708
982
82
Note 6. Other Intangible Assets and Goodwill
The following table sets forth information regarding the Company’s core deposit intangibles:
(Dollars in thousands)
Gross carrying value
Accumulated amortization
Net carrying value
Aggregate amortization expense
Weighted-average amortization period
(Period in years)
Estimated amortization expense for the years ending December 31,
2014
2015
2016
2017
2018
At or for the Years ended
December 31,
2013
December 31,
2012
December 31,
2011
$
$
$
$
27,857
(18,345)
9,512
22,404
(16,230)
6,174
28,248
(19,964)
8,284
2,401
2,110
2,473
9.5
2,650
2,198
1,700
828
430
Core deposit intangibles increased $5,739,000 during 2013 due to the acquisitions of Wheatland and NCBI. For additional information
relating to acquisitions, see Note 22.
The following schedule discloses the changes in the carrying value of goodwill:
(Dollars in thousands)
Net carrying value at beginning of period
Acquisitions
Impairment charge
Net carrying value at end of period
December 31,
2013
Years ended
December 31,
2012
December 31,
2011
$
$
106,100
23,606
—
129,706
106,100
—
—
106,100
146,259
—
(40,159)
106,100
The gross carrying value of goodwill and the accumulated impairment charge consists of the following:
(Dollars in thousands)
Gross carrying value
Accumulated impairment charge
Net carrying value
December 31,
2013
December 31,
2012
$
$
169,865
(40,159)
129,706
146,259
(40,159)
106,100
83
Note 6. Other Intangible Assets and Goodwill (continued)
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 2013 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
2013 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, 2013. However, 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. Due to high levels of volatility and dislocation in prices of shares of publicly-held, exchange listed banking companies in
2011, a goodwill impairment charge was recognized by the Company during the third quarter of 2011. The method utilized for the 2011
two-step impairment analysis and the corresponding amount of the impairment charge included quoted stock market prices for other
banks, discounted cash flows and inputs from comparable transactions.
Note 7. Deposits
Deposits consist of the following at:
(Dollars in thousands)
December 31, 2013
December 31, 2012
Non-interest bearing deposits
$
1,374,419
24.6%
1,191,933
NOW accounts
Savings accounts
Money market deposit accounts
Certificate accounts
Wholesale deposits 1
Total interest bearing deposits
Total deposits
Deposits with a balance of $100,000 and greater
Demand deposits
Certificate accounts
Total balances of $100,000 and greater
$
$
$
1,113,878
600,998
1,168,918
1,116,622
205,132
4,205,548
20.0%
10.8%
20.9%
20.0%
3.7%
75.4%
988,984
478,809
931,370
1,015,491
757,874
4,172,528
22.2%
18.4%
8.9%
17.4%
19.0%
14.1%
77.8%
5,579,967
100.0%
5,364,461
100.0%
2,685,577
661,924
3,347,501
2,361,528
1,044,488
3,406,016
__________
1 Wholesale deposits include brokered deposits classified as NOW, money market deposit and certificate accounts.
The scheduled maturities of time deposits are as follows and include $51,979,000 of wholesale deposits as of December 31, 2013:
(Dollars in thousands)
Years ending December 31,
2014
2015
2016
2017
2018
Thereafter
84
Amount
864,633
164,104
79,425
33,975
19,244
7,220
1,168,601
$
$
Note 7. Deposits (continued)
The Company reclassified $3,422,000 and $3,482,000 of overdraft demand deposits to loans as of December 31, 2013 and 2012,
respectively. The Company has entered into deposit transactions with its executive officers and directors and their affiliates. The aggregate
amount of deposits with such related parties at December 31, 2013, and 2012 was $12,770,000 and $20,404,000, respectively.
Debit card expense for the years ended December 31, 2013, 2012, and 2011 was $6,131,000, $4,497,000, and $4,400,000, respectively,
and was included in other expense in the Company’s statements of operations.
Note 8. Securities Sold Under Agreements to Repurchase
Repurchase agreements consist of the following:
(Dollars in thousands)
Overnight
Maturing within 30 days
(Dollars in thousands)
Overnight
Maturing within 30 days
December 31, 2013
Repurchase
Amount
Weighted-
Average
Fixed Rate
Amortized
Cost of
Underlying
Assets
Fair
Value of
Underlying
Assets
303,709
9,685
313,394
0.28% $
0.32%
0.28% $
304,263
11,095
315,358
312,856
11,301
324,157
December 31, 2012
Repurchase
Amount
Weighted-
Average
Fixed Rate
Amortized
Cost of
Underlying
Assets
Fair
Value of
Underlying
Assets
285,349
4,159
289,508
0.32% $
287,597
0.50%
4,228
0.32% $
291,825
293,958
4,306
298,264
$
$
$
$
The securities, consisting of U.S. government sponsored enterprises issued or guaranteed residential mortgage-backed securities, subject
to agreements to repurchase, were for the same securities originally sold, and were held in custody accounts by third parties. The fair
value of collateral utilized for repurchase agreements is continually monitored and additional collateral is provided as deemed appropriate.
Note 9. Borrowings
Each FHLB advance bears a fixed rate of interest and consists of the following:
(Dollars in thousands)
Maturing within one year
Maturing one year through two years
Maturing two years through three years
Maturing three years through four years
Maturing four years through five years
Thereafter
Total
December 31, 2013
December 31, 2012
Amount
Weighted
Rate
Amount
Weighted
Rate
$
559,084
0.24% $
720,000
3.36%
2.99%
—%
2.83%
3.12%
1.21% $
—
75,000
45,000
—
157,013
997,013
77,979
45,042
—
20,250
137,827
840,182
$
85
0.28%
—%
3.48%
2.99%
—%
3.07%
1.09%
Note 9. Borrowings (continued)
In addition to specifically pledged loans and investment securities, FHLB advances are collateralized by FHLB stock owned by the
Company and a blanket assignment of the unpledged qualifying loans and investments.
With respect to $275,000,000 of FHLB advances at December 31, 2013, FHLB holds put options that will be exercised on the quarterly
measurement date when 3-month LIBOR is 8 percent or greater. The FHLB put options as of December 31, 2013 are summarized as
follows:
(Dollars in thousands)
Maturing during years ending December 31,
2015
2016
2018
2021
Amount
Interest
Rate
$
$
75,000
45,000
20,000
3.16% - 3.64%
2.93% - 3.05%
2.73% - 2.85%
135,000
2.88% - 3.43%
275,000
The Company’s remaining borrowings consisted of capital lease obligations, liens on OREO and other debt obligations through
consolidation of certain VIEs. At December 31, 2013, the Company had $255,000,000 in unsecured lines of credit which are typically
renewed on an annual basis with various correspondent entities.
Note 10. Subordinated Debentures
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 from time to 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 purposes, the FRB has allowed bank holding companies to include trust preferred securities in Tier 1 capital up to a certain
limit. Provisions of the Dodd-Frank Act require the FRB to exclude trust preferred securities from Tier 1 capital, but a grandfather
provision 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. All of the Company’s trust preferred securities qualified as Tier 1 instruments at December 31,
2013.
86
Note 10. Subordinated Debentures (continued)
The terms of the subordinated debentures, arranged by maturity date, are reflected in the table below. The amounts include fair value
adjustments from acquisitions.
(Dollars in thousands)
December 31, 2013
Balance
Rate
Variable Rate
Structure
Maturity
Date
First Company Statutory Trust 2001
$
First Company Statutory Trust 2003
Glacier Capital Trust II
Citizens (ID) Statutory Trust I
Glacier Capital Trust III
Glacier Capital Trust IV
Bank of the San Juans Bancorporation Trust I
3,018
2,227
46,393
5,155
36,083
30,928
1,758
$
125,562
Note 11. Derivatives and Hedging Activities
3.537% 3 mo LIBOR plus 3.30
07/31/2031
3.496% 3 mo LIBOR plus 3.25
03/26/2033
2.994% 3 mo LIBOR plus 2.75
04/07/2034
2.894% 3 mo LIBOR plus 2.65
06/17/2034
1.533% 3 mo LIBOR plus 1.29
04/07/2036
1.813% 3 mo LIBOR plus 1.57
09/15/2036
2.058% 3 mo LIBOR plus 1.82
03/01/2037
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 the Company’s forecasted
variable rate borrowings. The Company recognizes 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 allow
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. As a result, the Company could have interest rate swaps with negative fair
values included in other assets on the statements of financial condition and interest rate swaps with positive fair values included in other
liabilities.
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 agreement of terms were negotiated, including
forecasted notional amounts, interest rates and maturity dates.
The Company is exposed to credit-related losses in the event of nonperformance by the counterparty to the agreements. The Company
controls the credit risk through monitoring procedures and does not expect the counterparty to fail on its obligations. The Company only
conducts business with primary dealers as and believes that the credit risk inherent in these contracts was not significant.
The Company’s interest rate swap derivative financial instruments as of December 31, 2013 are as follows:
(Dollars in thousands)
Interest rate swap
Interest rate swap
Forecasted
Notional
Amount
Variable
Interest Rate 1
Fixed
Interest Rate 1
Term 2
$
160,000
3 month LIBOR
3.378% Oct. 21, 2014 - Oct. 21, 2021
100,000
3 month LIBOR
2.498% Nov 30, 2015 - Nov. 30, 2022
__________
1 The Company pays the fixed interest rate and the counterparty pays the Company the variable interest rate.
2 No cash will be exchanged prior to the term.
The hedging strategy converts the LIBOR based variable interest rate on forecasted borrowings to a fixed interest rate, thereby protecting
the Company from floating interest rate variability.
87
Note 11. Derivatives and Hedging Activities (continued)
The following table discloses the offsetting of financial assets and interest rate swap derivative assets:
(Dollars in thousands)
Gross Amounts
of Recognized
Assets
December 31, 2013
December 31, 2012
Gross Amounts
Offset in the
Statements of
Financial
Position
Net Amounts of
Assets
Presented in the
Statements of
Financial
Position
Gross Amounts
of Recognized
Assets
Gross Amounts
Offset in the
Statements of
Financial
Position
Net Amounts of
Assets
Presented in the
Statements of
Financial
Position
Interest rate swaps
$
6,844
(4,948)
1,896
—
—
—
The following table discloses the offsetting of financial liabilities and interest rate swap derivative liabilities:
(Dollars in thousands)
Gross Amounts
of Recognized
Liabilities
December 31, 2013
December 31, 2012
Gross Amounts
Offset in the
Statements of
Financial
Position
Net Amounts of
Liabilities
Presented in the
Statements of
Financial
Position
Gross Amounts
of Recognized
Liabilities
Gross Amounts
Offset in the
Statements of
Financial
Position
Net Amounts of
Liabilities
Presented in the
Statements of
Financial
Position
Interest rate swaps
$
4,948
(4,948)
—
16,832
—
16,832
Pursuant to the interest rate swap agreements, the Company pledged collateral to the counterparty in the form of investment securities
totaling $6,918,000 at December 31, 2013. There was $0 collateral pledged from the counterparty to the Company as of December 31,
2013. There is the possibility that the Company may need to pledge additional collateral in the future if there were declines in the fair
value of the interest rate swap derivative financial instruments versus the collateral pledged.
Note 12. Regulatory Capital
The FRB has adopted capital adequacy guidelines pursuant to which it assesses the adequacy of capital in supervising a bank holding
company. The following tables illustrate the FRB’s adequacy guidelines and the Company’s and the Bank’s compliance with those
guidelines:
(Dollars in thousands)
Total capital (to risk-weighted assets)
Consolidated
Glacier Bank
Tier 1 capital (to risk-weighted assets)
Consolidated
Glacier Bank
Tier 1 capital (to average assets)
Consolidated
Glacier Bank
Actual
December 31, 2013
Minimum Capital
Requirement
Well Capitalized
Requirement
Amount
Ratio
Amount
Ratio
Amount
Ratio
$ 1,005,980
18.97% $
424,322
8.00% $
530,402
948,618
17.93%
423,235
8.00%
529,044
$
938,887
17.70% $
212,161
4.00% $
318,241
881,692
16.67%
211,618
4.00%
317,426
$
938,887
12.11% $
310,082
4.00%
N/A
881,692
11.44%
308,281
4.00% $
385,351
10.00%
10.00%
6.00%
6.00%
N/A
5.00%
88
Note 12. Regulatory Capital (continued)
(Dollars in thousands)
Total capital (to risk-weighted assets)
Consolidated
Glacier Bank
Tier 1 capital (to risk-weighted assets)
Consolidated
Glacier Bank
Tier 1 capital (to average assets)
Consolidated
Glacier Bank
Actual
December 31, 2012
Minimum Capital
Requirement
Well Capitalized
Requirement
Amount
Ratio
Amount
Ratio
Amount
Ratio
$
923,574
20.09% $
367,701
8.00% $
459,627
851,819
18.79%
362,711
8.00%
453,388
$
865,213
18.82% $
183,851
4.00% $
275,776
794,228
17.52%
181,355
4.00%
272,033
$
865,213
11.31% $
306,005
4.00%
N/A
794,228
10.55%
301,013
4.00% $
376,267
10.00%
10.00%
6.00%
6.00%
N/A
5.00%
The Federal Deposit Insurance Corporation Improvement Act generally restricts a depository institution from making any capital
distribution (including payment of a dividend) or paying any management fee to its bank holding company if the institution would
thereafter be capitalized at less than 8 percent Total capital (to risk-weighted assets), 4 percent Tier 1 capital (to risk-weighted assets), or
4 percent Tier 1 capital (to average assets).
At December 31, 2013 and 2012, the Bank’s capital measures exceeded the well capitalized threshold, which requires Total capital (to
risk-weighted assets) of at least 10 percent, Tier 1 capital (to risk-weighted assets) of at least 6 percent, and Tier 1 capital (to average
assets) of at least 5 percent. Failure to meet minimum capital requirements 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.
There are no conditions or events since year end 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. The Bank is also subject to Montana
state law and cannot declare a dividend greater than the previous two years’ net earnings without providing notice to the state.
Note 13. Accumulated Other Comprehensive Income
The components of accumulated other comprehensive income, included in stockholders’ equity, are as follows:
(Dollars in thousands)
Unrealized gains on available-for-sale securities
$
Tax effect
Net of tax amount
Unrealized gains (losses) on derivatives used for cash flow hedges
Tax effect
Net of tax amount
December 31,
2013
December 31,
2012
13,888
(5,403)
8,485
1,896
(736)
1,160
95,328
(37,083)
58,245
(16,832)
6,549
(10,283)
Total accumulated other comprehensive income
$
9,645
47,962
89
Note 14. Federal and State Income Taxes
The following is a summary of consolidated income tax expense (benefit):
(Dollars in thousands)
Current
Federal
State
Total current income tax expense
Deferred
Federal
State
Total deferred income tax expense (benefit)
Total income tax expense (benefit)
December 31,
2013
Years ended
December 31,
2012
December 31,
2011
$
$
18,377
7,007
25,384
3,918
715
4,633
30,017
12,718
5,522
18,240
708
129
837
19,077
8,836
4,191
13,027
(11,256)
(2,052)
(13,308)
(281)
Combined federal and state income tax expense differs from that computed at the federal statutory corporate tax rate as follows:
Federal statutory rate
State taxes, net of federal income tax benefit
Tax-exempt interest income
Tax credits
Goodwill impairment charge
Other, net
Effective tax rate
December 31,
2013
Years ended
December 31,
2012
December 31,
2011
35.0 %
4.0 %
(12.2)%
(3.2)%
— %
0.3 %
23.9 %
35.0 %
3.9 %
(14.0)%
(4.2)%
— %
(0.5)%
20.2 %
35.0 %
8.1 %
(65.5)%
(22.1)%
42.3 %
0.6 %
(1.6)%
90
Note 14. Federal and State Income Taxes (continued)
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)
Deferred tax assets
Allowance for loan and lease losses
Other real estate owned
Deferred compensation
Employee benefits
Federal income tax credits
Interest rate swap agreements
Other
Total gross deferred tax assets
Deferred tax liabilities
FHLB stock dividends
Deferred loan costs
Available-for-sale securities
Depreciation of premises and equipment
Intangibles
Interest rate swap agreements
Other
Total gross deferred tax liabilities
Net deferred tax asset
December 31,
2013
December 31,
2012
$
50,652
50,963
8,041
4,837
3,132
2,778
—
7,813
77,253
(10,359)
(6,058)
(5,402)
(3,939)
(3,099)
(736)
(4,111)
(33,704)
43,549
$
7,685
3,129
2,715
3,543
6,549
7,835
82,419
(10,143)
(5,316)
(37,083)
(5,437)
(1,117)
—
(2,929)
(62,025)
20,394
The Company’s federal income tax credit carryforwards will expire in 2033.
The Company and the Bank join together in the filing of consolidated income tax returns in the following jurisdictions: federal, Montana,
Idaho, Colorado and Utah. Although the Bank has operations in Wyoming and Washington, neither Wyoming nor Washington imposes
a corporate-level 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, 2013:
Years ended December 31,
Federal
Montana
Idaho
Colorado
Utah
2009, 2010, 2011 and 2012
2010, 2011 and 2012
2009, 2010, 2011 and 2012
2009, 2010, 2011 and 2012
2010, 2011 and 2012
The Company had no unrecognized income tax benefits as of December 31, 2013, and 2012. 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, 2013, 2012, and 2011 was not significant. The Company
had no accrued liabilities for the payment of interest or penalties at December 31, 2013, and 2012.
91
Note 14. Federal and State Income Taxes (continued)
The Company has assessed the need for a valuation allowance and determined that a valuation allowance was not necessary at December 31,
2013, and 2012. 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 future net operating losses (for tax purposes) are expected.
Retained earnings at December 31, 2013 includes $3,600,000 for which no provision for federal income tax has been made. This amount
represents the base year reserve for bad debts, which is essentially an allocation of earnings to pre-1988 bad debt deductions for federal
income tax purposes only. This amount is treated as a permanent difference and deferred taxes are not recognized unless it appears that
this bad debt reserve will be reduced and thereby result in taxable income in the foreseeable future. The Company is not currently
contemplating any changes in its business or operations which would result in a recapture of this reserve for bad debts for federal income
tax purposes.
Note 15. 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 awards were vested, using the treasury stock method.
Basic and diluted earnings per share has been computed based on the following:
(Dollars in thousands, except per share data)
December 31,
2013
Years ended
December 31,
2012
December 31,
2011
Net income available to common stockholders, basic and diluted
$
95,644
75,516
17,471
Average outstanding shares - basic
Add: dilutive stock options and awards
Average outstanding shares - diluted
Basic earnings per share
Diluted earnings per share
73,191,713
71,928,570
71,915,073
68,565
86
—
73,260,278
71,928,656
71,915,073
$
$
1.31
1.31
1.05
1.05
0.24
0.24
There were 38,915, 879,525 and 1,567,561 options excluded from the diluted average outstanding share calculation for December 31,
2013, 2012, and 2011, respectively, due to the option exercise price exceeding the market price of the Company’s common stock.
92
Note 16. Employee Benefit Plans
The Company has a 401(k) plan and a profit sharing plan which has 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, 2013, 2012, and 2011 was $5,862,000, $3,974,000 and $2,043,000 respectively.
The 401(k) plan allows eligible employees to contribute up to 60 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, 2013, 2012 and 2011 was $1,935,000,
$1,751,000, and $1,644,000, respectively.
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. The total amount deferred for the plans was $376,000, $278,000, and $362,000, for the years ending December 31,
2013, 2012, and 2011, respectively. The participant receives an earnings credit at a rate equal to 50 percent of the Company’s return on
average equity. The total earnings for the years ended December 31, 2013, 2012, and 2011 for the plans was $515,000, $231,000 and
$54,000, respectively. In connection with several acquisitions, the Company assumed the obligations of deferred compensation plans
for certain key employees. As of December 31, 2013 and 2012, the liability related to the obligations was $5,042,000 and $1,255,000
and was included in other liabilities. The total earnings for the years ended December 31, 2013, 2012, and 2011 for the acquired plans
was insignificant.
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 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.
The Company’s required contribution to the SERP for the years ended December 31, 2013, 2012 and 2011 was $76,000, $47,000, and
$21,000, respectively. The participant receives an earnings credit at a rate equal to 50 percent of the Company’s return on average equity.
The total earnings for the years ended December 31, 2013, 2012, and 2011 for this plan was $48,000, $37,000, and $9,000, respectively.
The Company has elected to self-insure certain costs related to employee health and dental benefit programs. Costs resulting from
noninsured losses are expensed as incurred. The Company has purchased insurance that limits its exposure on an aggregate and individual
claims basis for the employee health benefit programs.
The Company has entered into employment contracts with 26 senior officers that provide benefits under certain conditions following a
change in control of the Company.
93
Note 17. Stock-based Compensation Plans
The Company has the following stock-based compensation plans outstanding: 1) the Directors 1994 Stock Option Plan and 2) the 2005
Stock Incentive Plan. The Directors 1994 Stock Option Plan was approved to provide for the grant of stock options to outside Directors
of the Company. The Directors 1994 Stock Option Plan expired in March of 2009 and has granted but unexpired stock options outstanding
at December 31, 2013. The 2005 Stock Incentive Plan provides awards to certain full-time employees and directors of the Company.
The 2005 Stock Incentive Plan permits the granting of stock options, share appreciation rights, restricted shares, restricted share units,
and unrestricted shares, deferred share units, and performance awards. At December 31, 2013, the number of shares available to grant
to employees and directors was 4,116,931.
Stock Options
The Company has granted stock options to certain full-time employees and directors of the Company under the Directors 1994 Stock
Option Plan and the 2005 Stock Incentive Plan. Both plans contain provisions authorizing the grant of limited stock rights, which permit
the optionee, upon a change in control of the Company, to surrender his or her stock options for cancellation and receive cash or common
stock equal to the difference between the exercise price and the fair market value of the shares on the date of the grant. 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 is granted. All stock option shares are adjusted for stock splits and stock
dividends. The term of the stock options may not exceed five years from the date the options are granted.
The fair value of stock options granted is estimated at the date of grant using the Black Scholes option-pricing model. The Company
uses historical data to estimate option exercise and termination within the valuation model. Employee and director awards, which have
dissimilar historical exercise behavior, are considered separately for valuation purposes. The risk-free interest rate for periods within the
contractual life of the stock option is based on the U.S. Treasury yield in effect at the time of the grant. The stock option grants generally
vest upon six months or two years of service for directors and employees, respectively, and generally expire in five years. Expected
volatilities are based on historical volatility and other factors. There were no stock options granted during 2013, 2012 or 2011.
Compensation expense related to stock options for the years ended December 31, 2013, 2012 and 2011 was $0, $4,000 and $74,000,
respectively, and the recognized income tax benefit related to this expense was $0, $2,000 and $29,000. There was no unrecognized
compensation cost related to stock options as of December 31, 2013.
The total intrinsic value of options exercised during the years ended December 31, 2013, 2012 and 2011 was $1,907,000, $3,000 and $0,
respectively, and the income tax benefit received related to these exercises was $742,000, $1,000 and $0. Total cash received from options
exercised during the years ended December 31, 2013, 2012 and 2011 was $4,327,000, $81,000 and $0. Upon exercise of stock options,
the shares are issued from the Company’s authorized stock balance.
Changes in shares granted for stock options for the year ended December 31, 2013 are summarized as follows:
Outstanding at December 31, 2012
Exercised
Forfeited or expired
Outstanding at December 31, 2013
Exercisable at December 31, 2013
Options
Weighted-
Average
Exercise Price
$
791,440
(281,560)
(451,070)
58,810
58,810
16.95
15.37
18.14
15.47
15.47
The average remaining life on stock options outstanding and exercisable at December 31, 2013 is one month. The aggregate intrinsic
value of the outstanding and exercisable shares at December 31, 2013 was $842,000.
94
Note 17. Stock-based Compensation Plans (continued)
Restricted Stock Awards
The Company has awarded restricted stock to certain executive officers and directors under the 2005 Stock Incentive Plan. Common
stock issued under restricted stock awards may be issued under the terms of a vesting schedule or with an immediate vest and may not
be sold or otherwise transferred until restrictions have lapsed. The recipient does not have voting rights until the restricted stock award
has vested. Dividends paid on the restricted shares during the restriction period are paid immediately in cash. The fair value of the
restricted stock awarded is the closing price of the Company’s common stock on the award date.
Compensation expense related to restricted stock awards for the years ended December 31, 2013 and 2012 was $768,000 and $243,000,
respectively, and the recognized income tax benefit related to this expense was $299,000 and $96,000. As of December 31, 2013,
$1,348,000 of total unrecognized compensation costs related to restricted stock awards is expected to be recognized over a weighted-
average period of 2.2 years.
The fair value of restricted stock awards that vested during the years ended December 31, 2013 and 2012 was $197,000 and $243,000,
respectively, and the income tax benefit recognized related to these awards was $77,000 and $96,000. Upon vesting of restricted stock
awards, the shares are issued from the Company’s authorized stock balance.
The following table summarizes the restricted stock award activity for the year ended December 31, 2013:
Non-vested at December 31, 2012
Granted
Vested
Forfeited
Non-vested at December 31, 2013
Restricted
Stock
Weighted-
Average
Grant Date
Fair Value
— $
131,262
(11,753)
(2,067)
117,442
—
16.76
16.76
16.76
16.76
95
Note 18. Parent Holding Company Information (Condensed)
The following condensed financial information was the unconsolidated information for the parent holding company:
Statements of Financial Condition
(Dollars in thousands)
Assets
Cash on hand and in banks
Interest bearing cash deposits
Cash and cash equivalents
Investment securities, available-for-sale
Other assets
Investment in subsidiaries
Total assets
Liabilities and Stockholders’ Equity
Subordinated debentures
Other liabilities
Total liabilities
Common stock
Paid-in capital
Retained earnings
Accumulated other comprehensive income
Total stockholders’ equity
Total liabilities and stockholders’ equity
Statements of Operations
(Dollars in thousands)
Income
Dividends from subsidiaries
Loss on sale of investments
Other income
Intercompany charges for services
Total income
Expenses
Compensation and employee benefits
Other operating expenses
Total expenses
Income before income tax benefit and equity in undistributed net
income (loss) of subsidiaries
Income tax benefit
Income before equity in undistributed net income (loss) of
subsidiaries
Equity in undistributed net income (loss) of subsidiaries
Net Income
96
$
$
$
December 31,
2013
December 31,
2012
1,582
49,097
50,679
87
9,050
2,540
9,887
12,427
29,457
23,221
1,040,104
1,099,920
972,218
1,037,323
125,562
11,108
136,670
744
690,918
261,943
9,645
963,250
125,418
10,956
136,374
719
641,737
210,531
47,962
900,949
$
1,099,920
1,037,323
December 31,
2013
Years ended
December 31,
2012
December 31,
2011
$
$
65,445
(3,248)
966
7,387
70,550
9,175
6,536
15,711
54,839
3,676
58,515
37,129
95,644
78,209
—
566
16,041
94,816
12,392
10,267
22,659
72,157
2,319
74,476
1,040
75,516
43,450
—
864
14,438
58,752
9,185
11,827
21,012
37,740
2,176
39,916
(22,825)
17,091
Note 18. Parent Holding Company Information (Condensed) (continued)
Statements of Comprehensive Income
(Dollars in thousands)
Net Income
Other Comprehensive (Loss) Income, Net of Tax
Unrealized (losses) gains on available-for-sale securities
Reclassification adjustment for losses (gains) included in net income
Net unrealized (losses) gains on securities
Tax effect
Net of tax amount
Unrealized gains (losses) on derivatives used for cash flow hedges
Tax effect
Net of tax amount
Total other comprehensive (loss) income, net of tax
Total Comprehensive Income
$
57,327
Statements of Cash Flows
(Dollars in thousands)
Operating Activities
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Subsidiary income (in excess of) less than dividends distributed
Loss on sale of investments
Excess tax deficiencies from stock-based compensation
Net change in other assets and other liabilities
Net cash provided by operating activities
Investing Activities
Proceeds from sales, maturities and prepayments of
securities available-for-sale
Changes in investment securities and other stock - intercompany
Equity contribution to subsidiaries
Net addition of premises and equipment
Net cash provided by (used in) investing activities
Financing Activities
Net increase in other borrowed funds
Cash dividends paid
Excess tax deficiencies from stock-based compensation
Proceeds from stock options exercised
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
$
97
December 31,
2013
Years ended
December 31,
2012
December 31,
2011
$
95,644
75,516
17,091
(81,739)
299
(81,440)
31,680
(49,760)
18,728
(7,285)
11,443
(38,317)
31,617
—
31,617
(12,300)
19,317
(7,926)
3,084
(4,842)
14,475
89,991
63,190
(346)
62,844
(24,444)
38,400
(8,906)
3,465
(5,441)
32,959
50,050
December 31,
2013
Years ended
December 31,
2012
December 31,
2011
$
95,644
75,516
17,091
(37,129)
3,248
223
2,575
64,561
26,561
(946)
(11,336)
(603)
13,676
144
(44,232)
(223)
4,326
(39,985)
38,252
12,427
50,679
(1,040)
—
8
3,684
78,168
787
(19,183)
(28,500)
(2,927)
(49,823)
143
(47,472)
(8)
81
(47,256)
(18,911)
31,338
12,427
22,825
—
—
1,215
41,131
1,376
—
(1,110)
(1,920)
(1,654)
143
(37,395)
—
—
(37,252)
2,225
29,113
31,338
Note 19. Unaudited Quarterly Financial Data
Summarized unaudited quarterly financial data is as follows:
(Dollars in thousands, except per share data)
March 31
June 30
September 30
December 31
Quarters ended 2013
$
$
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income
Non-interest expense
Income before income taxes
Federal and state income tax expense
Net income
Basic earnings per share
Diluted earnings per share
(Dollars in thousands, except per share data)
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income
Non-interest expense
Income before income taxes
Federal and state income tax expense
Net income
Basic earnings per share
Diluted earnings per share
57,955
7,458
50,497
2,100
48,397
22,950
43,434
27,913
7,145
20,768
0.29
0.29
62,151
7,185
54,966
1,078
53,888
23,222
48,481
28,629
5,927
22,702
0.31
0.31
69,531
7,186
62,345
1,907
60,438
23,873
50,368
33,943
8,315
25,628
0.35
0.35
73,939
6,929
67,010
1,802
65,208
23,002
53,034
35,176
8,630
26,546
0.36
0.36
Quarters ended 2012
March 31
June 30
September 30
December 31
67,884
9,598
58,286
8,625
49,661
20,338
49,045
20,954
4,621
16,333
0.23
0.23
64,192
9,044
55,148
7,925
47,223
21,791
46,190
22,824
3,843
18,981
0.26
0.26
62,015
8,907
53,108
2,700
50,408
23,974
50,178
24,204
4,760
19,444
0.27
0.27
59,666
8,165
51,501
2,275
49,226
25,393
48,008
26,611
5,853
20,758
0.29
0.29
98
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, 2013 and 2012.
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, 2013.
Investment securities: fair value for available-for-sale securities is estimated by obtaining quoted market prices for identical assets, where
available. If such prices are not available, fair value is based on independent asset pricing services and models, the inputs of which are
market-based or independently sourced market parameters, including but not limited to, yield curves, interest rates, volatilities,
prepayments, defaults, 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 investment 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 Company reviews the vendors’
inputs for fair value estimates and the recommended assignments of levels within the fair value hierarchy. The review includes the extent
to which markets for investment securities are determined to have limited or no activity, or are judged to be active markets. The Company
reviews the extent to which observable and unobservable inputs are used as well as the appropriateness of the underlying assumptions
about risk that a market participant would use in active markets, with adjustments for limited or inactive markets. In considering the
inputs to the fair value estimates, the Company places less reliance on quotes that are judged to not reflect orderly transactions, or are
non-binding indications. In assessing credit risk, the Company reviews payment performance, collateral adequacy, third party research
and analyses, credit rating histories and issuers’ financial statements. For those markets determined to be inactive or limited, the valuation
techniques used are models for which management has verified that discount rates are appropriately adjusted to reflect illiquidity and
credit risk. The Company also independently obtains cash flow estimates that are stressed at levels that exceed those used by the
independent third party pricing vendors.
Interest rate swap derivative financial instruments: fair values for interest rate swap derivative financial instruments are based upon the
estimated amounts to settle the contracts considering current interest rates and are calculated using discounted cash flows that are observable
or that can be corroborated by observable market data and, therefore, are classified within Level 2 of the valuation hierarchy. The inputs
used to determine fair value include the 3 month LIBOR forward curve to estimate variable rate cash inflows and the Fed Funds Effective
Swap Rate to estimate the discount rate. The estimated variable rate cash inflows are compared to the fixed rate outflows and such
difference is discounted to a present value to estimate the fair value of the interest rate swaps. The Company also obtains and compares
the reasonableness of the pricing from an independent third party.
99
Note 20. Fair Value of Assets and Liabilities (continued)
The following schedules 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
Quoted Prices
in Active
Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair Value
December 31,
2013
(Dollars in thousands)
Investment securities, available-for-sale
U.S. government sponsored enterprises
$
10,628
State and local governments
Corporate bonds
Residential mortgage-backed securities
Interest rate swaps
Total assets measured at fair value
on a recurring basis
(Dollars in thousands)
Investment securities, available-for-sale
U.S. government and federal agency
U.S. government sponsored enterprises
State and local governments
Corporate bonds
Collateralized debt obligations
Residential mortgage-backed securities
Total assets measured at fair value
on a recurring basis
Interest rate swaps
Total liabilities measured at fair value
on a recurring basis
1,385,078
442,501
1,384,622
1,896
$
3,224,725
Fair Value
December 31,
2012
$
$
$
$
202
17,480
1,214,518
288,795
1,708
2,160,302
3,683,005
16,832
16,832
—
—
—
—
—
—
10,628
1,385,078
442,501
1,384,622
1,896
3,224,725
—
—
—
—
—
—
Fair Value Measurements
At the End of the Reporting Period Using
Quoted Prices
in Active
Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
—
—
—
—
—
—
—
—
—
202
17,480
1,214,518
288,795
1,708
2,160,302
3,683,005
16,832
16,832
—
—
—
—
—
—
—
—
—
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 year ended December 31, 2013.
Other real estate owned: OREO is carried at the lower of fair value at acquisition date or current estimated fair value, less estimated cost
to sell. Estimated fair value of OREO is based on appraisals or evaluations (new or updated). OREO is classified within Level 3 of the
fair value hierarchy.
100
Note 20. Fair Value of Assets and Liabilities (continued)
Collateral-dependent impaired loans, net of ALLL: loans included in the Company’s loan portfolio for which it is probable that the
Company will not collect all principal and interest due according to contractual terms are considered impaired. Estimated fair value of
collateral-dependent impaired loans is based on the fair value of the collateral, less estimated cost to sell. Collateral-dependent impaired
loans are classified within Level 3 of the fair value hierarchy.
The Company’s credit departments review appraisals for OREO and collateral-dependent loans, giving consideration to the highest and
best use of the collateral. The appraisal or evaluation (new or updated) is considered the starting point for determining fair value. The
valuation techniques used in preparing appraisals or evaluations (new or updated) include the cost approach, income approach, sales
comparison approach, or a combination of the preceding valuation techniques. The key inputs used to determine the fair value of the
collateral-dependent loans and OREO include selling costs, discounted cash flow rate or capitalization rate, and adjustment to comparables.
Valuations and significant inputs obtained by independent sources are reviewed by the Company for accuracy and reasonableness. The
Company also considers other factors and events in the environment that may affect the fair value. The appraisals or evaluations (new
or updated) are reviewed at least quarterly and more frequently based on current market conditions, including deterioration in a borrower’s
financial condition and when property values may be subject to significant volatility. After review and acceptance of the collateral
appraisal or evaluation (new or updated), adjustments to the impaired loan or OREO may occur. The Company generally obtains appraisals
or evaluations (new or updated) annually.
The following schedules 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:
(Dollars in thousands)
Other real estate owned
Collateral-dependent impaired loans, net of ALLL
Total assets measured at fair value
on a non-recurring basis
(Dollars in thousands)
Other real estate owned
Collateral-dependent impaired loans, net of ALLL
Total assets measured at fair value
on a non-recurring basis
Fair Value Measurements
At the End of the Reporting Period Using
Quoted Prices
in Active
Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
—
—
—
—
—
—
10,888
18,670
29,558
Fair Value Measurements
At the End of the Reporting Period Using
Quoted Prices
in Active
Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
—
—
—
—
—
—
13,983
22,966
36,949
Fair Value
December 31,
2013
$
$
10,888
18,670
29,558
Fair Value
December 31,
2012
$
$
13,983
22,966
36,949
101
Note 20. Fair Value of Assets and Liabilities (continued)
Non-recurring Measurements Using Significant Unobservable Inputs (Level 3)
The following table presents 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:
(Dollars in thousands)
Fair Value
December 31,
2013
Quantitative Information about Level 3 Fair Value Measurements
Valuation Technique
Unobservable Input
Range (Weighted-
Average) 1
Other real estate owned
$
9,278 Sales comparison approach Selling costs
7.0% - 10.0% (7.7%)
1,610 Combined approach
Adjustment to comparables
0.0% - 37.5% (1.4%)
Selling costs
Discount rate
5.0% - 10.0% (7.5%)
8.5% - 8.5% (8.5%)
Adjustment to comparables
25.0% - 25.0% (25.0%)
Collateral-dependent
impaired loans, net of ALLL $
4,076
Income approach
$
10,888
Selling costs
Discount rate
11,784 Sales comparison approach Selling costs
8.0% - 8.0% (8.0%)
8.3% - 8.3% (8.3%)
0.0% - 10.0% (7.9%)
2,810 Combined approach
Adjustment to comparables
0.0% - 1.0% (0.0%)
Selling costs
Discount rate
0.0% - 8.0% (7.8%)
7.3% - 7.3% (7.3%)
Adjustment to comparables
10.0% - 50.0% (18.9%)
$
18,670
Fair Value
December 31,
2012
(Dollars in thousands)
Quantitative Information about Level 3 Fair Value Measurements
Valuation Technique
Unobservable Input
Range (Weighted-
Average) 1
7.0% - 7.0% (7.0%)
7.0% - 14.0% (7.9%)
Other real estate owned
$
93 Cost approach
Selling costs
11,787 Sales comparison approach Selling costs
2,103 Combined approach
$
13,983
Adjustment to comparables
0.0% - 37.0% (11.7%)
Selling costs
Discount rate
5.0% - 8.0% (6.6%)
25.0% - 25.0% (25.0%)
Adjustment to comparables
0.0% - 30.0% (7.7%)
Collateral-dependent
impaired loans, net of ALLL $
84 Cost approach
5,509
Income approach
Selling costs
Selling costs
Discount rate
12,878 Sales comparison approach Selling costs
8.0% - 8.0% (8.0%)
8.0% - 10.0% (8.2%)
0.0% - 8.3% (6.3%)
0.0% - 16.0% (8.6%)
4,495 Combined approach
Adjustment to comparables
0.0% - 12.0% (1.6%)
Selling costs
Discount rate
8.0% - 10.0% (8.4%)
8.0% - 8.0% (8.0%)
Adjustment to comparables
0.0% - 36.0% (17.6%)
$
22,966
__________
1 The range for selling costs and adjustments to comparables indicate reductions to the fair value.
102
Note 20. Fair Value of Assets and Liabilities (continued)
Fair Value of Financial Instruments
The following is a description of the methods used to estimate the fair value of all other assets and liabilities recognized at amounts other
than fair value.
Cash and cash equivalents: fair value is estimated at book value.
Loans held for sale: fair value is estimated at book value.
Loans receivable, net of ALLL: fair value is estimated by discounting the future cash flows using the rates at which similar notes would
be written for the same remaining maturities. The market rates used are based on current rates the Company would impose for similar
loans and reflect a market participant assumption about risks associated with non-performance, illiquidity, and the structure and term of
the loans along with local economic and market conditions. Estimated fair value of impaired loans is based on the fair value of the
collateral, less estimated cost to sell, or the present value of the loan’s expected future cash flows (discounted at the loan’s effective
interest rate). All impaired loans are classified as Level 3 and all other loans are classified as Level 2 within the valuation hierarchy.
Accrued interest receivable: fair value is estimated at book value.
Non-marketable equity securities: fair value is estimated at book value due to restrictions that limit the sale or transfer of such securities.
Deposits: fair value of term deposits is estimated by discounting the future cash flows using rates of similar deposits with similar maturities.
The market rates used were obtained from an independent third party and reviewed by the Company. The rates were the average of
current rates offered by the Company’s local competitors. The estimated fair value of demand, NOW, savings, and money market deposits
is the book value since rates are regularly adjusted to market rates and transactions are executed at book value daily. Therefore, such
deposits are classified in Level 1 of the valuation hierarchy. Certificate accounts and wholesale deposits are classified as Level 2 within
the hierarchy.
FHLB advances: fair value of non-callable FHLB advances is estimated by discounting the future cash flows using rates of similar
advances with similar maturities. Such rates were obtained from current rates offered by FHLB. The estimated fair value of callable
FHLB advances was obtained from FHLB and the model was reviewed by the Company, including discussions with FHLB.
Repurchase agreements and other borrowed funds: fair value of term repurchase agreements and other term borrowings is estimated
based on current repurchase rates and borrowing rates currently available to the Company for repurchases and borrowings with similar
terms and maturities. The estimated fair value for overnight repurchase agreements and other borrowings is book value.
Subordinated debentures: fair value of the subordinated debt is estimated by discounting the estimated future cash flows using current
estimated market rates. The market rates used were averages of currently traded trust preferred securities with similar characteristics to
the Company’s issuances and obtained from an independent third party.
Accrued interest payable: fair value is estimated at book value.
Off-balance sheet financial instruments: commitments to extend credit and letters of credit represent the principal categories of off-balance
sheet financial instruments. Rates for these commitments are set at time of loan closing, such that no adjustment is necessary to reflect
these commitments at market value. The Company has an insignificant amount of off-balance sheet financial instruments.
103
Note 20. Fair Value of Assets and Liabilities (continued)
The following schedules present the carrying amounts, estimated fair values and the level within the fair value hierarchy of the Company’s
financial instruments:
(Dollars in thousands)
Financial assets
Cash and cash equivalents
Investment securities, available-for-sale
Loans held for sale
Loans receivable, net of ALLL
Accrued interest receivable
Non-marketable equity securities
Interest rate swaps
Total financial assets
Financial liabilities
Deposits
FHLB advances
Repurchase agreements and other borrowed funds
Subordinated debentures
Accrued interest payable
Total financial liabilities
(Dollars in thousands)
Financial assets
Cash and cash equivalents
Investment securities, available-for-sale
Loans held for sale
Loans receivable, net of ALLL
Accrued interest receivable
Non-marketable equity securities
Total financial assets
Financial liabilities
Deposits
FHLB advances
Repurchase agreements and other borrowed funds
Subordinated debentures
Accrued interest payable
Interest rate swaps
Total financial liabilities
Fair Value Measurements
At the End of the Reporting Period Using
Carrying
Amount
December 31,
2013
Quoted Prices
in Active
Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
$
$
$
155,657
3,222,829
46,738
3,932,487
41,898
52,192
1,896
7,453,697
5,579,967
840,182
321,781
125,562
3,505
6,870,997
155,657
—
46,738
—
41,898
—
—
244,293
4,258,213
—
—
—
3,505
4,261,718
—
3,222,829
—
3,807,993
—
52,192
1,896
7,084,910
1,341,382
857,551
321,781
71,501
—
2,592,215
—
—
—
187,731
—
—
—
187,731
—
—
—
—
—
—
Fair Value Measurements
At the End of the Reporting Period Using
Carrying
Amount
December 31,
2012
Quoted Prices
in Active
Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
187,040
—
145,501
—
37,770
—
370,311
3,585,126
—
—
—
4,675
—
3,589,801
—
3,683,005
—
3,184,987
—
48,812
6,916,804
1,789,134
1,027,101
299,540
70,895
—
16,832
3,203,502
—
—
—
186,201
—
—
186,201
—
—
—
—
—
—
—
$
$
$
$
187,040
3,683,005
145,501
3,266,571
37,770
48,812
7,368,699
5,364,461
997,013
299,540
125,418
4,675
16,832
6,807,939
104
Note 21. Contingencies and Commitments
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)
Commitments to extend credit
Letters of credit
Total outstanding commitments
December 31,
2013
December 31,
2012
$
$
866,885
14,665
881,550
802,595
12,600
815,195
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.
Note 22. Mergers and Acquisitions
On May 31, 2013, the Company acquired 100 percent of the outstanding common stock of Wheatland and its wholly-owned subsidiary,
First State Bank, a community bank based in Wheatland, Wyoming. First State Bank provides community banking services to individuals
and businesses from banking offices in Wheatland, Torrington and Guernsey, Wyoming. As a result of the acquisition, the Company has
increased its presence in the State of Wyoming and further diversified its loan, customer and deposit base with First State Bank’s strong
commitment to agriculture. First State Bank operates as a division of the Bank under the name “First State Bank, division of Glacier
Bank.” The Wheatland acquisition was valued at $39,315,000 and resulted in the Company issuing 1,455,256 shares of its common stock
and $11,025,000 in cash in exchange for all of Wheatland’s outstanding common stock shares. The fair value of the Company’s common
stock shares issued was determined on the basis of the closing market price of the Company’s common stock shares on the May 31, 2013
acquisition date.
On July 31, 2013, the Company acquired 100 percent of the outstanding common stock of NCBI and its wholly-owned subsidiary, North
Cascades National Bank, a community bank based in Chelan, Washington. North Cascades Bank provides community banking services
to individuals and businesses in central Washington, with banking offices located in Chelan, Wenatchee, East Wenatchee, Omak, Brewster,
Twisp, Okanogan, Grand Coulee and Waterville, Washington. The acquisition expanded the Company’s market into central Washington
and further diversified the Company’s loan, customer and deposit base due to the region’s solid economic base of agriculture, fruit
processing and tourism. North Cascades Bank operates as a division of the Bank under the name “North Cascades Bank, division of
Glacier Bank.” The NCBI acquisition was valued at $30,576,000 and resulted in the Company issuing 687,876 shares of its common
stock and $13,833,000 in cash in exchange for all of NCBI’s outstanding common stock shares. The fair value of the Company’s common
stock shares issued was determined on the basis of the closing market price of the Company’s common stock shares on the July 31, 2013
acquisition date.
105
Note 22. Mergers and Acquisitions (continued)
The assets and liabilities of Wheatland and NCBI were recorded on the Company’s consolidated statements of financial condition at their
estimated fair values as of the May 31, 2013 and July 31, 2013 acquisition dates, respectively, and their results of operations have been
included in the Company’s consolidated statements of operations since those dates. The excess of the fair value of consideration transferred
over total identifiable net assets was recorded as goodwill. The goodwill arising from the acquisitions consists largely of the synergies
and economies of scale expected from combining the operations of the Company, Wheatland and NCBI. None of the goodwill is deductible
for income tax purposes as both acquisitions were accounted for as tax-free exchanges. The following table discloses the calculation of
the fair value of consideration transferred, the total identifiable net assets acquired and the resulting goodwill relating to the Wheatland
and NCBI acquisitions:
Wheatland
May 31,
2013
NCBI
July 31,
2013
(Dollars in thousands)
Fair value of consideration transferred
Fair value of Company shares issued, net of equity issuance costs
$
Cash consideration for outstanding shares
Total fair value of consideration transferred
Recognized amounts of identifiable assets acquired
and liabilities assumed
Identifiable assets acquired
Cash and cash equivalents
Investment securities, available-for-sale
Loans receivable
Core deposit intangible
Accrued income and other assets
Total identifiable assets acquired
Liabilities assumed
Deposits
FHLB advances and other borrowed funds
Accrued expenses and other liabilities
Total liabilities assumed
Total identifiable net assets
28,290
11,025
39,315
23,148
75,643
171,199
2,079
15,063
287,132
255,197
5,467
562
261,226
25,906
Goodwill recognized
$
13,409
Total
45,033
24,858
69,891
51,013
123,701
387,185
5,739
39,325
606,963
550,177
5,467
5,034
560,678
46,285
23,606
16,743
13,833
30,576
27,865
48,058
215,986
3,660
24,262
319,831
294,980
—
4,472
299,452
20,379
10,197
The fair value of the Wheatland and NCBI assets acquired includes loans with fair values of $171,199,000 and $215,986,000, respectively.
The gross principal and contractual interest due under the Wheatland and NCBI contracts is $176,698,000 and $223,949,000, respectively,
all of which is expected to be collectible.
Core deposit intangible assets related to the Wheatland and NCBI acquisitions totaled $2,079,000 with an estimated life of 11 years and
$3,660,000 with an estimated life of 10 years, respectively.
The Company incurred $832,000 and $667,000, respectively, of Wheatland and NCBI third-party acquisition-related costs during the
year ended December 31, 2013. The expenses are included in other expense in the Company’s consolidated statements of operations.
106
Note 22. Mergers and Acquisitions (continued)
Total income consisting of net interest income and non-interest income of the acquired operations of Wheatland was approximately
$7,946,000 and net income was approximately $2,100,000 from May 31, 2013 to December 31, 2013. Total income consisting of net
interest income and non-interest income of the acquired operations of NCBI was approximately $6,837,000 and net income was
approximately $1,108,000 from July 31, 2013 to December 31, 2013. The following unaudited pro forma summary presents consolidated
information of the Company as if the Wheatland and NCBI acquisitions had occurred on January 1, 2012:
(Dollars in thousands)
Net interest income and non-interest income
Net income
Note 23. Subsequent Event
Year ended
December 31,
2013
December 31,
2012
$
339,236
96,392
334,317
80,403
In connection with the ongoing monitoring of its investment securities portfolio, the Company reclassified obligations of state and local
government securities with a fair value of approximately $484,583,000, inclusive of a net unrealized gain of $4,624,000, from AFS
classification to HTM classification. The reclassification occurred on January 1, 2014 and changed the allocation of the Company’s
entire investment securities portfolio from 100 percent AFS to approximately 85 percent AFS and 15 percent HTM. The future impact
of this reclassification, if any, on the Company’s financial condition and results of operations will depend on interest rate environments
and other factors which are not estimable at this time.
107
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 Chief
Executive Officer (“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 three months ended December 31, 2013 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 accounting principles generally accepted in the United States of America. 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 accounting principles generally accepted in
the United States of America. 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, 2013. This assessment was based on
criteria for effective internal control over financial reporting described in the “1992 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 accounting principles generally accepted in the United States of America.
BKD LLP, the independent registered public accounting firm that audited the financial statements for the year ended December 31, 2013,
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, 2013.
Item 9B. Other Information
None
108
Item 10. Directors, Executive Officers and Corporate Governance
PART III
Information regarding “Directors and Executive Officers” is set forth under the headings “Election of Directors” and “Management –
Executive Officers who are not Directors” of the Company’s 2014 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 “Compliance with Section 16
(a) Filing Requirements” of the Company’s Proxy Statement and is incorporated herein by reference.
Information regarding the Company’s audit committee financial expert is set forth under the heading “Meetings and Committees of the
Board of Directors – Committee Membership” in the Company’s Proxy Statement and is incorporated by reference.
Consistent with the requirements of the Sarbanes-Oxley Act, the Company has a Code of Ethics applicable to senior financial officers
including the principal executive officer. The Code of Ethics can be accessed electronically by visiting the Company’s website at
www.glacierbancorp.com. The Code of Ethics is also listed as Exhibit 14 to this report, and is incorporated by reference to the Company’s
2003 annual report Form 10-K.
Item 11. Executive Compensation
Information regarding “Executive Compensation” is set forth under the headings “Compensation of Directors” and “Executive
Compensation” 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” is set forth under the headings “Security
Ownership of Certain Beneficial Owners and Management” 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 heading
“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.
109
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.
Exhibit
3(a)
3(b)
10(a) *
10(b) *
10(c) *
10(d) *
10(e) *
10(f) *
10(g) *
10(h) *
14
21
23 ~
31.1 ~
31.2 ~
32 ~
101 ~
Amended and Restated Articles of Incorporation 1
Amended and Restated Bylaws 1
Amended and Restated 1994 Director Stock Option Plan and related agreements 2
Amended and Restated Deferred Compensation Plan effective January 1, 2008 3
Amended and Restated Supplemental Executive Retirement Agreement effective January 1, 2008 3
2005 Stock Incentive Plan and related agreements 4
Employment Agreement dated January 1, 2014 between the Company and Michael J. Blodnick 5
Employment Agreement dated January 1, 2014 between the Company and Ron J. Copher 5
Employment Agreement dated January 1, 2014 between the Company and Don Chery 5
Nonemployee Service Provider Deferred Compensation Plan 6
Code of Ethics 7
Subsidiaries of the Company (See item 1, “Subsidiaries”)
Consent of BKD LLP
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes – Oxley Act of 2002
The following financial information from Glacier Bancorp, Inc’s Annual Report on Form 10-K for the year
ended December 31, 2013 is formatted in XBRL: 1) the Consolidated Statements of Financial Condition,
2) the Consolidated Statements of Operations, 3) the Consolidated Statements of Stockholders’ Equity and
Comprehensive Income, 4) the Consolidated Statements of Cash Flows, and 5) the Notes to Consolidated
Financial Statements.
__________
1 Incorporated by reference to Exhibits 3.i. and 3.ii included in the Company’s Quarterly Report on form 10-Q for the quarter ended June 30, 2008.
2 Incorporated by reference to Exhibits 99.1 - 99.4 of the Company’s S-8 Registration Statement (No. 333-105995).
3 Incorporated by reference to Exhibits 10(c) and 10(d) included in the Company’s Form 10-K for the year ended December 31, 2008.
4 Incorporated by reference to Exhibits 99.1 through 99.3 of the Company’s S-8 Registration Statement (No. 333-125024).
5 Incorporated by reference to Exhibits 10.1 through 10.3 included in the Company’s Form 8-K filed by the Company on December 30, 2013.
6 Incorporated by reference to Exhibit 10.1 included in the Company’s Form 8-K filed by the Company on October 31, 2012.
7 Incorporated by reference to Exhibit 14, included in the Company’s Form 10-K for the year ended December 31, 2003.
* Compensatory Plan or Arrangement
~ Exhibit omitted from the 2013 Annual Report to Shareholders
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.
110
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 28, 2014.
SIGNATURES
GLACIER BANCORP, INC.
By: /s/ Michael J. Blodnick
Michael J. Blodnick
President and CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on February 28, 2014, by the
following persons on behalf of the registrant in the capacities indicated.
/s/ Michael J. Blodnick
Michael J. Blodnick
/s/ Ron J. Copher
Ron J. Copher
Board of Directors
/s/ Dallas I. Herron
Dallas I. Herron
/s/ Sherry L. Cladouhos
Sherry L. Cladouhos
/s/ James M. English
James M. English
/s/ Allen J. Fetscher
Allen J. Fetscher
/s/ Annie M. Goodwin
Annie M. Goodwin
/s/ Craig A. Langel
Craig A. Langel
/s/ L. Peter Larson
L. Peter Larson
/s/ Douglas J. McBride
Douglas J. McBride
/s/ John W. Murdoch
John W. Murdoch
/s/ Everit A. Sliter
Everit A. Sliter
President, CEO, and Director
(Principal Executive Officer)
Executive Vice President and CFO
(Principal Financial Accounting Officer)
Chairman
Director
Director
Director
Director
Director
Director
Director
Director
Director
111
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GLACIER BANCORP, INC. DIRECTORS AND OFFICERS
Glacier Bancorp, Inc. and Glacier Bank
Board of Directors
Dallas I. Herron, Chairman
CEO of CityServiceValcon, LLC
Michael J. Blodnick
President/CEO of Glacier Bancorp, Inc.
Sherry L. Cladouhos
Retired CEO of Blue Cross Blue Shield of Montana
James M. English
Attorney/English Law Firm
Allen J. Fetscher
President of Fetscher's, Inc./Vice President of
American Public Land Exchange Co, Inc./
Owner of Associated Agency
Annie M. Goodwin, RN
Attorney/Goodwin Law Office LLC/Former Montana
Commissioner of Banking and Financial Institutions
Corporate Officers
Michael J. Blodnick
President/Chief Executive Officer
Craig A. Langel, CPA, CVA
President of Langel & Associates, P.C./Owner and
CEO of CLC Restaurants, Inc.
L. Peter Larson
Retired Chairman/CEO of American Timber Company
Douglas J. McBride, OD, FAAO
Doctor of Optometry
John W. Murdoch
Retired Chairman of Murdoch’s Ranch &
Home Supply, LLC
Everit A. Sliter, CPA
Jordahl & Sliter, PLLC
Mark D. MacMillan
Senior Vice President/Information Technology
Ron J. Copher, CPA
Executive Vice President/Chief Financial Officer/Treasurer
Donald B. McCarthy
Senior Vice President/Controller
Don J. Chery
Executive Vice President/Chief Administrative Officer
Paul W. Peterson
Senior Vice President/Real Estate Loans
Angela L. Dose, CPA
Senior Vice President/Principal Accounting Officer
Robin S. Roush
Senior Vice President/Human Resources
T.J. Frickle
Senior Vice President/Enterprise-Wide Risk Management
Ryan T. Screnar, CPA, CGMA
Senior Vice President/Internal Audit and Compliance
Marcia L. Johnson
Senior Vice President/Operations
LeeAnn Wardinsky
Vice President/Secretary
Barry L. Johnston
Senior Vice President/Credit Administration
Cover photo by David M. Cobb
www.dmcobbphoto.com
"Virginia Creek Waterfall"
Virginia Falls, Glacier National Park, Montana
2013
________________
ANNUAL REPORT
2013 ANNUAL REPORT