INVESTOR INFORMATION
2014 Cash Dividend Data
Quarter
1
2
3
4
Special
Record Date
April 8, 2014
July 8, 2014
October 7, 2014
December 9, 2014
January 13, 2015
Payment Date
April 17, 2014
July 17, 2014
October 16, 2014
December 18, 2014
January 22, 2015
Share Amount
$0.16
$0.17
$0.17
$0.18
$0.30
2015 Anticipated Dividend Dates 1
2015 Anticipated Earnings 1
Quarter
1
2
3
4
Record Date
April 7, 2015
July 7, 2015
October 13, 2015
December 8, 2015
Payment Date
April 16, 2015
July 16, 2015
October 22, 2015
December 17, 2015
Quarter
1
2
3
4
Announcement Date
April 23, 2015
July 23, 2015
October 22, 2015
January 28, 2016
Common Stock Price
High close
Low close
Close
2014
$30.27
$24.74
$27.77
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
Ten-year Dividend History
Cash Dividends
Declared 2
$0.40
$0.45
$0.50
$0.52
$0.52
$0.52
$0.52
$0.53
$0.60
$0.98
Stock
Dividends/Splits
5 for 4 stock split
3 for 2 stock split
None
None
None
None
None
None
None
None
Distribution Date of
Stock Dividends/Splits
May 26, 2005
December 14, 2006
None
None
None
None
None
None
None
None
Year
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
__________
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 1,729 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
Miller Nash Graham & Dunn LLP
Pier 70, Suite 300
2801 Alaskan Way
Seattle, WA 98121
Dear Shareholder,
LETTER TO SHAREHOLDERS
As the economy continued to gain traction last year, especially in the six states that we operate within, we were able to take
advantage of these positive trends and again produce results similar to what we were accustomed to delivering for many
years prior to the economic downturn. From strong employment and commodity prices to record tourist visits and solid
population trends, these economies provided us a base in which to deliver record results. We have said repeatedly that this
region of the country is not only a great place to live, it is also a great place to conduct business.
It was a very good year for Glacier Bancorp, Inc. on a number of fronts as we enjoyed far more successes than setbacks and
reached or exceeded far more of our goals than those where we came up short. As we look back on 2014, there was much
to like and not many things we wish we would have changed.
THE YEAR IN REVIEW
Each year we set specific goals and targets in a wide range of performance areas both for the Company and each individual
bank division. We then measure and report these results throughout the year. This is the best way we have found to keep
score and, when you are running our type of banking model, it is a great way to maintain and generate that competitive spirit.
We use this scorecard internally to compare and rank each of the individual banks to one another. The banks then compare
their performance against that of their local competitors. In addition, we monitor and rank our Company’s performance
against that of our peers to make sure we are getting the job done.
Again this past year we set numerous benchmarks and goals we expected to achieve. Here are some of those highlights along
with one or two disappointments from last year:
•
For the first time in our Company’s history we achieved the milestone of eclipsing $100 million in net income. Last
year we produced record earnings totaling $113 million, or 18% above the prior year. Our goal for the year was to grow
earnings by 12%, so clearly in this area we outperformed. This was the third consecutive year that our earnings growth
exceeded even our own expectations. In addition, we generated this high level of earnings growth without growing the
balance sheet. I think in the last couple of years we did a good job of changing the mix of our assets and liabilities to
squeeze more earnings from a stable balance sheet.
• We generated diluted earnings per share for the year of $1.51, an increase of 15% over 2013 driven primarily by a 16%
increase in net interest income. In addition, tangible book value per common share increased 7% and our return on
tangible common equity was 13.07%. Considering the fact that our capital levels are among the highest in the industry,
we are very proud of this level of performance.
• One ratio we are probably the most proud of is our Return on Average Assets (“ROAA”) of 1.42%. This is a level of
performance that rivals some of our best years. What was even more impressive was the fact that seven of our thirteen
bank divisions generated an ROAA above 1.50%. During the financial crisis I said repeatedly that when this crisis ends,
it will be difficult for a bank to produce an ROAA of much better than 1%, and on average the industry as a whole is
still not quite there. However, our people proved that was not going to be the case and this is one time I could not be
more delighted to admit I was wrong.
•
• During the year we announced two new acquisitions. The purchase of First National Bank of the Rockies (“FNBR”),
headquartered in Grand Junction, Colorado, with ten offices throughout western Colorado, was completed in August and
that bank is now a part of our Bank of the San Juans bank division. Last year we also announced the addition of Community
Bank, Inc. located in Ronan, Montana, with eight offices in western Montana. This transaction closed in February of
2015. Over the past two years we have added four new banks to our Company with combined assets of over $1.1 billion.
It is one thing to complete an acquisition; however, most of the heavy lifting comes after that as you work to convert
platform systems, integrate processes, and train the new staff. Last year was one of our most ambitious years ever from
a conversion and integration perspective. First State Bank and North Cascades Bank, both acquired in 2013, completed
their full system conversions in April and October, and two months later we finished the FNBR data conversion. These
take a considerable amount of staff time and resources and, although there are always bugs that need to be worked out,
all three of these major system conversions went exceptionally well. I cannot shower enough praise on the hundreds of
individuals who worked tirelessly to complete these projects. Their effort was definitely one of last year’s highlights.
i
•
•
Twice last year we raised our regular dividend resulting in an overall increase of 12.5%. Plus, for the first time since
2005, we declared a special dividend of $0.30 per share. In total we paid out to you, our shareholders, $0.98 per share
last year compared to $0.60 the year before. Growing our dividend has always been very important to us, and we take
great pride in the fact that we have more than surpassed our long term goal of increasing the dividend by 10% annually.
Over the past thirty years our regular dividend has grown at a 13% annual growth rate, and we have declared 119
consecutive quarterly dividends. We have also now paid out 11 special dividends during that time.
Loans grew last year by 10.5%; however, that includes the addition of FNBR. Instead of total loan growth we tend to
focus on organic loan growth which excludes loans we acquire when we purchase a bank. Here again we exceeded our
goal of 5% by generating over 7% organic loan growth for the year. This was the second year in a row we produced
positive loan growth after five consecutive years of decreases.
• As successful as we have been the past two years in growing our loan portfolio, we have been equally pleased at the
progress made in reducing the size and dependence on the investment portfolio. During this time period we have decreased
the investment portfolio from nearly 50% of our total assets to 35% at year end. Shifting the mix of our asset base away
from securities into higher yielding loans has definitely made a major impact on both our interest income and the yield
on our earning assets.
Last year our deposit growth was truly impressive, especially our non-interest bearing deposits which increased by 19%.
Once again, excluding those non-interest bearing deposits that came with the acquisition of FNBR, we saw a 13% growth
in this very valuable funding source. Year in and year out all of our bank divisions work very hard to grow this form of
zero cost deposits. It was gratifying this past year to see that hard work pay off.
•
• Credit quality and credit costs continued to move in a positive direction. Again last year we made progress in just about
every credit metric we track. We set a goal of reducing our non-performing assets to below $90 million and achieved
that target. We also saw significant improvement in delinquencies, charge-offs, and other real estate owned expenses
which allowed us to reduce our loan loss provision for the fifth year in a row. Our goal for the year was to keep net
charge-offs as a percentage of loans below 0.25%. To finish the year with net charge-offs of 0.06% was remarkable and
a testament to the great job done by all those working on the loan side of our business.
• Our net interest margin improved by 50 basis points to 3.98%. This surpassed the target we set for the year of 3.63%.
At a time when bank margins have come under significant pressure, we have done a reasonably good job of managing
ours through this low rate environment. Historically we have enjoyed a healthy net interest margin and that was certainly
the case last year. Nevertheless, our balance sheet is positioned and structured to perform best if interest rates increase.
Something that we certainly hope begins to take place in 2015.
• An area that has received more of our attention this past year is the operating leverage. We certainly understand that if
we are going to be successful long term, we consistently have to find ways to assure our revenues grow at a faster pace
than our expenses. For years we have focused on this ratio at the Company level. Last year we began to emphasize its
importance at the individual bank division level and had some excellent results. All but two of our thirteen bank divisions
created positive operating leverage, and the two that came up short just missed. The Company as a whole also achieved
positive operating leverage of 2% last year.
• One disappointment last year, and certainly an area where we came up short, was in fee income and more specifically,
fee income on sold loans. Although it was hardly a surprise, a decrease of 31% in this fee income category is always a
tough pill to swallow. We knew that refinance activity would be down considerably from the previous two years; however,
we hoped that purchase volume would be stronger. Unfortunately, early last year mortgage interest rates spiked and,
even though they settled down through the remaining months of the year, our mortgage volumes were not able to recover.
• We also missed our efficiency ratio target for the year. Our expectation was to drive this number just below 53%. Instead
we ended the year at 54.3%, a slight improvement from the previous year, but still above what we projected. Even though
we did not hit our efficiency goal for the year as a Company, six of our thirteen bank divisions reached their individual
efficiency goals.
Probably the biggest disappointment last year was the performance of our stock price which declined by 7%. Even after
adding in the payment of dividends, our total return was still down 4% from the prior year. After more than doubling in
price in 2013, no one expected a repeat performance. I said at last year’s annual meeting of the shareholders that I thought
bank stocks at the end of 2013 got ahead of themselves and were probably due for some back-filling in 2014. We also
realize that the market is forward looking. With the uncertainty of the future rate environment, the current regulatory
undercurrent, and credit leverage near its end, there are still some headwinds facing the banking sector. However, even
with the price of our stock retreating last year, it in no way diminishes all the wonderful things we accomplished as a
Company, and in fact it only serves to further our resolve to do everything in our power to make sure next year will be
different.
•
ii
OUR UNIQUE BUSINESS MODEL
It has been a number of years since I focused on our banking model which continues to be quite different than that employed
by most other banks around the country. I am convinced that the high level of performance we have achieved over many
years is a direct result of this distinct model. We continue to operate as a Company of banks with thirteen bank divisions.
We believe it is probably the single most important factor that has allowed us to differentiate ourselves from most of the
other banks in the country. We also believe this unique model is what has allowed us to create superior shareholder value
over the last two decades, far beyond what we would have produced if we ran a more traditional bank model. Sometimes
the best way to create value is to be different and separate yourself from the norm. In our case running thirteen separate bank
divisions focused squarely on their markets, their economies, and their communities just seems to be a sensible way to fulfill
our customers’ banking needs.
I believe the community banking model is more complimentary to the markets we serve. We operate in numerous small
towns across our six state footprint where in so many instances the local community bank is the economic engine that drives
that market. Our model allows for most decisions to be made at the local level without the delays and hassles that come with
a large centralized banking system.
We have thirteen terrific bank presidents running our banking operations. Most of them have been with the Company for
years. A number of them were working for or running their banks long before we acquired them. In addition, most of them
have lived in and become an integral part of the markets they serve. They understand the unique culture we have built over
the years and believe in our model, after all each of them continue to play a vital role in building it out and making sure it is
preserved. They have a keen understanding of their staffs, their customers and their communities. They are the rainmakers
and a key component of what makes this community banking model work.
I have no doubt that the tremendous success we have had acquiring banks these past twenty years is in direct correlation to
our model. And it continues to be true today as demonstrated by the four acquisitions we have completed in just the past
two years. Even when one of our partners does not retain their individual identity, there is a desire to remain a part of a more
local bank.
Probably the most important reason that we continue to run this bank model is its ability to recruit and retain talent. We have
had an exceptional run over the years maintaining and attracting great employees. People like to work where they know
they can make a difference and this model allows them that opportunity. It affords them the ability to make decisions and
the flexibility to do what is necessary to serve their customers.
As we continue to grow it will require a constant search for ways to make this model more adaptable in order to meet both
the ever increasing regulatory demands and our customer expectations. At the same time we have to stay focused to make
sure we maintain the level of efficiency we have long enjoyed. With that said, this model has proven its resiliency during
some of the most challenging times our Company has ever faced. It has also demonstrated the ability to deliver consistent
superior returns for many years. I am confident that our banking model has a bright future and will continue to deliver
exceptional shareholder value for years to come.
MERGER AND ACQUISITIONS
The past two years from a merger and acquisition (“M & A”) perspective have been the busiest in our Company’s history.
Four deals have been completed and we certainly expect to complete more both this year and in the future. Last year we
were fortunate to add two franchises that we have followed for years and thought would be great fits for the Company. The
addition of First National Bank of the Rockies not only gave us a nice presence in Grand Junction, Colorado, the largest city
between Denver and Salt Lake City, but also extended our footprint into northwest Colorado. With the exception of a few
fill-in markets, our Bank of the San Juans now covers a good portion of western Colorado. This transaction not only extended
our geographic reach, but by bolting FNBR on to our existing bank we were able to realize some additional efficiency and
cost savings. By year end we had already completed their platform conversions and for the most part finished the integration
process. Although we did not acquire a large loan portfolio, we did receive a stable low cost funding base that will serve us
well for years to come.
In November we announced our plans to acquire Community Bank, Inc. We have subsequently closed this transaction and
are in the process of adding Community Bank’s Missoula presence to our First Security Bank and their Lake County footprint
iii
to our Glacier Bank. This transaction not only expanded our presence in western Montana, it also gave us a couple of needed
facilities that should solve some of our capacity issues in both markets. As with FNBR we expect Community Bank to create
some definite operating synergies and an expanded customer base to deliver more products and services. Even prior to
formally closing the transaction we have been busy working on the conversion of their platform systems with a mid-June
target date. This will be the fourth data conversion in just over one year.
With twenty acquisitions over the past fifteen years, M & A has become a business line for Glacier Bancorp. We continue
to maintain the same disciplined approach that has served us so well all these years, and we are confident this approach has
created a great deal of shareholder value over that time. We fully expect there will be more opportunities on this front as the
industry continues to consolidate, and we anticipate continuing to be a key player in this area as we look for strategic partners
throughout our footprint. Although there are very few large transformational transactions available in our part of the country,
that is of little concern to us. We are perfectly content doing the type and size of transactions we have done in the past. I
expect that to continue into the future.
We also plan to continue to use our stock as a valuable bargaining chip to attract potential sellers. It gives us a definite
advantage over non-publicly traded acquirers, and based on our performance over thirty plus years we believe that track
record also affords us an advantage over many publicly traded acquirers. Giving sellers a tax free exchange on a portion of
the proceeds from their ownership, a stock that has performed well above the industry, and a dividend that has shown great
growth and proved to be solid even in the most challenging of times are powerful attractions to a shareholder looking to sell
their bank.
LOOKING AHEAD TO 2015
During the last three years tailwinds in the form of lower credit costs, reduced premium amortization, and decreases in other
real estate owned expenses have allowed us to deliver significant increases in earnings. Those earnings catalysts are now
mostly behind us as we prepare to move forward and, although I have never given earnings guidance and don’t plan to start
now, it is probably not realistic to expect another year when we deliver 15 - 25% growth in earnings per share. With that
said I expect us to again produce returns at or near the top of our industry and “best in class” results. Our goal for the past
thirty years as a public company has been to grow earnings each year by 10%. Over those years we have done even better,
a feat we are very proud of. Whether we get there this year is still to be determined, but I will guarantee you one thing: you
will have 2,000 of us working our tails off to try and make it happen.
As for this year’s scorecard, here are a few of the things we will be targeting and working to achieve. Like every year, some
of these are going to take some luck and a lot of hard work if we hope to reach these objectives:
• We hope to grow our loan portfolio by 6% this year excluding any acquisition. This means we will not count the addition
of the Community Bank loans in our totals. I realize it is still early, but we did carry good momentum into this year and
so far the weather has definitely cooperated throughout this region of the country. So we believe this goal is attainable
provided there is no unforeseen economic or interest rate shock.
• Our expectations are to further lower our non-performing assets to $70 million. This is definitely an aggressive goal and
one that will require a couple of our larger non-performing assets to be sold or cure in order for us to reach this level.
We would like to keep net charge-offs at or below 0.15%, a little higher than what we experienced last year only because
we do not foresee the same level of recoveries that benefited us in 2014. As we look out over the horizon we do not see
anything that gives us pause in the area of credit quality.
In regard to our net interest margin, our hope is to maintain this ratio in the 3.75 - 4.00% range. Certainly there are a
number of things we can do to support and protect our margin; however, to some degree we are at the mercy of the
markets. If rates rise it would be a positive for both earnings and the net interest margin, provided the rise in rates
extended to both the short end and long end of the yield curve. No bank in the country wants to see a flattening in the
yield curve. That would be an even more challenging scenario than the one we have been operating under these past
seven years.
•
• We hope to reduce our efficiency ratio to 53% this year. This is possible, but it will require revenues to remain stable
and all of our banks to maintain their vigilance when it comes to controlling their cost structures. This year we have
only one platform conversion and not three as we had last year. In addition, our move to a new mortgage loan origination
system is now complete and should improve our accuracy, increase productivity, and help us better manage our mortgage
volume. We are now well on the way to implementing our new electronic data storage system which will help both the
front line and back office increase their efficiency.
iv
•
Excluding any possible extraordinary or special dividend, our goal again this year will be to increase our regular dividend
by 10%. Currently the Company has robust capital levels and is constantly evaluating how to best deploy that capital.
Our first priority is to assure we have the capital levels needed to support the growth in the balance sheet. Next, we try
to grow the regular dividend when possible, and periodically we might declare a special dividend as we did last year. I
would never rule out a stock repurchase program, but that option has always been at the bottom of our list.
• Regarding acquisitions, we hope that in 2015 we can complete two deals. The pace of acquisition activity during the past
two years is just about right. We will continue to work hard to attract banks that provide us both geographic as well as
balance sheet diversification. We also have certain strategic needs that we often find in a community bank acquisition.
Certain states and markets are currently more attractive to us than others, so more of our effort and attention will be
directed at banks in those areas.
In October of last year I announced my plans to retire at the end of 2016. The Glacier Bancorp board of directors hired
an executive search firm and collectively began the process of selecting my replacement. The search has been very
orderly and extensive and one that remains right on schedule. The board’s plan is to have a candidate named by early
May and have that individual on board no later than August of this year. I am personally committed to a smooth transition
and look forward to having my successor chosen so that we can begin the transition process. We will make an
announcement in May once our new president has been selected.
•
• We definitely have our work cut out for us this year and yet I am as excited as ever to demonstrate what we can accomplish.
As we discussed with all the board members, presidents, and senior staff at our meeting in January, this is a year when
we are going to have to earn everything we get. We are back to basic blocking and tackling and yet I think we have a
solid game plan and now it is up to us to execute it.
2,000 STRONG
With the latest acquisition we now have over 2,000 terrific individuals working for this Company. Many of these individuals
have worked for us for many years and we truly appreciate their commitment and service. At the same time we have had
the opportunity to welcome a number of new staff from the acquired banks who have brought us new ideas and skill sets.
We have been blessed for so many years to have a staff that has always been willing to do whatever has been asked of them,
to go that extra mile. This year we were thrilled to pay the entire staff an 8% profit sharing contribution. This was totally
performance based and after the year they had could not have been more deserved.
I would also like to thank our board. What a caring and dedicated group of individuals they are. This past year the time
commitment they made to this Company has been extraordinary.
And finally, thank you to you our shareholders for the faith and confidence you have in the 2,000 of us. I have not said this
before, but Glacier has been very fortunate to have had a great group of institutional shareholders which have invested with
us for a long time. Please know we greatly appreciate that loyalty, and we will continue to do everything in our power to
maintain that level of trust.
I will close with a quote from Vince Lombardi: “The price of success is hard work, dedication to the job at hand, and the
determination that whether we win or lose, we have applied the best of ourselves to the task at hand.” 2014 was a great year
for your Company. Now all 2,000 individuals who make up the GBCI TEAM are determined to work very hard to make
2015 even better.
Sincerely,
Michael J. Blodnick
President and Chief Executive Officer
v
FINANCIAL HIGHLIGHTS
2014
2013
December 31,
2012
2011
2010
Compounded Annual
Growth Rate
1-Year
2014/2013
5-Year
2014/2010
$8,306,507
2,908,425
4,358,342
(129,753)
140,606
6,345,212
296,944
$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
404,418
1,028,047
13.70
12.38%
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%
$
$
$
$
$
299,919
26,966
272,953
1,912
90,302
212,679
148,664
35,909
112,755
1.51
1.51
0.98
$
$
$
$
$
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
5.4 %
(9.8)%
10.8 %
(0.5)%
1.0 %
13.7 %
(64.7)%
25.7 %
6.7 %
5.8 %
1.3 %
13.8 %
(6.2)%
16.2 %
(72.2)%
(3.0)%
8.9 %
18.3 %
19.6 %
17.9 %
15.3 %
15.3 %
63.3 %
6.1 %
15.0 %
2.1 %
(1.9)%
(2.6)%
9.1 %
(17.8)%
(2.2)%
8.4 %
4.2 %
2.2 %
(0.2)%
(14.0)%
2.2 %
(56.6)%
0.9 %
4.7 %
31.1 %
55.2 %
26.8 %
21.9 %
21.9 %
13.5 %
1.42%
11.11%
64.90%
12.81%
18.93%
17.67%
12.45%
3.98%
54.31%
2.89%
209%
1.08%
1.23%
10.22%
45.80%
11.99%
18.97%
17.70%
12.11%
3.48%
54.51%
3.21%
158%
1.39%
1.01%
8.54%
50.48%
11.84%
20.09%
18.82%
11.31%
3.37%
54.02%
3.85%
133%
1.87%
0.72%
5.78%
74.29%
12.39%
20.27%
18.99%
11.81%
3.89%
51.34%
3.97%
102%
2.92%
0.67%
5.18%
85.25%
12.96%
19.51%
18.24%
12.71%
4.21%
51.35%
3.66%
70%
3.91%
89,900
$
$2,404,299
1,943
129
109,420
2,477,804
1,837
118
143,527
2,237,977
1,677
108
213,456
1,650,418
1,653
106
270,521
1,935,311
1,674
105
(Dollars in thousands, except per share data)
Selected Statements of Financial
Condition Information
Total assets
Investment securities
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
Equity as a percentage of total assets
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 2
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 3
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
Non-performing assets
Loans originated and acquired
Number of full time equivalent employees
Number of locations
__________
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 in "Item 6. Selected Financial Data."
2 Includes a 2014 special dividend declared of $0.30 per share.
3 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.
vi
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________________________________
FORM 10-K
______________________________________________________________________
ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014 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. ý 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 ý 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. ý Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months. ý Yes ¨ No
Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ý
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
ý
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
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 ý No
The aggregate market value of the voting common equity held by non-affiliates of the Registrant at June 30, 2014 (the last business day
of the most recent second quarter), was $2,087,026,461 (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 19, 2015 was 75,085,510. No preferred shares are issued
or outstanding.
Document Incorporated by Reference
Portions of the 2015 Annual Meeting Proxy Statement dated March 20, 2015 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
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113
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
129 locations in Montana, Idaho, Wyoming, Colorado, Utah and Washington through its wholly-owned bank subsidiary, Glacier Bank
(“Bank”). The Company offers a wide range of banking products and services, including transaction and savings deposits, real estate,
commercial, agriculture, and consumer loans and mortgage origination services. The Company serves individuals, small to medium-
sized businesses, community organizations and public entities. 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 foreclosed properties for 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, 2014, none of the Company’s subsidiaries were engaged in any operations in foreign countries.
In 2012, the Company combined its multiple bank subsidiaries into a single bank subsidiary, Glacier Bank. The bank subsidiaries now
operate as separate 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 and Pending 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:
FNBR Holding Corporation (“FNBR”) and its subsidiary, First National Bank of the Rockies, on August 31, 2014;
North Cascades Bancshares, Inc. (“NCBI”) and its subsidiary, North Cascades National Bank, on July 31, 2013; and
•
•
• Wheatland Bankshares, Inc. (“Wheatland”) and its subsidiary, First State Bank, on May 31, 2013
On November 5, 2014, the Company announced the signing of a definitive agreement to acquire Montana Community Banks, Inc.
(“Community”) and its wholly-owned subsidiary, Community Bank, Inc., a community bank based in Ronan, Montana. Community
provides banking services to individuals and businesses in western Montana, with banking offices located in Missoula, Polson, Ronan
and Pablo, Montana. As of December 31, 2014, Community had total assets of $175 million, gross loans of $93.0 million and total
deposits of $150 million. All necessary regulatory approvals and waivers have been obtained and closing is anticipated to take place in
the first quarter of 2015. The branches of Community will be merged into Glacier Bank and will become part of the Glacier Bank and
First Security Bank of Missoula divisions.
Market Area
The Company and the Bank have 129 locations, of which 8 are loan or administration offices, in 45 counties within 6 states including
Montana, Idaho, Wyoming, Colorado, Utah, and Washington. The Company and the Bank have 55 locations in Montana, 27 locations
in Idaho, 17 locations in Wyoming, 13 locations in Colorado, 4 locations in Utah and 13 locations in Washington.
The market area’s economic base primarily focuses on tourism, construction, mining, energy, manufacturing, agriculture, service industry,
and health care. The tourism industry is highly influenced by national parks, ski resorts, significant lakes and rural scenic areas.
3
Competition
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.
Competition is also increasing for deposit and lending services from internet-based competitors. Non-depository financial service
institutions, primarily in the securities, insurance and retail industries, have also become competitors for retail savings, investment funds
and lending activities. In addition to offering competitive interest rates, the principal methods used by the Bank to attract deposits include
the offering of a variety of services including on-line banking, mobile banking and convenient office locations and business hours. The
primary factors in competing for loans are interest rates and rate adjustment provisions, loan maturities, loan fees, and the quality of
service to borrowers and brokers.
Based on the Federal Deposit Insurance Corporation (“FDIC”) summary of deposits survey as of June 30, 2014, the Bank has approximately
23 percent of the total FDIC insured deposits in the 13 counties that it services in Montana. In Idaho, the Bank has approximately 7
percent of the deposits in the 9 counties that it services. In Wyoming, the Bank has 26 percent of the deposits in the 8 counties it services.
In Colorado, the Bank has 9 percent of the deposits in the 6 counties it services. In Utah, the Bank has 12 percent of the deposits in the
3 counties it services. In Washington, the Bank has 4 percent of the deposits in the 6 counties it services.
Employees
As of December 31, 2014, the Company and the Bank employed 2,030 persons, 1,827 of whom were employed full time and none of
whom were represented by a collective bargaining group. The Company and the Bank provide their employees with a comprehensive
benefit program, including health, dental and vision insurance, life and accident insurance, long-term disability coverage, vacation and
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 13 in the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” for detailed
information regarding employee benefit plans and eligibility requirements.
Board of Directors and Committees
The Company’s Board of Directors (“Board”) has the ultimate authority and responsibility for overseeing risk management at the Company.
Some aspects of risk oversight are fulfilled at the 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 2015
Annual Meeting Proxy Statement and is incorporated herein by reference. The Bank’s Board of Directors presently consists of the same
persons serving as Company directors.
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 does not purport to be complete and is qualified by reference
to those provisions. These statutes and regulations, as well as related policies, continue to be subject to change by Congress, state
legislatures and federal and state regulators. Changes in statutes, regulations or regulatory policies applicable to the Company, including
the interpretation or implementation thereof cannot be predicted and 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. Continued efforts to monitor and comply with new regulatory requirements add to the complexity and cost of the Company’s
business.
The Company is subject to regulation and supervision by the Federal Reserve and regulation by the State of Montana as a Montana
corporation. 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.
4
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.
Holding Company Bank Ownership. The BHCA requires every bank holding company to obtain the prior approval of the Federal Reserve
before 1) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after
such acquisition, it would own or control more than 5 percent of such shares; 2) acquiring all or substantially all of the assets of another
bank or bank holding company; or 3) merging or consolidating with another bank holding company.
Holding Company Control of Non-banks. With some exceptions, the BHCA 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. The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) further extended the
definition of an “affiliate” and treats credit exposure arising from derivative transactions, securities lending and borrowing transactions
as a covered transaction under the regulations. It also expands the scope of covered transactions required to be collateralized, requires
collateral to be maintained at all times for covered transactions required to be collateralized, and places limits on acceptable collateral.
These regulations and restrictions may limit the Company’s ability to obtain funds from the Bank for its cash needs, including funds for
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 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, capital and 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 primary supervision, periodic examination and regulation of the FDIC and
the Montana Department of Administration's Banking and Financial Institutions Division as the Bank’s primary regulators. These agencies
have the authority to prohibit the Bank from engaging in what they believe constitute unsafe or unsound banking practices. In addition,
with respect to branches of the Bank outside of Montana, the Bank 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.
5
Consumer Protection. Although the Bank is not supervised directly by the Consumer Financial Protection Bureau (“CFPB”), its consumer
banking activities are subject to regulation by the CFPB. 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. In recent years, examination
and enforcement by state and federal banking agencies for non-compliance with consumer protection laws and their implementing
regulations have increased and become more intense. Failure to comply with these laws and regulations may subject the Bank to various
penalties, including but not limited to, enforcement actions, injunctions, fines, civil 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. The Dodd-Frank Act and federal regulations place additional restrictions on loans to insiders, and generally prohibits loans
to senior officers other than for certain specified purposes.
Regulation of Management. Federal law 1) sets forth circumstances under which officers or directors of a bank may be removed by the
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. Each insured depository institution must
implement a comprehensive written information security program that includes administrative, technical, and physical safeguards
appropriate to the institution’s size and complexity and the nature and scope of its activities. The information security program must be
designed to ensure the security and confidentiality of customer information, protect against unauthorized access to or use of such
information and ensure the proper disposal of customer and consumer information. An institution that fails to meet these standards may
be required to submit a compliance plan, or submit 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.
6
Dividends
A principal source of the Company’s cash is from dividends received from the Bank, which are subject to government regulation and
limitation on the Bank’s ability to pay dividends. 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 regulators. 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 (“Basel III”) introduces additional limitations on a bank’s ability to issue dividends by requiring
banks to maintain a common equity conservation buffer of at least an additional 2.5 percent of risk-weighted assets over the minimum
required capital ratio to avoid restrictions on dividends, redemptions and executive bonus payments. The Federal Reserve has issued a
policy statement on the payment of cash dividends by bank holding companies which expresses the view that although no specific
regulations restrict dividend payments by bank holding companies other than state corporate laws, a bank holding company should not
pay cash dividends unless the company’s net income for the past year is sufficient to cover both the cash dividends and a prospective rate
of earnings retention that is consistent with the bank holding company’s capital needs, asset quality and overall financial condition.
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. On July 2, 2013, the Federal Reserve, the FDIC, and
the Office of the Comptroller of the Currency (“OCC”) approved a final rule (“Final Rule”) to establish a new comprehensive regulatory
capital framework for all U.S. financial institutions and their holding companies. The phase-in period for the Final Rule began for the
Bank on January 1, 2015, with full compliance with the Final Rule phased in by January 1, 2019. The Final Rule implements the Basel
III regulatory capital reforms and changes required by the Dodd-Frank Act and substantially amends the regulatory risk-based capital
rules applicable to the Bank. Basel III refers to various documents released by the Basel Committee on Banking Supervision.
Effective January 1, 2015, 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 new capital rules require the Bank to meet the capital conservation buffer requirement by 2019 in order to avoid constraints on capital
distributions, such as dividends and equity repurchases, and certain bonus compensation for executive officers. These new capital rules
also change the risk-weights of certain assets for purposes of the risk-based capital ratios and phases out certain instruments as qualifying
capital. Mortgage servicing rights, certain deferred tax assets, and investments in unconsolidated subsidiaries over designated percentages
of common stock will be deducted from capital, subject to a two-year transition period. In addition, Tier 1 capital will include accumulated
other comprehensive income, which includes all unrealized gain and losses on available-for-sale debt and equity securities, subject to a
two-year transition period. The Bank, as a non-advanced approaches banking organization, may make a one-time permanent election to
continue to exclude these items. Management anticipates that it will elect the opt-out provision to reduce the impact of market volatility
on its regulatory capital levels. Basel III also contains specific rules addressing the impact of merger and acquisition activity on the
ability of a bank holding company to continue to benefit from the permanent grand-fathering of existing non-qualifying capital instruments
in Tier 1 capital.
The application of the Final Rule may result in lower returns on invested capital, require the raising of additional capital or require
regulatory action if the Bank were unable to comply with such requirements. In addition, management may be required to modify its
business strategy due to the changes to the asset risk-weights for risk-based capital calculations and the requirement to meet the capital
conservation buffers. The imposition of liquidity requirements in connection with Basel III could also cause the Bank to increase its
holdings of liquid assets, change its business strategy, and make other changes to the terms of its funding. Management believes that, as
of December 31, 2014, the Company would meet all capital adequacy requirements under the Basel III capital rules on a fully phased-
in basis as if all such requirements were currently in effect.
7
Regulatory Oversight and Examination
The Federal Reserve conducts periodic inspections of bank holding companies. 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.
The federal banking regulators have issued guidance on sound risk management practices for concentrations in commercial real estate
lending. The purpose of the guidance is to guide banks in developing risk management practices and capital levels commensurate with
the level and nature of real estate concentrations. The banking regulators are directed to examine each bank’s exposure to commercial
real estate loans that are dependent on cash flow from the real estate held as collateral and to focus their supervisory resources on institutions
that may have significant commercial real estate loan concentration risk. The guidance provides that the strength of an institution’s
lending and risk management practices with respect to such concentrations will be taken into account in evaluating capital adequacy and
does not specifically limit a bank’s commercial real estate lending to a specified concentration level.
Corporate Governance and Accounting
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.
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. The Patriot Act also includes provisions providing the government with power to investigate terrorism, including expanded
government access to bank account records. Bank regulators are directed to consider a holding company’s and bank’s effectiveness in
combating money laundering when ruling on Bank Holding Company Act and Bank Merger Act applications. The Company and the
Bank have established compliance programs designed to comply with the Patriot Act requirements.
8
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. The Bank is subject to FDIC regulations implementing the privacy protection provisions of the
GLB Act. These regulations require banks to disclose their privacy policy, including informing consumers of their information sharing
practices and informing consumers of their rights to opt out of certain practices.
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 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 by the FDIC designed to tie what banks pay for deposit insurance to the risks they pose. The Dodd-Frank Act
redefined the assessment base used for calculating FDIC deposit insurance assessments by requiring the FDIC to determine deposit
insurance assessments based on assets instead of deposits. Assessments are now based on the average consolidated total assets less
average tangible equity capital of a financial institution. 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 reserve ratio
meet 1.35 percent 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. No institution may pay a dividend if it is in default on its federal deposit insurance assessment. The FDIC may also prohibit
any insured institution from engaging in any activity determined by regulation or order to pose a serious risk to the DIF.
The FDIC may terminate the deposit insurance of any insured depository institution if it determines after a hearing that the institution
has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated
any applicable law, regulation, order or any condition imposed by an agreement with the FDIC. Management is not aware of any existing
circumstances which would result in termination of the deposit insurance of the Bank.
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. The 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
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. 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.
9
The Dodd-Frank Act generally prohibits a depository institution from converting from a state to federal charter, or vice versa, while it is
the subject to an enforcement action unless the depository institution seeks prior approval from its primary regulator and complies with
specified procedures to ensure compliance with the enforcement action.
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.
The Dodd-Frank Act established the CFPB and empowered it to exercise broad rulemaking, supervision and enforcement authority for
a wide range of consumer protection laws. The Bank is subject to consumer protection regulations issued by the CFPB, but as a financial
institution with assets of less than $10 billion, the Bank is generally not subject to supervision and examination by the CFPB. The CFPB
has issued and continues to issue numerous regulations under which the Company will continue to incur additional expense in its ongoing
compliance with the CFPB regulations, and the Dodd-Frank Act specifically.
Proposed Legislation
The economic and political environment of the past several years has led to a number of proposed legislative, governmental and regulatory
initiatives that may significantly impact the banking industry. The CFPB, for example, has already signaled that it will propose additional
regulations with respect to debt collection, overdraft protection, arbitration clauses, and mortgage servicing in 2015 which could change
the competitive and operating environment in which the Bank operates. Other regulatory initiatives by federal and state banking agencies
may also significantly impact the Bank’s business. The Bank cannot predict whether these or any other proposals will be enacted or the
ultimate impact of any such initiatives on its operations, competitive situation, financial conditions, or results of operations.
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.
Economic conditions in the market areas the Bank serves may adversely impact its earnings and could increase the credit risk associated
with its loan portfolio and the value of its investment portfolio.
Substantially all of the Bank’s loans are to businesses and individuals in Montana, Idaho, Wyoming, Utah, Colorado and Washington,
and a softening of the economies in these market areas could have a material adverse effect on its business, financial condition, results
of operations and prospects. While both the national economy and local economies in which the Bank operates have improved, a future
deterioration in the economy, whether nationally or in the markets it serves would have a negative impact on its business. Any softening
in economic conditions could result in the following consequences, any of which could have an adverse impact, which could be material,
on the Company’s business, financial condition, results of operations and prospects:
•
•
•
•
•
•
loan delinquencies may increase;
problem assets and foreclosures may increase;
collateral for loans made may decline further in value, in turn reducing customers’ borrowing power, reducing the value of assets
and collateral associated with existing loans;
certain securities within the investment portfolio could become other than temporarily impaired, requiring a write-down through
earnings to fair value, thereby reducing equity;
low cost or non-interest bearing deposits may decrease; and
demand for loan and other products and services may decrease.
10
The allowance for loan and lease losses may not be adequate to cover actual loan losses, which could adversely affect earnings.
The Bank maintains an allowance for loan and lease losses (“ALLL” or “allowance”) in an amount that it believes is adequate to provide
for losses in the loan portfolio. While the Bank strives to carefully manage and monitor credit quality and to identify loans that may
become non-performing, at any time there are loans included in the portfolio that will result in losses, but that have not been identified
as non-performing or potential problem loans. With respect to real estate loans and property taken in satisfaction of such loans (“other
real estate owned” or “OREO”), the Bank can be required to recognize significant declines in the value of the underlying real estate
collateral 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 Bank’s ability to recover on real estate loans by selling or disposing of the underlying real estate
collateral is adversely impacted by declining values, which increases the likelihood the Bank will suffer losses on defaulted loans beyond
the amounts provided for in the ALLL. This, in turn, could require material increases in the Bank’s provision for loan losses and ALLL.
By closely monitoring credit quality, the Bank attempts to identify deteriorating loans before they become non-performing assets and
adjust the ALLL accordingly. However, because future events are uncertain, and if difficult economic conditions 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 Bank’s loan
portfolio and the adequacy of the ALLL. These regulatory authorities may require the Bank to recognize further loan loss provisions or
charge-offs based upon their judgments, which may be different from the Bank’s judgments. Any increase in the ALLL could have an
adverse effect, which could be material, on the Company’s financial condition and results of operations.
The Bank has a high concentration of loans secured by real estate, so any future deterioration in the real estate markets could require
material increases in the ALLL and adversely affect the Company’s financial condition and results of operations.
The Bank has a high degree of concentration in loans secured by real estate. Any future deterioration in the real estate markets could
adversely impact borrowers’ ability to repay loans secured by real estate and the value of real estate collateral, thereby increasing the
credit risk associated with the loan portfolio. The Bank’s ability to recover on these loans by selling or disposing of the underlying real
estate collateral would be adversely impacted by any decline in real estate values, which increases the likelihood that the Bank will suffer
losses on defaulted loans secured by real estate beyond the amounts provided for in the ALLL. This, in turn, could require material
increases in the ALLL which would adversely affect 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 may not be able to continue paying quarterly dividends, and particularly special dividends which are carefully considered,
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 quarterly and special dividends is subject to government regulation in that regulatory authorities may prohibit banks and
bank holding companies from paying dividends that would constitute an unsafe or unsound banking practice. This is heavily based on
the Company’s earnings and capital levels which currently are strong. Current guidance from the Federal Reserve provides, among other
things, that dividends per share should not exceed earnings per share measured over the previous four fiscal quarters. 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 average 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 Bank could increase.
11
Despite the FDIC’s actions to restore the DIF, the DIF could 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 Bank’s loan portfolio mix increases the exposure to credit risks tied to deteriorating conditions.
The loan portfolio contains a high percentage of commercial, commercial real estate, real estate acquisition and development loans in
relation to the total loans and total assets. These types of loans have historically been viewed as having more risk of default than residential
real estate loans or certain other types of loans or investments. In fact, the FDIC has issued pronouncements alerting banks of its concern
about banks with a heavy concentration of commercial real estate loans. These types of loans also typically are larger than residential
real estate loans and other commercial loans. Because the Bank’s loan portfolio contains a significant number of commercial and
commercial real estate loans with relatively large balances, the deterioration of one or more of these loans may cause a significant increase
in non-performing loans. An increase in non-performing loans could result in a loss of earnings from these loans, an increase in the
provision for loan losses, or an increase in 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 Bank 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 Bank does not record interest income on non-accrual
loans or OREO, thereby adversely affecting its income. When the Bank takes collateral in foreclosures and similar proceedings, it is
required to mark the related asset to the then fair value of the collateral, less estimated cost to sell, which may result in a charge-off of
the value of the asset and lead the Bank to increase the provision for loan losses. An increase in the level of non-performing assets also
increases the Bank’s risk profile and may impact the capital levels its regulators believe are appropriate in light of such risks. Further
decreases in the value of these assets, or the underlying collateral, or in these borrowers’ performance or financial condition, whether or
not due to economic and market conditions beyond the Bank’s control, could adversely affect 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 Bank’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 Bank’s investment portfolio could adversely affect earnings.
The fair value of the Bank’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 Bank determines whether the impairment is temporary
or other-than-temporary. If an impairment is determined to be other-than-temporary, an impairment loss is recognized by reducing the
amortized cost only for the credit loss associated with the other-than-temporary loss with a corresponding charge to earnings for a like
amount. Any such impairment charge would have an adverse effect, which could be material, on the Company’s results of operations
and financial condition, including its capital.
Concurrent with the Bank’s loan growth over the last two years, the investment portfolio has decreased from 41 percent of total assets
at December 31, 2013 to 35 percent of total assets at December 31, 2014. While the Bank believes that the terms of such investments
have been kept relatively short, the Bank is subject to elevated interest rate risk exposure if rates were to increase sharply. Further, the
change in the mix of the Bank’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 portfolio, the Bank 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 Bank’s entire investment portfolio from 100 percent AFS to approximately 85 percent AFS and 15 percent HTM.
At December 31, 2014, the investment portfolio consisted of 82 percent AFS and 18 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.
12
Fluctuating interest rates can adversely affect profitability.
The Bank’s profitability is dependent to a large extent upon net interest income, which is the difference (or “spread”) between the interest
earned on loans, investment securities and other interest earning assets and interest paid on deposits, borrowings, and other interest bearing
liabilities. Because of the differences in maturities and repricing characteristics of interest earning assets and interest bearing liabilities,
changes in interest rates do not produce equivalent changes in interest income earned on interest earning assets and interest paid on interest
bearing liabilities. Accordingly, fluctuations in interest rates could adversely affect the Bank’s interest rate spread, and, in turn, profitability.
The Bank seeks to manage its interest rate risk within well established policies and guidelines. Generally, the Bank seeks an asset and
liability structure that insulates net interest income from large deviations attributable to changes in market rates. However, the Bank’s
structures and practices to manage interest rate risk may not be effective in a highly volatile rate environment.
Interest rate swaps expose the Bank to certain risks, and may not be effective in mitigating exposure to changes in interest rates.
The Bank has entered into interest rate swap agreements in order to manage a portion of the interest rate volatility risk. The Bank 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 Bank vulnerable to interest rate movements. The Bank’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 Bank’s counterparty risk exposure. There can be no assurance that
these arrangements will be effective in reducing the Bank’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, 2014 and 2013; however,
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 2014 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.
The Company’s business is heavily dependent on the services of members of the senior management team and proposed changes could
have an impact the Company.
The Company believes its success to date has been substantially dependent on the members of the executive management team, in
particular the Chief Executive Officer (“CEO”). The unexpected loss of any of these persons could have an adverse effect on the Company’s
business and future growth prospects. Fortunately, the Company has a decentralized management style with separate Presidents for its
Bank divisions. Notwithstanding the foregoing, the CEO has been critical to the Company’s success. As previously announced, the
Company is engaged in a search process for management succession at the CEO level. Finding the right person to fit the Company’s
unique culture and ensuring a smooth transition, which the Company’s CEO has agreed to be an integral part of, is important to ensure
the continued success of the Company.
13
Competition in the Bank’s market areas may limit future success.
Commercial banking is a highly competitive business and a consolidating industry. The Bank competes with other commercial banks,
savings and loans, credit unions, finance, insurance and other non-depository companies operating in its market areas. The Bank is subject
to substantial competition for loans and deposits from other financial institutions. Some of its competitors are not subject to the same
degree of regulation and restriction as the Bank. Some of the Bank’s competitors have greater financial resources than the Bank. If the
Bank is unable to effectively compete in its market areas, the Bank’s business, results of operations and prospects could be adversely
affected.
A failure in or breach of the Bank’s operational or security systems, or those of the Bank’s third party service providers, including as a
result of cyber attacks, could disrupt business, result in the disclosure or misuse of confidential or proprietary information, damage the
Company’s reputation, increase costs and cause losses.
The Bank’s operations rely heavily on the secure processing, storage and transmission of confidential and other information on 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 Bank’s online banking system, customer relationship management, general ledger, deposit and loan servicing and other
systems. The security and integrity of the Bank’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 Bank 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 Bank has certain protective policies and procedures in place, the nature and sophistication of the threats
continue to evolve. The Bank may be required to expend significant additional resources in the future to modify and enhance its protective
measures.
Additionally, the Bank faces the risk of operational disruption, failure, termination or capacity constraints of any of the third parties that
facilitate its business activities, including exchanges, clearing agents, clearing houses or other financial intermediaries. Such parties
could also be the source of an attack on, or breach of, the Bank’s operational systems.
Any failures, interruptions or security breaches in the Bank’s information systems could damage its reputation, result in a loss of customer
business, result in a violation of privacy or other laws, or expose the Company to civil litigation, regulatory fines or losses not covered
by insurance.
The Company and the Bank operate in a highly regulated environment and changes or increases in, or supervisory enforcement of,
banking or other laws and regulations or governmental fiscal or monetary policies could adversely affect the Company.
The Company and the Bank are 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.
Regulators have significant discretion and authority to prevent or remedy unsafe or unsound practices or violations of laws or regulations
by financial institutions and bank holding companies in the performance of their supervisory and enforcement duties. Existing and
proposed federal and state laws and regulations restrict, limit and govern all aspects of the Company’s activities and may affect the ability
to expand its business over time, may result in an increase in the Company’s compliance costs, and may affect its ability to attract and
retain qualified executive officers and employees. 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, including limiting the types of financial services and products the Company may offer or
increasing the ability of non-banks to offer competing financial services and products. 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.
14
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 common stock in the Company, even in circumstances where such action is favored by a
majority of the Company’s shareholders.
The impact of Basel III is still uncertain.
The adoption of Basel III established, among other things, a new common equity Tier 1 minimum capital requirement (4.5 percent of
risk-weighted assets), increased the minimum Tier 1 capital to risk-based assets requirement (from 4.0 percent to 6.0 percent of risk-
weighted assets) and assigns a higher risk weight (150 percent) to exposures that are more than 90 days past due or are on nonaccrual
status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The Final
Rule also requires the Bank to meet the capital conservation buffer requirements of an additional 2.5 percent of common equity Tier 1
capital in order to avoid constraints on capital distributions and certain bonus compensation for executive officers. The Final Rule became
effective on January 1, 2015 with the capital conservation buffer requirement phased in beginning January 1, 2016 and ending January
1, 2019.
The application of the Final Rule may result in lower returns on invested capital, require the raising of additional capital or require
regulatory action if the Bank were unable to comply with such requirements. In addition, management may be required to modify its
business strategy due to the changes to the asset risk-weights for risk-based capital calculations and the requirement to meet the capital
conservation buffers. The imposition of liquidity requirements in connection with Basel III could also cause the Bank to increase its
holdings of liquid assets, change its business strategy, and make other changes to the terms of its funding. If the Bank were unable to
meet the capital conservation buffer requirements required in 2016, the Company’s ability to pay dividends to stockholders may also be
limited.
Item 1B. Unresolved Staff Comments
None
Item 2. Properties
The following schedule provides information on the Company’s 129 properties as of December 31, 2014:
(Dollars in thousands)
Montana
Idaho
Wyoming
Colorado
Utah
Washington
Properties
Leased
Properties
Owned
Net Book
Value
6
10
3
1
1
3
24
49
17
14
12
3
10
105
$
$
76,324
22,497
17,841
12,754
2,353
6,075
137,844
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.”
15
Item 3. Legal Proceedings
The Company is involved in various claims, legal actions and complaints which arise in the ordinary course of business. In the Company’s
opinion, all such matters are adequately covered by insurance, are without merit or are of such kind, or involve such amounts, that
unfavorable disposition would not have a material adverse effect on the financial condition or results of operations of the Company.
Item 4. Mine Safety Disclosures
Not Applicable
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, 2014, there were
approximately 1,729 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:
2014
2013
High
Low
High
Low
First quarter
Second quarter
Third quarter
Fourth quarter
$
30.27
29.55
28.93
29.57
25.35
24.88
25.86
24.74
18.98
22.43
25.05
30.87
The following table summarizes the Company’s dividends declared per quarter for the periods indicated:
First quarter
Second quarter
Third quarter
Fourth quarter
Special
Total
2014
2013
$
$
0.16
0.17
0.17
0.18
0.30
0.98
15.19
17.44
22.59
24.23
0.14
0.15
0.15
0.16
—
0.60
Future cash dividends will depend on a variety of factors, including net income, capital, asset quality, general economic conditions and
regulatory considerations. Information regarding the regulation considerations is set forth under the heading “Supervision and Regulation”
in “Item 1. Business.”
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 2014.
16
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.
The following table sets forth information regarding outstanding options and shares reserved for future issuance as of December 31,
2014:
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)
1,000
$
16.73
4,022,452
Plan Category
Equity compensation plans
approved by the shareholders
There are no equity compensation plans that have not been approved by the shareholders. For additional information on outstanding
stock options and non-vested restricted stock awards, see Note 12 to the Consolidated Financial Statements in “Item 8. Financial Statements
and Supplementary Data.”
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.
Total Return Performance
e
u
l
a
V
x
e
d
n
I
275
250
225
200
175
150
125
100
75
12/31/09
12/31/10
12/31/11
12/31/12
12/31/13
12/31/14
Glacier Bancorp, Inc.
Russell 2000
SNL Bank $5B-$10B Index
17
Total Return Performance
e
u
l
a
V
x
e
d
n
I
250
225
200
175
150
125
100
75
50
25
4
1 / 0
2 / 3
1
5
1 / 0
2 / 3
1
6
1 / 0
2 / 3
1
7
1 / 0
2 / 3
1
8
1 / 0
2 / 3
1
9
1 / 0
2 / 3
1
0
1 / 1
2 / 3
1
1
1 / 1
2 / 3
1
2
1 / 1
2 / 3
1
3
1 / 1
2 / 3
1
4
1 / 1
2 / 3
1
Glacier Bancorp, Inc.
Russell 2000
SNL Bank $5B-$10B Index
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 Annual Report on
Form 10-K.
(Dollars in thousands, except per share data)
2014
2013
December 31,
2012
2011
2010
Compounded Annual
Growth Rate
1-Year
2014/2013
5-Year
2014/2010
Selected Statements of Financial
Condition Information
Total assets
Investment securities
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
Equity as a percentage of total assets
$8,306,507
2,908,425
4,358,342
(129,753)
140,606
6,345,212
296,944
$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
404,418
1,028,047
13.70
12.38%
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%
5.4 %
(9.8)%
10.8 %
(0.5)%
1.0 %
13.7 %
(64.7)%
25.7 %
6.7 %
5.8 %
1.3 %
6.1 %
15.0 %
2.1 %
(1.9)%
(2.6)%
9.1 %
(17.8)%
(2.2)%
8.4 %
4.2 %
2.2 %
18
(Dollars in thousands, except per share data)
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 2
(Dollars in thousands)
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 3
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
Non-performing assets
Loans originated and acquired
Number of full time equivalent employees
Number of locations
$
$
$
$
$
2014
299,919
26,966
272,953
1,912
90,302
212,679
148,664
35,909
112,755
1.51
1.51
0.98
2014
Years ended December 31,
2012
2011
2013
$
$
$
$
$
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
$
$
$
$
$
At or for the Years ended December 31,
2012
2013
2011
1.42%
11.11%
64.90%
12.81%
18.93%
17.67%
12.45%
3.98%
54.31%
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%
Compounded Annual
Growth Rate
1-Year
2014/2013
5-Year
2014/2010
13.8 %
(6.2)%
16.2 %
(72.2)%
(3.0)%
8.9 %
18.3 %
19.6 %
17.9 %
15.3 %
15.3 %
63.3 %
(0.2)%
(14.0)%
2.2 %
(56.6)%
0.9 %
4.7 %
31.1 %
55.2 %
26.8 %
21.9 %
21.9 %
13.5 %
2010
288,402
53,634
234,768
84,693
87,546
187,948
49,673
7,343
42,330
0.61
0.61
0.52
2010
0.67%
5.18%
85.25%
12.96%
19.51%
18.24%
12.71%
4.21%
51.35%
2.89%
3.21%
3.85%
3.97%
3.66%
209%
158%
133%
102%
70%
1.08%
1.39%
1.87%
2.92%
3.91%
$
89,900
$2,404,299
1,943
129
109,420
2,477,804
1,837
118
143,527
2,237,977
1,677
108
213,456
1,650,418
1,653
106
270,521
1,935,311
1,674
105
__________
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 Includes a 2014 special dividend declared of $0.30 per share.
3 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.
19
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%
216.67%
(40,159)
40,159
7,546
32,613
0.46
0.46
0.47 %
3.74 %
(142.38)%
191,965
57,349
7,265
50,084
0.70
0.70
0.72%
5.78%
74.29%
20
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;
the risks presented by the lingering 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 or grow the Company through acquisitions;
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.
21
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2014 COMPARED TO DECEMBER 31, 2013
Highlights and Overview
During the current year, the Company completed the acquisition of FNBR and its subsidiary, First National Bank of the Rockies, which
has ten community banking offices in Grand Junction, Steamboat Springs, Meeker, Rangely, Craig, Hayden, and Oak Creek, Colorado.
As a result of the FNBR acquisition, the Company has increased its presence in northwestern Colorado and the branches were merged
into Glacier Bank and became a part of the Bank of the San Juans division. During the current year, the Company also successfully
completed the system conversion for this acquisition, as well as the NCBI and Wheatland acquisitions.
For the second consecutive year, the Company experienced organic loan growth. Excluding acquisitions, loans receivable increased $288
million, or 7 percent, during the current year, with the primary increase in commercial loans which increased $245 million from the prior
year end. The increase in the loan portfolio allowed the Company to continue to reduce its lower yielding investment portfolio during
the current year. Excluding the acquisitions and wholesale deposits, the Company’s non-interest bearing deposits increased $178 million,
or 13 percent, during the current year while interest bearing deposits increased $234 million, or 6 percent. Tangible stockholders’ equity
increased $63.4 million, or $0.75 per share, as a result of stock issued in connection with the current year acquisition, earnings retention
and an increase in accumulated other comprehensive income. The Company increased its quarterly dividend twice during 2014 from
$0.16 per share to $0.18 per share and declared a special dividend of $0.30 per share for a record dividend of $0.98 per share for 2014
compared to $0.60 per share for 2013.
The Company achieved its 2014 goal of reducing its non-performing assets below $90 million and ended the year at $89.9 million which
was a decrease of $19.5 million or, 18 percent, from the prior year end. The improvement in credit quality was also reflected in a decrease
of the provision for loan losses of $5.0 million during the current year and a decrease in OREO expenses of $4.6 million.
The Company had record earnings of $113 million for 2014, which was an increase of $17.1 million, or 18 percent over the 2013 net
income of $95.6 million. Diluted earnings per share for 2014 was $1.51, an increase of $0.20, or 15 percent, from the prior year diluted
earnings per share of $1.31. The net income improvement for 2014 over 2013 was principally due to an increase in interest income from
investment securities and the commercial loan portfolio.
The current year $36.3 million increase in interest income was the result of an $18.5 million increase in interest income on investment
securities and an $18.2 million increase in commercial loan interest income. The increased yields on investment securities was primarily
driven by a decrease in premium amortization (net of discount accretion) on the investment portfolio (“premium amortization”) which
was significantly higher in 2013 and had stabilized by the fourth quarter of 2013 and throughout 2014. The increase in interest income
on the commercial loan portfolio was primarily attributable to an increase in the volume of commercial loans as the local economies
continue to recover from the recession.
The Company’s net interest margin as a percentage of earning assets, on a tax-equivalent basis, of 3.98 percent for the current year
increased 50 basis points over the prior year net interest margin of 3.48 percent. The increase was primarily attributed to higher yielding
investment securities driven by a decrease in premium amortization and a shift in earning assets to the higher yielding loan portfolio;
such changes resulted in a 47 basis points increase in the yield on earning assets. The Company also benefited from a 3 basis points
decrease in the total cost of funding as the Company continued to focus on increasing low cost deposit balances, including non-interest
bearing deposits.
Looking forward, the Company’s future performance will depend on many factors including economic conditions in the markets the
Company serves, interest rate changes, increasing competition for deposits and loans, loan quality and growth, the impact and successful
integration of acquisitions, and regulatory burden.
22
Acquisitions
On August 31, 2014, the Company completed the acquisition of FNBR and its subsidiary, First National Bank of the Rockies. The
Company incurred $552 thousand of legal and professional expenses in connection with the acquisition during 2014. A bargain purchase
gain of $680 thousand resulted from the acquisition which was based on the estimated fair value of the assets acquired and liabilities
assumed. On July 31, 2013, the Company completed the acquisition of NCBI and its subsidiary, North Cascades National Bank. On
May 31, 2013, the Company completed the acquisition of Wheatland and its subsidiary, First State Bank. The Company’s results of
operations and financial condition include the acquisitions of FNBR, NCBI and Wheatland 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
Loans receivable
Non-interest bearing deposits
Interest bearing deposits
Federal Home Loan Bank advances
FNBR
August 31,
2014
NCBI
July 31,
2013
Wheatland
May 31,
2013
$
349,167
157,018
137,488
80,037
229,604
—
330,028
48,058
215,986
76,105
218,875
—
300,541
75,643
171,199
30,758
224,439
5,467
Assets
The following table summarizes the Company’s assets as of the dates indicated:
Financial Condition Analysis
(Dollars in thousands)
December 31,
2014
December 31,
2013
$ Change
% Change
Cash and cash equivalents
$
442,409
$
155,657
$
286,752
Investment securities, available-for-sale
Investment securities, held-to-maturity
Total investment securities
2,387,428
520,997
2,908,425
3,222,829
—
3,222,829
(835,401)
520,997
(314,404)
Loans receivable
Residential real estate
Commercial
Consumer and other
Loans receivable
Allowance for loan and lease losses
Loans receivable, net
Other assets
Total assets
_______
n/m - not measurable
611,463
3,263,448
613,184
4,488,095
(129,753)
4,358,342
577,589
2,901,283
583,966
4,062,838
(130,351)
3,932,487
597,331
573,377
$
8,306,507
$
7,884,350
$
33,874
362,165
29,218
425,257
598
425,855
23,954
422,157
184 %
(26)%
n/m
(10)%
6 %
12 %
5 %
10 %
— %
11 %
4 %
5 %
Total investment securities decreased $314 million, or 10 percent, from December 31, 2013. The Company implemented a strategy in
2013 to reduce the overall size of this portfolio and with the growth in the loan portfolio, the Company had the opportunity to retain
higher yielding loans to offset the decrease in the lower yielding investment securities. At December 31, 2014, investment securities
represented 35 percent of total assets, compared to 41 percent at December 31, 2013 and 48 percent at December 31, 2012.
23
Excluding the loans receivable from the FNBR acquisition, the loan portfolio increased $288 million, or 7 percent, since December 31,
2013. Excluding the acquisition, all loan categories experienced growth during 2014 with the largest category in commercial loans which
increased $245 million from the prior year. As the local markets continue to recover, opportunities for continued loan growth are available,
albeit competition for good quality loans remains strong.
Liabilities
The following table summarizes the liability balances as of the dates indicated, and the amount of change from December 31, 2013:
(Dollars in thousands)
Non-interest bearing deposits
Interest bearing deposits
Securities sold under agreements to repurchase
Federal Home Loan Bank advances
Other borrowed funds
Subordinated debentures
Other liabilities
Total liabilities
December 31,
2014
December 31,
2013
$ Change
% Change
$
1,632,403
$
1,374,419
$
4,712,809
4,205,548
397,107
296,944
7,311
125,705
106,181
313,394
840,182
8,387
125,562
53,608
$
7,278,460
$
6,921,100
$
257,984
507,261
83,713
(543,238)
(1,076)
143
52,573
357,360
19 %
12 %
27 %
(65)%
(13)%
— %
98 %
5 %
Excluding the FNBR acquisition, non-interest bearing deposits increased $178 million, or 13 percent, from December 31, 2013. Interest
bearing deposits of $4.713 billion at December 31, 2014 included $249 million of wholesale deposits (i.e., brokered deposits classified
as NOW, money market deposits and certificate accounts). Excluding the acquisition and an increase of $44.1 million in wholesale
deposits, interest bearing deposits at December 31, 2014 increased $234 million, or 6 percent, from a year ago. In addition to the increase
in deposit balances, the Company has benefited from a higher than expected increase in the number of checking accounts during the
current year. Federal Home Loan Bank (“FHLB”) advances of $297 million at December 31, 2014 decreased $543 million, or 65 percent,
from December 31, 2013 as the need for borrowings continued to decrease.
Stockholders’ Equity
The following table summarizes the stockholders’ equity balances as of the dates indicated and the amount of change from December 31,
2013:
(Dollars in thousands, except per share data)
December 31,
2014
December 31,
2013
$ Change
% Change
Common equity
$
1,010,303
$
953,605
$
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
17,744
1,028,047
(140,606)
887,441
12.38%
10.87%
13.70
11.83
27.77
$
$
$
$
$
$
$
$
9,645
963,250
(139,218)
824,032
12.22%
10.64%
12.95
11.08
29.79
$
$
$
$
56,698
8,099
64,797
(1,388)
63,409
0.75
0.75
(2.02)
6 %
84 %
7 %
1 %
8 %
1 %
2 %
6 %
7 %
(7)%
Tangible stockholders’ equity increased $63.4 million from a year ago as the result of earnings retention, stock issued in connection with
the FNBR acquisition, and an increase in accumulated other comprehensive income. Tangible book value per common share of $11.83
increased $0.75 per share from the prior year fourth quarter.
24
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,
2014
December 31,
2013
$
$
112,755
1.51
1.42%
11.11%
95,644
1.31
1.23%
10.22%
Net income for the year ended December 31, 2014 was $112.8 million, an increase of $17.2 million, or 18 percent, from the $95.6 million
of net income for the same period the prior year. Diluted earnings per share for the current year was $1.51 per share, an increase of $0.20
per share, or 15 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, 2013:
(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,
2014
December 31,
2013
$ Change
% Change
$
299,919
$
263,576
$
26,966
272,953
28,758
234,818
58,785
19,797
(188)
11,908
90,302
54,460
28,517
(299)
10,369
93,047
36,343
(1,792)
38,135
4,325
(8,720)
111
1,539
(2,745)
$
363,255
$
327,865
$
35,390
14 %
(6)%
16 %
8 %
(31)%
(37)%
15 %
(3)%
11 %
Net interest margin (tax-equivalent)
3.98%
3.48%
Net Interest Income
Interest income for 2014 increased $36.3 million, or 14 percent, from the prior year and was principally due to the decrease in premium
amortization on investment securities and increased income from commercial loans. Interest income on investment securities benefited
from a reduction of $36.6 million in premium amortization during the current year compared to the prior year. Current year interest
income on commercial loans increased $18.2 million, or 14 percent, from the prior year and was primarily the result of an increase in
the volume of commercial loans.
Interest expense for the current year decreased $1.8 million, or 6 percent, from the prior year and was primarily attributable to the decreases
in interest rates on certificate of deposits and lower volume of borrowings, such benefit partially offset by the increased costs associated
with an interest rate swap undertaken to reduce the Company’s sensitivity to rising interest rates. The interest rate swap with a notional
amount of $160 million had a three year deferred start with the interest expense accrual period beginning in October 2014 and scheduled
to end in October 2021. The total funding cost (including non-interest bearing deposits) for the current year was 39 basis points compared
to 42 basis points for the prior year.
25
The net interest margin as a percentage of earning assets, on a tax-equivalent basis, for 2014 was 3.98 percent, a 50 basis points increase
from the net interest margin of 3.48 percent for 2013. The increase in the net interest margin was due to the increased yield on the
investment portfolio combined with the shift in earning assets to the higher yielding loan portfolio. The premium amortization for 2014
accounted for a 40 basis points reduction in the net interest margin, compared to an 89 basis points reduction in the net interest margin
for the same period last year.
Non-interest Income
Non-interest income of $90.3 million for 2014 decreased $2.7 million, or 3 percent, over last year. Service charges and other fees of
$58.8 million for the current year increased $4.3 million, or 8 percent, from the prior year and was primarily the result of an increase in
the number of deposit accounts. Gain of $19.8 million on the sale of residential loans for 2014 decreased $8.7 million, or 31 percent,
from 2013 as a consequence of the slowdown in refinance activity. Current year other income of $11.9 million, increased $1.5 million,
or 15 percent, from the prior year as a result of a current year bargain purchase gain, proceeds from a bank owned life insurance policy,
and other income which was partially offset by the decrease in OREO income. Included in other income was operating revenue of $204
thousand from OREO and gain of $2.1 million from the sale of OREO, a combined total of $2.3 million for the current year compared
to $3.5 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, 2013:
(Dollars in thousands)
Compensation and employee benefits
Occupancy and equipment
Advertising and promotions
Data processing
Other real estate owned
Regulatory assessments and insurance
Core deposit intangible amortization
Other expense
Total non-interest expense
Years ended
December 31,
2014
December 31,
2013
$
118,571
$
104,221
$
27,498
24,875
7,912
6,607
2,568
5,064
2,811
6,913
4,493
7,196
6,362
2,401
41,648
38,856
$
212,679
$
195,317
$
$ Change
% Change
14,350
2,623
999
2,114
(4,628)
(1,298)
410
2,792
17,362
14 %
11 %
14 %
47 %
(64)%
(20)%
17 %
7 %
9 %
Compensation and employee benefits for 2014 increased $14.4 million, or 14 percent, from last year due to the increased number of
employees from the recently acquired banks, additional benefit costs and annual salary increases. Occupancy and equipment expense
for 2014 increased $2.6 million, or 11 percent, over the prior year as a result of recent bank acquisitions and increases in equipment
expense related to additional information and technology infrastructure. Current year advertising and promotions increased $999 thousand
from the prior year primarily from the FNBR acquisition and recent marketing promotions at a number of the Bank divisions. Data
processing expense for 2014 increased $2.1 million, or 47 percent, from the prior year as a result of the acquired banks’ outsourced data
processing expense, conversion related expenses and general increases in data processing expense. OREO expense of $2.6 million in
2014 decreased $4.6 million, or 64 percent, from last year. OREO expense for the 2014 included $1.4 million of operating expenses,
$691 thousand of fair value write-downs, and $442 thousand of loss on sale of OREO. Other expense for the current year increased by
$2.8 million, or 7 percent, from the prior year primarily from increases in employee expenses from the recently acquired banks and
increases in consulting and advisory services.
Efficiency Ratio
The efficiency ratio was 54.31 percent for 2014 and 54.51 percent for 2013. The improvement in the efficiency ratio was the result of
the increase in net interest income from the shift in earning assets from investment securities to the higher yielding loans and decreases
in premium amortization on the investment portfolio. Such increases in net interest income outpaced the increase in non-interest expense
from compensation expense and the decrease in non-interest income driven by the decrease in refinance activity.
26
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 2014
Third quarter 2014
Second quarter 2014
First quarter 2014
Fourth quarter 2013
Third quarter 2013
Second quarter 2013
First quarter 2013
$
Provision
for Loan
Losses
191
360
239
1,122
1,802
1,907
1,078
2,100
Net
Charge-Offs
$
1,070
364
332
744
2,216
2,025
1,030
2,119
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
2.89%
2.93%
3.11%
3.20%
3.21%
3.27%
3.56%
3.84%
0.58%
0.39%
0.44%
1.05%
0.79%
0.66%
0.60%
0.95%
1.08%
1.21%
1.30%
1.37%
1.39%
1.56%
1.64%
1.79%
The provision for loan losses was $1.9 million for 2014, a decrease of $5.0 million, or 72 percent, from the prior year. Net charged-off
loans during 2014 was $2.5 million, a decrease of $4.9 million from 2013.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF THE RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2013 COMPARED TO DECEMBER 31, 2012
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
27
Net Interest Income
Net interest income for 2013 increased $16.8 million, or 8 percent, over the prior year. Interest income for 2013 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 2013 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 total funding cost (including non-interest bearing deposits) for 2013 was 42 basis points compared to 55 basis points for the prior
year.
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 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 the prior year.
Non-interest Income
Non-interest income of $93.0 million for 2013 increased $1.6 million, or 2 percent, over the prior 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 2013 decreased $3.7 million, or 12 percent, from the prior
year. The Company experienced a slowdown in refinance activity during 2013 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 2013 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 2013 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
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 prior 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 2013 decreased $11.8 million, or 62 percent,
from the prior year. The OREO expense for 2013 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 2013 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.
28
Efficiency Ratio
The efficiency ratio was 54.51 percent for 2013 and 54.02 percent for 2012. Although there was an increase in net interest income during
2013 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.
Provision for Loan Losses
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 2013 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.
ADDITIONAL MANAGEMENT’S DISCUSSION AND ANALYSIS
Investment Activity
On January 1, 2014, the Company redesignated 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. Investment
securities classified as available-for-sale are carried at estimated fair value and investment securities classified as held-to-maturity are
carried at amortized cost. Unrealized gains or losses, net of tax, on available-for-sale securities are reflected as an adjustment to other
comprehensive income. The Company’s investment securities are summarized below:
(Dollars in thousands)
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 available-for-
sale
Held-to-maturity
State and local
governments
Total held-to-maturity
Total investment
securities
December 31, 2014
December 31, 2013
December 31, 2012
December 31, 2011
December 31, 2010
Carrying
Amount
Percent
Carrying
Amount
Percent
Carrying
Amount
Percent
Carrying
Amount
Percent
Carrying
Amount
Percent
$
44
—% $
—
—% $
202
—% $
208
—% $
211
—%
21,945
1%
10,628
—%
17,480
—%
31,155
1%
41,518
2%
997,969
314,854
34% 1,385,078
43% 1,214,518
33% 1,064,655
11%
442,501
14%
288,795
8%
62,237
34%
2%
657,421
—
27%
—%
—
—%
—
—%
1,708
—%
5,366
—%
6,595
—%
1,052,616
36% 1,384,622
43% 2,160,302
59% 1,963,122
63% 1,690,102
71%
2,387,428
82% 3,222,829
100% 3,683,005
100% 3,126,743
100% 2,395,847
100%
520,997
520,997
18%
18%
—
—
—%
—%
—
—
—%
—%
—
—
—%
—%
—
—
—%
—%
$2,908,425
100% $3,222,829
100% $3,683,005
100% $3,126,743
100% $2,395,847
100%
The Company’s investment portfolio is primarily comprised of state and local government securities and residential mortgage-backed
securities. State and local government securities are largely exempt from federal income tax and the maximum federal statutory rate of
35 percent is used in calculating the Company’s tax-equivalent yields on the tax-exempt securities. 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.
29
State and local government securities carry different risks that are not as prevalent in other security types. The Company evaluates the
investment grade quality of its securities in accordance with regulatory guidance. Investment grade securities are those where the issuer
has an adequate capacity to meet the financial commitments under the security for the projected life of the investment. An issuer has an
adequate capacity to meet financial commitments if the risk of default by the obligor is low and the full and timely payment of principal
and interest are expected. In assessing credit risk, the Company may use credit ratings from Nationally Recognized Statistical Rating
Organizations (“NRSRO” entities such as Standard and Poor's [“S&P”] and Moody’s) as support for the evaluation; however, they are
not solely relied upon. There have been no significant differences in the Company’s internal evaluation of the creditworthiness of any
issuer when compared with the ratings assigned by the NRSROs. The following table stratifies the state and local government securities
by the associated NRSRO ratings. The highest issued rating was used to categorize the securities in the table for those securities where
the NRSRO ratings were not at the same level.
(Dollars in thousands)
December 31, 2014
December 31, 2013
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
S&P: AAA / Moody’s: Aaa
S&P: AA+, AA, AA- / Moody’s: Aa1, Aa2, Aa3
S&P: A+, A, A- / Moody’s: A1, A2, A3
S&P: BBB+, BBB, BBB- / Moody’s: Baa1, Baa2, Baa3
Not rated by either entity
Below investment grade
Total
$
$
363,840
868,990
233,751
—
16,781
—
1,483,362
374,870
908,334
248,592
—
17,119
—
1,548,915
306,536
817,227
234,188
1,555
17,841
—
1,377,347
302,106
824,287
239,087
1,556
18,042
—
1,385,078
State and local government securities largely consist of both taxable and tax-exempt general obligation and revenue bonds. The following
table stratifies the state and local government securities by the associated security type.
(Dollars in thousands)
General obligation - unlimited
General obligation - limited
Revenue
Certificate of participation
Other
Total
December 31, 2014
December 31, 2013
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
$
$
765,710
271,428
391,902
35,610
18,712
1,483,362
803,152
284,865
405,104
36,823
18,971
1,548,915
702,641
251,109
365,890
39,674
18,033
1,377,347
709,719
255,493
362,665
39,492
17,709
1,385,078
The following table outlines the five states in which the Company owns the highest concentrations of state and local government securities.
(Dollars in thousands)
Texas
Washington
Michigan
California
Pennsylvania
All other states
Total
December 31, 2014
December 31, 2013
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
$
$
208,129
150,691
115,564
109,057
107,261
792,660
1,483,362
216,483
159,259
121,535
112,367
110,444
828,827
1,548,915
155,237
114,740
118,542
111,766
113,085
763,977
1,377,347
155,974
117,394
120,385
110,267
113,656
767,402
1,385,078
30
The following table presents the carrying amount and weighted-average yield of available-for-sale and held-to-maturity investment
securities by contractual maturity at December 31, 2014. Weighted-average yields are based upon the amortized cost of securities and
are calculated using the interest method which takes into consideration premium amortization, discount accretion and mortgage-backed
securities’ prepayment provisions. Weighted-average yields on tax-exempt investment securities exclude the federal income tax benefit.
(Dollars in thousands)
Amount
Yield
Amount
Yield Amount Yield
Amount
Yield
Amount
Yield
Amount
Yield
One Year
or Less
After One
through Five
Years
After Five
through Ten
Years
After
Ten Years
Residential
Mortgage-Backed
Securities
Total
Available-for-sale
U.S. government and federal
agency
U.S. government sponsored
enterprises
$
—
—% $
14
1.58% $
30
1.85% $
8,152
2.38%
787
1.99% 13,006
2.04%
—
—
—% $
—%
State and local governments
37,835
1.96% 135,486
2.15% 80,320
3.33%
744,328
4.20%
Corporate bonds
80,792
2.21% 234,062
2.05%
Residential mortgage-backed
securities
—
—%
—
—%
—
—
—%
—%
—
—
—%
—
—
—
—
—% $
44
1.76%
—%
—%
—%
21,945
2.16%
997,969
3.76%
314,854
2.09%
—% 1,052,616
2.31% 1,052,616
2.31%
Total available-for-sale
126,779
2.14% 370,349
2.08% 93,356
3.14%
744,328
4.20% 1,052,616
2.31% 2,387,428
2.87%
Held-to-maturity
State and local governments
Total held-to-maturity
—
—
—%
—%
—
—
—%
—%
188
188
2.47%
2.47%
520,809
4.37%
520,809
4.37%
—
—
—%
—%
520,997
4.37%
520,997
4.37%
Total investment securities
$126,779
2.14% $370,349
2.08% $ 93,544
3.14% $1,265,137
4.27% $1,052,616
2.31% $2,908,425
3.15%
Interest income from investment securities consisted of the following:
(Dollars in thousands)
Taxable interest
Tax-exempt interest
Total interest income
Years ended
December 31,
2014
December 31,
2013
December 31,
2012
$
$
45,920
47,132
93,052
31,591
42,921
74,512
28,687
37,699
66,386
For additional information on investment securities, see Notes 1 and 3 to the Consolidated Financial Statements in “Item 8. Financial
Statements and Supplementary Data.”
Other-Than-Temporary Impairment on Securities Analysis
Non-marketable equity securities. Of the non-marketable equity securities owned at December 31, 2014, 97 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.
Based on the Company’s evaluation of its investments in non-marketable equity securities as of December 31, 2014, the Company
determined that none of such securities had other-than-temporary impairment.
31
Debt securities. In evaluating debt securities for other-than-temporary impairment losses, management assesses whether the Company
intends to sell the security or if it is more-likely-than-not that the Company will be required to sell the debt security. In so doing,
management considers contractual constraints, liquidity, capital, asset / liability management and securities portfolio objectives. For debt
securities with limited or inactive markets, the impact of macroeconomic conditions in the U.S. upon fair value estimates includes higher
risk-adjusted discount rates and changes in credit ratings provided by NRSROs. In June 2014, Standard and Poor's reaffirmed its AA+
rating of U.S. government long-term debt and the outlook remains stable. In July 2013, Moody's upgraded its outlook to stable from
negative while maintaining its Aaa rating on U.S. government long-term debt. In September 2014, Fitch reaffirmed its AAA rating of
U.S. government long-term debt and the outlook remains stable. 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.
The following table separates investments with an unrealized loss position at December 31, 2014 into two categories: investments
purchased prior to 2014 and those purchased during 2014. Of those investments purchased prior to 2014, the fair market value and
unrealized gain or loss at December 31, 2013 is also presented.
December 31, 2014
December 31, 2013
Fair Value
Unrealized
Loss
Unrealized
Loss as a
Percent of
Fair Value
Fair Value
Unrealized
Loss
Unrealized
Loss as a
Percent of
Fair Value
(Dollars in thousands)
Temporarily impaired securities purchased
prior to 2014
U.S. government and federal agency
$
3
$
State and local governments
Corporate bonds
Residential mortgage-backed securities
262,731
68,163
201,940
Total
$
532,837
$
Temporarily impaired securities purchased
during 2014
U.S. government sponsored enterprises $
State and local governments
Residential mortgage-backed securities
13,793
$
39,682
69,245
Total
$
122,720
$
—
(6,682)
(750)
(2,234)
(9,666)
(2)
(863)
(252)
(1,117)
Temporarily impaired securities
U.S. government and federal agency
$
3
$
U.S. government sponsored enterprises
State and local governments
Corporate bonds
Residential mortgage-backed securities
13,793
302,413
68,163
271,185
Total
$
655,557
$
—
(2)
(7,545)
(750)
(2,486)
(10,783)
— % $
(3)%
(1)%
(1)%
(2)% $
3
$
256,018
68,867
257,394
582,282
$
—
(15,036)
(1,164)
(4,654)
(20,854)
— %
(6)%
(2)%
(2)%
(4)%
— %
(2)%
— %
(1)%
— %
— %
(2)%
(1)%
(1)%
(2)%
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, 2014:
(Dollars in thousands)
Greater than 10.0%
5.1% to 10.0%
0.1% to 5.0%
Total
Number of
Debt
Securities
Unrealized
Loss
1
16
280
297
$
$
(114)
(1,117)
(9,552)
(10,783)
32
With respect to the duration of the impaired debt securities, the Company identified 153 securities which have been continuously impaired
for the twelve months ending December 31, 2014. 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 were in an unrealized loss position.
The following table provides details of the 153 securities which have been continuously impaired for the twelve months ended December
31, 2014, including the most notable loss for any one bond in each category.
(Dollars in thousands)
U.S. government and federal agency
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
1
$
— $
135
4
13
153
$
(5,648)
(205)
(1,560)
(7,413)
—
(573)
(110)
(460)
Based on the Company's analysis of its impaired debt securities as of December 31, 2014, 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, 2014 were
issued by Freddie Mac, Fannie Mae, the Government National Mortgage Association and other agencies of the United States 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, 2014 have been determined by the Company to be investment grade.
Lending Activity
The Company focuses its lending activities primarily on the following types of loans: 1) first-mortgage, conventional loans secured by
residential properties, particularly single-family; 2) commercial lending, including agriculture, that concentrates on targeted businesses;
and 3) installment lending for consumer purposes (e.g., home equity, automobile, etc.). Supplemental information regarding the Company’s
loan portfolio and credit quality based on regulatory classification is provided in the section captioned “Loans by Regulatory Classification”
included in “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, 2014
December 31, 2013
December 31, 2012
December 31, 2011
December 31, 2010
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
$
611,463
14 % $
577,589
15 % $
516,467
16 % $
516,807
16 % $
632,877
18 %
2,337,548
54 % 2,049,247
52 % 1,655,508
51 % 1,672,059
50 % 1,796,503
925,900
21 %
852,036
22 %
623,397
19 %
623,868
19 %
654,588
3,263,448
75 % 2,901,283
74 % 2,278,905
70 % 2,295,927
69 % 2,451,091
394,670
218,514
613,184
9 %
5 %
366,465
217,501
9 %
5 %
403,925
198,128
14 %
583,966
14 %
602,053
12 %
6 %
18 %
440,569
212,832
653,401
13 %
6 %
19 %
483,137
182,184
665,321
50 %
18 %
68 %
13 %
5 %
18 %
4,488,095
103 % 4,062,838
103 % 3,397,425
104 % 3,466,135
104 % 3,749,289
104 %
(129,753)
(3)%
(130,351)
(3)%
(130,854)
(4)%
(137,516)
(4)%
(137,107)
(4)%
Loans receivable, net
$ 4,358,342
100 % $ 3,932,487
100 % $ 3,266,571
100 % $ 3,328,619
100 % $ 3,612,182
100 %
33
The stated maturities or first repricing term (if applicable) for the loan portfolio at December 31, 2014 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
Total
Residential
Real Estate
Commercial
Consumer
and Other
Total
$
$
198,784
129,166
13,768
113,676
111,274
44,795
611,463
989,593
1,106,142
169,519
372,496
449,616
176,082
3,263,448
258,724
44,155
5,766
125,231
167,398
11,910
613,184
1,447,101
1,279,463
189,053
611,403
728,288
232,787
4,488,095
Residential Real Estate Lending
The Company’s lending activities consist of the origination of both construction and permanent loans on residential real estate. The
Company actively solicits residential real estate loan applications from real estate brokers, contractors, existing customers, customer
referrals, and on-line applications. The Company’s lending policies generally limit the maximum loan-to-value ratio on residential
mortgage loans to 80 percent of the lesser of the appraised value or purchase price. Policies allow for higher loan-to-values with appropriate
risk mitigation such as documented compensating factors, credit enhancement, etc. The Company also provides interim construction
financing for single-family dwellings. These loans are supported by a term take-out commitment.
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.
34
Home Equity Loans
The Company’s home equity loans of $395 million and $366 million as of December 31, 2014 and 2013, respectively, consist of 1-4
family junior lien mortgages and first and junior lien lines of credit secured by residential real estate. At December 31, 2014, the home
equity loan portfolio consisted of 70 percent variable interest rate and 30 percent fixed interest rate loans. Approximately 51 percent of
the home equity loans were in a first lien status with the remaining 49 percent in junior lien status. Approximately 17 percent of the
home equity loans were closed-end amortizing loans and 83 percent were open-end, revolving home equity lines of credit. At December 31,
2013, the home equity loan portfolio consisted of 62 percent variable interest rate and 38 percent fixed interest rate loans. Approximately
49 percent of the home equity loans were in a first lien status with the remaining 51 percent in junior lien status. Approximately 20
percent of the home equity loans were closed-end amortizing loans and 80 percent were open-end, revolving home equity lines of credit.
Prior to 2014, home equity lines of credit were generally originated with maturity terms from 10 to 15 years. At origination, borrowers
chose 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 the origination date which then converts to a variable interest rate for the remaining term of such home equity lines of credit. During
the draw period, a borrower with a variable interest rate term had the option of converting to a fixed interest rate for all or a portion of
the remaining term to maturity. Beginning in 2014, home equity lines of credit are originated with maturity terms of 15 years. At
origination, borrowers can choose a variable interest rate that changes quarterly, or after the first 3, 5 or 10 years from the origination
date.
The draw period for home equity lines of credit usually exists from origination to maturity. During the draw period, the Company has
home equity lines of credit where the borrowers pay interest only and home equity lines of credit where borrowers pay principal and
interest.
Credit Risk Management
The Company is committed to a conservative management of the credit risk within the loan portfolio, including the early recognition of
problem loans. The Company’s credit risk management includes stringent credit policies, individual loan approval limits, limits on
concentrations of credit, and committee approval of larger loan requests. Management practices also include regular internal and external
credit examinations, identification and review of individual loans and leases experiencing deterioration of credit quality, procedures for
the collection of non-performing assets, quarterly monitoring of the loan portfolio, semi-annual review of loans by industry, and periodic
stress testing of the loans secured by real estate. Federal and state regulatory safety and soundness examinations are conducted annually.
The Company’s loan policy and credit administration practices establish standards and limits for all extensions of credit that are secured
by interests in or liens on real estate, or made for the purpose of financing the construction of real property or other improvements.
Ongoing monitoring and review of the loan portfolio is based on current information, including: the borrowers’ and guarantors’
creditworthiness, value of the real estate and other collateral, the project’s performance against projections, and monthly inspections by
Company employees or external parties until the real estate project is complete.
Monitoring of the junior lien and home equity lines of credit portfolios includes evaluating payment delinquency, collateral values,
bankruptcy notices and foreclosure filings. Additionally, the Company places junior lien mortgages and junior lien home equity lines of
credit on non-accrual status when there is evidence that the associated senior lien is 90 days past due or is in the process of foreclosure,
regardless of the junior lien delinquency status.
Loan Approval Limits
Individual loan approval limits have been established for each lender based on the loan types and experience of the individual. 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.
35
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 $48.1 million and $56.7 million of loans with interest reserves with remaining reserves of $1.0 million and $385
thousand as of December 31, 2014 and 2013, respectively. During 2014, the Company extended, renewed or restructured 4 loans with
interest reserves, such loans having an aggregate outstanding principal balance of $7.9 million as of December 31, 2014. 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. Such actions were based on prudent underwriting standards and not to keep the loans
current. As of December 31, 2014, the Company had 4 construction loans totaling $1.0 million with interest reserves that are currently
non-performing or which are potential problem loans.
Loan Purchases and Sales
Fixed rate, long-term mortgage loans are generally sold in the secondary market. The Company is active in the secondary market,
primarily through the origination of conventional, Federal Housing Administration and Department of Veterans Affairs residential
mortgages. The sale of loans in the secondary mortgage market reduces the Company’s risk of holding long-term, fixed rate loans during
periods of rising 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 Small Business Administration loans, and
other commercial loans, with a portion of those loans sold to investors. The Company has not originated any type of subprime mortgages,
either for the loan portfolio or for sale to investors. In addition, the Company has not purchased 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 legal and regulatory
requirements, which establishes criteria for obtaining appraisals or evaluations (new or updated), including transactions that are otherwise
exempt from the appraisal requirements.
Each of the Bank divisions monitor conditions, including supply and demand factors, in the real estate markets served so they can react
quickly to changing market conditions to mitigate potential losses from specific credit exposures within the loan portfolio. Evidence of
the following real estate market conditions and trends is obtained from lending personnel and third party sources:
•
•
•
•
•
•
demographic indicators, including employment and population trends;
foreclosures, vacancy, construction and absorption rates;
property sales prices, rental rates, and lease terms;
current tax assessments;
economic indicators, including trends within the lending areas; and
valuation trends, including discount and capitalization rates.
Third party information sources include federal, state, and local governments and agencies thereof, private sector economic data vendors,
real estate brokers, licensed agents, sales, rental and foreclosure data tracking services.
36
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. 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.
Non-performing Assets
The following table summarizes information regarding non-performing assets at the dates indicated:
(Dollars in thousands)
December 31,
2014
December 31,
2013
December 31,
2012
December 31,
2011
December 31,
2010
At or for the Years ended
Other real estate owned
$
27,804
26,860
45,115
78,354
73,485
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
35
105
74
214
6,798
48,138
6,946
61,882
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
Total non-performing assets 1
$
89,900
109,420
143,527
213,456
270,521
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
$
$
$
1.08%
1.39%
1.87%
2.92%
3.91%
209%
158%
133%
102%
70%
25,904
32,116
27,097
49,086
45,497
69,129
81,110
100,151
98,859
26,475
3,005
4,122
5,161
7,441
10,987
__________
1 As of December 31, 2014, non-performing assets have not been reduced by U.S. government guarantees of $3.6 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.
37
The Company has made significant strides in reducing its non-performing assets since its peak of $270 million at December 31, 2010
through actively and methodically managing or disposing of its non-performing assets. The non-performing assets at December 31, 2014
were $89.9 million, a decrease of $19.5 million, or 18 percent, from a year ago. Land, lot and other construction loans (i.e., regulatory
classification) continues to be the largest category and was $47.7 million, or 53 percent, of the non-performing assets at December 31,
2014. The Company has continued to make progress by reducing this category the past few years. Other credit quality measures have
also seen improvement over the last few years including early stage delinquencies (accruing loans 30-89 days past due) at December 31,
2014 which decreased $6.2 million, or 19 percent, from the prior year.
Most of the Company’s non-performing assets are secured by real estate, and based on the most current information available to
management, including updated appraisals or evaluations (new or updated), the Company believes the value of the underlying real estate
collateral is adequate to minimize significant charge-offs or losses to the Company. The Company evaluates the level of its non-performing
loans, the values of the underlying real estate and other collateral, and related trends in 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. The Company continues to maintain an adequate
allowance while working to reduce non-performing loans.
For non-performing construction loans involving residential structures, the percentage-of-completion exceeds 95 percent at December 31,
2014. For non-performing construction loans involving commercial structures, the percentage-of-completion ranges from projects not
started to projects completed at December 31, 2014. 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 43 percent of the Company’s non-accrual loans as of December 31, 2014.
Land, lot and other construction loans, a regulatory classification, were 95 percent of the non-accrual construction loans. Of the Company’s
$26.8 million of non-accrual construction loans at December 31, 2014, 93 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 states 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 lingering
economic recovery, the upscale primary, secondary and other housing markets, as well as the associated construction and building industries
show improved activity after several years of decline. 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 $161 million and $200 million as of December 31, 2014 and 2013, respectively. The ALLL includes specific valuation
allowances of $11.6 million and $11.9 million of impaired loans as of December 31, 2014 and 2013, respectively. Of the total impaired
loans at December 31, 2014, there were 23 significant commercial real estate and other commercial loans that accounted for $62.7 million,
or 39 percent, of the impaired loans. The 23 loans were collateralized by 127 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, 2014, there were 132 loans aggregating $77.1 million, or 48 percent,
whereby the borrowers had more than one impaired loan.
38
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 $103 million
and $124 million as of December 31, 2014 and 2013, respectively. The Company’s TDR loans are considered impaired loans of which
$33.7 million and $42.5 million as of December 31, 2014 and 2013, respectively, are designated as non-accrual.
Each restructured debt is separately negotiated with the borrower and includes terms and conditions that reflect the borrower’s prospective
ability to service the debt as modified. The Company discourages the use of the multiple loan strategy when restructuring loans regardless
of whether or not the loans are designated as TDRs.
Other Real Estate Owned
The book value prior to the acquisition and transfer of the loan into OREO during 2014 was $12.7 million of which $3.5 million was
residential real estate loans, $6.2 million was commercial loans, and $3.0 million was consumer loans. The fair value of the loan collateral
acquired in foreclosure during 2014 was $11.5 million of which $3.4 million was residential real estate, $5.4 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,
2014
Years ended
December 31,
2013
December 31,
2012
$
$
26,860
3,928
11,493
1,661
(691)
(15,447)
27,804
45,115
1,203
15,266
79
(3,639)
(31,164)
26,860
78,354
—
27,536
—
(13,258)
(47,517)
45,115
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 historical loss experience, adjusted for changes in
trends and conditions of qualitative or environmental factors.
39
The Bank divisions’ credit administration reviews their respective loan portfolios to determine which loans are impaired and estimates
the specific valuation allowance. The impaired loans and related specific valuation allowance are then provided to the Company’s credit
administration for further review and approval. The Company’s credit administration also determines the estimated general valuation
allowance and reviews and approves the overall ALLL. The credit administration of the Company exercises significant judgment when
evaluating the effect of applicable qualitative or environmental factors on the Company’s historical loss experience for loans not identified
as impaired. Quantification of the impact upon the Company’s ALLL is inherently subjective as data for any factor may not be directly
applicable, consistently relevant, or reasonably available for management to determine the precise impact of a factor on the collectability
of the Company’s loans collectively evaluated for impairment as of each evaluation date. The Company’s credit administration documents
its conclusions and rationale for changes that occur in each applicable factor’s weight (i.e., measurement) and ensures that such changes
are directionally consistent based on the underlying current trends and conditions for the factor. To have directional consistency, the
provision for loan losses and credit quality should generally move in the same direction.
The Company’s model includes thirteen Bank divisions with separate management teams providing substantial local oversight to the
lending and credit management function. The Company’s business model affords multiple reviews of larger loans before credit is extended,
a significant benefit in mitigating and managing the Company’s credit risk. The geographic dispersion of the market areas in which the
Company operates further mitigates the risk of credit loss. While this process is intended to limit credit exposure, there can be no assurance
that further problem credits will not arise and additional loan losses incurred, particularly in 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:
December 31, 2014
Percent
of Loans
in
Category
ALLL
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
$ 14,680
13% $ 14,067
14% $ 15,482
15% $ 17,227
15% $ 20,957
67,799
52%
70,332
51%
74,398
49%
76,920
48%
76,147
30,891
9,963
21%
9%
28,630
9,299
21%
9%
21,567
10,659
18%
12%
20,833
13,616
18%
13%
19,932
13,334
17%
48%
17%
13%
6,420
$129,753
5%
8,023
100% $130,351
5%
8,748
100% $130,854
6%
8,920
100% $137,516
6%
6,737
100% $137,107
5%
100%
(Dollars in
thousands)
Residential
real estate
Commercial
real estate
Other
commercial
Home equity
Other
consumer
Total
40
The following table summarizes the ALLL experience for the periods indicated:
(Dollars in thousands)
December 31,
2014
December 31,
2013
Years ended
December 31,
2012
December 31,
2011
December 31,
2010
Balance at beginning of period
Provision for loan losses
$
130,351
1,912
130,854
6,887
137,516
21,525
137,107
64,500
142,927
84,693
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
(431)
(4,860)
(2,312)
(7,603)
328
3,757
1,008
5,093
(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
Charge-offs, net of recoveries
(2,510)
(7,390)
(28,187)
(64,091)
(90,513)
Balance at end of period
$
129,753
130,351
130,854
137,516
137,107
ALLL as a percentage of total loans
Net charge-offs as a percentage of average
loans
2.89%
0.06%
3.21%
0.20%
3.85%
0.80%
3.97%
1.77%
3.66%
2.26%
The ALLL was $130 million at December 31, 2014 and remained stable compared to a year ago. The ALLL was 2.89 percent of total
loans outstanding at December 31, 2014 compared to 3.21 percent at December 31, 2013.
The Company’s ALLL of $130 million is considered adequate to absorb losses from any class of its loan portfolio. For the periods ended
December 31, 2014 and 2013, the Company believes the ALLL is commensurate with the risk in the Company’s loan portfolio and is
directionally consistent with the change in the quality of the Company’s loan portfolio.
When applied to the Company’s historical loss experience, the qualitative or environmental factors result in the provision for loan losses
being recorded in the period in which the loss has probably occurred. When the loss is confirmed at a later date, a charge-off is recorded.
During 2014, loan charge-offs, net of recoveries, exceeded the provision for loan losses by $598 thousand. During the same period in
2013, loan charge-offs, net of recoveries, exceeded the provision for loan losses by $503 thousand.
The Company provides commercial services to individuals, small to medium-sized businesses, community organizations and public
entities from 129 locations, including 121 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.
41
There have been improvements in the economic environment during the last year compared to the past several years. The housing recovery
is slowly recovering. Home prices continue to increase both nationally and within the Company’s footprint; however, the year-over-year
price change continued to slow in all the Company’s states except Montana. Personal income growth has improved in each of the
Company’s states. The Federal Reserve Bank of Philadelphia’s composite state coincident indices reflected positive growth in each of
the Company’s states, except Wyoming, over the last three months and the six month forecast of the state leading indices projects steady
growth in the Company’s footprint. Unemployment rates in each of the Company’s states except Washington remain lower than the
national unemployment rate of 5.6 percent for December 2014. Employment growth has remained positive in most industries across the
Company’s footprint and the personal bankruptcy filing rate has declined nationally and in each of the Company’s states. Foreclosure
starts have continued to decline year-over-year nationally and in each of the Company’s states. The tourism industry and related lodging
has continued 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. Overall, the Company has started to see positive signs throughout the various economic indices; however,
given the significant recession experienced during 2008 and 2009, the Company is cautiously optimistic that the housing industry will
continue to recover. The Company will continue to actively monitor the economy’s impact on its lending portfolio.
In evaluating the need for a specific or general valuation allowance for impaired and unimpaired loans, respectively, within the Company’s
construction loan portfolio (i.e., regulatory classification), including residential construction and land, lot and other construction loans,
the credit risk related to such loans was considered in the ongoing monitoring of such loans, including assessments based on current
information, including appraisals or evaluations (new or updated) of the underlying collateral, expected cash flows and the timing thereof,
as well as the estimated cost to sell when such costs are expected to reduce the cash flows available to repay or otherwise satisfy the
construction loan. Construction loans were 12 percent and 11 percent of the Company’s total loan portfolio and accounted for 43 percent
and 40 percent of the Company’s non-accrual loans at December 31, 2014 and 2013, respectively. Collateral securing construction loans
includes residential buildings (e.g., single/multi-family and condominiums), commercial buildings, and associated land (e.g., multi-acre
parcels and individual lots, with and without shorelines).
The Company’s ALLL consisted of the following components as of the dates indicated:
(Dollars in thousands)
Specific valuation allowance
General valuation allowance
Total ALLL
December 31,
2014
December 31,
2013
$
$
11,597
118,156
129,753
11,949
118,402
130,351
During 2014, the ALLL decreased by $598 thousand, the net result of a $352 thousand decrease in the specific valuation allowance and
a $246 thousand decrease in the general valuation allowance. The specific valuation allowance decreased as the result of a $15.8 million
decrease in loans individually reviewed for impairment with a specific impairment. The general valuation allowance remained stable
compared to the prior year end even with an increase of $326 million in loans collectively evaluated for impairment, excluding the FNBR
acquisition. The stable general valuation allowance resulted from improved historical loss experience adjusted for qualitative or
environmental factors from the prior year which was applied to the loans collectively evaluated for impairment.
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.”
42
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 in this Annual Report on Form 10-K 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,
2014
December 31,
2013
$ Change
% Change
Custom and owner occupied construction
$
56,689
$
50,352
$
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
47,406
104,095
82,829
101,818
86,116
14,126
16,205
150,075
34,217
84,569
73,132
109,175
50,422
15,951
12,585
103,807
6,337
13,189
19,526
9,697
(7,357)
35,694
(1,825)
3,620
46,268
Total land, lot, and other construction
451,169
365,072
86,097
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
849,148
674,381
811,479
588,114
1,523,529
1,399,593
547,910
523,354
310,785
279,959
775,785
68,358
844,143
733,406
73,348
806,754
160,426
123,154
334,788
133,773
468,561
124,203
298,119
130,758
428,877
98,244
37,669
86,267
123,936
24,556
30,826
42,379
(4,990)
37,389
37,272
36,669
3,015
39,684
25,959
Total loans receivable, including loans held for sale
Less loans held for sale 1
4,534,821
(46,726)
4,109,576
(46,738)
425,245
12
Total loans receivable
$
4,488,095
$
4,062,838
$
425,257
__________
1 Loans held for sale are primarily 1st lien 1-4 family loans.
13 %
39 %
23 %
13 %
(7)%
71 %
(11)%
29 %
45 %
24 %
5 %
15 %
9 %
5 %
11 %
6 %
(7)%
5 %
30 %
12 %
2 %
9 %
26 %
10 %
— %
10 %
43
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,
2014
December 31,
2013
Non-
Accruing
Loans
December 31,
2014
Accruing
Loans 90
Days
or More Past
Due
December 31,
2014
Other
Real Estate
Owned
December 31,
2014
$
1,132
218
1,350
20,842
3,581
14,170
1,318
2,660
5,151
47,722
13,574
3,013
16,587
4,375
3,074
9,580
442
10,022
440
6,099
231
6,330
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
1,132
218
1,350
11,066
2,019
10,946
983
260
162
25,436
12,494
1,799
14,293
4,292
2,607
7,866
442
8,308
—
5,439
157
5,596
—
—
—
—
—
—
—
—
—
—
31
—
31
74
—
35
—
35
—
17
57
74
—
—
—
9,776
1,562
3,224
335
2,400
4,989
22,286
1,049
1,214
2,263
9
467
1,679
—
1,679
440
643
17
660
Total
$
89,900
109,420
61,882
214
27,804
44
(Dollars in thousands)
Custom and owner occupied construction
Pre-sold and spec construction
Total residential construction
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
Other
Total
__________
n/m - not measurable
Accruing 30-89 Days Delinquent
Loans, by Loan Type
December 31,
2014
December 31,
2013
$ Change
% Change
$
— $
869
869
391
267
—
21
679
5,971
3,131
9,102
2,915
994
6,804
491
7,295
—
1,288
928
2,216
1,834
202
$
—
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
—
(202)
869
667
(1,325)
(348)
(8)
21
(1,660)
650
793
1,443
(627)
(372)
(5,582)
9
(5,573)
(1,075)
(711)
(138)
(849)
1,834
$
25,904
$
32,116
$
(6,212)
(100)%
n/m
330 %
(77)%
(57)%
(100)%
n/m
(71)%
12 %
34 %
19 %
(18)%
(27)%
(45)%
2 %
(43)%
(100)%
(36)%
(13)%
(28)%
n/m
(19)%
45
The following table summarizes net charge-offs at the dates indicated, including identification by regulatory classification:
Net Charge-Offs (Recoveries),
Years ended, By Loan Type
December 31,
2014
December 31,
2013
Charge-Offs
December 31,
2014
Recoveries
December 31,
2014
—
—
—
147
718
365
13
—
—
1,243
993
257
1,250
2,457
32
915
491
1,406
160
601
454
1,055
—
7,603
—
94
94
537
343
313
153
6
—
1,352
324
419
743
1,388
4
543
308
851
22
411
228
639
—
5,093
(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
$
—
(94)
(94)
(390)
375
52
(140)
(6)
—
(109)
669
(162)
507
(51)
(10)
(61)
(383)
843
715
(81)
248
(473)
869
350
397
747
Commercial and industrial
1,069
3,096
Agriculture
1st lien
Junior lien
Total 1-4 family
Multifamily residential
Home equity lines of credit
Other consumer
Total consumer
Other
Total
28
372
183
555
138
190
226
416
—
$
2,510
53
681
106
787
(39)
1,606
324
1,930
8
7,390
46
Sources of Funds
The Company’s deposits have traditionally been the principal source of funds for use in lending and other business purposes. The
Company also obtains funds from repayment of loans and investment securities, securities sold under agreements to repurchase
(“repurchase agreements”), wholesale deposits, advances from FHLB and other borrowings. Loan repayments are a relatively stable
source of funds, while interest bearing deposit inflows and outflows are significantly influenced by general interest rate levels and market
conditions. Borrowings and advances may be used on a short-term basis to compensate for reductions in normal sources of funds such
as deposit inflows at less than projected levels. Borrowings also may be used on a long-term basis to support expanded activities, to
match maturities of longer-term assets or manage interest rate risk.
Deposits
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, fixed rate certificates of deposit with maturities ranging
from three months to five years, negotiated-rate jumbo certificates, and individual retirement accounts. These deposits are obtained
primarily from individual and business residents of the Bank’s geographic market areas. In addition, wholesale deposits are obtained
through various programs and include brokered deposits classified as NOW, money market deposit and certificate accounts. The
Company’s deposits are summarized below:
(Dollars in thousands)
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
December 31, 2014
December 31, 2013
December 31, 2012
December 31, 2011
December 31, 2010
Non-interest bearing
deposits
NOW accounts
Savings accounts
Money market deposit
accounts
Certificate accounts
$1,632,403
26% $1,374,419
25% $1,191,933
22% $1,010,899
21% $ 855,829
19%
1,328,130
21% 1,113,878
693,714
11%
600,998
20%
11%
988,984
478,809
18%
9%
843,129
404,671
18%
8%
771,961
361,124
1,274,525
1,167,228
20% 1,168,918
21%
931,370
18%
873,562
18%
876,948
18% 1,116,622
20% 1,015,491
19% 1,080,917
22% 1,079,138
17%
8%
19%
24%
13%
Wholesale deposits
249,212
4%
205,132
3%
757,874
14%
608,035
13%
576,902
Total interest bearing
deposits
4,712,809
74% 4,205,548
75% 4,172,528
78% 3,810,314
79% 3,666,073
81%
Total deposits
$6,345,212
100% $5,579,967
100% $5,364,461
100% $4,821,213
100% $4,521,902
100%
The following table summarizes the amounts outstanding at December 31, 2014 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 $15.6 million. Included in demand
deposits are brokered deposits of $233 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
$
$
186,861
161,076
175,999
177,599
701,535
3,231,003
—
—
—
3,231,003
Total
3,417,864
161,076
175,999
177,599
3,932,538
For additional information on deposits, see Note 7 to the Consolidated Financial Statements in “Item 8. Financial Statements and
Supplementary Data.”
47
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 entering into an agreement to repurchase that same securities at an agreed upon later
date, typically overnight. A rate of interest is paid for the agreed period of time. Through a policy adopted by the Bank’s Board of
Directors, the Bank enters into repurchase agreements with local municipalities, and certain customers, and 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 the 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 rates 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 of the Company.
Additionally, the Company has other sources of secured and unsecured borrowing lines from various sources that may be used from time
to time.
For additional information concerning the Company’s borrowings, see Note 8 to the Consolidated Financial Statements in “Item 8.
Financial Statements and Supplementary Data.”
Short-term borrowings
A critical component of the Company’s liquidity and capital resources is access to short-term borrowings to fund its operations. Short-
term borrowings are accompanied by increased risks managed by the Asset Liability Committee (“ALCO”) such as rate increases or
unfavorable change in terms which would make it more costly to obtain future short-term borrowings. The Company’s short-term
borrowing sources include FHLB advances, federal funds purchased and retail and wholesale repurchase agreements. The Company
also has access to the short-term discount window borrowing programs (i.e., primary credit) of the Federal Reserve Bank (“FRB”). FHLB
advances and certain other short-term borrowings may be renewed as long-term borrowings to decrease certain risks such as liquidity or
interest rate risk; however, the reduction in risks are weighed against the increased cost of funds and other risks.
The following table provides information relating to 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,
2014
At or for the Years ended
December 31,
2013
December 31,
2012
$
$
$
$
$
$
397,107
313,394
289,508
0.27%
0.28%
0.32%
397,107
317,745
326,184
295,004
466,784
354,324
0.27%
0.29%
0.37%
93,979
2.81%
618,084
295,422
559,084
720,000
0.24%
0.28%
939,109
693,225
792,018
719,762
0.24%
0.25%
0.5%
48
Subordinated Debentures
In addition to funds obtained in the ordinary course of business, the Company formed or acquired financing subsidiaries for the purpose
of issuing trust preferred securities that entitle the investor to receive cumulative cash distributions thereon. The subordinated debentures
outstanding as of December 31, 2014 were $126 million, including fair value adjustments from prior acquisitions. For additional
information regarding the subordinated debentures, see Note 9 to the Consolidated Financial Statements “Item 8. Financial Statements
and Supplementary Data.”
Contractual Obligations and Off-Balance Sheet Arrangements
In the normal course of business, there may be various outstanding commitments to obtain funding and to extend credit, such as letters
of credit and un-advanced loan commitments, which are not reflected in the accompanying condensed consolidated financial statements.
The Company does not anticipate any material losses as a result of these transactions. 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, 2014:
(Dollars in thousands)
Total
$ 6,345,212
397,107
296,944
6,245
125,705
1,165
Deposits
Repurchase agreements
FHLB advances
Other borrowed funds
Subordinated debentures
Capital lease obligations
Operating lease
obligations
Total
Indeter-
minate
Maturity 1
5,162,285
—
—
—
—
—
Payments Due by Period
2015
2016
2017
2018
2019
Thereafter
871,060
397,107
93,979
—
—
694
182,513
—
45,042
4
—
92
2,089
229,740
72,987
—
—
147
—
92
1,786
75,012
23,335
—
20,250
197
—
92
1,541
45,415
29,745
—
174
199
—
92
1,360
31,570
3,287
—
137,499
5,698
125,705
103
3,820
276,112
12,944
$ 7,185,322
—
5,162,285
2,348
1,365,188
__________
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.
2.
3.
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.
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.
Balancing the benefits between providing for adequate liquidity to mitigate potential adverse events and the cost of that liquidity.
The Company has a wide range of versatility in managing the liquidity and asset/liability mix. The 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.
49
The following table identifies certain liquidity sources and capacity available to the Company at December 31, 2014:
(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 and federal agency
U.S. government sponsored enterprises
State and local governments
Corporate bonds
Residential mortgage-backed securities
Total unencumbered securities
$
$
$
$
$
$
December 31,
2014
1,371,940
(296,944)
1,074,996
815,506
—
815,506
255,000
44
15,066
850,193
183,490
186,369
$
1,235,162
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 75,026,092 have been issued as of December 31, 2014. The Company also has the capacity
to issue 1,000,000 shares of preferred stock of which none have been issued as of December 31, 2014. 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.
In July 2013, the Federal Reserve, the FDIC and the OCC approved the Final Rule to establish a new comprehensive regulatory capital
framework with a phase-in period beginning on January 1, 2015 and ending on January 1, 2019. The Final Rule implements the Basel
III regulatory capital reforms and changes required by the Dodd-Frank Act and substantially amends the regulatory risk-based capital
rules applicable to the Company. The Company has evaluated the impact of the Final Rule and believes that, as of December 31, 2014,
the Company would meet all capital adequacy requirements under the Basel III capital rules on a fully phased-in basis as if all such
requirements were currently in effect.
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, 2014 and 2013.
There are no conditions or events after December 31, 2014 that management believes have changed the Company’s or the Bank’s risk-
based capital category.
50
The following table illustrates the Federal Reserve’s capital adequacy guidelines and the Company’s compliance with those guidelines
as of December 31, 2014.
(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
$
1,028,047
1,028,047
1,028,047
(140,606)
(140,606)
(140,606)
(17,744)
(17,744)
(17,744)
—
124,500
994,197
71,085
124,500
1,065,282
—
124,500
994,197
5,627,995
5,627,995
$
$
$
7,987,637
12.45%
17.67%
6.00%
11.67%
18.93%
10.00%
8.93%
For additional information regarding regulatory capital, see Note 11 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, 2014 and 2013 was $35.9 million and $30.0 million, respectively. The Company’s
effective tax rate for the years ended December 31, 2014 and 2013 was 24.2 percent and 23.9 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 $47.1 million and $42.9 million for the years ended December 31, 2014 and 2013, respectively. The federal
income tax credit benefits were $3.9 million for each of the years ended December 31, 2014 and 2013, respectively.
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 investment securities mature. The federal income tax credits on these investment securities
are subject to federal and state income tax.
51
Following is a list of expected federal income tax credits to be received in the years indicated.
(Dollars in thousands)
2015
2016
2017
2018
2019
Thereafter
New
Markets
Tax Credits
Low-Income
Housing
Tax Credits
Investment
Securities
Tax Credits
Total
$
2,850
1,014
450
—
—
—
$
4,314
1,175
1,175
1,060
1,060
1,060
961
6,491
887
862
786
708
659
3,103
7,005
4,912
3,051
2,296
1,768
1,719
4,064
17,810
See Note 15 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).
52
5.04%
5.32%
5.64%
5.33%
6.12%
1.16%
3.88%
—%
0.16%
0.08%
0.25%
1.11%
0.38%
1.26%
December 31, 2014
Years ended
December 31, 2013
December 31, 2012
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
$ 635,256
3,029,733
588,452
$ 30,721
145,631
30,515
4.84% $ 623,433
4.81% 2,542,255
586,649
5.19%
$ 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
4,253,441
206,867
4.86% 3,752,337
189,064
5.04% 3,506,622
187,371
Total loans 1
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)
1,208,970
68,643
5.68% 1,064,457
61,924
5.82%
888,839
47,407
322,917
33,112
284,100
2.40% 2,525,317
4.34% 7,342,111
125,315
338,866
$7,806,292
1.31% 2,598,589
3.87% 6,994,050
113,321
365,408
$7,472,779
54,389
30,231
271,991
$
—
1,148
340
2,382
7,858
1,467
9,570
—% $1,244,332
999,288
540,495
0.10%
0.05%
0.20% 1,075,625
0.69% 1,114,010
0.76%
1.65%
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%
0.20%
888,620
0.81% 1,049,752
0.27%
1.09%
693,463
996,766
$
—
1,370
342
2,221
11,633
2,617
12,566
1,974,049
7,436,460
138,928
347,138
$7,922,526
$1,463,689
1,141,424
660,465
1,215,163
1,144,485
193,514
573,607
451,458
4,201
0.93%
431,046
4,278
0.99%
495,871
4,965
1.00%
6,843,805
63,630
6,907,435
746
697,344
297,303
19,698
1,015,091
$7,922,526
26,966
0.39% 6,810,599
59,497
6,870,096
28,758
0.42% 6,528,795
59,571
6,588,366
35,714
0.55%
732
667,107
239,138
29,219
936,196
719
642,009
194,413
47,272
884,413
$7,806,292
$7,472,779
$ 295,951
$ 255,342
$ 236,277
3.95%
3.98%
3.45%
3.48%
3.33%
3.37%
__________
1 Total loans are gross of the ALLL, net of unearned income, and include loans held for sale. Non-accrual loans are included in the average volume
2
for the entire period.
Includes tax effect of $21.5 million, $19.0 million and $16.7 million on tax-exempt investment income for the years ended December 31, 2014,
2013 and 2012, respectively.
Includes tax effect of $1.5 million on investment income tax credits for the years ended December 31, 2014, 2013 and 2012.
3
4 Wholesale deposits include brokered deposits classified as NOW, money market deposit and certificate accounts.
53
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,
2014 vs. 2013
Increase (Decrease) Due to:
Rate
Volume
Year ended December 31,
2013 vs. 2012
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
$
560
24,439
98
(10,769)
14,328
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)
636
(6,258)
(1,672)
31,783
24,489
(241)
3
(69)
(1,428)
946
3,306
(280)
2,237
1,196
18,181
(1,574)
21,014
38,817
(68)
64
212
(1,181)
298
(1,040)
(77)
(1,792)
581
14,316
(1,919)
2,483
15,461
199
68
467
712
(978)
(318)
(649)
(499)
(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)
173
61
281
247
(648)
(4,346)
203
(4,029)
$
18,357
22,252
40,609
15,960
3,105
19,065
Net interest income (tax-equivalent) increased $40.6 million for the year ended December 31, 2014 compared to the same period in 2013.
Similar to the prior year, the increase in current year net interest income primarily resulted from higher yielding investment securities
due to a significant decrease in premium amortization and the growth of the Company’s commercial loan portfolio. The decrease in
interest expense was driven by lower yields on certificate accounts and lower volume of FHLB advances as a result of the continued
increase in deposits.
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 of investment securities and increased volume of the
commercial loan portfolio. Additionally, the Company was able to lower interest expense by continuing to reduce deposit and borrowing
interest rates.
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.
54
Critical Accounting Policies
The preparation of consolidated financial statements in conformity with GAAP often requires management to use significant judgments
as well as subjective and/or complex measurements in making estimates and assumptions that affect the reported amounts of assets,
liabilities, income and expenses. The Company considers its accounting policies for the ALLL, goodwill and fair value measurements
to be critical accounting policies. The application of these policies has a significant impact on the Company’s consolidated financial
statements and financial results could differ significantly if different judgments or estimates were to be applied.
Allowance for Loan and Lease Losses
For information regarding the ALLL, its relation to the provision for loan losses and risk related to asset quality, see the section captioned
“Allowance for Loan and Lease Losses” included in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations” and Notes 1 and 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.”
Impact of Recently Issued Accounting Standards
New authoritative accounting guidance that has either been issued or is effective during 2014 or 2015 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 - Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure, FASB
ASC Topic 860, Transfers and Servicing, FASB ASC Topic 606, Revenue from Contracts with Customers, FASB ASC Subtopic 310-40,
Receivables - Troubled Debt Restructurings by Creditors and FASB ASC Topic 323, Investments - Equity Method and Joint Ventures.
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 10
to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.”
55
Net interest income simulation
The Company uses a detailed and dynamic simulation model to quantify the estimated exposure of net interest income (“NII”) to sustained
interest rate changes. While ALCO routinely monitors simulated NII sensitivity over rolling two-year and five-year horizons, it also
utilizes additional tools to monitor potential longer-term interest rate risk. The simulation model captures the impact of changing interest
rates on the interest income received and interest expense paid on all assets and liabilities reflected on the Company’s statements of
financial condition. This sensitivity analysis is compared to ALCO policy limits which specify a maximum tolerance level for NII
exposure over a one year and two year horizon, assuming no balance sheet growth. The ALCO policy rate scenarios include upward and
downward shifts in interest rates for 100 basis points (“bps”), 200 bps, 300 bps, and 400 bps scenarios with instantaneous and parallel
changes in current market yield curves. The ALCO policy also includes 200 bps and 400 bps rate scenarios with gradual parallel shifts
in interest rates over 12-month and 24-month periods, respectively. Given the historically low rate environment, a downward shift in
interest rates of only 100 bps is modeled. Since the model assumes that interest rates will not be negative, the 100 bps 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.
The following is indicative of the Company’s overall NII sensitivity analysis as of December 31, 2014 as compared to the ALCO policy
limits approved by the Company’s Board. The Company’s interest sensitivity remained within policy limits at December 31, 2014.
Rate Scenarios
-100 bps Rate shock
+100 bps Rate shock
+200 bps Rate shock
+200 bps Rate ramp
+300 bps Rate shock
+400 bps Rate shock
+400 bps Rate ramp
Year 1
Year 2
Policy
Limits
Estimated
Sensitivity
Policy
Limits
Estimated
Sensitivity
(10.0)%
(10.0)%
(10.0)%
(10.0)%
(20.0)%
(20.0)%
(10.0)%
(4.2)%
1.6 %
3.6 %
2.2 %
4.0 %
3.3 %
4.0 %
(15.0)%
(15.0)%
(15.0)%
(15.0)%
(20.0)%
(20.0)%
(20.0)%
(6.4)%
3.5 %
7.0 %
4.3 %
8.9 %
9.8 %
4.8 %
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 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.
56
The following reflects the Company’s EVE maximum sensitivity policy limits and EVE analysis as of December 31, 2014:
Rate Scenarios
-100 bps Rate shock
+100 bps Rate shock
+200 bps Rate shock
+300 bps Rate shock
+400 bps Rate shock
Item 8. Financial Statements and Supplementary Data
Policy
Limits
Post
Shock Ratio
(10)%
(10)%
(20)%
(30)%
(40)%
(6.6)%
(1.6)%
(5.9)%
(11.3)%
(17.1)%
57
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, 2014 and 2013, 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, 2014. 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, 2014, and 2013, and the
results of its operations and its cash flows for each of the years in the three-year period ended December
31, 2014, 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, 2014, 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 26, 2015, expressed an unqualified opinion on the effectiveness of the Company’s internal
control over financial reporting.
Denver, Colorado
February 26, 2015
58
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,
2014, 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
59
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, 2014, 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 26, 2015, expressed an unqualified opinion thereon.
Denver, Colorado
February 26, 2015
60
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
Investment securities, held-to-maturity
Total investment securities
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,
2014
December 31,
2013
$
$
$
122,834
1,025
318,550
442,409
2,387,428
520,997
2,908,425
46,726
4,488,095
(129,753)
4,358,342
179,175
27,804
40,587
41,737
10,900
129,706
52,868
67,828
8,306,507
1,632,403
4,712,809
397,107
296,944
7,311
125,705
4,155
102,026
7,278,460
—
750
708,356
301,197
17,744
1,028,047
109,995
10,527
35,135
155,657
3,222,829
—
3,222,829
46,738
4,062,838
(130,351)
3,932,487
167,671
26,860
41,898
43,549
9,512
129,706
52,192
55,251
7,884,350
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
$
8,306,507
7,884,350
Number of common stock shares issued and outstanding
75,026,092
74,373,296
See accompanying notes to consolidated financial statements.
61
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 on sale of investments
Other income
Total non-interest income
Non-Interest Expense
Compensation and employee benefits
Occupancy and equipment
Advertising and promotions
Data processing
Other real estate owned
Regulatory assessments and insurance
Core deposit intangible amortization
Other expense
Total non-interest expense
Income Before Income Taxes
Federal and state income tax expense
Net Income
Basic earnings per share
Diluted earnings per share
Dividends declared per share
Average outstanding shares - basic
Average outstanding shares - diluted
Years ended
December 31,
2014
December 31,
2013
December 31,
2012
$
$
$
$
$
30,721
145,631
30,515
93,052
299,919
13,195
865
9,570
199
3,137
26,966
272,953
1,912
271,041
54,089
4,696
19,797
(188)
11,908
90,302
118,571
27,498
7,912
6,607
2,568
5,064
2,811
41,648
212,679
148,664
35,909
112,755
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
1.51
1.51
0.98
74,641,957
74,687,315
1.31
1.31
0.60
73,191,713
73,260,278
1.05
1.05
0.53
71,928,570
71,928,656
See accompanying notes to consolidated financial statements.
62
GLACIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
Net Income
Other Comprehensive Income (Loss), Net of Tax
Unrealized gains (losses) on available-for-sale securities
Reclassification adjustment for losses included in net income
Net unrealized gains (losses) on available-for-sale securities
Tax effect
Net of tax amount
Unrealized (losses) gains on derivatives used for cash flow hedges
Reclassification adjustment for losses included in net income
Net unrealized (losses) gains on derivatives used for
cash flow hedges
Tax effect
Net of tax amount
December 31,
2014
Years ended
December 31,
2013
December 31,
2012
$
112,755
95,644
75,516
31,569
204
31,773
(12,313)
19,460
(19,557)
993
(18,564)
7,203
(11,361)
(81,739)
299
(81,440)
31,680
(49,760)
18,728
—
18,728
(7,285)
11,443
31,617
—
31,617
(12,300)
19,317
(7,926)
—
(7,926)
3,084
(4,842)
14,475
89,991
Total other comprehensive income (loss), net of tax
8,099
(38,317)
Total Comprehensive Income
$
120,854
57,327
See accompanying notes to consolidated financial statements.
63
GLACIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Years ended December 31, 2014, 2013 and 2012
(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, 2011
71,915,073
$
719
642,882
173,139
33,487
850,227
Comprehensive income
Cash dividends declared ($0.53 per share)
Stock issuances under stock incentive plans
Stock-based compensation and related taxes
—
—
22,149
—
—
—
—
—
Balance at December 31, 2012
71,937,222
$
719
Comprehensive income (loss)
Cash dividends declared ($0.60 per share)
—
—
Stock issuances under stock incentive plans
Stock issued in connection with acquisitions
Stock-based compensation and related taxes
292,942
2,143,132
—
—
—
3
22
—
Balance at December 31, 2013
74,373,296
$
744
Comprehensive income
Cash dividends declared ($0.98 per share)
Stock issuances under stock incentive plans
Stock issued in connection with acquisitions
Stock-based compensation and related taxes
—
—
97,064
555,732
—
Balance at December 31, 2014
75,026,092
$
—
—
1
5
—
750
—
—
323
(1,468)
641,737
—
—
4,504
45,011
(334)
690,918
—
—
783
15,122
1,533
708,356
75,516
(38,124)
—
—
14,475
—
—
—
210,531
47,962
95,644
(44,232)
—
—
—
261,943
112,755
(73,501)
—
—
—
(38,317)
—
—
—
—
9,645
8,099
—
—
—
—
89,991
(38,124)
323
(1,468)
900,949
57,327
(44,232)
4,507
45,033
(334)
963,250
120,854
(73,501)
784
15,127
1,533
301,197
17,744
1,028,047
See accompanying notes to consolidated financial statements.
64
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
Loans held for sale originated or acquired
Proceeds from sales of loans held for sale
Gain on sale of loans
Loss on sale of investments
Bargain purchase gain
Stock-based compensation expense, net of tax benefits
Excess tax (benefits) deficiencies from stock-based compensation
Depreciation of premises and equipment
(Gain) loss on sale of other real estate owned and write-downs, net
Amortization of core deposit intangibles
Deferred tax benefit
Net decrease (increase) in accrued interest receivable
Net (increase) decrease in other assets
Net decrease (increase) in accrued interest payable
Net increase (decrease) in other liabilities
Net cash provided by operating activities
Investing Activities
Sales of available-for-sale securities
Maturities, prepayments and calls of available-for-sale securities
Purchases of available-for-sale securities
Maturities, prepayments and calls of held-to-maturity securities
Purchases of held-to-maturity securities
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 (paid) received in acquisitions
Net cash provided by (used in) investing activities
December 31,
2014
Years ended
December 31,
2013
December 31,
2012
$
112,755
95,644
75,516
1,912
27,491
(669,144)
705,178
(19,797)
188
(680)
859
(138)
12,108
(937)
2,811
5,931
2,648
(5,702)
567
6,684
182,734
169,372
628,238
(281,332)
8,930
(49,691)
1,418,517
(1,735,155)
(14,389)
15,714
801
(2,112)
158,893
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
181,971
1,682,363
(1,426,262)
—
—
1,224,222
(1,559,353)
(8,977)
28,535
583
26,155
149,237
21,525
71,992
(1,188,632)
1,204,431
(32,227)
—
—
254
8
10,615
13,311
2,110
837
(2,809)
(3,291)
(1,150)
11,303
183,793
—
2,041,416
(2,638,054)
—
—
1,034,374
(1,049,344)
(10,730)
41,804
888
—
(579,646)
See accompanying notes to consolidated financial statements.
65
GLACIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
Financing Activities
Net increase (decrease) in deposits
Net increase in securities sold under agreements to repurchase
Net decrease in Federal Home Loan Bank advances
Net decrease (increase) in other borrowed funds
Cash dividends paid
Excess tax benefits (deficiencies) from stock-based compensation
Stock-based compensation activity
Net cash (used in) provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
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
Transfer of investment securities from
available-for-sale to held-to-maturity
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,
2014
Years ended
December 31,
2013
December 31,
2012
$
$
$
$
455,604
83,713
(543,238)
(933)
(50,944)
138
785
(54,875)
286,752
155,657
442,409
(334,672)
23,886
(162,298)
(1,502)
(44,232)
(223)
4,326
(514,715)
(31,383)
187,040
155,657
26,398
33,343
30,111
23,576
484,583
1,361
11,493
15,127
16,690
349,167
316,670
—
4,819
15,266
45,033
24,858
630,569
560,678
543,248
30,865
(72,033)
180
(47,472)
(8)
81
454,861
59,008
128,032
187,040
36,865
21,257
—
5,659
27,536
—
—
—
—
See accompanying notes to consolidated financial statements.
66
GLACIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Operations and Summary of Significant Accounting Policies
General
Glacier Bancorp, Inc. (“Company”) is a Montana corporation headquartered in Kalispell, Montana. The Company provides a full range
of banking services to individuals and businesses in Montana, Idaho, Wyoming, Colorado, Utah and Washington through its wholly-
owned bank subsidiary, Glacier Bank (“Bank”). The Company offers a wide range of banking products and services, including transaction
and savings deposits, real estate, commercial, agriculture and consumer loans and mortgage origination services. The Company serves
individuals, small to medium-sized businesses, community organizations and public entities.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
(“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the
reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change include: 1) the determination of the allowance for loan and lease
losses (“ALLL” or “allowance”); 2) the valuation of investment securities; 3) the valuation of real estate acquired in connection with
foreclosures or in satisfaction of loans; and 4) the evaluation of goodwill impairment. For the determination of the ALLL and real estate
valuation estimates, management obtains independent appraisals (new or updated) for significant items. Estimates relating to investment
valuations are obtained from independent third parties. Estimates relating to the evaluation of goodwill for impairment are determined
based on internal calculations using significant independent party inputs.
Principles of Consolidation
The consolidated financial statements of the Company include the parent holding company and the Bank. The Bank consists of thirteen
bank divisions, a treasury division and an information technology division. The treasury division includes the Bank’s investment portfolio
and wholesale borrowings and the information technology division includes the Bank’s internal data processing and information technology
expenses. 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.
In August 2014, the Company completed its acquisition of FNBR Holding Corporation (“FNBR”) and its wholly-owned subsidiary, First
National Bank of the Rockies, a community bank based in Grand Junction, Colorado. In July 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. In May 2013, the Company acquired Wheatland Bankshares, Inc. (“Wheatland”) and its wholly-owned subsidiary,
First State Bank, a community bank based in Wheatland, Wyoming. The transactions were accounted for using the acquisition method,
and their results of operations have been included in the Company’s consolidated financial statements as of the acquisition dates.
The Company formed GBCI Other Real Estate (“GORE”) to isolate certain bank foreclosed properties for 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.
67
Note 1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Pending Acquisition
On November 5, 2014, the Company announced the signing of a definitive agreement to acquire Montana Community Banks, Inc.
(“Community”) and its wholly-owned subsidiary, Community Bank, Inc., a community bank based in Ronan, Montana. Community
provides banking services to individuals and businesses in western Montana, with banking offices located in Missoula, Polson, Ronan
and Pablo, Montana. As of December 31, 2014, Community had total assets of $175,041,000, gross loans of $92,952,000 and total
deposits of $149,544,000. All necessary regulatory approvals and waivers have been obtained and closing is anticipated to take place in
the first quarter of 2015. The branches of Community will be merged into Glacier Bank and will become part of the Glacier Bank and
First Security Bank of Missoula bank divisions.
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.
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, 2014 and 2013:
(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, 2014
December 31, 2013
CDE (NMTC)
LIHTC
CDE (NMTC)
LIHTC
$
$
$
$
36,077
—
116
616
36,809
4,555
4
185
4,744
—
13,106
—
258
13,364
1,690
5
—
1,695
36,039
—
117
843
36,999
4,555
4
151
4,710
—
13,536
—
153
13,689
1,723
5
189
1,917
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.
68
Note 1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, cash held as demand deposits at various banks and the Federal Reserve Bank (“FRB”),
interest bearing deposits, federal funds sold, and liquid investments with original maturities of three months or less.
Investment Securities
Debt securities for which the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and are
carried at amortized cost. Debt 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 held-to-maturity or trading are classified as available-for-sale and are reported at fair value with unrealized gains and losses,
net of income taxes, as a separate component of other comprehensive income. 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. The Company does not have any investment securities classified as trading
securities.
The Company reviews and analyzes the various risks that may be present within the investment portfolio on an ongoing basis, including
market risk and credit risk. Market risk is the risk to an entity’s financial condition resulting from adverse changes in the value of its
holdings arising from movements in interest rates, foreign exchange rates, equity prices or commodity prices. The Company assesses
the market risk of individual securities as well as the investment portfolio as a whole. Credit risk, broadly defined, is the risk that an
issuer or counterparty will fail to perform on an obligation. A 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 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 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.
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; and 3) the overall deal structure, including the Company’s position within the structure,
the overall and near term financial performance of the issuer and underlying collateral, delinquencies, defaults, loss severities, recoveries,
prepayments, cumulative loss projections, discounted cash flows and fair value estimates.
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.
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Note 1. Nature of Operations and Summary of Significant Accounting Policies (continued)
For debt securities with other-than-temporary impairment, the previous amortized cost basis less the other-than-temporary impairment
recognized in earnings shall be the new amortized cost basis of the security. In subsequent periods, the Company accretes into interest
income the difference between the new amortized cost basis and cash flows expected to be collected prospectively over the life of the
debt security.
Loans Held for Sale
Loans held for sale generally consist of long-term, fixed rate, conforming, single-family residential real estate loans 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.
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Note 1. Nature of Operations and Summary of Significant Accounting Policies (continued)
A restructured loan is considered a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s
financial difficulties, grants a concession to the debtor that it would not otherwise consider. The Company periodically enters into
restructure agreements with borrowers whereby the loans were previously identified as TDRs. When such circumstances occur, the
Company carefully evaluates the facts of the subsequent restructure to determine the appropriate accounting and under certain
circumstances it may be acceptable not to account for the subsequently restructured loan as a TDR. When assessing whether a concession
has been granted by the Company, any prior forgiveness on a cumulative basis is considered a continuing concession. A TDR loan is
considered an impaired loan and a specific valuation allowance is established when the fair value of the collateral-dependent loan or
present value of the loan’s expected future cash flows (discounted at the loan’s effective interest rate based on the original contractual
rate) is lower than the carrying value of the impaired loan. The Company has made the following types of loan modifications, some of
which were considered a TDR:
•
•
•
Reduction of the stated interest rate for the remaining term of the debt;
Extension of the maturity date(s) at a stated rate of interest lower than the current market rate for newly originated debt having
similar risk characteristics; and
Reduction of the face amount of the debt as stated in the debt agreements.
The Company recognizes that while borrowers may experience deterioration in their financial condition, many continue to be creditworthy
customers who have the willingness and capacity for debt repayment. In determining whether non-restructured or unimpaired loans
issued to a single or related party group of borrowers should continue to accrue interest when the borrower has other loans that are
impaired or are TDRs, the Company on a quarterly or more frequent basis performs an updated and comprehensive assessment of the
willingness and capacity of the borrowers to timely and ultimately repay their total debt obligations, including contingent obligations.
Such analysis takes into account current financial information about the borrowers and financially responsible guarantors, if any, including
for example:
•
•
•
analysis of global, i.e., aggregate debt service for total debt obligations;
assessment of the value and security protection of collateral pledged using current market conditions and alternative market
assumptions across a variety of potential future situations; and
loan structures and related covenants.
For additional information relating to loans, see Note 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.
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Note 1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Commercial. Commercial loans consist of loans to commercial customers for use in financing working capital needs, equipment purchases
and business expansions. The loans in this category are repaid primarily from the cash flow of a borrower’s principal business operation.
Credit risk in these loans is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow stability
from business operations across the Company’s diverse, geographic market areas.
Home Equity. Home equity loans consist of junior lien mortgages and first and junior lien lines of credit (revolving open-end and
amortizing closed-end) secured by owner-occupied 1-4 family residences. Repayment of these loans is primarily dependent on the
personal income and credit rating of the borrowers. Credit risk in these loans is impacted by economic conditions within the Company’s
market areas that affect the value of the residential property securing the loans and affect the borrowers' personal incomes. Mitigating
risk factors for this loan class are a large number of borrowers, geographic dispersion of market areas and the loans are originated for
terms that range from 10 years to 15 years.
Other Consumer. The other consumer loan portfolio consists of various short-term loans such as automobile loans and loans for other
personal purposes. Repayment of these loans is primarily dependent on the personal income of the borrowers. Credit risk is driven by
consumer economic factors (such as unemployment and general economic conditions in the Company’s diverse, geographic market area)
and the creditworthiness of a borrower.
The ALLL consists of a specific valuation allowance component and a general valuation allowance component. The specific component
relates to loans that are determined to be impaired and individually evaluated for impairment. The Company measures impairment on a
loan-by-loan basis based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except when
it is determined that repayment of the loan is expected to be provided solely by the underlying collateral. For impairment based on
expected future cash flows, the Company considers all information available as of a measurement date, including past events, current
conditions, potential prepayments, and estimated cost to sell when such costs are expected to reduce the cash flows available to repay or
otherwise satisfy the loan. For alternative ranges of cash flows, the likelihood of the possible outcomes is considered in determining the
best estimate of expected future cash flows. The effective interest rate for a loan restructured in a TDR is based on the original contractual
rate. For collateral-dependent loans and real estate loans for which foreclosure or a deed-in-lieu of foreclosure is probable, impairment
is measured by the fair value of the collateral, less estimated cost to sell. The fair value of the collateral is determined primarily based
upon appraisal or evaluation of the underlying real property value.
The general valuation allowance component relates to probable credit losses inherent in the balance of the loan portfolio based on historical
loss experience, adjusted for changes in trends and conditions of qualitative or environmental factors. The historical loss experience is
based on the previous twelve quarters loss experience by loan class adjusted for risk characteristics in the existing loan portfolio. The
same trends and conditions are evaluated for each class within the loan portfolio; however, the risk characteristics are weighted separately
at the individual class level based on the Company’s judgment and experience.
The changes in trends and conditions evaluated for each class within the loan portfolio include the following:
•
•
•
•
•
•
•
•
•
Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery
practices not considered elsewhere in estimating credit losses;
Changes in global, national, regional, and local economic and business conditions and developments that affect the collectability
of the portfolio, including the condition of various market segments;
Changes in the nature and volume of the portfolio and in the terms of loans;
Changes in experience, ability, and depth of lending management and other relevant staff;
Changes in the volume and severity of past due and nonaccrual loans;
Changes in the quality of the Company’s loan review system;
Changes in the value of underlying collateral for collateral-dependent loans;
The existence and effect of any concentrations of credit, and changes in the level of such concentrations; and
The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit
losses in the Company’s existing portfolio.
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.
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Note 1. Nature of Operations and Summary of Significant Accounting Policies (continued)
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.
Other Real Estate Owned
Property acquired by foreclosure or deed-in-lieu of foreclosure is initially recorded at fair value, less estimated selling cost, at acquisition
date (i.e., cost of the property). The Company is considered to have received physical possession of residential real estate property
collateralizing a consumer mortgage loan upon the occurrence of either the Company obtaining legal title to the property or the borrower
conveying all interest in the property through a deed-in-lieu or similar agreement. Fair value is determined as the amount that could be
reasonably expected in a current sale between a willing buyer and a willing seller in an orderly transaction between market participants
at the measurement date. Subsequent to the initial acquisition, if the fair value of the asset, less estimated selling cost, is less than the
cost of the property, a loss is recognized in other expense and the asset carrying value is reduced. Gain or loss on disposition of 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, 2014 and 2013, 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.
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Note 1. Nature of Operations and Summary of Significant Accounting Policies (continued)
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.
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 2014 and 2013 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.
Bank-Owned Life Insurance
The Company maintains bank-owned life insurance policies on certain current and former employees and directors, which are recorded
at their cash surrender values as determined by the insurance carriers. At December 31, 2014 and 2013, the carrying value associated
with these policies is $46,030,000 and $37,617,000, respectively, and is recorded in other assets in the Company’s statements of financial
position. The appreciation in the cash surrender value of the policies is recognized as a component of other non-interest income in the
Company’s statements of operations.
Derivatives and Hedging Activities
For asset and liability management purposes, the Company 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) over the payment term of the interest rate swap. 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. For the years ended December 31, 2014, 2013,
and 2012, the Company’s cash flow hedges were determined to be fully effective.
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Note 1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Interest rate derivative financial instruments receive hedge accounting treatment only if they are designated as a hedge and are expected
to be, and are, highly effective in substantially reducing interest rate risk arising from the assets and liabilities identified as exposing the
Company to risk. Derivative financial instruments that 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 10.
The Company also has residential real estate derivatives for commitments to fund certain residential real estate loans (interest rate locks)
to be sold into the secondary market and forward commitments for the future delivery of residential real estate loans to third party investors
on a best efforts basis. It is the Company’s practice to enter into forward commitments for the future delivery of residential real estate
loans when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting
from its commitments to fund the loans. These derivatives are not designated in hedge relationships. Such derivatives are short-term in
nature and changes in fair value are not recorded as gains on sale of loans because the change is not significant.
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 12.
Advertising and Promotion
Advertising and promotion costs are recognized in the period incurred.
Income Taxes
The Company’s income tax expense consists of current and deferred income tax expense. Current income tax expense reflects taxes to
be paid or refunded for the current period by applying the provisions of enacted tax law to earnings or losses. Deferred income tax
expense results from changes in deferred assets and liabilities between periods.
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 15.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income (“OCI”). OCI includes unrealized gains and losses, net
of tax effect, on available-for-sale securities and derivatives used for cash flow hedges.
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 17.
Reclassifications
Certain reclassifications have been made to the 2013 and 2012 financial statements to conform to the 2014 presentation.
75
Note 1. Nature of Operations and Summary of Significant Accounting Policies (continued)
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 August 2014, FASB amended FASB ASC Subtopic 310-40, Receivables - Classification of Certain Government-Guaranteed Mortgage
Loans upon Foreclosure. The amendment requires that a mortgage loan be derecognized and that a separate other receivable be recognized
upon foreclosure if the following conditions are met: 1) The loan has a government guarantee that is not separable from the loan before
foreclosure; 2) At the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim
on the guarantee, and the creditor has the ability to recover under that claim; and 3) At the time of foreclosure, any amount of the claim
that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be
measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. 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 prospective transition method or a modified retrospective method as defined in the amendment. The
Company has evaluated the impact of the adoption of this amendment and determined there would not be a material effect on the Company’s
financial position or results of operations.
In June 2014, FASB amended FASB ASC Topic 860, Transfers and Servicing. The amendments in this Update require the following
two accounting changes: 1) change the accounting for repurchase-to-maturity transactions to secured borrowing accounting; and 2) for
repurchase finance arrangements, require separate accounting for a transfer of a financial asset executed contemporaneously with a
repurchase agreement with the same counterparty, which will result in a secured borrowing accounting for the repurchase agreement.
The amendments also require certain disclosures for securities sold under agreements to repurchase (“repurchase agreements”), securities
lending transactions, and repurchase-to-maturity transactions that are accounted for as secured borrowings. The accounting changes are
effective for public business entities for the first interim or annual reporting periods beginning after December 15, 2014. Early application
for public business entities is not permitted. The disclosure changes for repurchase agreements are effective for public business entities
for annual reporting 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.
In May 2014, FASB amended FASB ASC Topic 606, Revenue from Contracts with Customers. The amendments clarify the principals
for recognizing revenue and develop a common revenue standard among industries. The new guidance establishes the following core
principal: recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for goods or services. Five steps are provided for a company or organization to
follow to achieve such core principle. The new guidance also includes a cohesive set of disclosure requirements that will provide users
of financial statements with comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows
arising from contracts with customers. For public entities, the amendments are effective for annual reporting periods beginning after
December 15, 2016, including interim periods within the reporting period. Early application is not permitted. The entity should apply
the amendments using one of two retrospective methods described in the amendment. 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.
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 has evaluated
the impact of the adoption of this amendment and determined there was not a material effect on the Company’s financial position or
results of operations.
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Note 1. Nature of Operations and Summary of Significant Accounting Policies (continued)
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.
Note 2. Cash on Hand and in Banks
The Bank is required to maintain an average reserve balance with either FRB or in the form of cash on hand. The required reserve balance
at December 31, 2014 was $33,177,000.
Note 3. Investment Securities
Effective January 1, 2014, the Company redesignated 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 available-for-sale classification to held-to-maturity classification.
The Company considers the held-to-maturity classification of these investment securities to be appropriate as it has the positive intent
and ability to hold these securities to maturity.
The following tables present the amortized cost, the gross unrealized gains and losses and the fair value of the Company’s investment
securities:
Amortized
Cost
December 31, 2014
Gross Unrealized
Gains
Losses
(Dollars in thousands)
Available-for-sale
U.S. government and federal agency
$
U.S. government sponsored enterprises
State and local governments
Corporate bonds
Residential mortgage-backed securities
Total available-for-sale
Held-to-maturity
State and local governments
Total held-to-maturity
44
21,916
962,365
313,545
1,043,897
2,341,767
520,997
520,997
Total investment securities
$
2,862,764
(Dollars in thousands)
Available-for-sale
U.S. government sponsored enterprises
State and local governments
Corporate bonds
Residential mortgage-backed securities
Total available-for-sale
Amortized
Cost
$
10,441
1,377,347
440,337
1,380,816
3,208,941
Total investment securities
$
3,208,941
77
Fair
Value
44
21,945
997,969
314,854
1,052,616
2,387,428
550,946
550,946
Fair
Value
10,628
1,385,078
442,501
1,384,622
3,222,829
—
(2)
(4,569)
(750)
(2,486)
(7,807)
(2,976)
(2,976)
—
(23,890)
(1,758)
(10,265)
(35,913)
(35,913)
3,222,829
—
31
40,173
2,059
11,205
53,468
32,925
32,925
86,393
187
31,621
3,922
14,071
49,801
49,801
(10,783)
2,938,374
December 31, 2013
Gross Unrealized
Gains
Losses
Note 3. Investment Securities (continued)
The following table presents the amortized cost and fair value of available-for-sale and held-to-maturity securities by contractual maturity
at December 31, 2014. Actual maturities may differ from expected or contractual maturities since borrowers have the right to prepay
obligations with or without prepayment penalties.
December 31, 2014
Available-for-Sale
Held-to-Maturity
(Dollars in thousands)
Amortized Cost
Fair Value
Amortized Cost
Fair Value
Due within one year
Due after one year through five years
Due after five years through ten years
Due after ten years
Residential mortgage-backed securities 1
Total
$
126,102
367,037
90,172
714,559
1,297,870
1,043,897
$
2,341,767
126,779
370,349
93,356
744,328
1,334,812
1,052,616
2,387,428
—
—
188
520,809
520,997
—
520,997
—
—
188
550,758
550,946
—
550,946
________
1 Residential mortgage-backed securities, which have prepayment provisions, are not assigned to maturity categories due to fluctuations in their
prepayment speeds.
Gain or loss on sale of investment securities consists of the following:
(Dollars in thousands)
Available-for-sale
Gross proceeds
Less amortized cost 1
Net available-for-sale
Gross gain on sale of investments
Gross loss on sale of investments
Net available-for-sale
Held-to-maturity 2
Gross proceeds
Less amortized cost 1
Net held-to-maturity
Gross gain on sale of investments
Gross loss on sale of investments
Net held-to-maturity
December 31,
2014
Years ended
December 31,
2013
December 31,
2012
$
$
$
$
$
$
$
$
219,849
(220,053)
181,971
(182,270)
(204)
501
(705)
(204)
8,930
(8,914)
16
22
(6)
16
(299)
3,723
(4,022)
(299)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
__________
1 The cost of each investment security sold is determined by specific identification.
2 The gain or loss on sale of held-to-maturity investment securities is solely due to securities that were partially or wholly called.
78
Note 3. Investment Securities (continued)
At December 31, 2014 and 2013, the Company had investment securities with carrying values of $1,673,263,000 and $1,635,316,000,
respectively, pledged as collateral for FHLB advances, FRB discount window borrowings, repurchase agreements, interest rate swap
agreements and deposits of several local government units.
Investment securities with an unrealized loss position are summarized as follows:
(Dollars in thousands)
Available-for-sale
Less than 12 Months
Fair
Value
Unrealized
Loss
December 31, 2014
12 Months or More
Fair
Value
Unrealized
Loss
Total
Fair
Value
Unrealized
Loss
U.S. government and federal agency
$
U.S. government sponsored enterprises
State and local governments
Corporate bonds
—
13,793
91,082
60,289
Residential mortgage-backed securities
Total available-for-sale
192,962
$
358,126
—
(2)
(1,273)
(545)
(926)
(2,746)
3
—
115,927
7,874
78,223
202,027
—
—
(3,296)
(205)
(1,560)
(5,061)
3
13,793
207,009
68,163
271,185
560,153
—
(2)
(4,569)
(750)
(2,486)
(7,807)
Held-to-maturity
State and local governments
Total held-to-maturity
$
$
18,643
18,643
(624)
(624)
76,761
76,761
(2,352)
(2,352)
95,404
95,404
(2,976)
(2,976)
(Dollars in thousands)
Available-for-sale
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 available-for-sale
$
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)
Based on an analysis of its investment securities with unrealized losses as of December 31, 2014 and 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. The fair value of the investment securities is expected to recover as payments are
received and the securities approach maturity. At December 31, 2014, 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.
79
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 segments are further disaggregated into 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, 2014
Total
Residential
Real Estate
Commercial
Real Estate
Other
Commercial
Home
Equity
Other
Consumer
Balance at beginning of period
$
130,351
14,067
Provision for loan losses
Charge-offs
Recoveries
1,912
(7,603)
5,093
716
(431)
328
Balance at end of period
$
129,753
14,680
70,332
(2,877)
(1,802)
2,146
67,799
28,630
3,708
(3,058)
1,611
30,891
9,299
1,254
(1,038)
448
9,963
8,023
(889)
(1,274)
560
6,420
(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
80
Note 4. Loans Receivable, Net (continued)
The following schedules disclose the ALLL and loans receivable:
(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
Total loans receivable
(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
Total loans receivable
$
$
$
$
$
$
Total
Residential
Real Estate
December 31, 2014
Other
Commercial
Commercial
Real Estate
Home
Equity
Other
Consumer
11,597
118,156
853
13,827
2,967
64,832
6,836
24,055
129,753
14,680
67,799
30,891
447
9,516
9,963
494
5,926
6,420
161,366
4,326,729
$ 4,488,095
19,576
591,887
611,463
105,264
2,232,284
2,337,548
25,321
900,579
925,900
6,901
387,769
394,670
4,304
214,210
218,514
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
199,680
3,863,158
$ 4,062,838
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
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, 2014 and 2013. No borrower had outstanding loans
or commitments exceeding 10 percent of the Company’s consolidated stockholders’ equity as of December 31, 2014.
Net deferred fees, costs, premiums and discounts of $13,710,000 and $10,662,000 were included in the loans receivable balance at
December 31, 2014 and 2013, respectively. At December 31, 2014, the Company had $2,915,617,000 in variable rate loans and
$1,572,478,000 in fixed rate loans. The weighted-average interest rate on loans was 4.86 percent and 5.04 percent at December 31, 2014
and 2013, respectively. At December 31, 2014, 2013, and 2012, loans sold and serviced for others were $133,768,000, $148,376,000,
and $116,439,000, respectively. At December 31, 2014, the Company had loans of $2,596,010,000 pledged as collateral for FHLB
advances and FRB discount window. There were no significant purchases or sales of loans designated held-to-maturity during 2014 and
2013.
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, 2014 and 2013 was $49,446,000 and $35,224,000, respectively. During 2014, new
loans to such related parties were $24,380,000, repayments were $9,864,000 and the effect of changes in composition of related parties
was $(294,000). 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.
81
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
Total
Recorded balance
Unpaid principal balance
Specific valuation allowance
Average balance
At or for the Year ended December 31, 2014
Total
Residential
Real Estate
Commercial
Real Estate
Other
Commercial
Home
Equity
Other
Consumer
$
45,688
48,477
11,597
53,339
$
115,678
145,038
128,645
$
161,366
193,515
11,597
181,984
4,110
4,276
853
5,480
15,466
16,683
15,580
19,576
20,959
853
21,060
27,155
28,048
2,967
24,519
78,109
100,266
89,015
105,264
128,314
2,967
113,534
11,377
12,461
6,836
19,874
13,944
19,117
14,024
25,321
31,578
6,836
33,898
1,214
1,336
447
1,039
5,687
6,403
7,163
6,901
7,739
447
8,202
1,832
2,356
494
2,427
2,472
2,569
2,863
4,304
4,925
494
5,290
(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
Total
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
Interest income recognized on impaired loans for the years ended December 31, 2014, 2013, and 2012 was not significant.
82
Note 4. Loans Receivable, Net (continued)
The following is a loans receivable aging analysis:
(Dollars in thousands)
Total
Residential
Real Estate
December 31, 2014
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
$
19,139
6,765
214
61,882
88,000
4,400,095
$ 4,488,095
3,506
1,686
35
6,798
12,025
599,438
611,463
7,925
3,592
31
39,717
51,265
2,286,283
2,337,548
5,310
609
74
8,421
14,414
911,486
925,900
1,374
679
17
5,969
8,039
386,631
394,670
1,024
199
57
977
2,257
216,257
218,514
(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
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 $3,005,000, $4,122,000, and $5,161,000 for the years ended December 31, 2014, 2013, and 2012, 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, 2014
Total
Residential
Real Estate
Commercial
Real Estate
Other
Commercial
Home
Equity
Other
Consumer
51
37,781
37,075
$
$
5
$
4,453
—
—
—
—
—
18
21,760
21,803
24
12,522
11,884
6
3,385
3,274
2
927
1
693
2
2,833
3
114
114
—
—
83
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, 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
—
—
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
For the years ended December 31, 2014, 2013 and 2012 the majority of TDRs occurred in the commercial real estate class. The concessions
granted typically were for extensions of maturity date and 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 $12,674,000, $18,345,000 and $39,769,000 for the years ended December 31, 2014, 2013 and 2012, 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. At December 31, 2014, the Company had $698,000 of consumer mortgage loans secured by residential real estate properties for
which formal foreclosure proceedings are in process. At December 31, 2014, the Company had $2,322,000 of OREO secured by residential
real estate properties.
There were $4,263,000 and $2,024,000 of additional unfunded commitments on TDRs outstanding at December 31, 2014 and 2013,
respectively. The amount of charge-offs on TDRs during 2014, 2013 and 2012 was $1,361,000, $1,945,000 and $6,271,000, respectively.
84
Note 5. Premises and Equipment
Premises and equipment, net of accumulated depreciation, consist of the following:
(Dollars in thousands)
Land
Office buildings and construction in progress
Furniture, fixtures and equipment
Leasehold improvements
Accumulated depreciation
Net premises and equipment
December 31,
2014
December 31,
2013
$
$
27,605
172,544
70,622
7,813
(99,409)
179,175
27,260
159,391
66,375
7,589
(92,944)
167,671
Depreciation expense for the years ended December 31, 2014, 2013, and 2012 was $12,108,000, $10,485,000, and $10,615,000,
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, 2014, 2013, and 2012 was $2,786,000, $2,912,000, and $2,868,000, 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, 2014, 2013, and 2012 was $146,000, $142,000, and $410,000, respectively.
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, 2014 are as follows:
(Dollars in thousands)
Years ending December 31,
2015
2016
2017
2018
2019
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
2,348
2,089
1,786
1,541
1,360
3,820
3,042
2,181
1,878
1,633
1,452
3,923
12,944
14,109
$
$
694
92
92
92
92
103
1,165
99
1,066
659
407
85
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,
2015
2016
2017
2018
2019
At or for the Years ended
December 31,
2014
December 31,
2013
December 31,
2012
$
$
$
$
32,056
(21,156)
10,900
27,857
(18,345)
9,512
22,404
(16,230)
6,174
2,811
2,401
2,110
9.6
2,676
2,170
1,287
876
810
Core deposit intangibles increased $4,199,000 and $5,739,000 during 2014 and 2013, respectively, due to acquisitions. For additional
information relating to acquisitions, see Note 22.
The following schedule discloses the changes in the carrying value of goodwill:
(Dollars in thousands)
Net carrying value at beginning of period
Acquisitions
Net carrying value at end of period
December 31,
2014
$
$
129,706
—
129,706
Years ended
December 31,
2013
December 31,
2012
106,100
23,606
129,706
106,100
—
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,
2014
December 31,
2013
$
$
169,865
(40,159)
129,706
169,865
(40,159)
129,706
86
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 2014 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
2014 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, 2014. 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.
Note 7. Deposits
Time deposits that meet or exceed the Federal Deposit Insurance Corporation Insurance limit of $250,000 at December 31, 2014 and
2013 were $314,752,000 and $232,783,000, respectively.
The scheduled maturities of time deposits are as follows and include $15,699,000 of wholesale deposits as of December 31, 2014:
(Dollars in thousands)
Years ending December 31,
2015
2016
2017
2018
2019
Thereafter
$
Amount
871,060
182,513
72,987
23,335
29,745
3,287
$
1,182,927
The Company reclassified $4,385,000 and $3,422,000 of overdraft demand deposits to loans as of December 31, 2014 and 2013,
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, 2014 and 2013 was $11,263,000 and $12,770,000, respectively.
87
Note 8. Borrowings
The Company’s repurchase agreements amounted to $397,107,000 and $313,394,000 at December 31, 2014 and 2013, respectively, are
short-term in nature, and are secured by residential mortgage-backed securities with carrying values of $523,855,000 and $398,447,000,
respectively. Securities are pledged to customers at the time of the transaction in an amount at least equal to the outstanding balance and
is held in custody accounts by third parties. The fair value of collateral is continually monitored and additional collateral is provided as
deemed appropriate.
The Company’s FHLB advances bear a fixed rate of interest and are subject to restrictions or penalties in the event of prepayment. The
advances are collateralized by specifically pledged loans and investment securities, FHLB stock owned by the Company, and a blanket
assignment of the unpledged qualifying loans and investments. The scheduled maturities of FHLB advances consist 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, 2014
December 31, 2013
Amount
Weighted
Rate
Amount
Weighted
Rate
$
$
93,979
45,042
—
20,250
174
137,499
296,944
2.81% $
2.99%
—%
2.83%
4.74%
3.12%
2.98% $
559,084
77,979
45,042
—
20,250
137,827
840,182
0.24%
3.36%
2.99%
—%
2.83%
3.12%
1.21%
With respect to $275,000,000 of FHLB advances at December 31, 2014, 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 option maturities range from 2015 to 2021 and the
interest rates range from 2.73 percent to 3.64 percent.
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, 2014, the Company had $255,000,000 in unsecured lines of credit which are typically
renewed on an annual basis with various correspondent entities.
Note 9. 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 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.
88
Note 9. Subordinated Debentures (continued)
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 applicable to the Company permits bank holding companies with consolidated assets of less than $15 billion to continue counting
existing trust preferred securities as Tier 1 capital until they mature. All of the Company’s trust preferred securities qualified as Tier 1
instruments at December 31, 2014.
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, 2014
Balance
Rate
Variable Rate
Structure
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
3,081
2,272
46,393
5,155
36,083
30,928
1,793
$
125,705
Note 10. Derivatives and Hedging Activities
3.533% 3 mo LIBOR plus 3.30%
3.505% 3 mo LIBOR plus 3.25%
2.980% 3 mo LIBOR plus 2.75%
2.893% 3 mo LIBOR plus 2.65%
1.520% 3 mo LIBOR plus 1.29%
1.811% 3 mo LIBOR plus 1.57%
2.056% 3 mo LIBOR plus 1.82%
Maturity
Date
07/31/2031
03/26/2033
04/07/2034
06/17/2034
04/07/2036
09/15/2036
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.
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 counterparty credit risk by maintaining bilateral
collateral agreements and through monitoring policy and procedures. The Company only conducts business with primary dealers 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, 2014 are as follows:
(Dollars in thousands)
Interest rate swap
Interest rate swap
Forecasted
Notional
Amount
Variable
Interest Rate 1
Fixed
Interest Rate 1
Payment Term 2
$
160,000
3 month LIBOR
100,000
3 month LIBOR
3.378% Oct. 21, 2014 - Oct. 21, 2021
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 beginning of the payment term.
89
Note 10. Derivatives and Hedging Activities (continued)
The hedging strategy converts the LIBOR-based variable interest rate on borrowings to a fixed interest rate, thereby protecting the
Company from interest rate variability.
On October 21, 2014, the interest rate swap with the $160,000,000 notional amount began its payment term. The Company designated
wholesale deposits as the cash flow hedge and these deposits were determined to be fully effective during the current year. As such, no
amount of ineffectiveness has been included in the Company’s statements of operations. Therefore, the aggregate fair value of the interest
rate swap was recorded in other liabilities with changes recorded in OCI. The Company expects the hedge to remain highly effective
during the remaining term of the interest rate swap. Interest expense recorded on this interest rate swap totaled $1,066,000 during 2014
and is reported as a component of interest expense on wholesale deposits. Unless the interest rate swap is terminated during the next
year, the Company expects $5,064,000 of the unrealized loss reported in OCI at December 31, 2014 to be reclassified to interest expense
during 2015.
The following table presents the pre-tax gains or losses recorded in accumulated other comprehensive income and the Company’s
statements of operations relating to the interest rate swap derivative financial instruments:
(Dollars in thousands)
Interest rate swaps
Years ended
December 31,
2014
December 31,
2013
December 31,
2012
Amount of (loss) gain recognized in OCI (effective portion)
$
Amount of loss reclassified from OCI to interest expense
Amount of loss recognized in other non-interest expense
(ineffective portion)
(19,557)
(993)
—
18,728
—
—
(7,926)
—
—
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, 2014
December 31, 2013
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, 2014
December 31, 2013
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
$
16,668
—
16,668
4,948
(4,948)
—
Pursuant to the interest rate swap agreements, the Company pledged collateral to the counterparty in the form of investment securities
totaling $20,339,000 at December 31, 2014. There was $0 collateral pledged from the counterparty to the Company as of December 31,
2014. 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.
90
Note 11. 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)
Actual
December 31, 2014
Minimum Capital
Requirement
Well Capitalized
Requirement
Amount
Ratio
Amount
Ratio
Amount
Ratio
$ 1,065,282
1,023,669
18.93% $
18.25%
450,240
448,739
8.00% $
8.00%
562,800
560,924
10.00%
10.00%
$
994,197
952,815
17.67% $
16.99%
225,120
224,370
4.00% $
4.00%
337,680
336,554
6.00%
6.00%
N/A
5.00%
Consolidated
Glacier Bank
$
994,197
952,815
12.45% $
12.03%
319,505
316,938
4.00%
4.00% $
N/A
396,173
(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
948,618
18.97% $
17.93%
424,322
423,235
8.00% $
8.00%
530,402
529,044
10.00%
10.00%
$
938,887
881,692
17.70% $
16.67%
212,161
211,618
4.00% $
4.00%
318,241
317,426
$
938,887
881,692
12.11% $
11.44%
310,082
308,281
4.00%
4.00% $
N/A
385,351
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, 2014 and 2013, 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.
91
Note 12. Stock-based Compensation Plan
The Company has a stock-based compensation plan that 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, 2014, the number of shares available to grant
to employees and directors under this plan was 4,022,452.
Stock Options
The Company has granted stock options to certain full-time employees and directors of the Company under the 2005 Stock Incentive
Plan. The plan contains 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 2014, 2013 or 2012.
Compensation expense and the recognized income tax benefit related to stock options for the years ended December 31, 2014, 2013 and
2012 was not significant. There was no unrecognized compensation cost related to stock options as of December 31, 2014.
The total intrinsic value of options exercised during the years ended December 31, 2014, 2013 and 2012 was $778,000, $1,907,000 and
$3,000, respectively, and the income tax benefit related to these exercises was $302,000, $742,000 and $1,000. Total cash received from
options exercised during the years ended December 31, 2014, 2013 and 2012 was $871,000, $4,327,000 and $81,000. 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, 2014 are summarized as follows:
Outstanding at December 31, 2013
Exercised
Forfeited or expired
Outstanding at December 31, 2014
Exercisable at December 31, 2014
Options
Weighted-
Average
Exercise Price
$
58,810
(56,360)
(1,450)
1,000
1,000
15.47
15.45
15.37
16.73
16.73
The average remaining contractual term on stock options outstanding and exercisable at December 31, 2014 is six months. The aggregate
intrinsic value of the outstanding and exercisable shares at December 31, 2014 was $11,000.
Restricted Stock Awards
The Company has awarded restricted stock to certain senior 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. 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, 2014, 2013 and 2012 was $1,603,000, $768,000
and $243,000, respectively, and the recognized income tax benefit related to this expense was $622,000, $299,000 and $96,000. As of
December 31, 2014, total unrecognized compensation expense of $2,276,000 related to restricted stock awards is expected to be recognized
over a weighted-average period of 1.9 years.
92
Note 12. Stock-based Compensation Plan (continued)
The fair value of restricted stock awards that vested during the years ended December 31, 2014, 2013 and 2012 was $953,000, $197,000
and $243,000, respectively, and the income tax benefit related to these awards was $532,000, $77,000 and $96,000, respectively. 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, 2014:
Non-vested at December 31, 2013
Granted
Vested
Forfeited
Non-vested at December 31, 2014
Note 13. Employee Benefit Plans
Restricted
Stock
Weighted-
Average
Grant Date
Fair Value
117,442
$
97,367
(51,068)
(1,688)
162,053
16.76
26.63
18.66
21.76
22.04
The Company provides its employees with a comprehensive benefit program, including health, dental and vision insurance, life and
accident insurance, long-term disability coverage, vacation and sick leave, 401(k) plan, profit sharing plan and a stock-based compensation
plan. The Company has elected to self-insure certain costs related to employee health, dental and vision benefit programs. Costs resulting
from noninsured losses are expensed as incurred. The Company has purchased insurance that limits its exposure on an individual claim
basis for the employee health benefit programs. The Company has entered into employment contracts with 25 senior officers that provide
benefits under certain conditions following a change in control of the Company.
The Company’s 401(k) plan and profit sharing plan have safe harbor and employer discretionary components. To be considered eligible
for the 401(k) and safe harbor components of the profit sharing plan, an employee must be 21 years of age and employed for three full
months. Employees are eligible to participate in the 401(k) plan the first day of the month once they have met the eligibility requirements.
To be considered eligible for the employer discretionary contribution of the profit sharing plan, an employee must be 21 years of age,
worked one full calendar quarter, worked 501 hours in the plan year and be employed as of the last day of the plan year. Participants are
at all times fully vested in all contributions.
The profit sharing plan contributions consists of a 3 percent non-elective safe harbor contribution fully funded by the Company and an
employer discretionary contribution. The employer discretionary contribution depends on the Company’s profitability. The total profit
sharing plan expense for the years ended December 31, 2014, 2013, and 2012 was $7,107,000, $5,862,000 and $3,974,000 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, 2014, 2013 and 2012 was $2,246,000,
$1,935,000, and $1,751,000, 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 $591,000, $376,000, and $278,000, for the years ending December 31,
2014, 2013, and 2012, 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, 2014, 2013, and 2012 for the plans was $369,000, $515,000 and
$231,000, respectively. In connection with several acquisitions, the Company assumed the obligations of deferred compensation plans
for certain key employees. As of December 31, 2014 and 2013, the liability related to the obligations was $4,810,000 and $5,042,000,
respectively, and was included in other liabilities. The total earnings for the years ended December 31, 2014, 2013, and 2012 for the
acquired plans was insignificant.
93
Note 13. Employee Benefit Plans (continued)
The Company has a Supplemental Executive Retirement Plan (“SERP”) which is intended to supplement payments due to participants
upon retirement under the Company’s other qualified plans. The Company credits the participant’s account on an annual basis for an
amount equal to employer contributions that would have otherwise been allocated to the participant’s account under the tax-qualified
plans were it not for limitations imposed by the IRS or the participation in the non-funded deferred compensation plan. Eligible employees
include participants of the non-funded deferred compensation plan and employees whose benefits were limited as a result of IRS
regulations. The Company’s required contribution to the SERP for the years ended December 31, 2014, 2013 and 2012 was $151,000,
$76,000, and $47,000, 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, 2014, 2013, and 2012 for this plan was $59,000, $48,000, and
$37,000, respectively.
Note 14. Other Expenses
Other expenses consists of the following:
(Dollars in thousands)
Debit card expenses
VIE write-downs, losses and other expenses
Consulting and outside services
Employee expenses
Printing and supplies
Checking and operating expenses
Postage
Telephone
Loan expenses
Legal fees
Accounting and audit fees
ATM expenses
Other
Total other expenses
Note 15. Federal and State Income Taxes
The following is a summary of consolidated income tax expense:
(Dollars in thousands)
Current
Federal
State
Total current income tax expense
Deferred
Federal
State
Total deferred income tax expense
Total income tax expense
94
Years ended
December 31,
2014
December 31,
2013
December 31,
2012
$
5,802
4,231
4,179
3,557
3,547
3,517
3,391
2,911
2,513
1,455
1,393
1,268
3,884
6,131
4,210
3,243
2,686
3,112
3,091
3,302
2,498
2,444
1,728
1,146
1,087
4,178
4,497
3,879
2,079
2,098
2,922
1,644
3,120
2,252
3,430
1,521
1,442
1,161
6,042
$
41,648
38,856
36,087
Years ended
December 31,
2014
December 31,
2013
December 31,
2012
$
21,860
8,118
29,978
5,016
915
5,931
$
35,909
18,377
7,007
25,384
3,918
715
4,633
30,017
12,718
5,522
18,240
708
129
837
19,077
Note 15. Federal and State Income Taxes (continued)
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
Other, net
Effective tax rate
Years ended
December 31,
2014
December 31,
2013
December 31,
2012
35.0 %
4.0 %
(11.5)%
(2.8)%
(0.5)%
24.2 %
35.0 %
4.0 %
(12.2)%
(3.2)%
0.3 %
23.9 %
35.0 %
3.9 %
(14.0)%
(4.2)%
(0.5)%
20.2 %
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
Interest rate swap agreements
Acquisition fair market value adjustments
Deferred compensation
Income tax credits and net operating loss carryforwards
Employee benefits
Other
Total gross deferred tax assets
Deferred tax liabilities
Available-for-sale securities
FHLB stock dividends
Deferred loan costs
Intangibles
Depreciation of premises and equipment
Interest rate swap agreements
Other
Total gross deferred tax liabilities
Net deferred tax asset
December 31,
2014
December 31,
2013
$
50,013
8,200
6,467
5,302
5,024
4,652
2,839
4,290
50,652
8,041
—
4,151
4,837
2,778
3,132
3,662
86,787
77,253
(17,716)
(10,342)
(6,419)
(4,290)
(2,358)
—
(3,925)
(45,050)
41,737
$
(5,402)
(10,359)
(6,058)
(3,099)
(3,939)
(736)
(4,111)
(33,704)
43,549
95
Note 15. Federal and State Income Taxes (continued)
The Company has federal income tax credit carryforwards of $845,000 expiring in 2034. The Company has federal net operating loss
carryforwards of $9,388,000 expiring between 2029 and 2031. The Company has Colorado net operating loss carryforwards of
$17,317,000 expiring between 2029 and 2031.
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, 2014:
Federal
Montana
Idaho
Colorado
Utah
Years ended December 31,
2008, 2009, 2010, 2011, 2012 and 2013
2011, 2012 and 2013
2009, 2010, 2011, 2012 and 2013
2008, 2009, 2010, 2011, 2012 and 2013
2011, 2012 and 2013
The Company had no unrecognized income tax benefits as of December 31, 2014 and 2013. 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, 2014, 2013, and 2012 was not significant. The Company
had no accrued liabilities for the payment of interest or penalties at December 31, 2014 and 2013.
The Company has assessed the need for a valuation allowance and determined that a valuation allowance was not necessary at December 31,
2014 and 2013. 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, 2014 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.
96
Note 16. Accumulated Other Comprehensive Income
The following table illustrates the activity within accumulated other comprehensive income by component, net of tax:
(Dollars in thousands)
Gains (Losses)
on Available-
For-Sale
Securities
(Losses) Gains
on Derivatives
Used for Cash
Flow Hedges
Total
Balance at December 31, 2011
$
38,928
(5,441)
Other comprehensive income (loss) before reclassification
Amounts reclassified from accumulated other comprehensive income (loss)
Net current period other comprehensive income (loss)
Balance at December 31, 2012
Other comprehensive (loss) income before reclassification
Amounts reclassified from accumulated other comprehensive income
Net current period other comprehensive (loss) income
Balance at December 31, 2013
Other comprehensive income (loss) before reclassification
Amounts reclassified from accumulated other comprehensive income (loss)
Net current period other comprehensive income (loss)
Balance at December 31, 2014
$
19,317
—
19,317
58,245
(49,943)
183
(49,760)
8,485
19,335
125
19,460
27,945
(4,842)
—
(4,842)
(10,283)
11,443
—
11,443
1,160
(11,969)
608
(11,361)
(10,201)
33,487
14,475
—
14,475
47,962
(38,500)
183
(38,317)
9,645
7,366
733
8,099
17,744
Note 17. Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding
during the period presented. Diluted earnings per share is computed by including the net increase in shares as if dilutive outstanding
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,
2014
Years ended
December 31,
2013
December 31,
2012
Net income available to common stockholders, basic and diluted
$
112,755
95,644
75,516
Average outstanding shares - basic
Add: dilutive stock options and awards
Average outstanding shares - diluted
Basic earnings per share
Diluted earnings per share
74,641,957
73,191,713
71,928,570
45,358
68,565
86
74,687,315
73,260,278
71,928,656
$
$
1.51
1.51
1.31
1.31
1.05
1.05
There were 0, 38,915 and 879,525 options excluded from the diluted average outstanding share calculation for the years ended
December 31, 2014, 2013, and 2012, respectively, due to the option exercise price exceeding the market price of the Company’s common
stock.
97
Note 18. Parent Holding Company Information (Condensed)
The following condensed financial information was the unconsolidated information for the parent holding company:
Condensed Statements of Financial Condition
(Dollars in thousands)
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
Dividends payable
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
Condensed Statements of Operations and Comprehensive Income
(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 of subsidiaries
Income tax benefit
Income before equity in undistributed net income of subsidiaries
Equity in undistributed net income of subsidiaries
December 31,
2014
December 31,
2013
$
$
$
$
4,019
51,127
55,146
91
8,511
1,121,937
1,185,685
22,557
125,705
9,376
157,638
750
708,356
301,197
17,744
1,028,047
1,185,685
1,582
49,097
50,679
87
9,050
1,040,104
1,099,920
—
125,562
11,108
136,670
744
690,918
261,943
9,645
963,250
1,099,920
Years ended
December 31,
2014
December 31,
2013
December 31,
2012
$
78,500
—
199
9,283
87,982
10,773
6,824
17,597
70,385
2,919
73,304
39,451
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
57,327
78,209
—
566
16,041
94,816
12,392
10,267
22,659
72,157
2,319
74,476
1,040
75,516
89,991
Net Income
Comprehensive Income
$
$
112,755
120,854
98
Years ended
December 31,
2014
December 31,
2013
December 31,
2012
$
112,755
95,644
75,516
(39,451)
—
(138)
140
73,306
—
—
—
(179)
(667)
(18,115)
(18,961)
143
(50,944)
138
785
(49,878)
4,467
50,679
55,146
(37,129)
3,248
223
2,575
64,561
23,990
2,571
(946)
(603)
—
(11,336)
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)
(2,927)
—
(28,500)
(49,823)
143
(47,472)
(8)
81
(47,256)
(18,911)
31,338
12,427
Note 18. Parent Holding Company Information (Condensed) (continued)
Condensed 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 dividends distributed
Loss on sale of investments
Excess tax (benefits) deficiencies from stock-based compensation
Net change in other assets and other liabilities
Net cash provided by operating activities
Investing Activities
Sales of available-for-sale securities
Maturities, prepayments and calls of available-for-sale securities
Changes in investment securities and other stock - intercompany
Net addition of premises and equipment
Net sale of non-marketable equity securities
Equity contributions to subsidiaries
Net cash (used in) provided by investing activities
Financing Activities
Net increase in other borrowed funds
Cash dividends paid
Excess tax benefits (deficiencies) from stock-based compensation
Stock-based compensation activity
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
$
99
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 2014
$
$
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
74,087
6,640
67,447
1,122
66,325
19,388
50,070
35,643
8,913
26,730
0.36
0.36
73,963
6,528
67,435
239
67,196
22,504
52,673
37,027
8,350
28,677
0.38
0.38
75,690
6,430
69,260
360
68,900
24,432
54,238
39,094
9,800
29,294
0.40
0.40
76,179
7,368
68,811
191
68,620
23,978
55,698
36,900
8,846
28,054
0.37
0.37
Quarters ended 2013
March 31
June 30
September 30
December 31
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
100
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, 2014 and 2013.
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, 2014.
Investment securities, available-for-sale: fair value for available-for-sale securities is estimated by obtaining quoted market prices for
identical assets, where available. If such prices are not available, fair value is based on independent asset pricing services and models,
the inputs of which are market-based or independently sourced market parameters, including but not limited to, yield curves, interest
rates, volatilities, 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 available-for-sale securities are the responsibility of the Company’s corporate accounting and treasury
departments. The Company obtains fair value estimates from independent third party vendors on a monthly basis. The Company reviews
the vendors’ inputs for fair value estimates and the recommended assignments of levels within the fair value hierarchy. The review
includes the extent to which markets for investment securities are determined to have limited or no activity, or are judged to be active
markets. The Company reviews the extent to which observable and unobservable inputs are used as well as the appropriateness of the
underlying assumptions about risk that a market participant would use in active markets, with adjustments for limited or inactive markets.
In considering the inputs to the fair value estimates, the Company places less reliance on quotes that are judged to not reflect orderly
transactions, or are non-binding indications. In assessing credit risk, the Company reviews payment performance, collateral adequacy,
third party research and analyses, credit rating histories and issuers’ financial statements. For those markets determined to be inactive
or limited, the valuation techniques used are models for which management has verified that discount rates are appropriately adjusted to
reflect illiquidity and credit risk.
Interest rate swap derivative financial instruments: fair values for interest rate swap derivative financial instruments are based upon the
estimated amounts to settle the contracts considering current interest rates and are calculated using discounted cash flows that are observable
or that can be corroborated by observable market data and, therefore, are classified within Level 2 of the valuation hierarchy. The inputs
used to determine fair value include the 3 month LIBOR forward curve to estimate variable rate cash inflows and the Fed Funds Effective
Swap Rate to estimate the discount rate. The estimated variable rate cash inflows are compared to the fixed rate outflows and such
difference is discounted to a present value to estimate the fair value of the interest rate swaps. The Company also obtains and compares
the reasonableness of the pricing from an independent third party.
101
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)
—
—
—
—
—
—
—
—
44
21,945
997,969
314,854
1,052,616
2,387,428
16,668
16,668
—
—
—
—
—
—
—
—
Fair Value
December 31,
2014
$
$
$
$
44
21,945
997,969
314,854
1,052,616
2,387,428
16,668
16,668
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 and federal agency
U.S. government sponsored enterprises
State and local governments
Corporate bonds
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
(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
1,385,078
442,501
1,384,622
1,896
$
3,224,725
—
—
—
—
—
—
10,628
1,385,078
442,501
1,384,622
1,896
3,224,725
—
—
—
—
—
—
Non-recurring Measurements
The following is a description of the inputs and valuation methodologies used for assets recorded at fair value on a non-recurring basis,
as well as the general classification of such assets pursuant to the valuation hierarchy. There have been no significant changes in the
valuation techniques during the period ended December 31, 2014.
Other real estate owned: OREO is carried at the lower of fair value at acquisition date or current estimated fair value, less estimated cost
to sell. Estimated fair value of OREO is based on appraisals or evaluations (new or updated). OREO is classified within Level 3 of the
fair value hierarchy.
Collateral-dependent impaired loans, net of ALLL: loans included in the Company’s loan portfolio for which it is probable that the
Company will not collect all principal and interest due according to contractual terms are considered impaired. Estimated fair value of
collateral-dependent impaired loans is based on the fair value of the collateral, less estimated cost to sell. Collateral-dependent impaired
loans are classified within Level 3 of the fair value hierarchy.
102
Note 20. Fair Value of Assets and Liabilities (continued)
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)
—
—
—
—
—
—
3,000
15,480
18,480
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
December 31,
2014
$
$
3,000
15,480
18,480
Fair Value
December 31,
2013
$
$
10,888
18,670
29,558
103
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)
Other real estate owned
Collateral-dependent
impaired loans, net of ALLL $
Fair Value
December 31,
2014
Quantitative Information about Level 3 Fair Value Measurements
Valuation Technique
Unobservable Input
Range (Weighted-
Average) 1
$
$
2,393 Sales comparison approach Selling costs
0.0% - 10.0% (5.8%)
Adjustment to comparables
0.0% - 7.0% (0.5%)
607 Combined approach
3,000
6 Cost approach
5,335
Income approach
Selling costs
Discount rate
Selling costs
Selling costs
Discount rate
6,330 Sales comparison approach Selling costs
10.0% - 10.0% (10.0%)
10.0% - 10.0% (10.0%)
7.0% - 7.0% (7.0%)
8.0% - 10.0% (8.5%)
8.3% - 12.0% (9.1%)
0.0% - 10.0% (8.3%)
3,809 Combined approach
Selling costs
8.0% - 10.0% (9.2%)
Adjustment to comparables
0.0% - 30.0% (3.5%)
Adjustment to comparables
10.0% - 20.0% (16.2%)
$
15,480
Fair Value
December 31,
2013
(Dollars in thousands)
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
__________
1 The range for selling costs and adjustments to comparables indicate reductions to the fair value.
104
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.
Investment securities, held-to-maturity: fair value for held-to-maturity securities is estimated in the same manner as available-for-sale
securities, which is described above.
Loans held for sale: fair value is estimated at book value.
Loans receivable, net of ALLL: fair value is estimated by discounting the future cash flows using the rates at which similar notes would
be written for the same remaining maturities. The market rates used are based on current rates the Company would impose for similar
loans and reflect a market participant assumption about risks associated with non-performance, illiquidity, and the structure and term of
the loans along with local economic and market conditions. Estimated fair value of impaired loans is based on the fair value of the
collateral, less estimated cost to sell, or the present value of the loan’s expected future cash flows (discounted at the loan’s effective
interest rate). All impaired loans are classified as Level 3 and all other loans are classified as Level 2 within the valuation hierarchy.
Accrued interest receivable: fair value is estimated at book value.
Non-marketable equity securities: fair value is estimated at book value due to restrictions that limit the sale or transfer of such securities.
Deposits: fair value of term deposits is estimated by discounting the future cash flows using rates of similar deposits with similar maturities.
The market rates used were obtained from an independent third party and reviewed by the Company. The rates were the average of
current rates offered by the Company’s local competitors. The estimated fair value of demand, NOW, savings, and money market deposits
is the book value since rates are regularly adjusted to market rates and transactions are executed at book value daily. Therefore, such
deposits are classified in Level 1 of the valuation hierarchy. Certificate accounts and wholesale deposits are classified as Level 2 within
the hierarchy.
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.
105
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
Investment securities, held-to-maturity
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
(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
Fair Value Measurements
At the End of the Reporting Period Using
Carrying
Amount
December 31,
2014
Quoted Prices
in Active
Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
$
$
$
442,409
2,387,428
520,997
46,726
4,358,342
40,587
52,868
7,849,357
6,345,212
296,944
404,418
125,705
4,155
16,668
7,193,102
442,409
—
—
46,726
—
40,587
—
529,722
4,928,771
—
—
—
4,155
—
4,932,926
—
2,387,428
550,946
—
4,288,417
—
52,868
7,279,659
1,421,234
312,363
404,418
76,711
—
16,668
2,231,394
—
—
—
—
149,769
—
—
149,769
—
—
—
—
—
—
—
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
106
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
—
—
—
—
—
—
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,
2014
December 31,
2013
$
$
960,180
16,531
976,711
866,885
14,665
881,550
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 August 31, 2014, the Company acquired 100 percent of the outstanding common stock of FNBR, a privately-owned company, and
its wholly-owned subsidiary, First National Bank of the Rockies, a community bank based in Grand Junction, Colorado. First National
Bank of the Rockies provides community banking services to individuals and businesses in northwestern Colorado, with banking offices
located in Grand Junction, Steamboat Springs, Meeker, Rangely, Craig, Hayden and Oak Creek. As a result of the acquisition, the
Company further diversified its loan and deposit customer base with its increased presence in the state of Colorado. The branches of
First National Bank of the Rockies were merged into Glacier Bank and became a part of the Bank of the San Juans division. The
consideration paid by the Company to acquire FNBR was $31,817,000, which resulted in the Company issuing 555,732 shares of its
common stock and $16,690,000 in cash in exchange for all of FNBR’s outstanding common stock. 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
August 31, 2014 acquisition date. The Company recorded a $680,000 bargain purchase gain due to the fair value of FNBR’s identifiable
net assets exceeding the consideration transferred. The bargain purchase gain is included in other income in the Company’s consolidated
statements of operations. Before recognizing the bargain purchase gain, the Company reassessed whether it correctly identified and
valued each of the assets acquired and liabilities assumed. The objective of the reassessment process was to ensure that the measurements
reflected consideration of all available information as of the acquisition date. The reassessment process included reviewing FNBR’s
statement of financial condition to verify that all assets and liabilities had been identified and then re-evaluating and challenging again
the procedures and the reasonableness of the significant assumptions utilized in determining the fair value of the identifiable assets and
liabilities with respect to the acquisition date. The Company obtained fair value estimates from independent third party specialists for
the significant identifiable assets and liabilities, including loans, investment securities and deposits. Following the reassessment process,
the Company concluded that the consideration transferred and all of the assets acquired and liabilities assumed had been properly identified
and valued.
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. The excess of the fair value of consideration transferred over total identifiable net assets was recorded as goodwill. The
goodwill arising from the acquisition consists largely of the synergies and economies of scale expected from combining the operations
of the Company and NCBI. None of the goodwill is deductible for income tax purposes as the acquisition was accounted for as a tax-
free exchange.
107
Note 22. Mergers and Acquisitions (continued)
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. The excess of the fair value of consideration transferred over total identifiable net assets was recorded as goodwill. The
goodwill arising from the acquisition consists largely of the synergies and economies of scale expected from combining the operations
of the Company and Wheatland. None of the goodwill is deductible for income tax purposes as the acquisition was accounted for as a
tax-free exchange.
The assets and liabilities of FNBR, NCBI and Wheatland were recorded on the Company’s consolidated statements of financial condition
at their estimated fair values as of the August 31, 2014, July 31, 2013 and May 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 following table discloses
the calculation of the fair value of the consideration transferred, the total identifiable net assets acquired and the resulting bargain purchase
gain or goodwill arising from the FNBR, NCBI and Wheatland acquisitions:
FNBR
August 31,
2014
NCBI
July 31,
2013
Wheatland
May 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
Contingent consideration
Total fair value of consideration transferred
Recognized amounts of identifiable assets acquired and liabilities assumed
Identifiable assets acquired
Cash and cash equivalents
Investment securities
Loans receivable
Core deposit intangible
Accrued income and other assets
Total identifiable assets acquired
Liabilities assumed
Deposits
Federal Home Loan Bank advances
Accrued expenses and other liabilities
Total liabilities assumed
Total identifiable net assets
15,127
16,690
—
31,817
14,578
157,018
137,488
4,199
35,884
349,167
309,641
—
7,029
316,670
32,497
(Bargain purchase gain) goodwill recognized
$
(680)
108
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
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
13,409
Note 22. Mergers and Acquisitions (continued)
The fair value of the FNBR, NCBI and Wheatland assets acquired includes loans with fair values of $137,488,000, $215,986,000 and
$171,199,000, respectively. The gross principal and contractual interest due under the FNBR, NCBI and Wheatland contracts is
$146,019,000, $223,949,000 and $176,698,000, respectively, all of which is expected to be collectible.
Core deposit intangible assets related to the FNBR, NCBI and Wheatland acquisitions totaled $4,199,000 with an estimated life of 10
years, $3,660,000 with an estimated life of 10 years, and $2,079,000 with an estimated life of 11 years, respectively.
The Company incurred $552,000 of FNBR third-party acquisition-related costs during the year ended December 31, 2014. The Company
incurred $667,000 and $832,000, respectively, of NCBI and Wheatland 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.
Total income consisting of net interest income and non-interest income of the acquired operations of FNBR was approximately $6,672,000
and net income was approximately $1,675,000 from August 31, 2014 to December 31, 2014. 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. 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.
The following unaudited pro forma summary presents consolidated information of the Company as if the FNBR acquisition had occurred
on January 1, 2013:
(Dollars in thousands)
Net interest income and non-interest income
Net income
Years ended
December 31,
2014
December 31,
2013
$
371,772
113,364
340,393
99,275
The following unaudited pro forma summary presents consolidated information of the Company as if the NCBI and Wheatland acquisitions
had occurred on January 1, 2012:
(Dollars in thousands)
Net interest income and non-interest income
Net income
Years ended
December 31,
2013
December 31,
2012
$
339,236
96,392
334,317
80,403
109
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 year ended December 31, 2014 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, 2014. 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, 2014,
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, 2014 and is included in “Item
8. Financial Statements and Supplementary Data.”
Item 9B. Other Information
None
110
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 2015 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 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, principal financial officer and principal accounting 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.
Information regarding “Compensation Committee Interlocks and Insider Participation” is set forth under such heading of the Company’s
Proxy Statement and is incorporated herein by reference.
Information regarding the “Compensation Committee Report” is set forth under the heading “Report of Compensation Committee” of
the Company’s Proxy Statement and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Information regarding “Security Ownership of Certain Beneficial Owners and Management” 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.
111
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(i)
3(ii)
10(a) *
10(b) *
10(c) *
10(d) *
10(e) *
10(f) *
10(g) *
14
21
23 ~
31.1 ~
31.2 ~
32 ~
101 ~
Amended and Restated Articles of Incorporation 1
Amended and Restated Bylaws 1
Amended and Restated Deferred Compensation Plan effective January 1, 2008 2
Amended and Restated Supplemental Executive Retirement Agreement effective January 1, 2008 2
2005 Stock Incentive Plan and related agreements 3
Employment Agreement dated January 1, 2015 between the Company and Michael J. Blodnick 4
Employment Agreement dated January 1, 2015 between the Company and Ron J. Copher 4
Employment Agreement dated January 1, 2015 between the Company and Don Chery 4
Nonemployee Service Provider Deferred Compensation Plan 5
Code of Ethics 6
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, 2014 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 10(c) and 10(d) included in the Company’s Form 10-K for the year ended December 31, 2008.
3 Incorporated by reference to Exhibits 99.1 through 99.3 of the Company’s S-8 Registration Statement (No. 333-125024).
4 Incorporated by reference to Exhibits 10.1 through 10.3 included in the Company’s Form 8-K filed by the Company on January 6, 2015.
5 Incorporated by reference to Exhibit 10.1 included in the Company’s Form 8-K filed by the Company on October 31, 2012.
6 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 2014 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.
112
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 26, 2015.
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 26, 2015, by the
following persons on behalf of the registrant and 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/ Douglas J. McBride
Douglas J. McBride
/s/ John W. Murdoch
John W. Murdoch
President, CEO, and Director
(Principal Executive Officer)
Executive Vice President and CFO
(Principal Financial Accounting Officer)
Chairman
Director
Director
Director
Director
Director
Director
Director
113
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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
Craig A. Langel, CPA, CVA
President of Langel & Associates, P.C./Owner and
CEO of CLC Restaurants, Inc.
Douglas J. McBride, OD, FAAO
Doctor of Optometry
John W. Murdoch
Retired Chairman of Murdoch’s Ranch &
Home Supply, LLC
Corporate Officers
Michael J. Blodnick
President/Chief Executive Officer
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 Chuck Haney
www.chuckhaney.com
"Hanging Gardens at Logan Pass"
Glacier National Park, Montana
2014
________________
ANNUAL REPORT
2014 ANNUAL REPORT