2017
________________
ANNUAL REPORT
2017 ANNUAL REPORT
INVESTOR INFORMATION
2017 Cash Dividends Declared
Frequency
Quarterly (1)
Quarterly (2)
Quarterly (3)
Special
Quarterly (4)
Record Date
April 11, 2017
July 12, 2017
September 21, 2017
September 22, 2017
December 5, 2017
Payment Date
April 20, 2017
July 21, 2017
September 28, 2017
September 29, 2017
December 14, 2017
Per Share Amount
$0.21
$0.21
$0.21
$0.30
$0.21
Year
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Ten-Year Common Stock Price and Dividend History
High
$40.05
$19.61
$19.00
$16.00
$16.33
$30.88
$30.79
$30.29
$37.87
$41.23
Common Stock Price
Low
$13.29
$11.80
$12.84
$8.95
$12.12
$14.76
$24.27
$22.16
$21.90
$31.38
Close
$19.02
$13.72
$15.11
$12.03
$14.71
$29.79
$27.77
$26.53
$36.23
$39.39
Cash Dividends
Declared Per Share
$0.52
$0.52
$0.52
$0.52
$0.53
$0.60
$0.98
$1.05
$1.10
$1.14
2018 Anticipated Dividend Dates 1
Quarter
1
2
3
4
Record Date
April 10, 2018
July 10, 2018
October 9, 2018
December 11, 2018
Payment Date
April 19, 2018
July 19, 2018
October 18, 2018
December 20, 2018
2018 Anticipated Earnings Dates 1
Quarter
1
2
3
4
Announcement Date
April 19, 2018
July 19, 2018
October 18, 2018
January 24, 2019
___________________________
1 Subject to approval by the Board of Directors
Stock Listing
Glacier Bancorp, Inc.'s common stock trades on the
NASDAQ Global Select Market under the symbol:
GBCI. There are approximately 1,691 shareholders
of record for Glacier Bancorp, Inc. stock.
Corporate Headquarters
49 Commons Loop
Kalispell, Montana 59901
(406) 751-7708
www.glacierbancorp.com
Annual Meeting
The Annual Meeting of Shareholders will be held
April 25, 2018 at 9:00 a.m. Mountain Time at The Hilton
Garden Inn, 1840 Highway 93 South, Kalispell, Montana.
Stock Transfer Agent
American Stock Transfer & Trust Company, LLC
Brooklyn, New York
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.
Email Notifications
Readers may subscribe to Glacier Bancorp, Inc. email
notifications for corporate events, document filings,
press releases and end-of-day stock quotes in the Email
Notification section of the Company's website.
Independent Registered Public Accountants
BKD, LLP
Denver, Colorado
www.bkd.com
Legal Counsel
Moore, Cockrell, Goicoechea & Johnson, P.C.
Kalispell, Montana
www.mcgalaw.com
Miller Nash Graham & Dunn LLP
Seattle, Washington
www.millernash.com
Dear Shareholder,
LETTER TO SHAREHOLDERS
2017 was an excellent year for the Company. Our team of 2,354 talented employees did a fantastic job of growing
the business and building long-term franchise value. Our Western U.S. markets showed strong economic growth,
we expanded into Arizona by closing on our acquisition of The Foothills Bank, and we announced two new terrific
acquisitions that closed in early 2018. We were also successful in keeping the Company’s total asset size below
$10 billion at year end, avoiding a significant reduction in fee income associated with crossing that threshold for
another year. And once again, we were recognized by Forbes and Bank Director Magazine as one of the top ten
performing banks in America.
We operate in a constantly changing industry and environment, but despite this your Company remains strong -
stronger than we have ever been. This strength comes from our exceptional Directors, Bank Presidents, Senior
Staff and employees who are all committed to serving our customers and communities with excellence.
The Tax Act
The Tax Cuts and Jobs Act (“Tax Act”) was enacted in late December 2017 and, despite being a drag on performance
in the fourth quarter, the Tax Act will benefit the Company for years to come. The Tax Act lowers federal income
tax in 2018 and future years from a maximum corporate rate of 35% to 21%. This required us to take a one time
tax expense charge of $19.7 million and reduce the value of the Company’s net deferred tax assets in the fourth
quarter because we will recognize the future tax benefits when the lower corporate income tax rate will be in effect.
The good news is we will start benefiting from the lower federal income tax rate starting in 2018. This makes
talking about our financial performance for 2017 a little difficult because we feel investors will get a better view
of the core performance of the Company by looking past the one time Tax Act adjustment in 2017.
I will do my best in this letter to present our financial results clearly and readers can also review the 10-K included
in this Annual Report which has helpful information regarding the impact of the one time Tax Act adjustment in
2017 and full year financial performance.
A Record year
Key Performance Measurements
Tangible stockholders’ equity of your Company increased $49.6 million or 5% to $1.007 billion and tangible book
value per common share increased 3% or $0.40 from a year ago to $12.91 in 2017.
Net income for 2017 was a record $136 million, an increase of $14.9 million, or 12%, from the $121 million of
net income in 2016, excluding the impact of the Tax Act.
Return on Equity (“ROE”) for the year was a very strong 11.46%, excluding the impact of the Tax Act.
The Company declared and paid a regular dividend of $0.21 per share in the fourth quarter of 2017, which was
the 131st consecutive quarterly dividend paid by the Company. For the full year we paid regular dividends of $0.84
per share and a special dividend of $0.30 per share for a total of $1.14 per share, or 65% of earnings, excluding
the impact of the Tax Act. We prefer paying dividends as a way to distribute excess capital back to shareholders
and we expect to continue this practice.
i
Total Shareholder Return (“TSR”) for the year was 13.2%. This measure shows the return a shareholder would
have received on our stock for the year if the stock price appreciation and dividends paid to a shareholder are
calculated as a total return. We encourage shareholders to view this measure over a longer term (see the chart we
provide on page 21 of the 10-K included in this Annual Report) as we don’t have any control over the broader
stock market and the market volatility can impact this measure. TSR over the last 5 years was 217%. Compared
to our peer group, we rank in the 95th percentile of performance for TSR over this period.
In addition to strong financial performance, giving back to the communities in which we operate remains a key
priority for the Company and once again the team did an outstanding job for the year by contributing a record
13,000 hours to over 700 non-profits, donating or investing over $33 million, and making over $250 million in
Community Development loans. We are committed to making the communities we serve a better place to live.
Key Initiatives and Operating Results
We successfully executed our strategy to stay below $10 billion in total assets at the end of 2017 in order to delay
the impact of the Durbin Amendment for one additional year, saving the Company from an annual reduction in
fee income of about $14 million that would have started in July of 2018. The Durbin Amendment, which came
into effect as part of the Dodd-Frank Act, establishes limits on the amount of interchange fees that can be charged
to merchants for debit card processing and will reduce our interchange fee income when we become subject to
this requirement. The team worked together to accomplish delaying the impact of the Durbin Amendment without
materially impacting customer relationships or profitability. We accomplished this strategy by selectively
redeploying investment cash flow and by temporarily moving deposits off of our balance sheet. We exceeded $10
billion in assets at the end of January 2018, but because we ended 2017 below $10 billion, we will not be subject
to the Durbin Amendment until July 2019.
Core deposits increased $380 million, or 5%, from the prior year end to $7.420 billion. We moved $433 million
in deposits off balance sheet, but these deposits can be brought back onto our balance sheet at our discretion without
any customer inconvenience. Including the deposit accounts moved off balance sheet, organic core deposits actually
increased $478 million, or 7%, in 2017 and we were very pleased to see our non-interest bearing deposit accounts
increase $270 million, or 13%, to $2.312 billion at year end. Stable, low cost core deposit funding has always
been important to our Company but it appeared to become less important to the industry over the last several years
as deposits flowed rather effortlessly into the banking system. I am happy to report that we never took our eye off
of the core deposit ball and our team has diligently grown this important part of the business year after year. We
offer our totally free checking product for businesses and consumers to help us consistently grow and retain
accounts.
Organic loan growth for the year was $601 million, or 11 %, and our portfolio of loans grew to $6.6 billion. This
increase primarily came from growth in commercial real estate lending and other commercial loans. In 2017 we
were able to launch a new consumer lending platform to help deliver more consistent service to customers across
the business and we also started the roll out of new commercial loan pricing technology to give us better information
on how to price individual loans more effectively. We continue to enjoy solid growth as most of our markets in
the West are growing faster than the U.S. average, and we benefit from our long term relationships with strong
customers. However, we continue to keep a close eye on our growth rate and take the time to get comfortable that
the quality of our loans meet our high standards. It’s easy to grow when every one in the industry is growing, but
more difficult to slow down when the prevailing wisdom says there is smooth sailing ahead. We don’t see storm
clouds on the horizon, but we continue to closely monitor our portfolio and markets to make sure we are not entering
a credit downturn. We are, after all, in a long term cyclical industry and can’t lose sight of this.
The total funding cost for 2017 (including non-interest bearing deposits) was 36 basis points compared to 37 basis
points for 2016. This remarkable performance reflects the very stable nature of our core deposits that I touched
ii
on earlier. If interest rates rise as anticipated over the next few years, these stable deposits will continue to serve
us well.
The net interest margin as a percentage of earning assets was 4.12%, a 10 basis point increase from the net interest
margin of 4.02% for 2016. The increase in the margin was primarily attributable to a shift in earning assets from
our lower yielding investment portfolio to higher yielding loans as well as stable cost of funds and good pricing
on new loans. We expect to continue to see these dynamics continue in 2018.
The efficiency ratio, which measures expenses as a percent of revenues, was 53.94% for 2017 which was a decrease
from the prior year of nearly 200 basis points. The improvement was driven by the increase in net interest income
which was largely due to higher interest income on commercial loans. Like the game of golf, a lower number is
better when scoring efficiency. We had a goal of 55% for the year and we were very pleased to handily beat this
target. The team delivered another strong performance in this area by remaining very focused on managing
expenses. While we don’t expect a repeat of the large decrease we saw last year, we do expect to improve our
efficiency each year by carefully reviewing operations and identifying areas where we can do better.
On the loan side of the ledger, non-performing assets at year end were $65.1 million, a decrease of $6.2 million,
or 9%, from a year ago. Non-performing assets as a percentage of subsidiary assets at year end were 0.68%, which
was a decrease of 8 basis points from the prior year end of 0.76%. Credit quality trends generally are positive and
credit risk appears to be low at this point.
The allowance for loan and lease losses as a percent of total loans outstanding at December 31, 2017 was 1.97
percent, a decrease of 31 basis points from 2.28 percent at December 31, 2016. This decrease was primarily driven
by loan growth and stabilizing credit quality. We continue to think that it is prudent to carry a loan loss provision
that reflects our conservative nature and outlook. It’s better to be realistic in this area than overly optimistic.
Acquisitions
In 2016 the Company announced the acquisition of The Foothills Bank, a community bank based in Yuma, Arizona
with assets of $377 million and loans of $325 at year end 2017. This acquisition was completed in April of 2017.
We are excited about entering the Arizona market and we welcome the terrific Foothills team to the Glacier family.
During 2017 we announced the acquisition of Collegiate Peaks Bank in Colorado and First Security Bank in
Bozeman, Montana. Both acquisitions provide significant strategic advantages. Ron Copher (our Chief Financial
Officer) and Don Chery (our Chief Administrative Officer) and I spent many days doing due diligence on both of
these transactions and we are very confident that these transactions will be great additions to the Company. These
acquisitions mark the Company’s nineteenth and twentieth acquisitions since 2000 and the eighth and ninth
announced transactions in the past five years.
Collegiate Peaks Bank was founded in 1987 and purchased in 2006 by a group of investors led by David Boyles,
John Perkins, and Charlie Forster who had previously left a large bank in Denver with a dream to build an exceptional
community bank focused on personalized service. We were fortunate to be given the opportunity to provide
financing to the bank a number of years ago and to get to know the management team at that time. When they
decided to consider future options, they contacted us and we were able to work directly with them to announce a
transaction. Collegiate Peaks Bank is located in the mountain towns of Buena Vista and Salida and in the Denver
area. Collegiate Peaks provides us with a strong presence in mountain markets as well as the fast growing Denver
region and provides us with a platform to further grow along the bustling Colorado Front Range. At year end 2017,
they recorded total assets of $533 million, gross loans of $346 million, and total deposits of $464 million. We
closed this transaction at the end of January 2018 and we welcome the exceptional Collegiate team to the Glacier
family.
iii
First Security Bank was founded almost 100 years ago and has grown to be the largest community bank in the
Bozeman area. A group of local families have carefully built the bank over a number of generations. The Board
of First Security Bank put a lot of thought into their future and decided that partnering with our Company was the
best path forward. We had talked with the owners of First Security Bank on and off about a partnership for a
number of years and we were pleased to be considered when the time came for them to choose a partner. Our
approach to acquisitions matched what they were looking for and we were very fortunate to agree upon terms and
announce we had a deal in October of 2017. With First Security Bank we gain a leadership position in the high
growth Bozeman market and the rich agricultural area known as the Golden Triangle. We feel the long term growth
prospects are exceptional and being the largest community bank in these markets will generate future significant
benefits for the Company. In addition, First Security Bank has very talented executives and staff that will join
our team and we welcome them all. We closed this transaction at the end of February 2018. At year end, First
Security Bank had total assets of $1.028 billion, gross loans of $640 million and total deposits of $891 million.
The Year Ahead
We have a very exciting year in sight for 2018. With the Tax Act now signed into law, we see a lot of optimism
among our business customers and hope to see the corresponding increase in our business as a result. We are
taking a bit of a cautious approach and would like to see tangible signs of improvement before we declare the
economic outlook materially changed for the better.
We will grow the Company 15% in the first quarter alone by closing on Collegiate Peaks Bank and First Security
Bank. We expect to convert these banks over to our core processing system in the second half of the year. This
will take a lot of work but we have an incredibly talented team in place with strong acquisition and conversion
experience. We are going to stay focused on our core business in 2018 while closing and converting these two
banks. In addition, we want to continue to ensure our customer service experience is best in class and further
strengthen our unique and very successful business model. Building on the strong foundation we have in place,
we are positioning your Company to continue to be the first choice for banking in all of our markets. We are
keeping what works and changing what doesn’t, all with an eye toward the future. This alone is a full agenda and,
while we always remain ready to react to the unexpected, we look forward to accomplishing these things in the
coming year.
Our future success continues to be driven by our exceptional team as we could not have delivered the results
covered in this letter without their unwavering dedication to serving our customers. I am very confident that under
the guidance of our terrific Board of Directors, our Bank Presidents and Senior Staff, our employees, will make
2018 another record year for Glacier Bancorp.
Our annual meeting will be held in Kalispell, Montana at 9:00 a.m. on April 25 so please stop by the Hilton Garden
Inn and join us if you are in town.
Once again, thank you for your trust and confidence,
Randall “Randy” Chesler
President and Chief Executive Officer
iv
FINANCIAL HIGHLIGHTS
(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
Income before income taxes
Federal and state 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 1,2
Average equity to average asset ratio
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Common Equity Tier 1 (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
2017
$ 9,706,349
2,426,556
6,448,256
(129,568)
191,995
7,579,747
353,995
370,797
1,199,057
15.37
12.35%
At or for the Years ended December 31,
2014
2015
2016
9,450,600
3,101,151
5,554,891
(129,572)
159,400
7,372,279
251,749
478,090
1,116,869
14.59
11.82%
9,089,232
3,312,832
4,948,984
(129,697)
155,193
6,945,008
394,131
430,016
1,076,650
14.15
11.85%
8,306,507
2,908,425
4,358,342
(129,753)
140,606
6,345,212
296,944
404,418
1,028,047
13.70
12.38%
2013
7,884,350
3,222,829
3,932,487
(130,351)
139,218
5,579,967
840,182
321,781
963,250
12.95
12.22%
$
$
$
$
$
375,022
29,864
345,158
10,824
112,239
265,571
181,002
44,926
136,076
1.75
1.75
1.14
1.41%
11.46%
65.14%
12.27%
15.64%
14.39%
12.81%
11.90%
4.12%
53.94%
1.97%
255%
0.68%
344,153
29,631
314,522
2,333
107,318
258,714
160,793
39,662
121,131
1.59
1.59
1.10
1.32%
10.79%
69.18%
12.27%
16.38%
15.12%
13.42%
11.90%
4.02%
55.88%
2.28%
257%
0.76%
319,681
29,275
290,406
2,284
98,761
236,757
150,126
33,999
116,127
1.54
1.54
1.05
1.36%
10.84%
68.18%
12.52%
17.17%
15.91%
14.06%
12.01%
4.00%
55.40%
2.55%
244%
0.88%
299,919
26,966
272,953
1,912
90,302
212,679
148,664
35,909
112,755
1.51
1.51
0.98
1.42%
11.11%
64.90%
12.81%
18.93%
17.67%
N/A
12.45%
3.98%
54.31%
2.89%
209%
1.08%
263,576
28,758
234,818
6,887
93,047
195,317
125,661
30,017
95,644
1.31
1.31
0.60
1.23%
10.22%
45.80%
11.99%
18.97%
17.70%
N/A
12.11%
3.48%
54.51%
3.21%
158%
1.39%
$
65,179
$ 3,629,493
2,278
145
71,385
3,474,000
2,222
142
80,079
3,000,830
2,149
144
89,900
2,404,299
1,943
129
109,420
2,477,804
1,837
118
______________________________
1 Excludes a one-time revaluation of the deferred tax assets and deferred tax liabilities as a result of The Tax Cuts and Jobs Act for the year ended December 31, 2017. For
additional information on the revaluation, see the “Non-GAAP Financial Measures” section in “Item 6. Selected Financial Data” of the attached Form 10-K.
2 Includes a special dividend declared of $0.30 per share for 2017, 2016, 2015 and 2014.
3 Non-interest expense before other real estate owned (“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.
v
(This page intentionally left blank.)
vi
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________________________________
FORM 10-K
______________________________________________________________________
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017 or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 000-18911
______________________________________________________________________
GLACIER BANCORP, INC.
(Exact name of registrant as specified in its charter)
______________________________________________________________________
MONTANA
(State or other jurisdiction of
incorporation or organization)
49 Commons Loop, Kalispell, Montana
(Address of principal executive offices)
81-0519541
(IRS Employer
Identification No.)
59901
(Zip Code)
(406) 756-4200
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value per share
(Title of each class)
NASDAQ Global Select Market
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months.
Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of regulation S-K is not contained herein, and will not be contained,
to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K.
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company,
or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging
growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
No
The aggregate market value of the voting common equity held by non-affiliates of the Registrant at June 30, 2017 (the last business day of the
most recent second quarter), was $2,837,602,927 (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 5, 2018 was 79,785,733. No preferred shares are issued or
outstanding.
Document Incorporated by Reference
Portions of the 2018 Annual Meeting Proxy Statement dated on or about March 15, 2018 are incorporated by reference into Parts I and 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
Item 15
Item 16
SIGNATURES
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
Exhibits, Financial Statement Schedules
Form 10-K Summary
Page
4
13
19
19
19
19
20
22
25
61
62
63
66
67
68
69
70
72
118
118
118
119
119
119
119
119
120
120
121
2
ABBREVIATIONS/ACRONYMS
GLBA – Gramm-Leach-Bliley Financial Services
Interstate Act – Riegle-Neal Interstate Banking and Branching
Modernization Act of 1999
ALCO – Asset Liability Committee
ALLL or allowance – allowance for loan and lease losses
ASC – Accounting Standards CodificationTM
ATM – automated teller machine
Bank – Glacier Bank
Basel III – third installment of the Basel Accords
BHCA – Bank Holding Company Act of 1956, as amended
Board – Glacier Bancorp, Inc.’s Board of Directors
bp or bps – basis point(s)
BSA – Bank Secrecy Act
CCP – Core Consolidation Project
CDE – Certified Development Entity
CDFI Fund – Community Development Financial Institutions Fund OREO – other real estate owned
CEO – Chief Executive Officer
CFO – Chief Financial Officer
CFPB – Consumer Financial Protection Bureau
Collegiate – Columbine Capital Corp. and its subsidiary,
Efficiency Act of 1994
IRS – Internal Revenue Service
LIBOR – London Interbank Offered Rate
LIHTC – Low-Income Housing Tax Credit
NII – net interest income
NMTC – New Markets Tax Credits
NOW – negotiable order of withdrawal
NRSRO – Nationally Recognized Statistical Rating Organizations
OCI – other comprehensive income
Tools Required to Intercept and Obstruct Terrorism Act of 2001
PCAOB – Public Company Accounting Oversight Board (United States)
Proxy Statement – the 2018 Annual Meeting Proxy Statement
Repurchase agreements – securities sold under agreements
Patriot Act – Uniting and Strengthening America by Providing Appropriate
to repurchase
S&P – Standard and Poor’s
SAB – SEC Staff Accounting Bulletin
SEC – United States Securities and Exchange Commission
SERP – Supplemental Executive Retirement Plan
SOX Act – Sarbanes-Oxley Act of 2002
Tax Act – The Tax Cuts and Jobs Act
TSB – Treasure State Bank
TDR – troubled debt restructuring
VIE – variable interest entity
Collegiate Peaks Bank
Company – Glacier Bancorp, Inc.
COSO – Committee of Sponsoring Organizations of the
Treadway Commission
CRA – Community Reinvestment Act of 1977
DDA – demand deposit account
DIF – federal Deposit Insurance Fund
DFAST – Dodd-Frank Act stress test
Dodd-Frank Act – Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010
EVE – economic value of equity
Fannie Mae – Federal National Mortgage Association
FASB – Financial Accounting Standards Board
FDIC – Federal Deposit Insurance Corporation
FHLB – Federal Home Loan Bank
Final Rules – final rules implemented by the federal banking
agencies that amended regulatory risk-based capital rules
Foothills – TFB Bancorp, Inc. and its subsidiary,
The Foothills Bank
FRB – Federal Reserve Bank
Freddie Mac – Federal Home Loan Mortgage Corporation
FSB – Inter-Mountain Bancorp., Inc., and its subsidiary,
First Security Bank
GAAP – accounting principles generally accepted in the
United States of America
Ginnie Mae – Government National Mortgage Association
3
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
145 locations in Montana, Idaho, Utah, Washington, Wyoming, Colorado, and Arizona through its wholly-owned bank subsidiary, Glacier
Bank (“Bank”). The Company offers a wide range of banking products and services, including: 1) retail banking; 2) business banking;
3) real estate, commercial, agriculture and consumer loans; and 4) mortgage origination services. The Company serves individuals, small
to medium-sized businesses, community organizations and public entities. 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 the Bank. As of December 31, 2017, the Bank consists of fourteen bank divisions,
a treasury division, an information technology division and a centralized mortgage division. The Bank divisions operate under separate
names, management teams and advisory directors. and include the following:
First Bank of Montana (Lewistown, Montana) with operations in Montana;
First Security Bank of Missoula (Missoula, Montana) with operations in Montana;
• Glacier Bank (Kalispell, Montana) with operations in Montana;
•
• Valley Bank of Helena (Helena, Montana) with operations in Montana;
• Big Sky Western Bank (Bozeman, Montana) with operations in Montana;
• Western Security Bank (Billings, Montana) with operations in Montana;
•
• Mountain West Bank (Coeur d’Alene, Idaho) with operations in Idaho, Utah and Washington;
• Citizens Community Bank (Pocatello, Idaho) with operations in Idaho;
1st Bank (Evanston, Wyoming) with operations in Wyoming and Utah;
•
First Bank of Wyoming (Powell, Wyoming) with operations in Wyoming;
•
•
First State Bank (Wheatland, Wyoming) with operations in Wyoming;
• North Cascades Bank (Chelan, Washington) with operations in Washington;
• Bank of the San Juans (Durango, Colorado) with operations in Colorado; and
• The Foothills Bank (Yuma, Arizona) with operations in Arizona.
In January 2018, the Company combined the 1st Bank and First Bank of Wyoming divisions into one Bank division and named it First
Bank. The combination was the result of the Company’s assessment of local market areas and determination that the Bank divisions
would be more efficiently operated under one division. The treasury division includes the Bank’s investment portfolio and wholesale
borrowings, the information technology division includes the Bank’s internal data processing, and the centralized mortgage division
includes mortgage loan servicing and secondary market originations and sales. The Company considers the Bank to be its sole operating
segment.
The Bank has subsidiary interests in variable interest entities (“VIE”) for which the Bank has both the power to direct the VIE’s significant
activities and the obligation to absorb losses or right to receive benefits of the VIE that could potentially be significant to the VIE. These
subsidiary interests are included in the Company’s consolidated financial statements. The Bank also has subsidiary interests in VIEs for
which the Bank does not have a controlling financial interest and is not the primary beneficiary. These subsidiary interests are not included
in the Company’s consolidated financial statements.
The parent holding company owns non-bank subsidiaries that have issued trust preferred securities as Tier 1 capital instruments. The
trust subsidiaries are not included in the Company’s consolidated financial statements. The Company's investments in the trust subsidiaries
are included in non-marketable equity securities on the Company's statements of financial condition.
As of December 31, 2017, the Company and its subsidiaries were not engaged in any operations in foreign countries.
4
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 primarily in existing and new markets in the Rocky Mountain states. The Company has
completed the following acquisitions during the last five years:
(Dollars in thousands)
TFB Bancorp, Inc. and its subsidiary, The Foothills Bank
(collectively, “Foothills”)
Date
Total
Assets
Gross
Loans
Total
Deposits
April 30, 2017
$
385,839
292,529
296,760
Treasure State Bank (“TSB”)
August 31, 2016
76,165
51,875
58,364
Cañon Bank Corporation and its subsidiary, Cañon National Bank
October 31, 2015
270,121
159,759
237,326
Montana Community Banks, Inc. and its subsidiary,
Community Bank
FNBR Holding Corporation and its subsidiary,
First National Bank of the Rockies
North Cascades Bancshares, Inc. and its subsidiary,
North Cascades National Bank
February 28, 2015
175,774
84,689
237,326
August 31, 2014
349,167
137,488
309,641
July 31, 2013
330,028
215,986
294,980
Wheatland Bankshares, Inc. and its subsidiary, First State Bank
May 31, 2013
300,541
171,199
255,197
In January 2018, the Company acquired the outstanding common stock of Columbine Capital Corp., and its wholly-owned subsidiary,
Collegiate Peaks Bank, a community bank based in Buena Vista, Colorado (collectively, “Collegiate”). Collegiate provides banking
services to businesses and individuals in the Mountain and Front Range communities of Colorado, with banking offices located in Aurora,
Buena Vista, Denver and Salida. As of December 31, 2017, Collegiate had total assets of $533 million, gross loans of $346 million and
total deposits of $464 million. Collegiate operates as a division of the Bank under the name “Collegiate Peaks Bank, division of Glacier
Bank.”
In October 2017, the Company announced the signing of a definitive agreement to acquire Inter-Mountain Bancorp., Inc., and its wholly-
owned subsidiary, First Security Bank, a community bank based in Bozeman, Montana (collectively, “FSB”). FSB provides banking
services to businesses and individuals throughout Montana, with banking offices located in Bozeman, Belgrade, Big Sky, Choteau,
Fairfield, Fort Benton, Three Forks, Vaughn and West Yellowstone. As of December 31, 2017, FSB had total assets of $1.028 billion,
gross loans of $640 million and total deposits of $891 million. The acquisition has received the required regulatory approvals, is subject
to other customary conditions of closing and is expected to be completed in February 2018. Upon closing of the transaction, FSB will
be merged into the Bank and will operate as a separate bank division under its existing name. Big Sky Western Bank, the Bank’s existing
Bozeman-based division, will combine with the new FSB division. The agriculture-focused northern branches of FSB, located in the
area known as the Golden Triangle, will combine with the Bank’s First Bank of Montana division.
See Notes 22 and 23 in the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” for additional
information regarding these acquisitions.
Market Area
The Company and the Bank have 145 locations, of which 9 are loan or administration offices, in 51 counties within 7 states including
Montana, Idaho, Utah, Washington, Wyoming, Colorado, and Arizona. The Company and the Bank have 59 locations in Montana, 28
locations in Idaho, 4 locations in Utah, 13 locations in Washington, 16 locations in Wyoming, 20 locations in Colorado, and 5 locations
in Arizona.
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.
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.
5
Based on the Federal Deposit Insurance Corporation (“FDIC”) summary of deposits survey as of June 30, 2017, the Bank has approximately
24 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 Utah, the Bank has 11 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. In Wyoming, the Bank has 24 percent of the deposits
in the 8 counties it services. In Colorado, the Bank has 5 percent of the deposits in the 9 counties it services. In Arizona, the Bank has
4 percent of the deposits in the 3 counties it services.
Employees
As of December 31, 2017, the Company and the Bank employed 2,354 persons, 2,179 of whom were employed full time and none of
whom were represented by a collective bargaining group. The Company and the Bank provide their qualifying employees with a
comprehensive benefit program, including health, dental and vision insurance, life and accident insurance, short- and long-term disability
coverage, vacation and sick leave, 401(k) plan, profit sharing plan, stock-based compensation plan, deferred compensation plans, and a
supplemental executive retirement plan. 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 Board level, and the Board delegates other aspects of its risk oversight function to its
committees. The Board has established, among others, an Audit Committee, a Compensation Committee, a Nominating/Corporate
Governance Committee, a Compliance Committee, and a Risk Oversight Committee. Additional information regarding Board committees
is set forth under the heading “Meetings and Committees of the Board of Directors - Committee Membership” in the Company’s 2018
Annual Meeting Proxy Statement (“Proxy Statement”) and is incorporated herein by reference.
Website Access
Copies of the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments
to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge
through the Company’s website (www.glacierbancorp.com) as soon as reasonably practicable after the Company has filed the material
with, or furnished it to, the United States Securities and Exchange Commission (“SEC”). Copies can also be obtained by accessing the
SEC’s website (www.sec.gov).
Supervision and Regulation
The Company and the Bank are subject to extensive regulation under federal and state laws. This section provides a general overview
of the federal and state regulatory framework applicable to the Company and the Bank. In general, this regulatory framework is designed
to protect depositors, the federal Deposit Insurance Fund (“DIF”), and the federal and state banking system as a whole, rather than
specifically for the protection of shareholders. Note that this section is not intended to summarize all laws and regulations applicable to
the Company and the Bank. Descriptions of statutory or regulatory provisions do not purport to be complete and are qualified by reference
to those provisions.
These statutes and regulations, as well as related policies, continue to be subject to change by Congress, state legislatures, and federal
and state regulators. Changes in statutes, regulations, or regulatory policies applicable to the Company and the Bank (including their
interpretation or implementation) cannot be predicted and could have a material effect on the Company’s and the Bank’s business and
operations. Numerous changes to the statutes, regulations, and regulatory policies applicable to the Company and the Bank 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 and the Bank's business and operations.
The Company is subject to regulation and supervision by the Federal Reserve (as a bank holding company) and regulation by the State
of Montana (as a Montana corporation). The Company is also subject to the disclosure and regulatory requirements of the Securities Act
of 1933, as amended, and the Securities Exchange Act of 1934, as amended, both as administered by the SEC. The Bank is subject to
regulation and supervision by the FDIC, the Montana Department of Administration's Banking and Financial Institutions Division, and,
with respect to Bank branches outside of the State of Montana, the respective regulators in those states.
6
Federal Bank Holding Company Regulation
General. The Company is a bank holding company under the Bank Holding Company Act of 1956, as amended (“BHCA”), due to its
ownership of and control over the Bank. As a bank holding company, the Company is subject to regulation, supervision, and examination
by the Federal Reserve. In general, the BHCA limits the business of a bank holding company to owning or controlling banks and engaging
in other activities closely related to the business of banking. In addition, the Company must also file reports with and provide additional
information to the Federal Reserve.
Holding Company Bank Ownership. The BHCA requires every bank holding company to obtain the prior approval of the Federal Reserve
before: 1) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after
such acquisition, it would own or control more than 5 percent of such shares; 2) acquiring all or substantially all of the assets of another
bank or bank holding company; or 3) merging or consolidating with another bank holding company.
Holding Company Control of Non-banks. With some exceptions, the BHCA prohibits a bank holding company from acquiring or retaining
direct or indirect ownership or control of more than 5 percent of the voting shares of any company that is not a bank or bank holding
company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing
services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities that, by federal statute,
agency regulation, or order, have been identified as activities closely related to the business of banking or 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 of 2010 (“Dodd-Frank Act”) further
extended the definition of an “affiliate” and treats credit exposure arising from derivative transactions, securities lending, and borrowing
transactions as covered transactions under the regulations. It also 1) expands the scope of covered transactions required to be collateralized;
2) requires collateral to be maintained at all times for covered transactions required to be collateralized; and 3) places limits on acceptable
collateral. These regulations and restrictions may limit the Company’s ability to obtain funds from the Bank for its cash needs, including
funds for payments of dividends, interest, and operational expenses.
Tying Arrangements. 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 required to act as a source of
financial and managerial strength to the Bank. This means that the Company is required to commit, as necessary, capital and resources
to support the Bank, including at times when the Company may not be in a financial position to provide such resources or when it may
not be in the Company's or its shareholders' best interests to do so. Any capital loans a bank holding company makes to its bank subsidiaries
are subordinate to deposits and to certain other indebtedness of the bank subsidiaries.
State Law Restrictions. As a Montana corporation, the Company is subject to certain limitations and restrictions under applicable Montana
corporate law. For example, Montana corporate law includes limitations and restrictions relating to indemnification of directors,
distributions to shareholders, transactions involving directors, officers, or interested shareholders, maintenance of books, records, and
minutes, and observance of certain corporate formalities.
Federal and State Regulation of the Bank
General. Deposits in the Bank, a Montana state-chartered bank with branches in Montana, Idaho, Utah, Washington, Wyoming, Colorado
and Arizona, 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. These agencies have the authority to
prohibit the Bank from engaging in what they believe constitutes unsafe or unsound banking practices. The federal laws that apply to
the Bank regulate, among other things, the scope of its business, its investments, its reserves against deposits, the timing of the availability
of deposited funds, and the nature, amount of, and collateral for loans. Federal laws also regulate community reinvestment and insider
credit transactions and impose safety and soundness standards. In addition to federal law and the laws of the State of Montana, with
respect to the Bank's branches in Idaho, Utah, Washington, Wyoming, Colorado and Arizona, the Bank is also subject to the various laws
and regulations governing its activities in those states.
7
Consumer Protection. The Bank is subject to a variety of federal and state consumer protection laws and regulations that govern its
relationships and interactions with consumers, including laws and regulations that impose certain disclosure requirements and that govern
the manner in which the Bank takes deposits, makes and collects loans, and provides other services. In recent years, examination and
enforcement by federal and state banking agencies for non-compliance with consumer protection laws and regulations have increased
and become more intense. Failure to comply with these laws and regulations may subject the Bank to various penalties, including but
not limited to enforcement actions, injunctions, fines, civil monetary penalties, criminal penalties, punitive damages, and the loss of
certain contractual rights. The Bank has established a comprehensive compliance system to ensure consumer protection.
Community Reinvestment. The Community Reinvestment Act of 1977 (“CRA”) requires that, in connection with examinations of financial
institutions within their jurisdiction, federal bank regulators 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 institutions.
A bank’s community reinvestment record is also considered by the applicable banking agencies in evaluating mergers, acquisitions, and
applications to open a branch or facility. In some cases, a bank's failure to comply with the CRA or CRA protests filed by interested
parties during applicable comment periods can result in the denial or delay of such transactions. The Bank received a “satisfactory”
rating in its most recent CRA examination.
Insider Credit Transactions. Banks are subject to certain restrictions on extensions of credit to executive officers, directors, principal
shareholders, and their related interests. Extensions of credit 1) must be made on substantially the same terms (including interest rates
and collateral) and follow credit underwriting procedures that are at least as stringent as those prevailing at the time for comparable
transactions with persons not related to the lending bank; and 2) must not involve more than the normal risk of repayment or present
other unfavorable features. Banks are also subject to certain lending limits and restrictions on overdrafts to insiders. A violation of these
restrictions may result in the assessment of substantial civil monetary penalties, regulatory enforcement actions, and other regulatory
sanctions. The Dodd-Frank Act and federal regulations place additional restrictions on loans to insiders and generally prohibit loans to
senior officers other than for certain specified purposes.
Regulation of Management. Federal law 1) sets forth circumstances under which officers or directors of a bank may be removed by the
bank's federal supervisory agency; 2) as discussed above, places restraints on lending by a bank to its executive officers, directors, principal
shareholders, and their related interests; and 3) generally prohibits management personnel of a bank from serving as directors or in other
management positions of another financial institution whose assets exceed a specified amount or which has an office within a specified
geographic area.
Safety and Soundness Standards. Certain non-capital safety and soundness standards are also imposed upon banks. These standards
cover, among other things, internal controls, information systems and internal audit systems, loan documentation, credit underwriting,
interest rate exposure, asset growth, compensation, fees and benefits, such other operational and managerial standards as the agency
determines to be appropriate, and standards for asset quality, earnings, and stock valuation. In addition, each insured depository institution
must implement a comprehensive written information security program that includes administrative, technical, and physical safeguards
appropriate to the institution’s size and complexity and the nature and scope of its activities. The information security program must be
designed to ensure the security and confidentiality of customer information, protect against unauthorized access to or use of such
information, and ensure the proper disposal of customer and consumer information. An institution that fails to meet these standards may
be required to submit a compliance plan, or be subject to regulatory sanctions, including restrictions on growth. The Bank has established
comprehensive policies and risk management procedures to ensure the safety and soundness of the Bank.
Interstate Banking and Branching
The Dodd-Frank Act eliminated interstate branching restrictions that were implemented as part of the Riegle-Neal Interstate Banking
and Branching Efficiency Act of 1994 ("Interstate Act"), and removed many restrictions on de novo interstate branching by state and
federally chartered banks. Federal regulators now have authority to approve applications by such banks to establish de novo branches
in states other than the bank's home state if the host state's banks could establish a branch at the same location. The Interstate Act requires
regulators to consult with community organizations before permitting an interstate institution to close a branch in a low-income area.
Federal bank regulations prohibit banks from using their interstate branches primarily for deposit production and federal bank regulatory
agencies have implemented a loan-to-deposit ratio screen to ensure compliance with this prohibition.
8
Dividends
A principal source of the Company’s cash is from dividends received from the Bank, which are subject to regulation and limitation. As
a general rule, regulatory authorities may prohibit banks and bank holding companies from paying dividends in a manner that would
constitute an unsafe or unsound banking practice. For example, regulators have stated that paying dividends that deplete an institution's
capital base to an inadequate level would be an unsafe and unsound banking practice and that an institution should generally pay dividends
only out of current operating earnings. In addition, a bank may not pay cash dividends if that payment could reduce the amount of its
capital below that necessary to meet minimum applicable regulatory capital requirements. Current guidance from the Federal Reserve
provides, among other things, that dividends per share on the Company’s common stock generally should not exceed earnings per share,
measured over the previous four fiscal quarters. Under Montana law, the Bank may not declare a dividend greater than the previous two
years' net earnings without providing notice to the Montana Department of Administration's Banking and Financial Institutions Division.
Rules adopted in accordance with the third installment of the Basel Accords (“Basel III”) also impose limitations on the Bank's ability
to pay dividends. In general, these rules limit the Bank's ability to pay dividends unless the Bank's common equity conservation buffer
exceeds the minimum required capital ratio by at least 2.5 percent of risk-weighted assets.
The Federal Reserve has also issued a policy statement on the payment of cash dividends by bank holding companies. In general, the
policy statement expresses the view that although no specific regulations restrict dividend payments by bank holding companies other
than state corporate laws, a bank holding company should not pay cash dividends unless the bank holding company’s earnings for the
past year are sufficient to cover both the cash dividends and a prospective rate of earnings retention that is consistent with the bank holding
company’s capital needs, asset quality, and overall financial condition. A bank holding company's ability to pay dividends may also be
restricted if a subsidiary bank becomes under-capitalized. These various regulatory policies may affect the Company's and the Bank's
ability to pay dividends or otherwise engage in capital distributions.
The Dodd-Frank Act
General. The Dodd-Frank Act was signed into law in July 2010. The Dodd-Frank Act significantly changed the bank regulatory structure
and is affecting the lending, deposit, investment, trading, and operating activities of banks and bank holding companies, including the
Bank and the Company. Some of the provisions of the Dodd-Frank Act that may impact the Company's and the Bank's business and
operations are summarized below. There has been recent discussion of providing some relief from certain provisions of the Dodd-Frank
Act for smaller financial institutions. For example, a bipartisan Senate bill has been introduced in an effort to roll back key provisions
of the Dodd-Frank Act. However, at this time it is too early to predict the likelihood, timing, and scope of any such amendments.
Corporate Governance. The Dodd-Frank Act requires publicly traded companies to provide their shareholders with 1) a non-binding
shareholder vote on executive compensation; 2) a non-binding shareholder vote on the frequency of such vote; 3) disclosure of “golden
parachute” arrangements in connection with specified change in control transactions; and 4) a non-binding shareholder vote on golden
parachute arrangements in connection with these change in control transactions. In August 2015, the SEC adopted a rule mandated by
the Dodd-Frank Act that requires a public company to disclose the ratio of the compensation of its Chief Executive Officer (“CEO”) to
the median compensation of its employees. This rule is intended to provide shareholders with information that they can use to evaluate
a CEO’s compensation.
Prohibition Against Charter Conversions of Financial Institutions. The Dodd-Frank Act generally prohibits a depository institution from
converting from a state to federal charter, or vice versa, while it is the subject to an enforcement action unless the depository institution
seeks prior approval from its primary regulator and complies with specified procedures to ensure compliance with the enforcement action.
Repeal of Demand Deposit Interest Prohibition. The Dodd-Frank Act repeals the federal prohibitions on the payment of interest on
demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts.
9
Consumer Financial Protection Bureau. The Dodd-Frank Act established the Consumer Financial Protection Bureau (the “CFPB”) and
empowered it to exercise broad rulemaking, supervision, and enforcement authority for a wide range of consumer protection laws. Since
the Company's total consolidated assets exceeded $10 billion during the first quarter of 2018, the Company will now be subject to the
direct supervision of the CFPB. The CFPB has issued and continues to issue numerous regulations under which the Company and the
Bank will continue to incur additional expense in connection with its ongoing compliance obligations. Significant recent CFPB
developments that may affect operations and compliance costs include:
•
•
•
•
positions taken by the CFPB on fair lending, including applying the disparate impact theory which could make it more difficult
for lenders to charge different rates or to apply different terms to loans to different customers;
the CFPB's final rule amending Regulation C, which implements the Home Mortgage Disclosure Act, requiring most lenders
to report expanded information in order for the CFPB to more effectively monitor fair lending concerns and other information
shortcomings identified by the CFPB;
positions taken by the CFPB regarding the Electronic Fund Transfer Act and Regulation E, which require companies to obtain
consumer authorizations before automatically debiting a consumer’s account for pre-authorized electronic funds transfers; and
focused efforts on enforcing certain compliance obligations the CFPB deems a priority, such as automobile loan servicing, debt
collection, mortgage origination and servicing, remittances, and fair lending, among others.
Stress Testing
As required by the Dodd-Frank Act, the Federal Reserve and the FDIC published final rules regarding company-run stress testing
(“DFAST”). These rules require bank holding companies and banks with average total consolidated assets of $10 billion or more to
conduct an annual company-run stress test of capital, consolidated earnings, and losses under one base and at least two stress scenarios
provided by federal regulators. Regulators may then consider the results of those stress tests in determining and evaluating capital
adequacy, proposed acquisitions, and the safety and soundness of proposed dividends or stock repurchases. The Company exceeded $10
billion in total consolidated assets in the first quarter of 2018. The Company has analyzed these requirements and is developing systems,
action plans, policies, procedures and monitoring protocols to ensure that it complies with these stress testing rules.
Interchange Fees
Under the Durbin Amendment to the Dodd-Frank Act, the Federal Reserve adopted rules establishing standards for assessing whether
the interchange fees that may be charged with respect to certain electronic transactions are "reasonable and proportional" to the costs
incurred by issuers for processing such transactions. Notably, the Federal Reserve's rules set a maximum permissible interchange fee,
among other requirements.
As of December 31, 2017, the Company and the Bank qualified for the small issuer exemption from the Federal Reserve's interchange
fee cap, which applies to any debit card issuer that has total consolidated assets of less than $10 billion as of the end of the previous
calendar year. In the first quarter of 2018, the Company exceeded $10 billion in total consolidated assets and will now be subject to this
interchange fee cap. Effective in 2019, the interchange fee cap is expected to have a $13 - $16 million pre-tax annual impact to the
Company's earnings.
Capital Adequacy
Banks and bank holding companies are subject to various regulatory capital requirements administered by state and federal regulatory
agencies, which involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory
guidelines. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting,
and other factors. The capital requirements are intended to ensure that institutions have adequate capital given the risk levels of assets
and off-balance sheet financial instruments and are applied separately to the Company and the Bank.
Federal regulations require insured depository institutions and bank holding companies to meet several minimum capital standards,
including: 1) a common equity Tier 1 capital to risk-based assets ratio of 4.5 percent; 2) a Tier 1 capital to risk-based assets ratio of 6
percent; 3) a total capital to risk-based assets ratio of 8 percent; and 4) a 4 percent Tier 1 capital to total assets leverage ratio. These
minimum capital requirements became effective in January 2015 and were the result of final rules implementing certain regulatory
amendments based on the recommendation of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank
Act ("Final Rules").
The Final Rules also require a new capital conservation buffer designed to absorb losses during periods of economic stress. The Bank
is required to meet this new buffer requirement by 2019 in order to avoid constraints on capital distributions (e.g., dividends, equity
repurchases, and certain bonus compensation for executive officers). The Final Rules change the risk-weights of certain assets for purposes
of the risk-based capital ratios and phase out certain instruments as qualifying capital.
10
The Final Rules also contain revisions to the prompt corrective action framework, which is designed to place restrictions on an insured
depository institution if its capital levels begin to show signs of weakness. Under the prompt corrective action requirements, which are
designed to complement the capital conservation buffer, insured depository institutions will be required to meet the following increased
capital level requirements to qualify as “well capitalized”: 1) a Tier 1 common equity capital ratio of at least 6.5 percent; 2) a Tier 1
capital ratio of at least 8 percent; 3) a total capital ratio of at least 10 percent; 4) a Tier 1 leverage ratio of at least 5 percent; and 5) not
be subject to any order or written directive requiring a specific capital level. The FDIC’s rules (as amended by the Final Rules) contain
other capital classification categories, such as “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and
“critically undercapitalized,” each of which are based on certain capital ratios. An institution may be downgraded to a category lower
than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition, or if the institution receives an unsatisfactory
examination rating.
The application of the Final Rules may result in lower returns on invested capital, require the raising of additional capital or require
regulatory action if the Bank were unable to comply with such requirements. In addition, management may be required to modify its
business strategy due to the changes to the asset risk-weights for risk-based capital calculations and the requirement to meet the capital
conservation buffers. The imposition of liquidity requirements in connection with these rules could also cause the Bank to increase its
holdings of liquid assets, change its business strategy, and make other changes to the terms of its funding. Management believes that, as
of December 31, 2017, the Company would meet all capital adequacy requirements under these capital rules on a fully phased-in basis
as if all such requirements were currently in effect.
Regulatory Oversight and Examination
Inspections. The Federal Reserve conducts periodic inspections of bank holding companies, such as the Company. In general, the
objectives of the Federal Reserve's inspection program are to ascertain whether the financial strength of a bank holding company is
maintained on an ongoing basis and to determine the effects or consequences of transactions between a bank holding company or its non-
banking subsidiaries and its bank subsidiaries. The inspection type and frequency typically varies depending on asset size, complexity
of the organization, and the bank holding company’s rating at its last inspection.
Examinations. Banks are subject to periodic examinations by their primary regulators. In assessing a bank's condition, bank examinations
have evolved from reliance on transaction testing to a risk-focused approach. These examinations are extensive and cover the entire
breadth of the operations of a bank. Generally, safety and soundness examinations occur on an 18-month cycle for banks under $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 agencies, and in some cases they may occur on a combined schedule. The frequency of consumer
compliance and CRA examinations is linked to the size of the institution and its compliance and CRA ratings at its most recent examinations.
However, the examination authority of the Federal Reserve and the FDIC allows them to examine supervised institutions as frequently
as deemed necessary based on the condition of the institution or as a result of certain triggering events. The Company exceeded $10
billion in total consolidated assets in the first quarter of 2018; therefore, the Company will now be subject to the direct supervision of
the CFPB.
Commercial Real Estate Ratios. The federal banking regulators recently issued guidance reminding financial institutions to reexamine
the existing regulations regarding concentrations in commercial real estate lending. The purpose of the guidance is to guide banks in
developing risk management practices and capital levels commensurate with the level and nature of real estate concentrations. The
banking regulators are directed to examine each bank’s exposure to commercial real estate loans that are dependent on cash flow from
the real estate held as collateral and to focus their supervisory resources on institutions that may have significant commercial real estate
loan concentration risk. The guidance provides that the strength of an institution’s lending and risk management practices with respect
to such concentrations will be taken into account in evaluating capital adequacy and does not specifically limit a bank’s commercial real
estate lending to a specified concentration level.
Corporate Governance and Accounting
The Sarbanes-Oxley Act of 2002 (“SOX Act”) addresses, among other things, corporate governance, auditing and accounting, enhanced
and timely disclosure of corporate information, and penalties for non-compliance. In general, the SOX Act 1) requires chief executive
officers and chief financial officers to certify to the accuracy of periodic reports filed with the SEC; 2) imposes specific and enhanced
corporate disclosure requirements; 3) accelerates the time frame for reporting insider transactions and periodic disclosures by public
companies; 4) requires companies to adopt and disclose information about corporate governance practices, including whether or not they
have adopted a code of ethics for senior financial officers and whether the audit committee includes at least one “audit committee financial
expert”; and 5) requires the SEC, based on certain enumerated factors, to regularly and systematically review corporate filings. As a
publicly reporting company, the Company is subject to the requirements of the SOX Act and related rules and regulations issued by the
SEC and NASDAQ.
11
Anti-Money Laundering and Anti-Terrorism
The Bank Secrecy Act (“BSA”) requires all financial institutions to establish a risk-based system of internal controls reasonably designed
to prevent money laundering and the financing of terrorism. The BSA also sets forth various recordkeeping and reporting requirements
(such as reporting suspicious activities that might signal criminal activity) and certain due diligence and "know your customer"
documentation requirements.
The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001
(“Patriot Act”), intended to combat terrorism, was renewed with certain amendments in 2006. In relevant part, the Patriot Act 1) prohibits
banks from providing correspondent accounts directly to foreign shell banks; 2) imposes due diligence requirements on banks opening
or holding accounts for foreign financial institutions or wealthy foreign individuals; 3) requires financial institutions to establish an anti-
money laundering compliance program; and 4) eliminates civil liability for persons who file suspicious activity reports. The Patriot Act
also includes provisions providing the government with power to investigate terrorism, including expanded government access to bank
account records. Regulators are directed to consider a bank holding company’s and a bank’s effectiveness in combating money laundering
when reviewing and ruling on applications under the BHCA and the Bank Merger Act. The Company and the Bank have established
comprehensive compliance programs designed to comply with the requirements of the BSA and Patriot Act.
Financial Services Modernization
The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (“GLBA”) brought about significant changes to the laws affecting
banks and bank holding companies. Generally, the GLBA 1) repeals historical restrictions on preventing banks from affiliating with
securities firms; 2) provides a uniform framework for the activities of banks, savings institutions, and their holding companies; 3) broadens
the activities that may be conducted by national banks and banking subsidiaries of bank holding companies; 4) provides an enhanced
framework for protecting the privacy of consumer information and requires notification to consumers of bank privacy policies; and 5)
addresses a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions.
The Bank is subject to FDIC regulations implementing the privacy provisions of the GLBA. These regulations require a bank to disclose
its privacy policy, including informing consumers of the bank's information sharing practices and their right to opt out of certain practices.
Deposit Insurance
FDIC Insured Deposits. The Bank's deposits are insured under the Federal Deposit Insurance Act, up to the maximum applicable limits
and are subject to deposit insurance assessments by the FDIC, which are designed to tie what banks pay for deposit insurance to the risks
they pose. The Dodd-Frank Act redefined the assessment base used for calculating deposit insurance assessments by requiring the FDIC
to determine assessments based on assets instead of deposits. Assessments are now based on the average consolidated total assets less
average tangible equity capital of a financial institution. In addition, the Dodd-Frank Act 1) raised the minimum designated reserve ratio
(the FDIC is required to set the reserve ratio each year) of the DIF from 1.15 percent to 1.35 percent; 2) required that the DIF reserve
ratio meet 1.35 percent by 2020; and 3) eliminated the requirement that the FDIC pay dividends to insured depository institutions when
the reserve ratio exceeds certain thresholds. The Dodd-Frank Act made banks with $10 billion or more in total assets, which threshold
the Bank exceeded in the first quarter of 2018, responsible for the increase from 1.15 percent to 1.35 percent. No institution may pay a
dividend if it is in default on its federal deposit insurance assessment. The FDIC may also prohibit any insured institution from engaging
in any activity determined by regulation or order to pose a serious risk to the DIF.
Safety and Soundness. The FDIC may terminate the deposit insurance of any insured depository institution if the FDIC determines after
a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, order, or any condition imposed by an agreement with the FDIC. Management
is not aware of any existing circumstances that would result in termination of the Bank's deposit insurance.
Insurance of Deposit Accounts. The Dodd-Frank Act permanently increased FDIC deposit insurance from $100,000 to $250,000 per
depositor. The FDIC insurance coverage limit applies per depositor, per insured depository institution for each account ownership
category.
Recent and Proposed Legislation
The economic and political environment of the past several years has led to a number of proposed legislative, governmental, and regulatory
initiatives that may significantly impact the banking industry. Other regulatory initiatives by federal and state agencies may also
significantly impact the Company's and the Bank’s business. The Company and 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. While recent history has demonstrated that new legislation or changes to existing laws or regulations typically
result in a greater compliance burden (and therefore increase the general costs of doing business), the current administration has expressed
an attempt to reduce these regulatory burdens.
12
On December 22, 2017, a law commonly known as the Tax Cuts and Jobs Act (“Tax Act”) was signed into law by President Donald
Trump. Among other provisions, the Tax Act reduced the federal corporate tax rate to 21 percent from the existing maximum rate of 35
percent. As a result of the Tax Act, the effective tax rate for the Company is expected to be reduced to a range of 17 to 18 percent. The
Tax Act also limits the ability of financial institutions with assets of $10 billion or more to deduct insurance premiums paid to the FDIC.
While the Company has evaluated the impact of the Tax Act with respect to the tax rate, it is too early to determine other potential impacts
of the Tax Act on the Company.
Effects of Federal Government Monetary Policy
The Company’s earnings and growth are affected not only by general economic conditions, but also by the fiscal and monetary policies
of the federal government, particularly the Federal Reserve. The Federal Reserve implements national monetary policy to promote
maximum employment, stable prices, and moderate long-term interest rates. Through its open market operations in U.S. government
securities, control of the discount rate applicable to borrowings, establishment of reserve requirements against certain deposits, and control
of the interest rate applicable to excess reserve balances and reverse repurchase agreements, the Federal Reserve influences the availability
and cost of money and credit and, ultimately, a range of economic variables including employment, output, and the prices of goods and
services. The nature and impact of future changes in monetary policies and their impact on the Company and the Bank cannot be predicted
with certainty.
Heightened Requirements for Bank Holding Companies with $10 Billion or More in Assets
Various federal banking laws and regulations impose heightened requirements on certain large banks and bank holding companies. Most
of these rules apply primarily to banks and bank holding companies with at least $50 billion in total consolidated assets, but certain rules
also apply to banks and bank holding companies with at least $10 billion in total consolidated assets. For example, because the Company
exceeded this $10 billion threshold in the first quarter of 2018, it will be required to, among other requirements:
perform annual stress tests;
•
• maintain a dedicated risk committee responsible for overseeing enterprise-wide risk management policies;
calculate its FDIC deposit assessment base using a performance score and a loss-severity score system; and
•
be examined for compliance with federal consumer protection laws primarily by the CFPB.
•
The Company has analyzed these heightened requirements to ensure that it will comply with these rules.
Item 1A. Risk Factors
The following is a discussion of what the Company believes are 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, Utah, Washington, Wyoming, Colorado and
Arizona, and a softening of the economies in these market areas could have a material adverse effect on its business, financial condition,
results of operations and prospects. Any future deterioration in economic conditions in the markets the Bank serves could result in the
following consequences, any of which could have an adverse impact, which could be material, on 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 in value, in turn reducing customers’ borrowing power;
certain securities within the investment portfolio could become other-than-temporarily impaired, requiring a write-down through
earnings to fair value, thereby reducing equity;
low cost or non-interest bearing deposits may decrease; and
demand for loan and other products and services may decrease.
13
National and global economic and geopolitical conditions could adversely affect the Company’s future results of operations or market
price of its stock.
The Company’s business is impacted by factors such as economic, political and market conditions, broad trends in industry and finance,
changes in government monetary and fiscal policies, inflation, and financial market volatility, all of which are beyond the Company’s
control. National and global economies are constantly in flux, as evidenced by recent market volatility resulting from, among other things,
a relatively new presidential administration and new tax and economic policies associated therewith (e.g., Tax Act), the uncertain future
relationship of the United Kingdom with the European Union (e.g., Brexit), and the ever-changing landscape of the energy industry.
Future economic conditions cannot be predicted, and any renewed deterioration in the economies of the nation as a whole or in the
Company’s markets could have an adverse effect, which could be material, on its business, financial condition, results of operations and
prospects, and could cause the market price of the Company’s stock to decline.
The Company will be subject to heightened regulatory requirements when the Company exceeds $10 billion in assets.
The Company exceeded its total consolidated assets of $10 billion during the first quarter of 2018. The Dodd-Frank Act and its
implementing regulations impose additional requirements on bank holding companies with $10 billion or more in total assets, including
compliance with specific sections of the Federal Reserve's prudential oversight requirements and annual stress testing requirements. The
Durbin Amendment, which was passed as part of Dodd-Frank, instructed the Federal Reserve to establish rules limiting the amount of
interchange fees that can be charged to merchants for debit card processing. The Federal Reserve's final rules contained several key
pieces, including in relevant part an interchange fee cap, certain fraud prevention adjustments, and, most notably, an exemption from the
interchange fee cap for small issuers. Issuers with less than $10 billion in total assets (as of the end of the previous calendar year) are
exempt from the Federal Reserve's interchange fee cap. As soon as the Company's total assets exceeded $10 billion, the interchange fee
cap of the Durbin Amendment negatively affects the interchange income the Bank receives from electronic payment transactions. The
interchange fee cap becomes effective to the Company commencing in 2019.
In addition, banks with $10 billion or more in total assets are primarily examined by the CFPB with respect to compliance with various
federal consumer financial protection laws and regulations. As a fairly new agency with evolving regulations and practices, it is uncertain
as to how the CFPB's examinations and regulatory authority may impact the Company's business.
A failure in or breach of the Bank’s operational or security systems, or those of the Bank’s third party service providers, including as a
result of cyber attacks, could disrupt business, result in the disclosure or misuse of confidential or proprietary information, damage 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, financial
reporting 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 allowance for loan and lease losses may not be adequate to cover actual loan losses, which could adversely affect earnings.
The Bank maintains an allowance for loan and lease losses (“ALLL” or “allowance”) in an amount that it believes is adequate to provide
for losses in the loan portfolio. While the Bank strives to carefully manage and monitor credit quality and to identify loans that may
become non-performing, at any time there are loans included in the portfolio that will result in losses, but that have not been identified
as non-performing or potential problem loans. With respect to real estate loans and property taken in satisfaction of such loans (“other
real estate owned” or “OREO”), the Bank can be required to recognize significant declines in the value of the underlying real estate
collateral quite suddenly as values are updated through appraisals and evaluations (new or updated) performed in the normal course of
monitoring the credit quality of the loans. There are many factors that can cause the value of real estate to decline, including declines in
the general real estate market, changes in methodology applied by appraisers, and/or using a different appraiser than was used for the
prior appraisal or evaluation. The Bank’s ability to recover on real estate loans by selling or disposing of the underlying real estate
collateral is adversely impacted by declining values, which increases the likelihood the Bank will suffer losses on defaulted loans beyond
the amounts provided for in the ALLL. This, in turn, could require material increases in the Bank’s provision for loan losses and ALLL.
14
By closely monitoring credit quality, the Bank attempts to identify deteriorating loans before they become non-performing assets and
adjust the ALLL accordingly. However, because future events are uncertain, and if difficult economic conditions occur, there may be
loans that deteriorate to a non-performing status in an accelerated time frame. As a result, future additions to the ALLL may be necessary
beyond the levels commensurate with any loan growth. Because the loan portfolio contains a number of loans with relatively large
balances, the deterioration of one or a few of these loans may cause a significant increase in non-performing loans, requiring an increase
to the ALLL. Additionally, future significant additions to the ALLL may be required based on changes in the mix of loans comprising
the portfolio, changes in the financial condition of borrowers, which may result from changes in economic conditions, or changes in the
assumptions used in determining the ALLL. Additionally, federal and state banking regulators, as an integral part of their supervisory
function, periodically review the Bank’s loan portfolio and the adequacy of the ALLL. These regulatory authorities may require the Bank
to recognize further loan loss provisions or charge-offs based upon their judgments, which may be different from the Bank’s judgments.
Any increase in the ALLL could have an adverse effect, which could be material, on 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.
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 financial condition and results of operations in various ways. The Bank does not record interest income on non-
accrual loans or OREO, thereby adversely affecting its earnings. When the Bank takes collateral in foreclosures and similar proceedings,
it is required to mark the related asset to the then fair value of the collateral, less estimated cost to sell, which may result in a charge-off
of the value of the asset and lead the Bank to increase the provision for loan losses. An increase in the level of non-performing assets
also increases the Bank’s risk profile and may impact the capital levels its regulators believe are appropriate in light of such risks. Further
decreases in the value of these assets, or the underlying collateral, or in these borrowers’ performance or financial condition, whether or
not due to economic and market conditions beyond the Bank’s control, could adversely affect 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.
The Bank’s loan portfolio mix increases the exposure to credit risks tied to deteriorating conditions.
The loan portfolio contains a high percentage of commercial, commercial real estate, real estate acquisition and development loans in
relation to the total loans and total assets. These types of loans have historically been viewed as having more risk of default than residential
real estate loans or certain other types of loans or investments. In fact, the FDIC has issued pronouncements alerting banks of its concern
about banks with a heavy concentration of commercial real estate loans. These types of loans also typically are larger than residential
real estate loans and other commercial loans. Because the Bank’s loan portfolio contains a significant number of commercial and
commercial real estate loans with relatively large balances, the deterioration of one or more of these loans may cause a significant increase
in non-performing loans. An increase in non-performing loans could result in a loss of earnings from these loans, an increase in the
provision for loan losses, or an increase in charge-offs, which could have a material adverse impact on results of operations and financial
condition.
Competition in the Bank’s market areas may limit future success.
Commercial banking is a highly competitive business and a consolidating industry. The Bank competes with other commercial banks,
credit unions, finance, insurance and other non-depository companies operating in its market areas. The Bank is subject to substantial
competition for loans and deposits from other financial institutions. Some of its competitors are not subject to the same degree of regulation
and restriction as the Bank. Some of the Bank’s competitors have greater financial resources than the Bank. If the Bank is unable to
effectively compete in its market areas, the Bank’s business, results of operations and prospects could be adversely affected.
15
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. In December 2017, the
Federal Reserve increased the federal funds target range by 0.25 percent from 1.25 to 1.50 percent and has indicated further increases
could continue depending on economic conditions.
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
become more challenging, the Company may be unable to grow organically or successfully complete or integrate potential future
acquisitions. The Company has historically used its strong stock currency to complete acquisitions. Downturns in the stock market and
the trading price of the Company’s stock could have an impact on 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.
Growth through future acquisitions could, in some circumstances, adversely affect profitability or other performance measures.
During 2017 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.
Acquisitions may also cause business disruptions that cause the Bank to lose customers or cause customers to remove their accounts from
the Bank and move to competing financial institutions. Further, acquisitions may also disrupt the Bank's ongoing businesses or create
inconsistencies in standards, controls, procedures, and policies that adversely affect relationships with employees, clients, customers,
and depositors. The loss of key employees during acquisitions may also adversely affect the Company's business.
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, book value per share, or the percentage ownership of current shareholders. In
acquisitions involving the use of cash as consideration, there will be an impact on the Company's capital position.
The Company’s business is heavily dependent on the services of members of the senior management team.
The Company believes its success to date has been substantially dependent on its executive management team. In addition, the Company’s
unique model relies upon the Presidents of its separate Bank divisions, particularly in light of the Company’s decentralized management
structure in which such Bank divisions have significant local decision-making authority. The unexpected loss of any of these persons
could have an adverse effect on the Company’s business and future growth prospects.
The Company’s future performance will depend on its ability to respond to technological change.
The financial services industry is experiencing rapid technological changes with frequent introductions of new technology-driven products
and services. Effective use of technology increase efficiency and enables financial institutions to better serve customers and to reduce
costs. Many of the Company’s competitors have substantially greater resources to invest in technological improvements than the Company
does. The Company’s future success will depend, to some degree, upon its ability to address the needs of its customers by using technology
to provide products and services that will satisfy customer demands for convenience, as well as create additional efficiencies in the
Company’s operations. The Company may not be able to effectively implement new technology-driven products or services, or be
successful in marketing these products and services. Additionally, the implementation of technological changes and upgrades to maintain
current systems and integrate new ones may cause services interruptions, transaction processing errors and system conversion delays and
may cause the Company to fail to comply with applicable laws. There can be no assurance that the Company will be able to successfully
manage the risks associated with increased dependency on technology.
16
A decline in the fair value of the Bank’s investment portfolio could adversely affect earnings and capital.
The fair value of the Bank’s investment securities could decline as a result of factors including changes in market interest rates, tax reform,
credit quality and credit ratings, lack of market liquidity and other economic conditions. 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.
The size of the investment portfolio has declined over the past few years and represents 25 percent of total assets at December 31, 2017
and 33 percent of total assets at December 31, 2016. 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, investment securities present
a different type of asset quality risk than the loan portfolio. At December 31, 2017, the investment portfolio consisted of 73 percent
available-for-sale and 27 percent held-to-maturity designated investment securities. 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.
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, 2017 and 2016; however,
there can be no assurance that future evaluations of goodwill will not result in findings of impairment and write-downs, which could be
material. While a non-cash item, impairment of goodwill could have a material adverse effect on the Company’s business, financial
condition and results of operations. Furthermore, impairment of goodwill could subject the Company to regulatory limitations, including
the ability to pay dividends on its common stock.
There can be no assurance the Company will be able to continue paying dividends on its common stock at recent levels.
The Company may not be able to continue paying quarterly dividends commensurate with recent levels given that the ability to pay
dividends on the Company’s common stock depends on a variety of factors. The payment of dividends is subject to government regulation
in that regulatory authorities may prohibit banks and bank holding companies from paying dividends that would constitute an unsafe or
unsound banking practice. 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 level of earnings at
the Bank.
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.
17
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
The FDIC has adopted a final rule to increase the federal Deposit Insurance Fund, including additional future premium increases and
special assessments.
On March 15, 2016, the FDIC adopted a final rule to increase insurance premiums and has imposed special assessments to rebuild and
maintain the DIF, and any additional future premium increases or special assessments could have a material adverse effect on the Company’s
business, financial condition, and results of operations. Additional information regarding this matter is set forth under the heading
“Supervision and Regulation” in “Item 1. Business.”
The Dodd-Frank Act broadened the base for FDIC insurance assessments. In addition, the Dodd-Frank Act established 1.35 percent as
the minimum DIF reserve ratio. The FDIC has determined that the fund reserve ratio should be 2.0 percent (which is beyond what is
required by law) and has adopted a plan under which it will meet the statutory minimum fund reserve ratio of 1.35 percent by the statutory
deadline of September 30, 2020. The Dodd-Frank Act made banks with $10 billion or more in total assets responsible for the increase
from 1.15 percent to 1.35 percent. The increase is effective for banks in the first quarter following four consecutive quarters of total
consolidated assets exceeding $10 billion. Since the Bank exceeded the $10 billion asset threshold in the first quarter of 2018, the increase
in deposit insurance assessments to be paid by the Bank is expected to be effective in the first quarter of 2019.
The impact of Basel III is uncertain.
Basel III sets forth more robust global regulatory standards on capital adequacy, qualifying capital instruments, leverage ratios, market
liquidity risk, and stress testing, which may be stricter than standards currently in place. The phase-in period for Basel III began on
January 1, 2015 and will end on January 1, 2019. The implementation of these new standards could have an adverse impact on the
Company’s financial position and future earnings due to, among other things, the increased Tier 1 capital ratio requirements being
implemented. Additional information regarding Basel III is set forth under the heading “Supervision and Regulation” in “Item 1. Business.”
The Company has various anti-takeover measures that could impede a takeover.
The Company’s articles of incorporation include certain provisions that could make it more difficult to acquire 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 Company's business is subject to the risks of earthquakes, floods, fires, and other natural catastrophes.
With Bank branches located in Montana, Idaho, Utah, Washington, Wyoming, Colorado and Arizona, the Company's business could be
affected by a major natural catastrophe, such as a fire, flood, earthquake, or other natural disaster. The occurrence of any of these natural
disasters may result in a prolonged interruption of the Company's business, which could have a material adverse effect on the Company's
financial condition and operations.
18
Item 1B. Unresolved Staff Comments
None
Item 2. Properties
The following schedule provides information on the Company’s 145 properties as of December 31, 2017:
(Dollars in thousands)
Montana
Idaho
Utah
Washington
Wyoming
Colorado
Arizona
Properties
Leased
Properties
Owned
Net Book
Value
7
7
1
3
1
2
3
24
52
21
3
10
15
18
2
121
$
$
82,614
27,981
2,147
5,959
16,567
15,574
5,231
156,073
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 4 to the Consolidated
Financial Statements in “Item 8. Financial Statements and Supplementary Data.”
Item 3. Legal Proceedings
The Company is involved in various claims, legal actions and complaints which arise in the ordinary course of business. In 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
19
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, 2017, there were
approximately 1,691 shareholders of record for the Company’s common stock. The market range of high and low sales prices for the
Company’s common stock for the periods indicated are shown below:
First quarter
Second quarter
Third quarter
Fourth quarter
2017
2016
High
Low
High
Low
$
38.17
37.41
38.18
41.23
31.70
31.56
31.38
35.50
26.50
27.84
30.12
37.87
21.90
24.18
25.09
27.31
The following table summarizes the Company’s dividends declared during the periods indicated:
First quarter
Second quarter
Third quarter
Fourth quarter
Special
Total
Years ended
December 31,
2017
December 31,
2016
$
$
0.21
0.21
0.21
0.21
0.30
1.14
0.20
0.20
0.20
0.20
0.30
1.10
Future cash dividends will depend on a variety of factors, including net income, capital, asset quality, general economic conditions and
regulatory considerations. Information regarding the regulation considerations is set forth under the heading “Supervision and Regulation”
in “Item 1. Business.”
Issuer Stock Purchases
The Company made no stock repurchases during 2017.
20
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 is computed assuming the reinvestment of dividends at the frequency with which dividends were paid during the applicable years.
21
Item 6. Selected Financial Data
Non-GAAP Financial Measures
In addition to the results presented in accordance with GAAP, this Annual Report on Form 10-K contains certain non-GAAP financial
measures. The Company believes that providing these non-GAAP financial measures provides investors with information useful in
understanding the Company’s financial performance, performance trends, and financial position. While the Company uses these non-
GAAP measures in its analysis of the Company’s performance, this information should not be considered an alternative to measurements
required by GAAP. The following table provides a reconciliation of certain GAAP financial measures to non-GAAP financial measures.
(Dollars in thousands, except per share data)
Federal and state income tax expense
Net income
Basic earnings per share
Diluted earnings per share
Return on average assets
Return on average equity
Dividend payout ratio
Effective tax rate
Year ended December 31, 2017
GAAP
Tax Act
Adjustment
Non-GAAP
$
$
$
$
64,625
116,377
1.50
1.50
1.20%
9.80%
76.00%
35.70%
(19,699)
19,699
0.25
0.25
0.21 %
1.66 %
(10.86)%
(10.88)%
44,926
136,076
1.75
1.75
1.41%
11.46%
65.14%
24.82%
The reconciling item between the GAAP and non-GAAP financial measures was the current year one-time net tax expense of $19.7
million. The one-time net tax expense was driven by the Tax Act and the change in the current year federal marginal rate of 35 percent
to 21 percent for future years, which resulted in this revaluation of its deferred tax assets and deferred tax liabilities (“net deferred tax
asset”). The Company believes the financial results are more comparable excluding the impact of the revaluation of the net deferred tax
asset.
Basic earnings per share is calculated by dividing net income by average outstanding shares and diluted earnings per share is calculated
by dividing net income by diluted average outstanding shares. The one-time net tax expense of $19.7 million was included in determining
income for both the GAAP basic earnings per share and the GAAP diluted earnings per share. Conversely, the one-time net tax expense
of $19.7 million was excluded in determining income for both the non-GAAP basic earnings per share and the non-GAAP diluted earnings
per share. Average outstanding shares of 77,537,664 was used in the GAAP and non-GAAP basic earnings per share for the year ended
December 31, 2017. Diluted average outstanding shares of 77,607,605 was used in the GAAP and non-GAAP diluted earnings per share
for the year ended December 31, 2017.
The return on average assets ratio is calculated by dividing net income by average assets and the return on average equity ratio is calculated
by dividing net income by average equity. The one-time net tax expense of $19.7 million was included in determining income for both
the GAAP return on average assets and the GAAP return on average equity. Conversely, the one-time net tax expense of $19.7 million
was excluded in determining income for both the non-GAAP return on average assets and the non-GAAP return on average equity.
Average assets of $9.678 billion was used in the GAAP and non-GAAP return on average assets ratios for the year ended December 31,
2017. Average equity of $1.188 billion was used in the GAAP and non-GAAP return on average equity ratios for the year ended December
31, 2017.
The dividend payout ratio is calculated by dividing dividends declared per share by basic earnings per share. The non-GAAP dividend
payout ratio uses the non-GAAP basic earnings per share for calculating the ratio.
The effective tax rate is calculated by dividing federal and state income tax expense by income before income taxes. The non-GAAP
effective tax rate uses the non-GAAP federal and state income tax expense of $44.9 million for calculating the rate.
22
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)
2017
2016
December 31,
2015
2014
2013
Compounded Annual
Growth Rate
1-Year
5-Year
Selected Statements of Financial
Condition Information
Total assets
Investment securities
Loans receivable, net
$9,706,349
$9,450,600
$9,089,232
$8,306,507
$7,884,350
2,426,556
3,101,151
3,312,832
2,908,425
3,222,829
6,448,256
5,554,891
4,948,984
4,358,342
3,932,487
Allowance for loan and lease losses
(129,568)
(129,572)
(129,697)
(129,753)
(130,351)
Goodwill and intangibles
191,995
159,400
155,193
140,606
139,218
Deposits
7,579,747
7,372,279
6,945,008
6,345,212
5,579,967
Federal Home Loan Bank advances
353,995
251,749
394,131
296,944
840,182
Securities sold under agreements to
repurchase and other borrowed funds
Stockholders’ equity
Equity per share
Equity as a percentage of total assets
370,797
478,090
430,016
404,418
1,199,057
1,116,869
1,076,650
1,028,047
15.37
12.35%
14.59
11.82%
14.15
11.85%
13.70
12.38%
321,781
963,250
12.95
12.22%
2.7 %
(21.8)%
16.1 %
— %
20.4 %
2.8 %
40.6 %
(22.4)%
7.4 %
5.3 %
4.5 %
4.2 %
(5.5)%
10.4 %
(0.1)%
6.6 %
6.3 %
(15.9)%
2.9 %
4.5 %
3.5 %
0.2 %
(Dollars in thousands, except per share data)
2017
Summary Statements of Operations
Years ended December 31,
2015
2014
2016
Compounded Annual
Growth Rate
1-Year
5-Year
2013
$
375,022
$
344,153
$
319,681
$
299,919
$
263,576
Interest income
Interest expense
Net interest income
Provision for loan losses
Non-interest income
Non-interest expense
Income before income taxes
Federal and state income tax expense 1
Net income 1
Basic earnings per share 1
Diluted earnings per share 1
Dividends declared per share 2
$
$
$
$
9.0%
0.8%
18.9%
364.0%
4.6%
2.7%
20.6%
13.3%
17.2%
10.1%
10.1%
3.6%
7.3%
0.8%
8.0%
9.5%
3.8%
6.3%
7.6%
8.4%
7.3%
6.0%
6.0%
13.7%
29,864
345,158
10,824
112,239
265,571
181,002
44,926
136,076
1.75
1.75
1.14
$
$
$
$
29,631
314,522
2,333
107,318
258,714
160,793
39,662
121,131
1.59
1.59
1.10
$
$
$
$
29,275
290,406
2,284
98,761
236,757
150,126
33,999
116,127
1.54
1.54
1.05
$
$
$
$
26,966
272,953
1,912
90,302
212,679
148,664
35,909
112,755
1.51
1.51
0.98
$
$
$
$
28,758
234,818
6,887
93,047
195,317
125,661
30,017
95,644
1.31
1.31
0.60
23
(Dollars in thousands)
2017
At or for the Years ended December 31,
2015
2014
2016
Selected Ratios and Other Data
Return on average assets 1
Return on average equity 1
Dividend payout ratio 1,2
Average equity to average asset ratio
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Common Equity Tier 1 (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
1.41%
11.46%
65.14%
12.27%
15.64%
14.39%
12.81%
11.90%
4.12%
53.94%
1.32%
10.79%
69.18%
12.27%
16.38%
15.12%
13.42%
11.90%
4.02%
55.88%
1.36%
10.84%
68.18%
12.52%
17.17%
15.91%
14.06%
12.01%
4.00%
55.40%
2013
1.23%
10.22%
45.80%
11.99%
18.97%
17.70%
1.42%
11.11%
64.90%
12.81%
18.93%
17.67%
N/A
N/A
12.45%
12.11%
3.98%
54.31%
3.48%
54.51%
1.97%
2.28%
2.55%
2.89%
3.21%
255%
257%
244%
209%
158%
0.68%
$65,179
0.76%
71,385
0.88%
80,079
1.08%
89,900
1.39%
109,420
Loans originated and acquired
$3,629,493
3,474,000
3,000,830
2,404,299
2,477,804
Number of full time equivalent employees
Number of locations
2,278
145
2,222
142
2,149
144
1,943
129
1,837
118
______________________________
1 Excludes a one-time revaluation of the deferred tax assets and deferred tax liabilities as a result of the Tax Act for the year ended December 31, 2017.
For additional information on the revaluation, see the “Non-GAAP Financial Measures” section.
2 Includes a special dividend declared of $0.30 per share for 2017, 2016, 2015 and 2014.
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.
24
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion is intended to provide a more comprehensive review of the Company’s operating results and financial condition
than can be obtained from reading the Consolidated Financial Statements alone. The discussion should be read in conjunction with the
Consolidated Financial Statements and the notes thereto included in “Item 8. Financial Statements and Supplementary Data.”
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K may contain forward-looking statements within the meaning of the Private Securities Litigation Reform
Act of 1995. These forward-looking statements include, but are not limited to, statements about the Company’s plans, objectives,
expectations and intentions that are not historical facts, and other statements identified by words such as “expects,” “anticipates,” “intends,”
“plans,” “believes,” “should,” “projects,” “seeks,” “estimates”, or the negative version of those words or other comparable words or
phrases of a future or forward-looking nature. These forward-looking statements are based on current beliefs and expectations of
management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which
are beyond the Company’s control. In addition, these forward-looking statements are subject to assumptions with respect to future
business strategies and decisions that are subject to change. The following factors, among others, could cause actual results to differ
materially from the anticipated results (express or implied) or other expectations in the forward-looking statements, including those set
forth in this Annual Report on Form 10-K, or the documents incorporated by reference:
•
•
•
•
•
•
•
•
•
•
•
•
•
the risks associated with lending and potential adverse changes of the credit quality of loans in the Company’s portfolio;
changes in trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal
Reserve System or the Federal Reserve Board, which could adversely affect the Company’s net interest income and profitability;
changes in the cost and scope of insurance from the FDIC and other third parties;
legislative or regulatory changes, including increased banking and consumer protection regulation that adversely affect the
Company’s business, both generally and as a result of the Company exceeding $10 billion in total consolidated assets;
ability to complete pending or prospective future acquisitions, limit certain sources of revenue, or increase cost of operations;
costs or difficulties related to the completion and integration of acquisitions;
the goodwill the Company has recorded in connection with acquisitions could become impaired, which may have an adverse
impact on earnings and capital;
reduced demand for banking products and services;
the reputation of banks and the financial services industry could deteriorate, which could adversely affect the Company's ability
to obtain (and maintain) customers;
competition among financial institutions in the Company's markets may increase significantly;
the risks presented by continued public stock market volatility, which could adversely affect the market price of the Company’s
common stock and the ability to raise additional capital or grow the Company through acquisitions;
the projected business and profitability of an expansion or the opening of a new branch could be lower than expected;
consolidation in the financial services industry in the Company’s markets resulting in the creation of larger financial institutions
who may have greater resources could change the competitive landscape;
dependence on the CEO, the senior management team and the Presidents of Glacier Bank divisions;
•
• material failure, potential interruption or breach in security of the Company’s systems and technological changes which could
expose us to new risks (e.g., cybersecurity), fraud or system failures;
natural disasters, including fires, floods, earthquakes, and other unexpected events;
the Company’s success in managing risks involved in the foregoing; and
the effects of any reputational damage to the Company resulting from any of the foregoing.
•
•
•
Additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed
in “Item 1A. Risk Factors.” Please take into account that forward-looking statements speak only as of the date of this Annual Report on
Form 10-K (or documents incorporated by reference, if applicable). Given the described uncertainties and risks, the Company cannot
guarantee its future performance or results of operations and you should not place undue reliance on these forward-looking statements.
The Company does not undertake any obligation to publicly correct, revise, or update any forward-looking statement if it later becomes
aware that actual results are likely to differ materially from those expressed in such forward-looking statement, except as required under
federal securities laws.
25
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2017 COMPARED TO DECEMBER 31, 2016
Highlights and Overview
During the second quarter of 2017, the Company completed the acquisition of Foothills, a community bank based in Yuma, Arizona.
Foothills became the Company’s fourteenth bank division and its first entrance into the Arizona market. During the fourth quarter of
2017, the Company also successfully completed the data processing system conversion for this acquisition. During the second quarter
of 2017, the Company announced the signing of a definitive agreement to acquire Collegiate, a community bank based in Buena Vista,
Colorado and the transaction was completed on January 31, 2018. Collegiate provides banking services to individuals and businesses in
the Mountain and Front Range communities of Colorado with five banking offices located in Aurora, Buena Vista, Denver and Salida.
The branches of Collegiate will operate as a new bank division of the Company. As of December 31, 2017, Collegiate had total assets
of $533 million, gross loans of $346 million and total deposits of $464 million. During the fourth quarter of 2017, the Company announced
the signing of a definitive agreement to acquire FSB, a community bank based in Bozeman, Montana. FSB provides banking services
to individuals and businesses throughout Montana with eleven banking offices located in Bozeman, Belgrade, Big Sky, Choteau, Fairfield,
Fort Benton, Three Forks, Vaughn and West Yellowstone. Upon closing of the transaction, which is anticipated to take place in February
2018, FSB will become a new bank division headquartered in Bozeman. Big Sky Western Bank, the Bank’s existing Bozeman-based
division will combine with the new FSB division. The agriculture-focused northern branches of FSB, located in the area known as the
Golden Triangle, will combine with the Bank’s First Bank of Montana division. As of December 31, 2017, FSB had total assets of $1.028
billion, gross loans of $640 million and total deposits of $891 million. See Notes 22 and 23 in the Consolidated Financial Statements in
“Item 8. Financial Statements and Supplementary Data” for additional information regarding these acquisitions.
During the current year, the Company successfully executed its strategy to stay below $10 billion in total assets as of year end to delay
the impact of the Durbin Amendment for one additional year. The Company accomplished this strategy in part by redeploying investment
cash flow and selectively selling securities into the higher yielding loan portfolio. The Durbin Amendment, which was passed as part of
the Dodd-Frank Act, establishes limits on the amount of interchange fees that can be charged to merchants for debit card processing and
will reduce the Company’s service charge fee income in the future. Due to the closing of the Collegiate acquisition in January 2018, the
Company crossed the $10 billion asset threshold. The Company has been preparing for this event and believes it is well positioned to
comply with DFAST requirements.
The Tax Act resulted in a decrease in the federal marginal tax rate from 35 percent to 21 percent beginning in 2018. As a result of the
Tax Act, the Company incurred a one-time tax expense adjustment of $19.7 million during 2017 due to the Company’s revaluation of its
net deferred tax assets. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to the years in which
the temporary differences are expected to be recognized. The effect on the deferred tax assets and liabilities from a change in tax rates
is recognized in net income in the period that includes the enactment date, which occurred on December 22, 2017 with the enactment of
the Tax Act.
The Company experienced a strong year for organic loan growth, which increased $601 million, or 11 percent, with the primary increases
in the commercial loan portfolio. As part of the strategy to stay below $10 billion, the Company redeployed cash flows from investment
securities into the loan portfolio. Additionally, the Company utilized a third party vendor to transfer $433 million of deposits off-balance
sheet as of December 31, 2017. These deposits can be brought back onto the Company’s balance sheet at the Company’s discretion.
Including the deposit accounts transferred, organic deposit growth increased $478 million, or 7 percent, during the current year. Tangible
stockholders’ equity increased $50 million, or $0.40 per share, as a result of earnings retention, increase in other comprehensive income
(“OCI”), and Company stock issued in connection with the current year acquisition, all of which offset the increases in goodwill and
intangibles from the acquisition. The Company increased its total dividends declared from $1.10 per share during 2016 to $1.14 per
share in 2017.
The Company continued to reduce its non-performing assets and ended the year at $65.2 million which was a decrease of $6.2 million
or, 9 percent, from the prior year end. The allowance as a percentage of total loans as of December, 31, 2017 was 1.97 percent, a decrease
of 31 basis points (“bps”), or 13.5 percent, from 2.28 percent at December 31, 2016. Loan portfolio growth, composition, average loan
size, credit quality considerations, and other environmental factors will continue to determine the ALLL.
26
Net income for the year was $116 million, a decrease of $4.8 million, or 4 percent, over the 2016 net income of $121 million. Diluted
earnings per share for the year was $1.50, a decrease of $0.09, or 6 percent, from 2016 diluted earnings per share of $1.59. Such decreases
were due to the one-time tax expense of $19.7 million from the revaluation of the net deferred tax assets. Excluding the $19.7 million
impact from the Tax Act, the Company had record earnings of $136 million for 2017, an increase of $14.9 million, or 12 percent, over
prior year’s net income of $121 million and diluted earnings per share of $1.75, an increase of $0.16, or 10 percent, from the prior year
diluted earnings per share of $1.59. The improvement in net income for 2017 over 2016 was principally due to an increase in interest
income from the commercial loan portfolio and the Bank divisions’ discipline in controlling operating expenses. For additional information
on the revaluation of net deferred tax assets, see the “Non-GAAP Financial Measures” section in “Item 6. Selected Financial Data.”
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.
Financial Highlights
(Dollars in thousands, except per share data)
Operating results
Net income 1
Basic earnings per share 1
Diluted earnings per share 1
Dividends declared per share
Market value per share
Closing
High
Low
Selected ratios and other data
Number of common stock shares outstanding
Average outstanding shares - basic
Average outstanding shares - diluted
Return on average assets (annualized) 1
Return on average equity (annualized) 1
Efficiency ratio
Dividend payout ratio 1
Loan to deposit ratio
Number of full time equivalent employees
Number of locations
Number of ATMs
At or for the Years ended
December 31,
2017
December 31,
2016
$
$
$
$
$
$
$
136,076
1.75
1.75
1.14
39.39
41.23
31.38
121,131
1.59
1.59
1.10
36.23
37.87
21.90
78,006,956
77,537,664
77,607,605
76,525,402
76,278,463
76,341,836
1.41%
11.46%
53.94%
65.14%
87.29%
2,278
145
200
1.32%
10.79%
55.88%
69.18%
78.10%
2,222
142
200
______________________________
1 Excludes a one-time revaluation of the deferred tax assets and deferred tax liabilities as a result of the Tax Act for the year ended December 31, 2017.
For additional information on the revaluation, see the “Non-GAAP Financial Measures” section in “Item 6. Selected Financial Data.”
27
Recent Acquisitions
On April 30, 2017, the Company completed the acquisition of Foothills, which resulted in goodwill of $30.6 million. On August 31,
2016, the Company completed the acquisition of TSB, which resulted in goodwill of $6.4 million. The Company’s results of operations
and financial condition include the acquisitions of Foothills and TSB from the acquisition dates. For additional information regarding
acquisitions, see Note 22 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.”
The following table 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
Foothills
April 30,
2017
TSB
August 31,
2016
$
385,839
25,420
292,529
97,527
199,233
22,800
76,165
—
51,875
13,005
45,359
3,260
Assets
The following table summarizes the Company’s assets as of the dates indicated:
Financial Condition Analysis
(Dollars in thousands)
December 31,
2017
December 31,
2016
$ Change
% Change
Cash and cash equivalents
$
200,004
$
152,541
$
47,463
Investment securities, available-for-sale
Investment securities, held-to-maturity
Total investment securities
1,778,243
648,313
2,426,556
2,425,477
675,674
3,101,151
(647,234)
(27,361)
(674,595)
Loans receivable
Residential real estate
Commercial real estate
Other commercial
Home equity
Other consumer
Loans receivable
Allowance for loan and lease losses
Loans receivable, net
720,728
3,577,139
1,579,353
457,918
242,686
6,577,824
(129,568)
6,448,256
674,347
2,990,141
1,342,250
434,774
242,951
5,684,463
(129,572)
5,554,891
Other assets
Total assets
631,533
9,706,349
$
642,017
9,450,600
$
$
46,381
586,998
237,103
23,144
(265)
893,361
4
893,365
(10,484)
255,749
31 %
(27)%
(4)%
(22)%
7 %
20 %
18 %
5 %
— %
16 %
— %
16 %
(2)%
3 %
Total investment securities of $2.427 billion at December 31, 2017 decreased $675 million, or 22 percent, from the prior year fourth
quarter. The decrease in the investment portfolio resulted from the Company continuing to redeploy the securities portfolio cash flow
into the Company’s higher yielding loan portfolio. Investment securities represented 25 percent of total assets at December 31, 2017
compared to 33 percent of total assets at December 31, 2016.
Excluding the Foothills acquisition, the loan portfolio increased $601 million, or 11 percent, since the prior year end and primarily came
from growth in commercial real estate and other commercial loans of $357 million and $209 million, respectively.
28
Liabilities
The following table summarizes the liability balances as of the dates indicated, and the amount of change from December 31, 2016:
(Dollars in thousands)
Deposits
Non-interest bearing deposits
NOW and DDA accounts
Savings accounts
Money market deposit accounts
Certificate accounts
Core deposits, total
Wholesale deposits
Deposits, total
Securities sold under agreements to repurchase
Federal Home Loan Bank advances
Other borrowed funds
Subordinated debentures
Other liabilities
Total liabilities
December 31,
2017
December 31,
2016
$ Change
% Change
$
$
2,311,902
1,695,246
1,082,604
1,512,693
817,259
7,419,704
160,043
7,579,747
362,573
353,995
8,224
126,135
76,618
8,507,292
$
$
2,041,852
1,588,550
996,061
1,464,415
948,714
7,039,592
332,687
7,372,279
473,650
251,749
4,440
125,991
105,622
8,333,731
$
$
270,050
106,696
86,543
48,278
(131,455)
380,112
(172,644)
207,468
(111,077)
102,246
3,784
144
(29,004)
173,561
13 %
7 %
9 %
3 %
(14)%
5 %
(52)%
3 %
(23)%
41 %
85 %
— %
(27)%
2 %
The Company reduced the amount of on-balance sheet deposits during the year as part of its strategy to stay below $10 billion in total
assets. Core deposits decreased $380 million, or 5 percent, from the prior year end. The Company utilized a third party vendor to transfer
$433 million of deposits off-balance sheet as of December 31, 2017. Including the deposit accounts transferred, organic core deposits
increased $478 million, or 7 percent, from December 31, 2016. At December 31, 2017, wholesale deposits were $160 million, a decrease
of $173 million, or 52 percent, over the prior year end.
Securities sold under agreements to repurchase (“repurchase agreements”) of $363 million at December 31, 2017 decreased $111 million,
or 23 percent, from the prior year end. Federal Home Loan Bank (“FHLB”) advances of $354 million at December 31, 2017 increased
$102 million over the prior year end. The increase was the result of strategically managing the deposit accounts to stay below $10 billion
and utilizing FHLB advances to manage the daily liquidity needs for loan growth.
Stockholders’ Equity
The following table summarizes the stockholders’ equity balances as of the dates indicated and the amount of change from December 31,
2016:
(Dollars in thousands, except per share data)
Common equity
Accumulated other comprehensive loss
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
December 31,
2017
December 31,
2016
$ Change
% Change
$
$
$
$
1,201,036
(1,979)
1,199,057
(191,995)
1,007,062
12.35%
10.58%
15.37
12.91
$
$
$
$
1,124,251
(7,382)
1,116,869
(159,400)
957,469
11.82%
10.31%
14.59
12.51
$
$
$
$
76,785
5,403
82,188
(32,595)
49,593
0.78
0.40
7 %
(73)%
7 %
20 %
5 %
4 %
3 %
5 %
3 %
Tangible stockholders’ equity increased $49.6 million, or 5 percent, from a year ago, the result of earnings retention and $46.7 million
of Company stock issued in connection with the Foothills acquisition; such increases more than offset the increase in goodwill and core
deposit intangibles. Tangible book value per common share at year end increased $0.40 per share from a year ago.
29
Income Summary
The following table summarizes revenue for the periods indicated, including the amount and percentage changes from December 31,
2016:
Results of Operations
$ Change
% Change
(Dollars in thousands)
Net interest income
Interest income
Interest expense
Total net interest income
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
Years ended
December 31,
2017
December 31,
2016
$
$
375,022
29,864
345,158
$
344,153
29,631
314,522
67,717
4,360
30,439
(660)
10,383
112,239
62,405
4,613
33,606
(1,463)
8,157
107,318
30,869
233
30,636
5,312
(253)
(3,167)
803
2,226
4,921
Net interest margin (tax-equivalent)
4.12%
4.02%
$
457,397
$
421,840
$
35,557
9 %
1 %
10 %
9 %
(5)%
(9)%
(55)%
27 %
5 %
8 %
Net Interest Income
Interest income for the current year increased $30.9 million, or 9 percent, from the prior year and was attributable to a $38.4 million
increase in income from commercial loans which more than offset the decrease of $8.4 million in interest income on investments.
Interest expense of $29.9 million for the current year increased $233 thousand over the prior year. Interest expense on deposits decreased
$1.6 million, or 9 percent, and was due to the decrease in wholesale deposits. Interest expense on repurchase agreements, FHLB advances,
and subordinated debt increased $1.8 million, or 16 percent, over the prior year and was primarily driven by the increase in interest rates.
The total funding cost (including non-interest bearing deposits) for 2017 was 36 basis points compared to 37 basis points for 2016.
The net interest margin as a percentage of earning assets, on a tax-equivalent basis, for 2017 was 4.12 percent, a 10 basis point increase
from the net interest margin of 4.02 percent for 2016. The increase in the margin was primarily attributable to a shift in earning assets
to higher yielding loans. Additionally, there was an increase in yields on earning assets combined with a continued increase in low cost
deposits during the current year.
Non-interest Income
Non-interest income of $112.2 million for 2017 increased $4.9 million, or 5 percent, over last year. Service charges and other fees of
$67.7 million for 2017 increased $5.3 million, or 9 percent, from the prior year as a result of an increased number of deposit accounts.
The gain on sale of loans of $30.4 million for 2017 decreased $3.2 million, or 9 percent, from prior year which was due to a lower volume
of refinanced and purchased mortgages. Other income of $10.4 million for 2017 increased $2.2 million, or 27 percent, over last year and
was the result of an increase on gain on sale of OREO.
30
Non-interest Expense
The following table summarizes non-interest expense for the periods indicated, including the amount and percentage changes from
December 31, 2016:
(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 expenses
Total non-interest expense
Years ended
December 31,
2017
December 31,
2016
$
$
160,506
26,631
8,405
14,150
1,909
4,431
2,494
47,045
265,571
$
$
151,697
25,979
8,433
14,390
2,895
4,780
2,970
47,570
258,714
$
$
$ Change
% Change
8,809
652
(28)
(240)
(986)
(349)
(476)
(525)
6,857
6 %
3 %
— %
(2)%
(34)%
(7)%
(16)%
(1)%
3 %
During 2016, the Company consolidated its Bank divisions’ individual core database systems into a single core database and re-issued
debit cards with chip technology (the Core Consolidation Project or “CCP”). Expenses related to CCP were $4.3 million during 2016.
Excluding CCP expenses, non-interest expense for the current year increased $11.2 million, or 4 percent, over the prior year. Compensation
and employee benefits for 2017 increased $8.8 million, or 6 percent, from the same period last year due to salary increases and the
increased number of employees from the acquired banks. Occupancy and equipment expense increased $652 thousand, or 3 percent from
the prior year as a result of increased costs from acquisitions. Data processing expense decreased $240 thousand, or 2 percent, from the
prior year as a result of decreased costs associated with CCP. Current year other expenses of $47.0 million decreased $525 thousand, or
1 percent, from the prior year and was principally driven by decreased costs associated with CCP.
Efficiency Ratio
The efficiency ratio of 53.94 percent for 2017 decreased 194 basis points from the prior year efficiency ratio of 55.88 percent which
resulted from the increase in net interest income largely due to higher interest income on commercial loans.
Provision for Loan Losses
The following table summarizes the provision for loan losses, net charge-offs and other select ratios for the previous eight quarters:
(Dollars in thousands)
Fourth quarter 2017
Third quarter 2017
Second quarter 2017
First quarter 2017
Fourth quarter 2016
Third quarter 2016
Second quarter 2016
First quarter 2016
Provision
for Loan
Losses
Net
Charge-Offs
(Recoveries)
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
$
$
2,886
3,327
3,013
1,598
1,139
626
—
568
2,894
3,628
2,362
1,944
4,101
478
(2,315)
194
1.97%
1.99%
2.05%
2.20%
2.28%
2.37%
2.46%
2.50%
0.57%
0.45%
0.49%
0.67%
0.45%
0.49%
0.44%
0.46%
0.68%
0.67%
0.70%
0.75%
0.76%
0.84%
0.82%
0.88%
The provision for loan losses was $10.8 million for 2017, an increase of $8.5 million from the same period in the prior year. Net charge-
offs during 2017 were $10.8 million compared to $2.5 million during 2016. Loan portfolio growth, composition, average loan size, credit
quality considerations, and other environmental factors will continue to determine the level of the loan loss provision.
31
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF THE RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2016 COMPARED TO DECEMBER 31, 2015
Income Summary
The following table summarizes revenue for the periods indicated, including the amount and percentage changes from December 31,
2015:
(Dollars in thousands)
Net interest income
Interest income
Interest expense
Total net interest income
Non-interest income
Service charges and other fees
Miscellaneous loan fees and charges
Gain on sale of loans
(Loss) gain on sale of investments
Other income
Total non-interest income
Years ended
December 31,
2016
December 31,
2015
$
$
344,153
29,631
314,522
$
319,681
29,275
290,406
62,405
4,613
33,606
(1,463)
8,157
107,318
59,286
4,276
26,389
19
8,791
98,761
$ Change
% Change
24,472
356
24,116
3,119
337
7,217
(1,482)
(634)
8,557
8 %
1 %
8 %
5 %
8 %
27 %
(7,800)%
(7)%
9 %
$
421,840
$
389,167
$
32,673
8 %
Net interest margin (tax-equivalent)
4.02%
4.00%
Net Interest Income
Net interest income for 2016 was $315 million, an increase of $24.1 million, or 8 percent, over the prior year. Interest income for the
2016 increased $24.5 million, or 8 percent, from the prior year and was principally due to a $24.0 million increase in income from
commercial loans. Additional increases included a $1.3 million in interest income from residential loans.
Interest expense of $29.6 million for 2016 increased $356 thousand, or 1 percent, over the prior year. Deposit interest expense for 2016
increased $2.3 million, or 14 percent, from the prior year and was driven by an increase in wholesale deposits and the additional interest
expense for an interest rate swap with a notional amount of $100 million that began accruing in December 2015. FHLB interest expense
decreased $2.6 million, or 30 percent, as the need for wholesale funding has decreased with strong deposit growth. The total funding
cost (including non-interest bearing deposits) for 2016 was 37 basis points compared to 40 basis points for 2015.
The net interest margin as a percentage of earning assets, on a tax-equivalent basis, for 2016 was 4.02 percent, a 2 basis point increase
from the net interest margin of 4.00 percent for 2015. The increase in the margin was primarily attributable to a shift in earning assets
to higher yielding loans combined with a continued increase in low cost deposits.
Non-interest Income
Non-interest income of $107.3 million for 2016 increased $8.6 million, or 9 percent, over the prior year. Service charges and other fees
of $62.4 million for 2016 increased $3.1 million, or 5 percent, from the prior year as a result of an increased number of deposit accounts,
both from organic growth and from recent acquisitions. The gain of $33.6 million on the sale of loans for 2016 increased $7.2 million,
or 27 percent, from 2015 which was attributable to the stronger housing market and the low interest rate environment. Included in other
income was operating revenue of $127 thousand from OREO and gains of $918 thousand from the sales of OREO, which totaled $1.0
million for 2016 compared to $1.1 million for the prior year.
32
Non-interest Expense
The following table summarizes non-interest expense for the periods indicated, including the amount and percentage changes from
December 31, 2015:
(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 expenses
Total non-interest expense
Years ended
December 31,
2016
December 31,
2015
$
$
151,697
25,979
8,433
14,390
2,895
4,780
2,970
47,570
258,714
$
$
134,382
25,483
8,661
11,244
3,693
5,283
2,964
45,047
236,757
$
$
$ Change
% Change
17,315
496
(228)
3,146
(798)
(503)
6
2,523
21,957
13 %
2 %
(3)%
28 %
(22)%
(10)%
— %
6 %
9 %
Non-interest expense of $259 million for 2016 increased $22.0 million, or 9 percent, over the prior year. Included in non-interest expense
was $4.3 million of CCP related expenses. Compensation and employee benefits for 2016 increased $17.3 million, or 13 percent, from
the prior year due to the increased number of employees including from the acquired banks and annual salary increases. Occupancy and
equipment expense of $26.0 million for 2016 increased $474 thousand, or 2 percent, over the prior year. Outsourced data processing
expense increased $3.3 million, or 29 percent, from the prior year primarily the result of additional costs from CCP. OREO expense of
$2.9 million for 2016 decreased $798 thousand, or 22 percent, from the the prior year. OREO expense for 2016 included $761 thousand
of operating expenses, $1.8 million of fair value write-downs, and $314 thousand of loss from the sales of OREO. Other expenses of
$47.2 million for 2016 increased $2.4 million, or 5 percent, from the prior year and was driven by increases from costs associated with
CCP.
Efficiency Ratio
The efficiency ratio was 55.88 percent for 2016 compared to 55.40 percent for 2015. Although there were increases in both net interest
income and non-interest income, such increases were outpaced by the increases in CCP expenses and compensation expenses which
contributed to the higher efficiency ratio in 2016.
Provision for Loan Losses
The provision for loan losses was $2.3 million for 2016, an increase of $49 thousand, or 2 percent, from the prior year. Net charge-offs
during 2016 was $2.5 million which was relatively flat compared to the net charge-offs of $2.3 million for 2015, although the quarterly
net charge-offs continue to experience a fair amount of volatility.
33
ADDITIONAL MANAGEMENT’S DISCUSSION AND ANALYSIS
Investment Activity
Investment securities classified as available-for-sale are carried at estimated fair value and investment securities classified as held-to-
maturity are carried at amortized cost. Unrealized gains or losses, net of tax, on available-for-sale securities are reflected as an adjustment
to OCI. 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
Residential mortgage-
backed securities
Commercial mortgage-
backed securities
Total available-for-
sale
Held-to-maturity
State and local
governments
Total held-to-maturity
Total investment
securities
December 31, 2017
December 31, 2016
December 31, 2015
December 31, 2014
December 31, 2013
Carrying
Amount
Percent
Carrying
Amount
Percent
Carrying
Amount
Percent
Carrying
Amount
Percent
Carrying
Amount
Percent
$
31,127
1% $
39,407
1% $
47,451
1% $
44
—% $
—
—%
19,091
1%
19,570
1%
93,167
3%
21,945
1%
10,628
—%
629,501
216,762
26%
9%
786,373
471,951
25%
15%
885,019
384,163
27%
12%
997,969
314,854
34% 1,385,078
11%
442,501
43%
14%
779,283
32% 1,007,515
33% 1,198,549
36% 1,049,575
36% 1,383,560
43%
102,479
4%
100,661
3%
2,411
—%
3,041
—%
1,062
—%
1,778,243
73% 2,425,477
78% 2,610,760
79% 2,387,428
82% 3,222,829
100%
648,313
648,313
27%
27%
675,674
675,674
22%
22%
702,072
702,072
21%
21%
520,997
520,997
18%
18%
—
—
—%
—%
$2,426,556
100% $3,101,151
100% $3,312,832
100% $2,908,425
100% $3,222,829
100%
The Company’s investment portfolio is primarily comprised of state and local government securities and mortgage-backed securities.
State and local government securities are largely exempt from federal income tax and the Company’s maximum federal statutory rate of
35 percent is used in calculating the tax-equivalent yields on the tax-exempt securities. As a result of the Tax Act, the federal statutory
rate decreased from 35 percent to 21 percent beginning in 2018. Net deferred tax assets associated with available-for-sale investment
securities were remeasured using enacted tax rates expected to apply to the years in which the temporary differences are expected to be
recognized. The effect on net deferred tax assets from the change in tax rates was recognized in net income during the current year, given
that the enactment of the Tax Act occurred on December 22, 2017. Mortgage-backed securities are primarily short, weighted-average
life U.S. agency guaranteed residential mortgage pass-through securities. To a lesser extent, mortgage-backed securities also consist of
short, weighted-average life U.S. agency guaranteed residential collateralized mortgage obligations and U.S. agency guaranteed
commercial mortgage-backed securities. Combined, the mortgage-backed securities provide the Company with ongoing liquidity as
scheduled and pre-paid principal is received on the securities.
State and local government securities carry different risks that are not as prevalent in other security types. The Company evaluates the
investment grade quality of its securities in accordance with regulatory guidance. Investment grade securities are those where the issuer
has an adequate capacity to meet the financial commitments under the security for the projected life of the investment. An issuer has an
adequate capacity to meet financial commitments if the risk of default by the obligor is low and the full and timely payment of principal
and interest are expected. In assessing credit risk, the Company may use credit ratings from Nationally Recognized Statistical Rating
Organizations (“NRSRO” entities such as Standard and Poor’s [“S&P”] and Moody’s) as support for the evaluation; however, they are
not solely relied upon. There have been no significant differences in the Company’s internal evaluation of the creditworthiness of any
issuer when compared with the ratings assigned by the NRSROs.
34
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, 2017
December 31, 2016
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
$
$
310,040
767,306
167,230
2,271
14,985
847
1,262,679
311,759
783,795
175,539
2,372
15,262
860
1,289,587
345,527
879,271
209,217
2,270
13,934
850
1,451,069
346,301
894,652
216,589
2,352
14,694
874
1,475,462
State and local government securities largely consist of both taxable and tax-exempt general obligation and revenue bonds. The following
table stratifies the state and local government securities by the associated security type.
(Dollars in thousands)
General obligation - unlimited
General obligation - limited
Revenue
Certificate of participation
Other
Total
December 31, 2017
December 31, 2016
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
$
$
717,610
195,278
322,394
19,366
8,031
1,262,679
735,218
203,643
323,183
19,922
7,621
1,289,587
805,779
221,099
389,506
23,590
11,095
1,451,069
819,990
228,218
391,615
24,603
11,036
1,475,462
The following table outlines the five states in which the Company owns the highest concentrations of state and local government securities.
(Dollars in thousands)
Washington
Texas
Michigan
Montana
California
All other states
Total
December 31, 2017
December 31, 2016
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
$
$
184,491
170,786
157,240
92,733
69,944
587,485
1,262,679
189,932
175,217
163,332
97,234
69,554
594,318
1,289,587
188,778
193,652
173,400
94,168
93,441
707,630
1,451,069
193,035
196,641
177,305
97,259
94,275
716,947
1,475,462
35
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, 2017. Weighted-average yields are based upon the amortized cost of securities and
are calculated using the interest method which takes into consideration premium amortization, discount accretion and mortgage-backed
securities’ prepayment provisions. Weighted-average yields on tax-exempt investment securities exclude the federal income tax benefit.
(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
Mortgage-Backed
Securities
Total
Available-for-sale
U.S. government and federal
agency
$
U.S. government sponsored
enterprises
—
—
—% $
2,227
1.76% $ 15,053
1.53% $
13,847
1.14% $
—%
19,091
1.96%
—
—%
—
—%
State and local governments
25,489
1.99%
34,962
2.38% 221,265
3.69%
347,785
4.09%
—
—
—
—
—% $
31,127
1.37%
—%
—%
—%
19,091
1.96%
629,501
3.77%
216,762
2.26%
Corporate bonds
44,161
2.24% 172,601
2.27%
Residential mortgage-backed
securities
Commercial mortgage-backed
securities
—
—
—%
—%
—
—
—%
—%
—
—
—
—%
—%
—%
—
—
—
—%
—%
779,283
2.07%
779,283
2.07%
—%
102,479
2.07%
102,479
2.07%
Total available-for-sale
69,650
2.15% 228,881
2.26% 236,318
3.55%
361,632
3.97%
881,762
2.07% 1,778,243
2.67%
Held-to-maturity
State and local governments
Total held-to-maturity
—
—
—%
—%
2,108
2.21%
86,741
3.02%
559,464
4.12%
2,108
2.21%
86,741
3.02%
559,464
4.12%
—
—
—%
—%
648,313
3.97%
648,313
3.97%
Total investment securities
$ 69,650
2.15% $230,989
2.26% $323,059
3.41% $ 921,096
4.07% $ 881,762
2.07% $2,426,556
3.02%
Interest income from investment securities consisted of the following:
(Dollars in thousands)
Taxable interest
Tax-exempt interest
Total interest income
December 31,
2017
$
$
38,433
43,535
81,968
Years ended
December 31,
2016
December 31,
2015
40,366
50,026
90,392
40,200
50,886
91,086
For additional information on investment securities, see Notes 1 and 2 to the Consolidated Financial Statements in “Item 8. Financial
Statements and Supplementary Data.”
Other-Than-Temporary Impairment on Securities Analysis
Non-marketable equity securities. Non-marketable equity securities largely consist of capital stock issued by the FHLB of Des Moines
and are evaluated for impairment whenever events or circumstances suggest the carrying value may not be recoverable. Based on the
Company’s evaluation of its investments in non-marketable equity securities as of December 31, 2017, the Company determined that
none of such securities had other-than-temporary impairment.
Debt securities. In evaluating debt securities for other-than-temporary impairment losses, management assesses whether the Company
intends to sell the security or if it is more-likely-than-not that the Company will be required to sell the debt security. In so doing,
management considers contractual constraints, liquidity, capital, asset/liability management and securities portfolio objectives. For debt
securities with limited or inactive markets, the impact of macroeconomic conditions in the U.S. upon fair value estimates includes higher
risk-adjusted discount rates and changes in credit ratings provided by NRSRO. In June 2017, S&P issued a credit opinion confirming
its AA+ rating of U.S. government long-term debt, and the outlook remains stable. In October 2017, Moody's issued a credit opinion
confirming its Aaa rating of U.S. government long-term debt and the outlook remains stable. In April 2017, Fitch issued a credit opinion
confirming its AAA rating of U.S. government long-term debt and the outlook remains stable. S&P, Moody's and Fitch have similar
credit ratings and outlooks with respect to certain long-term debt instruments issued by Federal National Mortgage Association (“Fannie
Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”) and other U.S. government agencies linked to the long-term U.S.
debt.
36
The following table separates investment securities with an unrealized loss position at December 31, 2017 into two categories: investments
purchased prior to 2017 and those purchased during 2017. Of those investments purchased prior to 2017, the fair market value and
unrealized gain or loss at December 31, 2016 is also presented.
(Dollars in thousands)
Temporarily impaired securities
purchased prior to 2017
U.S. government and federal agency
U.S. government sponsored enterprises
State and local governments
Corporate bonds
Residential mortgage-backed securities
Commercial mortgage-backed securities
Total
Temporarily impaired securities
purchased during 2017
State and local governments
Residential mortgage-backed securities
Commercial mortgage-backed securities
Total
Temporarily impaired securities
U.S. government and federal agency
U.S. government sponsored enterprises
State and local governments
Corporate bonds
Residential mortgage-backed securities
Commercial mortgage-backed securities
Total
December 31, 2017
December 31, 2016
Fair Value
Unrealized
Loss
Unrealized
Loss as a
Percent of
Fair Value
Fair Value
Unrealized
(Loss) Gain
Unrealized
(Loss) Gain
as a
Percent of
Fair Value
$
14,387
18,351
303,205
128,670
616,972
92,252
$ 1,173,837
$
$
5,795
9,924
8,366
24,085
$
14,387
18,351
309,000
128,670
626,896
100,618
$ 1,197,922
$
$
$
$
$
$
(143)
(104)
(13,341)
(483)
(7,833)
(1,735)
(23,639)
(396)
(97)
(135)
(628)
(143)
(104)
(13,737)
(483)
(7,930)
(1,870)
(24,267)
18,402
(1)% $
18,397
(1)%
307,559
(4)%
131,099
— %
784,546
(1)%
(2)%
102,472
(2)% $ 1,362,475
$
$
(133)
6
(11,340)
(485)
(9,070)
(1,915)
(22,937)
(1)%
— %
(4)%
— %
(1)%
(2)%
(2)%
(7)%
(1)%
(2)%
(3)%
(1)%
(1)%
(4)%
— %
(1)%
(2)%
(2)%
With respect to severity, the following table provides the number of debt securities and amount of unrealized loss in the various ranges
of unrealized loss as a percent of book value at December 31, 2017:
(Dollars in thousands)
Greater than 10.0%
5.1% to 10.0%
0.1% to 5.0%
Total
Number of
Debt
Securities
Unrealized
Loss
9
75
445
529
$
$
(1,999)
(9,153)
(13,115)
(24,267)
With respect to the valuation history of the impaired debt securities, the Company identified 302 securities which have been continuously
impaired for the twelve months ending December 31, 2017. The valuation history of such securities in the prior year(s) was also reviewed
to determine the number of months in the prior year(s) in which the identified securities were in an unrealized loss position.
37
The following table provides details of the 302 debt securities which have been continuously impaired for the twelve months ended
December 31, 2017, including the most notable loss for any one bond in each category.
(Dollars in thousands)
U.S. government and federal agency
U.S. government sponsored enterprises
State and local governments
Corporate bonds
Residential mortgage-backed securities
Commercial mortgage-backed securities
Total
Number of
Debt
Securities
Unrealized
Loss for
12 Months
Or More
Most
Notable
Loss
16
1
188
8
73
16
302
$
$
(138) $
(48)
(12,862)
(219)
(4,880)
(1,401)
(19,548)
(28)
(48)
(1,438)
(54)
(462)
(230)
Based on the Company's analysis of its impaired debt securities as of December 31, 2017, the Company determined that none of such
securities had other-than-temporary impairment and the unrealized losses were primarily the result of interest rate changes and market
spreads subsequent to acquisition. A substantial portion of the debt securities with unrealized losses at December 31, 2017 were issued
by Fannie Mae, Freddie Mac, Government National Mortgage Association (“Ginnie Mae”) and other agencies of the U.S. government
or have credit ratings issued by one or more of the NRSRO entities in the four highest credit rating categories. All of the Company's
impaired debt securities at December 31, 2017 have been determined by the Company to be investment grade.
Lending Activity
The Company focuses its lending activities primarily on the following types of loans: 1) first-mortgage, conventional loans secured by
residential properties, particularly single-family; 2) commercial lending, including agriculture and public entities; and 3) installment
lending for consumer purposes (e.g., home equity, automobile, etc.). Supplemental information regarding the Company’s loan portfolio
and credit quality based on regulatory classification is provided in the section captioned “Loans by Regulatory Classification” included
in “Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The regulatory classification
of loans is based primarily on the type of collateral for the loans. Loan information included in “Part I. Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations” is based on the Company’s loan segments and classes, which are based
on the purpose of the loan, unless otherwise noted as a regulatory classification. The following table summarizes the Company’s loan
portfolio as of the dates indicated:
(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
December 31, 2017
December 31, 2016
December 31, 2015
December 31, 2014
December 31, 2013
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
$
720,728
11 % $
674,347
12 % $
688,912
14 % $
611,463
14 % $
577,589
15 %
3,577,139
1,579,353
5,156,492
55 % 2,990,141
25 % 1,342,250
80 % 4,332,391
54 %
24 %
78 %
2,633,953
1,099,564
3,733,517
53 %
22 %
75 %
2,337,548
54 % 2,049,247
925,900
21 %
852,036
3,263,448
75 % 2,901,283
457,918
242,686
700,604
7 %
4 %
434,774
242,951
8 %
4 %
420,901
235,351
9 %
5 %
394,670
218,514
9 %
5 %
366,465
217,501
11 %
677,725
12 %
656,252
14 %
613,184
14 %
583,966
6,577,824
102 % 5,684,463
102 %
5,078,681
103 %
4,488,095
103 % 4,062,838
52 %
22 %
74 %
9 %
5 %
14 %
103 %
ALLL
(129,568)
(2)%
(129,572)
(2)%
(129,697)
(3)%
(129,753)
(3)%
(130,351)
(3)%
Loans receivable, net
$ 6,448,256
100 % $ 5,554,891
100 % $ 4,948,984
100 % $ 4,358,342
100 % $ 3,932,487
100 %
38
The stated maturities or first repricing term (if applicable) for the loan portfolio at December 31, 2017 was as follows:
(Dollars in thousands)
Variable rate maturing or repricing
In one year or less
After one year through five years
Thereafter
Fixed rate maturing
In one year or less
After one year through five years
Thereafter
Total
Residential
Real Estate
Commercial
Consumer
and Other
Total
$
$
255,733
156,282
4,682
169,674
127,273
7,084
720,728
1,296,661
1,713,739
292,190
546,275
779,841
527,786
5,156,492
335,641
130,032
4,529
111,210
116,155
3,037
700,604
1,888,035
2,000,053
301,401
827,159
1,023,269
537,907
6,577,824
Residential Real Estate Lending
The Company’s lending activities consist of the origination of both construction and permanent loans on residential real estate. The
Company actively solicits residential real estate loan applications from real estate brokers, contractors, existing customers, customer
referrals, and on-line applications. The Company’s lending policies generally limit the maximum loan-to-value ratio on residential
mortgage loans to 80 percent of the lesser of the appraised value or purchase price. Policies allow for higher loan-to-values with appropriate
risk mitigation such as documented compensating factors, credit enhancement, etc. For loans held for sale, the Company complies with
the investor’s loan-to-value guidelines. The Company also provides interim construction financing for single-family dwellings. These
loans are supported by a term take-out commitment.
Consumer Land or Lot Loans
The Company originates land and lot acquisition loans to borrowers who intend to construct their primary residence on the respective
land or lot. These loans are generally for a term of three to five years and are secured by the developed land or lot with the loan-to-value
limited to the lesser of 75 percent of the appraised value or 75 percent of the cost.
Unimproved Land and Land Development Loans
Although the Company has originated very few unimproved land and land development loans since the economic downturn in 2008, the
Company may originate such loans on properties intended for residential and commercial use where improved real estate market conditions
have occurred. These loans are typically made for a term of 18 months to two years and are secured by the developed property with a
loan-to-value not to exceed the lesser of 75 percent of cost or 65 percent of the appraised discounted bulk sale value upon completion of
the improvements. The projects under development are inspected on a regular basis and advances are made on a percentage-of-completion
basis. The loans are made to borrowers with real estate development experience and appropriate financial strength. Generally, the
Company requires that a certain percentage of the development be pre-sold or that construction and term take-out commitments are in
place prior to funding the loan. Loans made on unimproved land are generally made for a term of five to ten years with a loan-to-value
not to exceed the lesser of 50 percent of appraised value or 50 percent of cost.
Residential Builder Guidance Lines
The Company provides Builder Guidance Lines that are comprised of pre-sold and spec-home construction and lot acquisition loans.
The spec-home construction and lot acquisition loans are limited to a specific number and maximum amount. Generally, the individual
loans will not exceed a one year maturity. The homes under construction are inspected on a regular basis and advances made on a
percentage-of-completion basis.
Construction Loans
During the construction loan term, all construction loan collateral properties are inspected at least monthly, or more frequently as needed,
until completion. Draws on construction loans are predicated upon the results of the inspection and advanced based upon a percentage-
of-completion basis versus original budget percentages. When construction loans become non-performing and the associated project is
not complete, the Company on a case-by-case basis makes the decision to advance additional funds or to initiate collection/foreclosure
proceedings. Such decision includes obtaining “as-is” and “at completion” appraisals for consideration of potential increases or decreases
in the collateral’s value. The Company also considers the increased costs of monitoring progress to completion, and the related collection/
holding period costs should collateral ownership be transferred to the Company.
39
Commercial Real Estate Loans
Loans are made to purchase, construct and finance commercial real estate properties. These loans are generally made to borrowers who
will own and occupy the property, but may include loans to finance investment or income properties. Commercial real estate loans
generally have a loan-to-value up to the lesser of 75 percent of the appraised value or 75 percent of the cost and require a minimum 1.2
times debt service coverage margin.
Agricultural Lending
Agricultural lending is conducted on a conservative basis and consists of operating credits, term real estate loans for the acquisition or
refinance of agricultural real estate or equipment, and term livestock loans for the acquisition or refinance of livestock. Loan-to-value
on equipment, livestock and agricultural real estate is generally limited to 75 percent.
Home Equity Loans
The Company’s home equity loans of $458 million and $435 million as of December 31, 2017 and 2016, 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, 2017, the home
equity loan portfolio consisted of 90 percent variable interest rate and 10 percent fixed interest rate loans. Approximately 54 percent of
the home equity loans were in a first lien status with the remaining 46 percent in junior lien status. Approximately 8 percent of the home
equity loans were closed-end amortizing loans and 92 percent were open-end, revolving home equity lines of credit. At December 31,
2016, the home equity loan portfolio consisted of 85 percent variable interest rate and 15 percent fixed interest rate loans. Approximately
54 percent of the home equity loans were in a first lien status with the remaining 46 percent in junior lien status. Approximately 12
percent of the home equity loans were closed-end amortizing loans and 88 percent were open-end, revolving home equity lines of credit.
Home equity lines of credit are generally originated with maturity terms of 15 years. At origination, borrowers can choose a variable
interest rate that changes quarterly, or after the first 3, 5 or 10 years from the origination date. The draw period for home equity lines of
credit usually exists from origination to maturity. During the draw period, the Company has home equity lines of credit where the
borrowers pay interest only and home equity lines of credit where borrowers pay principal and interest.
Consumer Lending
The majority of consumer loans are secured by real estate, automobiles, or other assets. The Company intends to continue making such
loans because of their short-term nature, generally between three months and five years. Moreover, interest rates on consumer loans are
generally higher than on residential mortgage loans. The Company also originates second mortgage and home equity loans, especially
to existing customers in instances where the first and second mortgage loans are less than 80 percent of the current appraised value of
the property.
States and Political Subdivisions Lending
The Company lends directly to state and local political subdivisions. The loans are typically secured by the full faith and credit of the
municipality or a specific revenue stream such as water or sewer fees. In general, state and local political subdivision loans carry a low
risk of default and offer other complimentary business opportunities such as deposits and cash management. The loans are generally
long-term in nature and interest on many of these loans is considered tax-exempt for federal income tax purposes.
Credit Risk Management
The Company is committed to a conservative management of the credit risk within the loan portfolio, including the early recognition of
problem loans. The Company’s credit risk management includes stringent credit policies, individual loan approval limits, limits on
concentrations of credit, and committee approval of larger loan requests. Management practices also include regular internal and external
credit examinations, identification and review of individual loans and leases experiencing deterioration of credit quality, procedures for
the collection of non-performing assets, quarterly monitoring of the loan portfolio, semi-annual review of loans by industry, and periodic
stress testing of the loans secured by real estate. Federal and state regulatory safety and soundness examinations are conducted annually.
40
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 has loan approval authority between $500,000 and $2,000,000. Each of the Bank divisions’ advisory
boards has loan approval authority up to $4,000,000. Loans, or a combination of loans, including new and renewed, exceeding these
limits and up to $20,000,000 are subject to approval by the Company’s Executive Loan Committee consisting of the Bank divisions’
senior loan officers and the Company’s Chief Credit Administrator. Loans, or a combination of loans, including new and renewed, greater
than $20,000,000 are subject to approval by the Bank’s Board of Directors. Under banking laws, loans to one borrower and related
entities are limited to a prescribed percentage of the unimpaired capital and surplus of the Bank.
Interest Reserves
Interest reserves are used to periodically advance loan funds to pay interest charges on the outstanding balance of the related loan. As
with any extension of credit, the decision to establish a loan-funded interest reserve upon origination of construction loans, including
residential construction and land, lot and other construction loans, is based on prudent underwriting, including the feasibility of the project,
expected cash flow, creditworthiness of the borrower and guarantors, and the protection provided by the real estate and other underlying
collateral. Interest reserves provide an effective means for addressing the cash flow characteristics of construction loans. In response to
the downturn in the housing market and potential impact upon construction lending, the Company discourages the creation or continued
use of interest reserves.
Interest reserves are advanced provided the related construction loan is performing as expected. Loans with interest reserves may be
extended, renewed or restructured only when the related loan continues to perform as expected and meets the prudent underwriting
standards identified above. Such renewals, extension or restructuring are not permitted in order to keep the related loan current.
In monitoring the performance and credit quality of a construction loan, the Company assesses the adequacy of any remaining interest
reserve, and whether the use of an interest reserve remains appropriate in the presence of emerging weakness and associated risks in the
construction loan.
The ongoing accrual and recognition of uncollected interest as income continues only when facts and circumstances continue to reasonably
support the contractual payment of principal or interest. Loans are typically designated as non-accrual when the collection of the contractual
principal or interest is unlikely and has remained unpaid for ninety days or more. For such loans, the accrual of interest and its capitalization
into the loan balance will be discontinued.
The Company had $36.4 million and $58.7 million of loans with remaining interest reserves of $921 thousand and $1.1 million as of
December 31, 2017 and 2016, respectively. The Company did not extend, renew or restructure any loans with interest reserves during
2017 or 2016. As of December 31, 2017, the Company had no construction loans with interest reserves that are currently non-performing
or which are potential problem loans.
41
Loan Purchases and Sales
Fixed rate, long-term mortgage loans are generally sold in the secondary market. The Company is active in the secondary market,
primarily through the origination of conventional, Rural Development, Federal Housing Administration and Department of Veterans
Affairs residential mortgages. The sale of loans in the secondary mortgage market reduces the Company’s risk of holding long-term,
fixed rate loans during periods of rising interest rates. In connection with conventional loan sales, the Company typically sells the majority
of mortgage loans originated with servicing released. 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 investment
securities collateralized with subprime mortgages. The Company does not actively purchase loans from other financial institutions, and
substantially all of the Company’s loans receivable are with customers in the Company’s geographic market areas.
Loan Origination and Other Fees
In addition to interest earned on loans, the Company receives fees for originating loans. Loan fees generally are a percentage of the
principal amount of the loan and are charged to the borrower, and are normally deducted from the proceeds of the loan. Loan origination
fees are generally 1.0 percent to 1.5 percent on residential mortgages and 0.5 percent to 1.5 percent on commercial loans. Consumer
loans generally require a fixed fee amount. The Company also receives other fees and charges relating to existing loans, which include
charges and fees collected in connection with loan modifications.
Appraisal and Evaluation Process
The Company’s loan policy and credit administration practices have adopted and implemented the applicable legal and regulatory
requirements, which establishes criteria for obtaining appraisals or evaluations (new or updated), including transactions that are otherwise
exempt from the appraisal requirements.
Each of the Bank divisions monitor conditions, including supply and demand factors, in the real estate markets served so they can react
quickly to changing market conditions to mitigate potential losses from specific credit exposures within the loan portfolio. Evidence of
the following real estate market conditions and trends is obtained from lending personnel and third party sources:
•
•
•
•
•
•
demographic indicators, including employment and population trends;
foreclosures, vacancy, construction and absorption rates;
property sales prices, rental rates, and lease terms;
current tax assessments;
economic indicators, including trends within the lending areas; and
valuation trends, including discount and capitalization rates.
Third party information sources include federal, state, and local governments and agencies thereof, private sector economic data vendors,
real estate brokers, licensed agents, sales, rental and foreclosure data tracking services.
The time between ordering an appraisal or evaluation and receipt from third party vendors is typically two to six weeks for residential
property depending on geographic market and four to six weeks for non-residential property. For real estate properties that are of highly
specialized or limited use, significantly complex or large, additional time beyond the typical times may be required for new appraisals
or evaluations (new or updated).
As part of the Company’s credit administration and portfolio monitoring practices, the Company’s regular internal and external credit
examinations review a significant number of individual loan files. Appraisals and evaluations (new or updated) are reviewed to determine
whether the timeliness, methods, assumptions, and findings are reasonable and in compliance with the Company’s loan policy and credit
administration practices. Such reviews include the adequacy of the steps taken by the Company to ensure that the individuals who perform
appraisals and evaluations (new or updated) are appropriately qualified and are not subject to conflicts of interest. If there are any
deficiencies noted in the reviews, they are reported to Bank management and prompt corrective action is taken.
42
Non-performing Assets
The following table summarizes information regarding non-performing assets at the dates indicated:
(Dollars in thousands)
December 31,
2017
December 31,
2016
December 31,
2015
December 31,
2014
December 31,
2013
At or for the Years ended
Other real estate owned
$
14,269
20,954
26,815
27,804
26,860
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
2,366
3,582
129
6,077
4,924
35,629
4,280
44,833
Total non-performing assets
$
65,179
266
428
405
1,099
4,528
39,033
5,771
49,332
71,385
—
2,051
80
2,131
8,073
36,510
6,550
51,133
80,079
35
105
74
214
6,798
48,138
6,946
61,882
429
160
15
604
10,702
61,577
9,677
81,956
89,900
109,420
Non-performing assets as a percentage of
subsidiary assets
ALLL as a percentage of non-performing loans
0.68%
255%
0.76%
257%
0.88%
244%
1.08%
209%
1.39%
158%
Accruing loans 30-89 days past due
Accruing troubled debt restructurings
Non-accrual troubled debt restructurings
U.S. government guarantees included in
non-performing assets
Interest income 1
$
$
$
$
$
37,687
38,491
23,709
2,513
2,162
25,617
52,077
21,693
1,746
2,364
19,413
63,590
27,057
2,312
2,471
25,904
69,129
33,714
3,649
3,005
32,116
81,110
42,461
5,412
4,122
______________________________
1 Amounts represent estimated interest income that would have been recognized on loans accounted for on a non-accrual basis as of the end of each
period had such loans performed pursuant to contractual terms.
Non-performing assets at December 31, 2017 were $65.2 million, a decrease of $6.2 million, or 9 percent, from a year ago. Non-
performing assets as a percentage of subsidiary assets at December 31, 2017 was 0.68 percent which was a decrease of 8 basis points
from the prior year end of 0.76 percent. Early stage delinquencies (accruing loans 30-89 days past due) of $37.7 million at December
31, 2017 increased $12.1 million from the prior year end.
Most of the Company’s non-performing assets are secured by real estate, and based on the most current information available to
management, including updated appraisals or evaluations (new or updated), the Company believes the value of the underlying real estate
collateral is adequate to minimize significant charge-offs or losses to the Company. The Company evaluates the level of its non-performing
loans, the values of the underlying real estate and other collateral, and related trends in internal and external environmental factors and
net charge-offs in determining the adequacy of the ALLL. Through pro-active credit administration, the Company works closely with
its borrowers to seek favorable resolution to the extent possible, thereby attempting to minimize net charge-offs or losses to the Company.
43
In prior years, construction loans, a regulatory classification, accounted for a significant portion of the Company’s non-accrual loans. As
a result of the gradual economic recovery and the Company’s diligent focus on this category of non-performing loans, construction loans
only accounted for 24 percent of the Company’s non-accrual loans as of December 31, 2017. With very limited exceptions, the Company
does not disburse additional funds on non-performing loans. Instead, the Company has proceeded to collection and foreclosure actions
in order to reduce the Company’s exposure to loss on such loans.
For additional information on accounting policies relating to non-performing assets and impaired loans, see Note 1 to the Consolidated
Financial Statements in “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 $120
million and $130 million as of December 31, 2017 and December 31, 2016, respectively. The ALLL includes specific valuation allowances
of $5.2 million and $6.9 million of impaired loans as of December 31, 2017 and December 31, 2016, respectively.
Restructured Loans
A restructured loan is considered a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s
financial difficulties, grants a concession to the debtor that it would not otherwise consider. Each restructured debt is separately negotiated
with the borrower and includes terms and conditions that reflect the borrower’s prospective ability to service the debt as modified. The
Company discourages the use of the multiple loan strategy when restructuring loans regardless of whether or not the loans are designated
as TDRs. The Company’s TDR loans of $62.2 million and $73.8 million as of December 31, 2017 and December 31, 2016, respectively,
are considered impaired loans.
Other Real Estate Owned
The book value of loans prior to the acquisition of collateral and transfer of the loans into OREO during 2017 was $6.0 million. The fair
value of the loan collateral acquired in foreclosure during 2017 was $4.5 million. 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,
2017
December 31,
2016
Years ended
December 31,
2015
December 31,
2014
December 31,
2013
$
$
20,954
96
4,466
—
(604)
(10,643)
14,269
26,815
882
5,198
149
(1,821)
(10,269)
20,954
27,804
974
7,989
1,710
(1,575)
(10,087)
26,815
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
Allowance for Loan and Lease Losses
Determining the adequacy of the ALLL involves a high degree of judgment and is inevitably imprecise as the risk of loss is difficult to
quantify. The ALLL methodology is designed to reasonably estimate the probable loan and lease losses within the Company’s loan
portfolio. Accordingly, the ALLL is maintained within a range of estimated losses. The determination of the ALLL, including the provision
for loan losses and net charge-offs, is a critical accounting estimate that involves management’s judgments about all known relevant
internal and external environmental factors that affect loan losses, including the credit risk inherent in the loan portfolio, economic
conditions nationally and in the local markets in which the Company operates, trends and changes in collateral values, delinquencies,
non-performing assets, net charge-offs and credit-related policies and personnel. Although the Company continues to actively monitor
economic trends, soft economic conditions combined with potential declines in the values of real estate that collateralize most of the
Company’s loan portfolio may adversely affect the credit risk and potential for loss to the Company.
The ALLL evaluation is well documented and approved by the Company’s Board. In addition, the policy and procedures for determining
the balance of the ALLL are reviewed annually by the Company’s Board, the internal audit department, independent credit reviewers and
state and federal bank regulatory agencies.
44
At the end of each quarter, the Company analyzes its loan portfolio and maintains an ALLL at a level that is appropriate and determined
in accordance with GAAP. The allowance consists of a specific valuation allowance component and a general valuation allowance
component. The specific valuation allowance component relates to loans that are determined to be impaired. A specific valuation allowance
is established when the fair value of a collateral-dependent loan or the present value of the loan’s expected future cash flows (discounted
at the loan’s effective interest rate) is lower than the carrying value of the impaired loan. The general valuation allowance component
relates to probable credit losses inherent in the balance of the loan portfolio based on historical loss experience, adjusted for changes in
trends and conditions of qualitative or environmental factors.
The Bank divisions’ credit administration reviews their respective loan portfolios to determine which loans are impaired and estimates
the specific valuation allowance. The impaired loans and related specific valuation allowance are then provided to the Company’s credit
administration for further review and approval. The Company’s credit administration also determines the estimated general valuation
allowance and reviews and approves the overall ALLL. The credit administration of the Company exercises significant judgment when
evaluating the effect of applicable qualitative or environmental factors on the Company’s historical loss experience for loans not identified
as impaired. Quantification of the impact upon the Company’s ALLL is inherently subjective as data for any factor may not be directly
applicable, consistently relevant, or reasonably available for management to determine the precise impact of a factor on the collectability
of the Company’s loans collectively evaluated for impairment as of each evaluation date. The Company’s credit administration documents
its conclusions and rationale for changes that occur in each applicable factor’s weight (i.e., measurement) and ensures that such changes
are directionally consistent based on the underlying current trends and conditions for the factor. To have directional consistency, the
provision for loan losses and credit quality should generally move in the same direction.
The Company’s model includes fourteen bank divisions with separate management teams providing substantial local oversight to the
lending and credit management function. The Company’s business model affords multiple reviews of larger loans before credit is extended,
a significant benefit in mitigating and managing the Company’s credit risk. The geographic dispersion of the market areas in which the
Company operates further mitigates the risk of credit loss. While this process is intended to limit credit exposure, there can be no assurance
that further problem credits will not arise and additional loan losses incurred, particularly in this slowly improving, but fragile economic
recovery and in periods of rapid economic downturns.
The primary responsibility for credit risk assessment and identification of problem loans rests with the loan officer of the account. This
continuous process of identifying impaired loans is necessary to support management’s evaluation of the ALLL adequacy. An independent
loan review function verifying credit risk ratings evaluates the loan officer and management’s evaluation of the loan portfolio credit
quality.
No assurance can be given that the Company will not, in any particular period, sustain losses that are significant relative to the ALLL
amount, or that subsequent evaluations of the loan portfolio applying management’s judgment about then current factors, including
economic and regulatory developments, will not require significant changes in the ALLL. Under such circumstances, this could result
in enhanced provisions for loan losses. 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, 2017
Percent
of Loans
in
Category
ALLL
December 31, 2016
Percent
of Loans
in
Category
ALLL
December 31, 2015
Percent
of Loans
in
Category
ALLL
December 31, 2014
Percent
of Loans
in
Category
ALLL
December 31, 2013
Percent
of Loans
in
Category
ALLL
$ 10,798
11% $ 12,436
12% $ 14,427
13% $ 14,680
13% $ 14,067
68,515
54%
65,773
52%
67,877
52%
67,799
52%
70,332
39,303
6,204
24%
7%
37,823
7,572
24%
8%
32,525
8,998
22%
8%
30,891
9,963
21%
9%
28,630
9,299
14%
51%
21%
9%
4,748
$129,568
4%
5,968
100% $129,572
4%
5,870
100% $129,697
5%
6,420
100% $129,753
5%
8,023
100% $130,351
5%
100%
(Dollars in
thousands)
Residential
real estate
Commercial
real estate
Other
commercial
Home equity
Other
consumer
Total
45
The following table summarizes the ALLL experience for the periods indicated:
(Dollars in thousands)
December 31,
2017
December 31,
2016
Years ended
December 31,
2015
December 31,
2014
December 31,
2013
Balance at beginning of period
Provision for loan losses
$
129,572
10,824
129,697
2,333
129,753
2,284
130,351
1,912
130,854
6,887
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
(199)
(9,044)
(10,088)
(19,331)
82
3,569
4,852
8,503
(464)
(4,860)
(6,172)
(11,496)
207
5,576
3,255
9,038
(985)
(4,242)
(1,775)
(7,002)
92
3,620
950
4,662
(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
Charge-offs, net of recoveries
(10,828)
(2,458)
(2,340)
(2,510)
(7,390)
Balance at end of period
$
129,568
129,572
129,697
129,753
130,351
ALLL as a percentage of total loans
Net charge-offs as a percentage of average
loans
1.97%
0.17%
2.28%
0.05%
2.55%
0.05%
2.89%
0.06%
3.21%
0.20%
The ALLL as a percent of total loans outstanding at December 31, 2017 was 1.97 percent, a decrease of 31 basis points from 2.28 percent
at December 31, 2016, which was driven by loan growth, stabilizing credit quality, and no allowance carried over from the Foothills
acquisition as a result of the acquired loans recorded at fair value.
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, 2017 and 2016, the Company believes the ALLL is commensurate with the risk in the Company’s loan portfolio and is
directionally consistent with the change in the quality of the Company’s loan portfolio.
When applied to the Company’s historical loss experience, the qualitative or environmental factors result in the provision for loan losses
being recorded in the period in which the loss has probably occurred. When the loss is confirmed at a later date, a charge-off is recorded.
During 2017, charge-offs, net of recoveries, exceeded the provision for loan losses by $4 thousand. During the same period in 2016,
charge-offs, net of recoveries, exceeded the provision for loan losses by $125 thousand.
The Company provides commercial services to individuals, small to medium-sized businesses, community organizations and public
entities from 145 locations, including 136 branches, across Montana, Idaho, Utah, Washington, Wyoming, Colorado and Arizona. The
states in which the Company operates have diverse economies and markets that are tied to commodities (crops, livestock, minerals, oil
and natural gas), tourism, real estate and land development and an assortment of industries, both manufacturing and service-related. Thus,
the changes in the global, national, and local economies are not uniform across the Company’s geographic locations.
46
Overall, there continues to be improvements in the economic environment and housing markets throughout the Company’s footprint.
Home prices continue to increase in all of the states within the Company’s footprint. Washington and Arizona are experiencing the
strongest pricing pressures, while Wyoming continues to lag behind the national trend. Five of the Company’s states are ranked in the
top 10 nationally for house price appreciation. Home ownership in the United States has increased slightly to 63.9 percent as of the third
quarter of 2017 after bottoming out at 62.9 percent in the second quarter of 2016. The long-term average for the United States
homeownership rate is at 65.3 percent. Quarterly personal income growth remains in positive territory for each of the Company’s states,
while Wyoming is the only state in the Company’s footprint that doesn’t exceed the national average. The Federal Reserve Bank of
Philadelphia’s composite state coincident indices projects steady growth throughout the Company’s footprint, with Arizona being one of
only three states in the country with expected growth greater than 4.5 percent. The United States economy grew at or above 3 percent
for a second straight quarter. All of the states in the Company’s footprint have unemployment rates at or below 5 percent, which reflects
the Federal Reserve’s definition of full employment. There has been a slight uptick in crude oil and base metal prices, while natural gas
prices remain steady. Certain agriculture commodities within the Company’s footprint remain volatile. The tourism industry and related
lodging activity continues to be a source of strength for locations where the Company’s markets include national parks and similar
recreational areas. However, Canadian tourism in Washington, Idaho and Montana continues to be negatively impacted by the weak
Canadian dollar. Largely due to the recently enacted Tax Act, small business confidence ended the year at high levels; however, it remains
to be seen how much of an impact the Tax Act will have on the Company’s economic environment. In general, the Company sees positive
signs in the various economic indices; however, given the significant recession experienced during 2008 and 2009, the Company is
cautiously optimistic about the subsequent recovery of the housing industry. The Company will continue to actively monitor the economy’s
impact on its lending portfolio.
In evaluating the need for a specific or general valuation allowance for impaired and unimpaired loans, respectively, within the Company’s
construction loan portfolio (i.e., regulatory classification), including residential construction and land, lot and other construction loans,
the credit risk related to such loans was considered in the ongoing monitoring of such loans, including assessments based on current
information, including appraisals or evaluations (new or updated) of the underlying collateral, expected cash flows and the timing thereof,
as well as the estimated cost to sell when such costs are expected to reduce the cash flows available to repay or otherwise satisfy the
construction loan. Construction loans were 13 percent and 12 percent of the Company’s total loan portfolio and accounted for 24 percent
and 20 percent of the Company’s non-accrual loans at December 31, 2017 and December 31, 2016, respectively. Collateral securing
construction loans includes residential buildings (e.g., single/multi-family and condominiums), commercial buildings, and associated
land (e.g., multi-acre parcels and individual lots, with and without shorelines).
The Company’s ALLL consisted of the following components as of the dates indicated:
(Dollars in thousands)
Specific valuation allowance
General valuation allowance
Total ALLL
December 31,
2017
December 31,
2016
$
$
5,223
124,345
129,568
6,881
122,691
129,572
During 2017, the ALLL decreased by $4 thousand, the net result of a $1.7 million decrease in the specific valuation allowance and a $1.7
million increase in the general valuation allowance. The specific valuation allowance decreased as the result of a $4.4 million decrease
in loans individually evaluated for impairment with a specific impairment. The increase in the general valuation allowance since the
prior year end was a result of changes in qualitative or environmental factors and an increase of $605 million in loans collectively evaluated
for impairment, excluding the current year acquisition. At acquisition date, the assets and liabilities of the acquired banks are recorded
at their estimated fair values which results in no ALLL carried over on loans from acquired banks.
For additional information regarding the ALLL, its relation to the provision for loan losses and risk related to asset quality, see Note 3
to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.”
47
Loans by Regulatory Classification
Supplemental information regarding identification of the Company’s loan portfolio and credit quality based on regulatory classification
is provided in the following tables. The regulatory classification of loans is based primarily on the type of collateral for the loans. There
may be differences when compared to loan tables and loan amounts appearing elsewhere which reflect the Company’s internal loan
segments and classes which are based on the purpose of the loan.
The following table summarizes the Company’s loan portfolio by regulatory classification:
December 31,
2017
December 31,
2016
$ Change
% Change
(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
$
$
109,555
72,160
181,715
82,398
102,289
65,753
14,592
23,770
391,835
680,637
$
86,233
66,184
152,417
75,078
97,449
69,157
13,254
30,523
257,769
543,230
1,132,833
1,186,066
2,318,899
977,932
929,729
1,907,661
751,221
686,870
450,616
407,208
877,335
51,155
928,490
877,893
58,564
936,457
189,342
184,068
440,105
148,247
588,352
402,614
155,193
557,807
23,322
5,976
29,298
7,320
4,840
(3,404)
1,338
(6,753)
134,066
137,407
154,901
256,337
411,238
64,351
43,408
(558)
(7,409)
(7,967)
5,274
37,491
(6,946)
30,545
States and political subdivisions
383,252
255,420
127,832
Other
144,133
126,252
17,881
Total loans receivable, including loans held for sale
6,616,657
5,757,390
859,267
Less loans held for sale 1
(38,833)
(72,927)
34,094
Total loans receivable
$
6,577,824
$
5,684,463
$
893,361
______________________________
1 Loans held for sale are primarily 1st lien 1-4 family loans.
48
27 %
9 %
19 %
10 %
5 %
(5)%
10 %
(22)%
52 %
25 %
16 %
28 %
22 %
9 %
11 %
— %
(13)%
(1)%
3 %
9 %
(4)%
5 %
50 %
14 %
15 %
(47)%
16 %
The following table summarizes the Company’s non-performing assets by regulatory classification:
(Dollars in thousands)
Non-performing Assets,
by Loan Type
December 31,
2017
December 31,
2016
Non-
Accruing
Loans
December 31,
2017
Accruing
Loans 90
Days
or More Past
Due
December 31,
2017
Other
Real Estate
Owned
December 31,
2017
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
States and political subdivisions
48
38
86
7,888
1,861
10,866
116
1,312
151
22,194
13,848
4,584
18,432
5,294
3,931
9,261
567
9,828
—
3,292
322
3,614
1,800
—
226
226
9,864
2,137
11,905
175
1,466
—
25,547
18,749
3,426
22,175
5,184
1,615
9,186
1,167
10,353
400
5,494
391
5,885
—
—
38
38
806
1,065
8,760
—
260
—
10,891
11,778
3,711
15,489
4,700
3,931
6,452
518
6,970
—
2,652
162
2,814
—
Total
$
65,179
71,385
44,833
—
—
—
—
—
—
—
—
—
—
698
312
1,010
533
—
2,605
—
2,605
—
—
129
129
1,800
6,077
48
—
48
7,082
796
2,106
116
1,052
151
11,303
1,372
561
1,933
61
—
204
49
253
—
640
31
671
—
14,269
49
The following table summarizes the Company’s accruing loans 30-89 days past due by regulatory classification:
(Dollars in thousands)
Custom and owner occupied construction
Pre-sold and spec construction
Total residential construction
Land development
Consumer land or lots
Unimproved land
Developed lots for operative builders
Commercial lots
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
States and political subdivisions
Other
Total
______________________________
n/m - not measurable
Accruing 30-89 Days Delinquent
Loans, by Loan Type
December 31,
2017
December 31,
2016
$ Change
% Change
$
$
300
102
402
—
353
662
7
108
1,130
4,726
2,399
7,125
6,472
3,205
10,865
4,348
15,213
—
1,962
2,109
4,071
—
69
$
1,836
—
1,836
154
638
1,442
—
—
2,234
2,307
1,689
3,996
3,032
1,133
7,777
1,016
8,793
10
1,537
1,180
2,717
1,800
66
(1,536)
102
(1,434)
(154)
(285)
(780)
7
108
(1,104)
2,419
710
3,129
3,440
2,072
3,088
3,332
6,420
(84)%
n/m
(78)%
(100)%
(45)%
(54)%
n/m
n/m
(49)%
105 %
42 %
78 %
113 %
183 %
40 %
328 %
73 %
(10)
(100)%
425
929
1,354
28 %
79 %
50 %
(1,800)
(100)%
3
5 %
47 %
$
37,687
$
25,617
$
12,070
50
The following table summarizes the Company’s charge-offs and recoveries by regulatory classification:
(Dollars in thousands)
Custom and owner occupied construction
Pre-sold and spec construction
Total residential construction
Land development
Consumer land or lots
Unimproved land
Developed lots for operative builders
Commercial lots
Other construction
Total land, lot and other construction
Owner occupied
Non-owner occupied
Total commercial real estate
Commercial and industrial
Agriculture
1st lien
Junior lien
Total 1-4 family
Multifamily residential
Home equity lines of credit
Other consumer
Total consumer
Other
Total
Net Charge-Offs (Recoveries),
Years ended, By Loan Type
December 31,
2017
December 31,
2016
Charge-Offs
December 31,
2017
Recoveries
December 31,
2017
(1)
786
785
(2,661)
(688)
(184)
(27)
27
—
(3,533)
1,196
44
1,240
(370)
50
487
60
547
229
611
257
868
2,642
2,458
62
—
62
—
411
—
—
—
389
800
4,556
382
4,938
1,597
37
356
815
1,171
—
463
735
1,198
9,528
19,331
62
23
85
143
189
304
107
6
—
749
648
14
662
714
28
379
96
475
230
191
230
421
5,139
8,503
$
—
(23)
(23)
(143)
222
(304)
(107)
(6)
389
51
3,908
368
4,276
883
9
(23)
719
696
(230)
272
505
777
4,389
$
10,828
51
Sources of Funds
The Company’s deposits have traditionally been the principal source of funds for use in lending and other business purposes. The
Company also obtains funds from repayment of loans and investment securities, repurchase agreements, wholesale deposits, advances
from FHLB and other borrowings. Loan repayments are a relatively stable source of funds, while interest bearing deposit inflows and
outflows are significantly influenced by general interest rate levels and market conditions. Borrowings and advances may be used on a
short-term basis to compensate for reductions in normal sources of funds such as deposit inflows at less than projected levels. Borrowings
also may be used on a long-term basis to support expanded activities, match maturities of longer-term assets or manage interest rate risk.
Deposits
The Company has several deposit programs designed to attract both short-term and long-term deposits from the general public by providing
a wide selection of accounts and rates. These programs include non-interest bearing deposit accounts and interest bearing deposit accounts
such as NOW, DDA, savings, money market deposits, fixed rate certificates of deposit with maturities ranging from three months to five
years, negotiated-rate jumbo certificates, and individual retirement accounts. These deposits are obtained primarily from individual and
business residents in the Bank’s geographic market areas. Wholesale deposits are obtained through various programs and include brokered
deposits classified as NOW, DDA, money market deposit and certificate accounts. The Company utilized a third party vendor to transfer
$433 million of deposits off-balance sheet as of December 31, 2017. Such deposits can be brought back onto the Company’s balance
sheet at the Company’s discretion. The Company’s deposits are summarized below:
(Dollars in thousands)
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
December 31, 2017
December 31, 2016
December 31, 2015
December 31, 2014
December 31, 2013
Non-interest bearing
deposits
$2,311,902
31% $2,041,852
28% $1,918,310
28% $1,632,403
26% $1,374,419
25%
NOW and DDA accounts
1,695,246
22% 1,588,550
22% 1,516,026
22% 1,328,130
21% 1,113,878
Savings accounts
1,082,604
14%
996,061
13%
838,274
12%
693,714
11%
600,998
Money market deposit
accounts
Certificate accounts
Wholesale deposits
Total interest bearing
deposits
1,512,693
20% 1,464,415
20% 1,382,028
20% 1,274,525
20% 1,168,918
817,259
160,043
11%
2%
948,714
332,687
13% 1,060,650
15% 1,167,228
18% 1,116,622
4%
229,720
3%
249,212
4%
205,132
5,267,845
69% 5,330,427
72% 5,026,698
72% 4,712,809
74% 4,205,548
75%
20%
11%
21%
20%
3%
Total deposits
$7,579,747
100% $7,372,279
100% $6,945,008
100% $6,345,212
100% $5,579,967
100%
The following table summarizes the amounts outstanding at December 31, 2017 for deposits of $100,000 and greater, according to the
time remaining to maturity. Included in demand deposits are brokered deposits of $160 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
$
$
99,485
94,986
112,761
137,159
444,391
4,366,626
—
—
—
4,366,626
Total
4,466,111
94,986
112,761
137,159
4,811,017
For additional information on deposits, see Note 7 to the Consolidated Financial Statements in “Item 8. Financial Statements and
Supplementary Data.”
52
Securities Sold Under Agreements to Repurchase, Federal Home Loan Bank Advances and Other Borrowings
The Company borrows money through repurchase agreements. This process involves the selling of one or more of the securities in the
Company’s investment portfolio and simultaneously entering into an agreement to repurchase the same securities at an agreed upon later
date, typically overnight. A rate of interest is paid for the agreed period of time. Through a policy adopted by the Bank’s Board of
Directors, the Bank enters into repurchase agreements with local municipalities, and certain customers, and has adopted procedures
designed to ensure proper transfer of title and safekeeping of the underlying securities. In addition to retail repurchase agreements, the
Company periodically enters into wholesale repurchase agreements as additional funding sources. The Company has not entered into
reverse repurchase agreements.
The Bank is a member of the FHLB of Des Moines, which is one of eleven banks that comprise the FHLB system. The Bank is required
to maintain a certain level of activity-based stock in order to borrow or to engage in other transactions with the FHLB of Des Moines.
Additionally, the Bank is subject to a membership capital stock requirement that is based upon an annual calibration tied to the total assets
of the Bank. The borrowings are collateralized by eligible categories of loans and investment securities (principally, securities which
are obligations of, or guaranteed by, the U.S. government and its agencies), provided certain standards related to credit-worthiness have
been met. Advances are made pursuant to several different credit programs, each of which has its own interest rates and range of maturities.
The Bank’s maximum amount of FHLB advances is limited to the lesser of a fixed percentage of the Bank’s total assets or the discounted
value of eligible collateral. FHLB advances fluctuate to meet seasonal and other withdrawals of deposits and to expand lending or
investment opportunities of the Company. During the year ended December 31, 2017, the Company modified the majority of its long-
term FHLB advances, including prepaying higher cost advances, to strategically manage its asset size.
Additionally, the Company has other sources of secured and unsecured borrowing lines from various sources that may be used from time
to time.
For additional information concerning the Company’s borrowings, see Note 8 to the Consolidated Financial Statements in “Item 8.
Financial Statements and Supplementary Data.”
Short-term borrowings
A critical component of the Company’s liquidity and capital resources is access to short-term borrowings to fund its operations. Short-
term borrowings are accompanied by increased risks managed by the Bank’s Asset Liability Committee (“ALCO”) such as rate increases
or unfavorable change in terms which would make it more costly to obtain future short-term borrowings. The Company’s short-term
borrowing sources include FHLB advances, federal funds purchased and retail and wholesale repurchase agreements. The Company
also has access to the short-term discount window borrowing programs (i.e., primary credit) of the Federal Reserve Bank (“FRB”). FHLB
advances and certain other short-term borrowings may be renewed as long-term borrowings to decrease certain risks such as liquidity or
interest rate risk; however, the reduction in risks are weighed against the increased cost of funds and other risks.
The following table provides information relating to significant short-term borrowings, which consists of borrowings that mature within
one year of period end:
(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
December 31,
2017
At or for the Years ended
December 31,
2016
December 31,
2015
$
$
$
362,573
0.53%
497,187
413,873
0.45%
473,650
0.34%
473,650
384,066
0.31%
423,414
0.31%
441,041
376,983
0.27%
53
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, 2017 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 in “Item 8. Financial Statements
and Supplementary Data.”
Contractual Obligations and Off-Balance Sheet Arrangements
In the normal course of business, there may be various outstanding commitments to obtain funding and to extend credit, such as letters
of credit and un-advanced loan commitments, which are not reflected in the accompanying condensed consolidated financial statements.
The Company does not anticipate any material losses as a result of these transactions.
Off-balance sheet arrangements also include any obligation related to a variable interest held in an unconsolidated entity. The Company
does not anticipate any material losses as a result of these transactions. For additional information regarding the Company’s interests in
unconsolidated VIEs, see Note 6 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.”
The following table represents the Company’s contractual obligations as of December 31, 2017:
(Dollars in thousands)
Total
$ 7,579,747
362,573
353,995
7,964
126,135
287
Deposits
Repurchase agreements
FHLB advances
Other borrowed funds
Subordinated debentures
Capital lease obligations
Operating lease
obligations
Total
Indeter-
minate
Maturity 1
6,762,488
—
—
—
—
—
Payments Due by Period
2018
2019
2020
2021
2022
Thereafter
557,693
362,573
200,869
—
—
92
120,657
—
887
—
—
92
2,502
124,138
65,284
—
1,651
—
—
92
2,039
69,066
45,409
—
148,721
—
—
11
1,593
195,734
27,974
—
945
—
—
—
953
29,872
242
—
922
7,964
126,135
—
5,541
140,804
15,261
$ 8,445,962
—
6,762,488
2,633
1,123,860
______________________________
1 Represents non-interest bearing deposits and NOW, DDA, savings, and money market accounts.
54
Liquidity Risk
Liquidity risk is the possibility that the Company will not be able to fund present and future obligations as they come due because of an
inability to liquidate assets or obtain adequate funding at a reasonable cost. The objective of liquidity management is to maintain cash
flows adequate to meet current and future needs for credit demand, deposit withdrawals, maturing liabilities and corporate operating
expenses. Effective liquidity management entails three elements:
1. assessing on an ongoing basis, the current and expected future needs for funds, and ensuring that sufficient funds or access to
funds exist to meet those needs at the appropriate time;
2. providing for an adequate cushion of liquidity to meet unanticipated cash flow needs that may arise from potential adverse
circumstances ranging from high probability/low severity events to low probability/high severity; and
3. balancing the benefits between providing for adequate liquidity to mitigate potential adverse events and the cost of that liquidity.
The Company has a wide range of versatility in managing the liquidity and asset/liability mix. The Bank’s ALCO meets regularly to
assess liquidity risk, among other matters. The Company monitors liquidity and contingency funding alternatives through management
reports of liquid assets (e.g., investment securities), both unencumbered and pledged, as well as borrowing capacity, both secured and
unsecured, including off-balance sheet funding sources. The Company evaluates its potential funding needs across alternative scenarios
and maintains contingency funding plans consistent with the Company’s access to diversified sources of contingent funding.
The following table identifies certain liquidity sources and capacity available to the Company as of the dates indicated:
(Dollars in thousands)
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
Commercial mortgage-backed securities
Total unencumbered securities
December 31,
2017
December 31,
2016
$
$
$
$
$
$
$
1,807,787
(360,185)
1,447,602
1,054,103
—
1,054,103
1,558,527
(251,749)
1,306,778
1,226,683
—
1,226,683
230,000
255,000
29,097
3,358
769,786
5,982
115,527
54,998
978,748
39,407
12,086
814,942
19,573
258,260
78,144
1,222,412
55
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 78,006,956 have been issued as of December 31, 2017. The Company also has the capacity
to issue 1,000,000 shares of preferred stock of which none have been issued as of December 31, 2017. Conversely, the Company may
decide to utilize a portion of its strong capital position, as it has done in the past, to repurchase shares of its outstanding common stock,
depending on market price and other relevant considerations.
The Federal Reserve has adopted capital adequacy guidelines that are used to assess the adequacy of capital in supervising a bank holding
company. The federal banking agencies implemented the Final Rules to establish a new comprehensive regulatory capital framework
with a phase-in period beginning on January 1, 2015 and ending on January 1, 2019. The Final Rules implemented certain regulatory
amendments based on the recommendation of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank
Act and substantially amended the regulatory risk-based capital rules applicable to the Company. The Final Rules require the Company
to hold a conservation buffer designed to absorb losses during periods of economic stress. The capital conservation buffer for 2017 is
1.25%. As of December 31, 2017, management believes the Company and Bank meet all capital adequacy requirements to which they
are subject and there are no conditions or events subsequent to this date that management believes have changed the Company’s or Bank’s
risk-based capital category.
The following table illustrates the Bank’s regulatory ratios and the Federal Reserve’s current capital adequacy guidelines as of
December 31, 2017. The Federal Reserve’s fully phased-in guidelines applicable in 2019 are also summarized.
Glacier Bank regulatory ratios
Minimum capital requirements
Well capitalized requirements
Total Capital
(To Risk-
Weighted
Assets)
Tier 1 Capital
(To Risk-
Weighted
Assets)
Common
Equity Tier 1
(To Risk-
Weighted
Assets)
Leverage
Ratio/
Tier 1 Capital
(To Average
Assets)
15.04%
8.00%
10.00%
13.79%
6.00%
8.00%
13.79%
4.50%
6.50%
11.47%
4.00%
5.00%
Minimum capital requirements, including fully-phased in
capital conservation buffer (2019)
10.50%
8.50%
7.00%
N/A
For additional information regarding regulatory capital, see Note 11 to the Consolidated Financial Statements in “Item 8. Financial
Statements and Supplementary Data.”
56
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, Utah, Colorado and Arizona law, financial institutions are subject to a corporation income tax, which incorporates
or is substantially similar to applicable provisions of the Internal Revenue Code. The corporation income tax is imposed on federal
taxable income, subject to certain adjustments. State taxes are incurred at the rate of 6.75 percent in Montana, 7.4 percent in Idaho, 5
percent in Utah, 4.63 percent in Colorado and 4.9 percent in Arizona. Washington and Wyoming do not impose a corporate income tax.
Income tax expense for the years ended December 31, 2017 and 2016 was $64.6 million and $39.7 million, respectively, with such
increase resulting from the $19.7 million revaluation of the Company’s net deferred tax asset. Deferred tax assets and liabilities were
measured using enacted tax rates expected to apply to the years in which the temporary differences are expected to be recognized. The
effect on deferred tax assets and liabilities from the change in tax rates was recognized in net income during the current year, given that
the enactment of the Tax Act occurred on December 22, 2017, causing a current year effective tax rate of 35.7 percent. The current year
federal marginal rate was 35 percent and will decrease to 21 percent in 2018. Excluding the impact of the Tax Act, the effective federal
and state income tax rate for the Company was 24.8 percent in 2017 and is expected to decrease to a range of 17 to 18 percent during
2018 as a result of the Tax Act. The current and prior year’s low effective tax rates, excluding the impact of the Tax Act, of 24.8 percent
and 24.7 percent, respectively, are due to income from tax-exempt investment securities, municipal loans and leases and benefits from
federal income tax credits. The income from tax-exempt investment securities, loans and leases was $56.0 million and $58.1 million for
the years ended December 31, 2017 and 2016, respectively. The benefits from federal income tax credits were $5.6 million and $3.3
million for the years ended December 31, 2017 and 2016, respectively. For additional information on the revaluation of the net deferred
tax asset and the effective tax rate, see the “Non-GAAP Financial Measures” section in “Item 6. Selected Financial Data.”
The Company has equity investments in Certified Development Entities (“CDE”) which have received allocations of New Markets Tax
Credits (“NMTC”). Administered by the Community Development Financial Institutions Fund (“CDFI Fund”) of the U.S. Department
of the Treasury, the NMTC program is aimed at stimulating economic and community development and job creation in low-income
communities. The federal income tax credits received are claimed over a seven-year credit allowance period. The Company also has
equity investments in Low-Income Housing Tax Credits (“LIHTC”) which are indirect federal subsidies used to finance the development
of affordable rental housing for low-income households. The federal income tax credits are claimed over a ten-year credit allowance
period. The Company has investments of $21.2 million in Qualified Zone Academy and Qualified School Construction bonds whereby
the Company receives quarterly federal income tax credits in lieu of taxable interest income. The federal income tax credits on these
investment securities are subject to federal and state income tax.
Following is a list of expected federal income tax credits to be received in the years indicated.
(Dollars in thousands)
2018
2019
2020
2021
2022
Thereafter
New
Markets
Tax Credits
Low-Income
Housing
Tax Credits
Investment
Securities
Tax Credits
Total
$
$
2,874
2,974
3,296
3,296
2,528
1,930
16,898
4,808
5,070
4,855
4,038
4,010
18,618
41,399
908
850
791
737
673
2,149
6,108
8,590
8,894
8,942
8,071
7,211
22,697
64,405
For additional information on income taxes, see Note 15 to the Consolidated Financial Statements in “Item 8. Financial Statements and
Supplementary Data”.
Average Balance Sheet
The following schedule provides 1) the total dollar amount of interest and dividend income of the Company for earning assets and the
average yields; 2) the total dollar amount of interest expense on interest bearing liabilities and the average rates; 3) net interest and
dividend income and interest rate spread; and 4) net interest margin (tax-equivalent).
57
December 31, 2017
Years ended
December 31, 2016
December 31, 2015
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 1
Consumer and other loans
$ 744,523
4,792,720
684,129
$ 33,114
233,744
32,584
4.45% $ 741,876
4.88% 3,993,363
668,990
4.76%
$ 33,410
193,147
31,402
4.50% $ 687,013
4.84% 3,459,470
631,512
4.69%
$ 32,153
167,587
31,476
Total loans 2
Tax-exempt investment
securities 3
Taxable investment securities 4
Total earning assets
Goodwill and intangibles
Non-earning assets
Total assets
Liabilities
6,221,372
299,442
4.81% 5,404,229
257,959
4.77% 4,777,995
231,216
1,160,182
66,077
5.70% 1,325,810
75,907
5.73% 1,328,908
39,727
405,246
1,722,264
9,103,818
180,014
394,363
$9,678,195
41,775
375,641
2.31% 1,874,240
4.45% 8,604,279
155,981
392,353
$9,152,613
2.23% 1,918,283
4.37% 8,025,186
143,293
389,126
$8,557,605
77,199
41,648
350,063
$
Non-interest bearing deposits
NOW and DDA accounts
Savings accounts
Money market deposit accounts
Certificate accounts
Wholesale deposits 5
FHLB advances
$2,175,750
1,656,865
1,055,688
1,547,659
888,887
275,804
258,528
—
1,402
624
2,407
5,114
7,246
6,748
$
—% $1,934,543
0.08% 1,498,928
920,058
0.06%
0.16% 1,420,700
0.58% 1,013,046
2.63%
2.57%
335,616
294,952
—
1,062
464
2,183
5,998
8,695
6,221
$
—% $1,756,888
0.07% 1,371,340
758,776
0.05%
0.15% 1,340,967
0.59% 1,131,210
2.59%
2.07%
206,889
319,565
—
1,074
360
2,066
6,891
5,747
8,841
4.68%
4.84%
4.98%
4.84%
5.81%
2.17%
4.36%
—%
0.08%
0.05%
0.15%
0.61%
2.78%
2.73%
Repurchase agreements 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)
547,307
6,323
1.16%
515,254
5,008
0.97%
509,431
4,296
0.84%
8,406,488
83,991
8,490,479
29,864
0.36% 7,933,097
96,392
8,029,489
29,631
0.37% 7,395,066
91,360
7,486,426
29,275
0.40%
775
781,267
406,200
(526)
1,187,716
$9,678,195
763
740,792
371,925
9,644
1,123,124
$9,152,613
755
720,827
336,998
12,599
1,071,179
$8,557,605
$ 375,382
$ 346,010
$ 320,788
4.09%
4.12%
4.00%
4.02%
3.96%
4.00%
______________________________
1 Includes tax effect of $6.4 million, $4.2 million and $2.6 million on tax-exempt municipal loan and lease income for the years ended December 31,
2017, 2016 and 2015, respectively.
2 Total loans are gross of the allowance for loan and lease losses, net of unearned income and include loans held for sale. Non-accrual loans were included
in the average volume for the entire period.
3 Includes tax effect of $22.5 million, $25.9 million and $26.3 million on tax-exempt investment securities income for the years ended December 31,
2017, 2016 and 2015, respectively.
4 Includes tax effect of $1.3 million, $1.4 million and $1.4 million on federal income tax credits for the years ended December 31, 2017, 2016 and 2015,
respectively.
5 Wholesale deposits include brokered deposits classified as NOW, DDA, money market deposit and certificate accounts.
58
Rate/Volume Analysis
Net interest income can be evaluated from the perspective of relative dollars of change in each period. Interest income and interest
expense, which are the components of net interest income, are shown in the following table on the basis of the amount of any increases
(or decreases) attributable to changes in the dollar levels of the Company’s interest earning assets and interest bearing liabilities (“volume”)
and the yields earned and paid on such assets and liabilities (“rate”). The change in interest income and interest expense attributable to
changes in both volume and rates has been allocated proportionately to the change due to volume and the change due to rate.
(Dollars in thousands)
Interest income
Residential real estate loans
Commercial loans (tax-equivalent)
Consumer and other loans
Investment securities (tax-equivalent)
$
Total interest income
Interest expense
NOW and DDA accounts
Savings accounts
Money market deposit accounts
Certificate accounts
Wholesale deposits
FHLB advances
Repurchase agreements and other
borrowed funds
Total interest expense
Net interest income (tax-
equivalent)
Year ended December 31,
2017 vs. 2016
Increase (Decrease) Due to:
Rate
Volume
Year ended December 31,
2016 vs. 2015
Increase (Decrease) Due to:
Rate
Net
Net
Volume
119
38,029
623
(11,680)
27,091
109
67
189
(750)
(1,569)
(783)
297
(2,440)
(415)
2,568
559
(198)
2,514
231
93
35
(134)
120
1,310
1,018
2,673
(296)
40,597
1,182
(11,878)
29,605
340
160
224
(884)
(1,449)
527
1,315
233
2,568
26,393
1,960
(1,725)
29,196
103
78
129
(703)
3,602
(658)
61
2,612
(1,311)
(833)
(2,034)
560
(3,618)
(115)
26
(12)
(190)
(654)
(1,962)
651
(2,256)
1,257
25,560
(74)
(1,165)
25,578
(12)
104
117
(893)
2,948
(2,620)
712
356
$
29,531
(159)
29,372
26,584
(1,362)
25,222
Net interest income (tax-equivalent) increased $29.4 million for the year ended December 31, 2017 compared to the same period in 2016.
The interest income for 2017 increased over the same period last year primarily from continued increased growth of the Company’s
commercial loan portfolio along with increased yields on such loans. The decrease in interest income on the investment securities portfolio
was the result of continuing to redeploy cash flow from investment securities into the loan portfolio. Total interest expense remained
stable compared to the prior year with volatility in certain categories including wholesale deposits, FHLB advances and other borrowed
funds. The decrease in wholesale deposits resulted from the Company taking the opportunity to pay off some of those higher cost funding
sources. The increase in rates on FHLB advances resulted from the Company changing a portion of its LIBOR-based borrowings from
wholesale deposits to FHLB advances for its cash flow hedge. The increase in rates on other borrowed funds resulted from the increased
rates on the Company’s variable rate subordinated debentures.
Net interest income (tax-equivalent) increased $25.2 million during 2016 compared to 2015. The increase in interest income primarily
resulted from increased growth of the Company’s commercial loan portfolio. Total interest expense for 2016 remained relatively flat
compared to the prior year, although, there was an increase in expenses related to wholesale deposits which was offset by a decrease in
expense from FHLB advances. The increase in the amount of wholesale deposits and related expense was driven by a delayed start
interest rate swap (i.e., 3.5 years) with a notional amount of $100 million that started interest accruals in November 2015. The Company
utilized wholesale deposits as the cash flow hedge which resulted in an increase amount of wholesale deposits and associated interest
expense. The decrease in rates on FHLB advances was driven by long-term advances maturing and being replaced by short-term lower
cost FHLB advances.
59
Effect of inflation and changing prices
GAAP often requires the measurement of financial position and operating results in terms of historical dollars, without consideration for
change in relative purchasing power over time due to inflation. Virtually all assets of the Company are monetary in nature; therefore,
interest rates generally have a more significant impact on a company’s performance than does the effect of inflation.
Critical Accounting Policies
The preparation of consolidated financial statements in conformity with GAAP often requires management to use significant judgments
as well as subjective and/or complex measurements in making estimates and assumptions that affect the reported amounts of assets,
liabilities, income and expenses. The Company considers its accounting policies for the ALLL, goodwill and fair value measurements
to be critical accounting policies. The application of these policies has a significant impact on the Company’s consolidated financial
statements and financial results could differ significantly if different judgments or estimates were to be applied.
Allowance for Loan and Lease Losses
For information regarding the ALLL, its relation to the provision for loan losses and risk related to asset quality, see the section captioned
“Allowance for Loan and Lease Losses” included in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations” and Notes 1 and 3 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.”
Goodwill
For information on goodwill, see Notes 1 and 5 to the Consolidated Financial Statements in “Item 8. Financial Statements and
Supplementary Data.”
Fair Value Measurements
For information on fair value measurements, see Note 20 to the Consolidated Financial Statements in “Item 8. Financial Statements and
Supplementary Data.”
Impact of Recently Issued Accounting Standards
Authoritative accounting guidance that may have had a material impact on the Company that became effective during 2017 or 2016
includes amendments to:
•
•
•
•
•
•
Financial Accounting Standards Board (“FASB”) Accounting Standards CodificationTM (“ASC”) Topic 220, Income Statement
- Reporting Comprehensive Income;
FASB ASC Topic 718, Compensation - Stock Compensation;
FASB ASC Topic 250, Accounting Changes and Error Corrections;
FASB ASC Topic 805, Business Combinations; and
FASB ASC Topic 810, Consolidation
SEC Staff Accounting Bulletin (“SAB”) Topic 11.M, Disclosure of the Impact that Recently Issued Accounting Standards Will
Have on the Financial Statements of the Registrant when Adopted in a Future Period
Authoritative accounting guidance that may possibly have a material impact on the Company that is pending adoption at December 31,
2017 includes amendments to:
•
•
•
•
•
•
•
FASB ASC Topic 815, Derivatives and Hedging;
FASB ASC Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs;
FASB ASC Topic 350, Simplifying the Test for Goodwill;
FASB ASC Topic 326, Financial Instruments - Credit Losses;
FASB ASC Topic 842, Leases;
FASB ASC Topic 825, Financial Instruments; and
FASB ASC Topic 606, Revenue from Contracts with Customers
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.”
60
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The disclosures set forth in this item are qualified by the section captioned “Forward-Looking Statements” included in “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Market risk is the risk of loss in a financial
instrument arising from adverse changes in market rates/prices such as interest rates, foreign currency exchange rates, commodity prices,
and equity prices. The Company’s primary market risk exposure is interest rate risk.
Interest Rate Risk
Interest rate risk is the potential for loss of future earnings resulting from adverse changes in the level of interest rates. Interest rate risk
results from many factors and could have a significant impact on the Company’s net interest income, which is the Company’s primary
source of net income. Net interest income is affected by changes in interest rates, the relationship between rates on interest bearing assets
and liabilities, the impact of the interest fluctuations on asset prepayments and the mix of interest bearing assets and liabilities.
Although interest rate risk is inherent in the banking industry, banks are expected to have sound risk management practices in place to
measure, monitor and control interest rate exposures. The objective of interest rate risk management is to contain the risks associated
with interest rate fluctuations. The process involves identification and management of the sensitivity of net interest income to changing
interest rates.
The ongoing monitoring and management of this risk is an important component of the Company’s asset/liability management process
which is governed by policies established by the Company’s Board that are reviewed and approved annually. The Board delegates
responsibility for carrying out the asset/liability management policies to the Bank’s ALCO. In this capacity, the ALCO develops guidelines
and strategies impacting the Company’s asset/liability management related activities based upon estimated market risk sensitivity, policy
limits and overall market interest rate levels and trends. The Company’s goal of its asset and liability management practices is to maintain
or increase the level of net interest income within an acceptable level of interest rate risk.
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.”
Net interest income simulation
The Company uses a detailed and dynamic simulation model to quantify the estimated exposure of net interest income (“NII”) to sustained
interest rate changes. While ALCO routinely monitors simulated NII sensitivity over rolling two-year and five-year horizons, it also
utilizes additional tools to monitor potential longer-term interest rate risk (e.g., economic value of equity). The simulation model captures
the impact of changing interest rates on the interest income received and interest expense paid on all assets and liabilities reflected on
the Company’s statements of financial condition. This sensitivity analysis is compared to ALCO policy limits which specify a maximum
tolerance level for NII exposure over a one year and two year horizon, assuming no balance sheet growth. The ALCO policy rate scenarios
include upward and downward shifts in interest rates for 100 bps, 200 bps, 300 bps, and 400 bps scenarios with instantaneous and parallel
changes in current market yield curves. The ALCO policy also includes 200 bps and 400 bps rate scenarios with gradual parallel shifts
in interest rates over 12-month and 24-month periods, respectively. Given the historically low rate environment, a downward shift in
interest rates of only 100 bps is modeled. Other non-parallel rate movement scenarios are also modeled to determine the potential impact
on net interest income. The additional scenarios are adjusted as the economic environment changes and provide ALCO additional interest
rate risk monitoring tools to evaluate current market conditions.
61
The following is indicative of the Company’s overall NII sensitivity analysis as of December 31, 2017 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, 2017.
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
One Year
Two Years
Policy
Limits
Estimated
Sensitivity
Policy
Limits
Estimated
Sensitivity
(10.0)%
(10.0)%
(10.0)%
(10.0)%
(20.0)%
(20.0)%
(10.0)%
(3.9)%
(0.3)%
0.1 %
(0.3)%
0.6 %
(0.1)%
1.1 %
(15.0)%
(15.0)%
(15.0)%
(15.0)%
(20.0)%
(20.0)%
(20.0)%
(6.2)%
2.2 %
4.5 %
2.3 %
7.0 %
8.4 %
2.5 %
The preceding sensitivity analysis does not represent a forecast and should not be relied upon as being indicative of expected operating
results. These hypothetical estimates are based upon numerous assumptions including: the nature and timing of interest rate levels
including, but not limited to, yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and
deposits and reinvestment/replacement of asset and liability cash flows. While assumptions are developed based upon current economic
and local market conditions, the Company cannot make any assurances as to the predictive nature of these assumptions including how
customer preferences or competitor influences might change. Also, as market conditions vary from those assumed in the sensitivity
analysis, actual results will also differ due to prepayment/refinancing levels likely deviating from those assumed, the varying impact of
interest rate caps or floors on adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate
loans, depositor early withdrawals and product preference changes, and other internal and external variables. Furthermore, the sensitivity
analysis does not reflect actions that ALCO might take in responding to or anticipating changes in interest rates.
Economic value of equity
In addition to the NII analyses, the Company calculates the economic value of equity (“EVE”) which focuses on longer term interest rate
risk. The EVE process models the cash flow of financial instruments to maturity and then discounts those cashflows based on prevailing
interest rates in order to develop a baseline EVE. The interest rates used in the model are then shocked for an immediate increase and
decrease in interest rates. The results for the shocked model are compared to the baseline results to determine the percentage change in
EVE under the various scenarios. The resulting percentage change in the EVE is an indication of the longer term re-pricing risk and
option risks embedded in the balance sheet. The measure is not designed to estimate the Company’s capital levels, such as tangible,
regulatory, or market capitalization.
The following reflects the Company’s EVE maximum sensitivity policy limits and EVE analysis as of December 31, 2017:
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
(10.0)%
(10.0)%
(20.0)%
(30.0)%
(40.0)%
(5.1)%
(0.9)%
(3.6)%
(6.2)%
(9.2)%
62
Report of Independent Registered Public Accounting Firm
To the Stockholders, Board of Directors and Audit Committee
Glacier Bancorp, Inc.
Kalispell, Montana
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial condition of Glacier Bancorp, Inc. (the
Company) as of December 31, 2017 and 2016, 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, 2017, and the related notes (collectively referred to as the financial statements). In our opinion, the
consolidated financial statements referred to above present fairly, in all material respects, the financial position of
the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the
years in the three-year period ended December 31, 2017, in conformity with accounting principles generally
accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company’s internal control over financial reporting as of
December 31, 2017, based on criteria established in Internal Control – Integrated Framework: (2013), issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 22,
2018, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial
reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audits.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and
disclosures in the financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2005.
Denver, Colorado
February 22, 2018
63 Report of Independent Registered Public Accounting Firm
To the Stockholders, Board of Directors and Audit Committee
Glacier Bancorp, Inc.
Kalispell, Montana
Opinion on the Internal Control over Financial Reporting
We have audited Glacier Bancorp, Inc.’s (the Company) internal control over financial reporting as of
December 31, 2017, based on criteria established in Internal Control – Integrated Framework: (2013),
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated
Framework: (2013), issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States) (PCAOB), the consolidated financial statements of Glacier Bancorp, Inc. and our
report dated February 22, 2018, expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting, included
in the accompanying Management’s Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based
on our audit.
We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audit also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for
our opinion.
64 Glacier Bancorp, Inc.
Kalispell, Montana
Definitions and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in conditions or that the degree of
compliance with the policies or procedures may deteriorate.
Denver, Colorado
February 22, 2018
65
GLACIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except per share data)
Assets
Cash on hand and in banks
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 loss
Total stockholders’ equity
December 31,
2017
December 31,
2016
$
$
$
139,948
60,056
200,004
1,778,243
648,313
2,426,556
38,833
6,577,824
(129,568)
6,448,256
177,348
14,269
44,462
38,344
14,184
177,811
29,884
96,398
9,706,349
2,311,902
5,267,845
362,573
353,995
8,224
126,135
3,450
73,168
8,507,292
—
780
797,997
402,259
(1,979)
1,199,057
135,268
17,273
152,541
2,425,477
675,674
3,101,151
72,927
5,684,463
(129,572)
5,554,891
176,198
20,954
45,832
67,121
12,347
147,053
25,550
74,035
9,450,600
2,041,852
5,330,427
473,650
251,749
4,440
125,991
3,584
102,038
8,333,731
—
765
749,107
374,379
(7,382)
1,116,869
Total liabilities and stockholders’ equity
$
9,706,349
9,450,600
Number of common stock shares issued and outstanding
78,006,956
76,525,402
See accompanying notes to consolidated financial statements.
66
GLACIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
Interest Income
Investment securities
Residential real estate loans
Commercial loans
Consumer and other loans
Total interest income
Interest Expense
Deposits
Securities sold under agreements to repurchase
Federal Home Loan Bank advances
Other borrowed funds
Subordinated debentures
Total interest expense
Net Interest Income
Provision for loan losses
Net interest income after provision for loan losses
Non-Interest Income
Service charges and other fees
Miscellaneous loan fees and charges
Gain on sale of loans
(Loss) gain on sale of investments
Other income
Total non-interest income
Non-Interest Expense
Compensation and employee benefits
Occupancy and equipment
Advertising and promotions
Data processing
Other real estate owned
Regulatory assessments and insurance
Core deposit intangible amortization
Other expenses
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
December 31,
2017
Years ended
December 31,
2016
December 31,
2015
$
$
$
$
$
81,968
33,114
227,356
32,584
375,022
16,793
1,858
6,748
79
4,386
29,864
345,158
10,824
334,334
67,717
4,360
30,439
(660)
10,383
112,239
160,506
26,631
8,405
14,150
1,909
4,431
2,494
47,045
265,571
181,002
64,625
116,377
90,392
33,410
188,949
31,402
344,153
18,402
1,207
6,221
67
3,734
29,631
314,522
2,333
312,189
62,405
4,613
33,606
(1,463)
8,157
107,318
151,697
25,979
8,433
14,390
2,895
4,780
2,970
47,570
258,714
160,793
39,662
121,131
91,086
32,153
164,966
31,476
319,681
16,138
1,021
8,841
81
3,194
29,275
290,406
2,284
288,122
59,286
4,276
26,389
19
8,791
98,761
134,382
25,483
8,661
11,244
3,693
5,283
2,964
45,047
236,757
150,126
33,999
116,127
1.50
1.50
1.14
77,537,664
77,607,605
1.59
1.59
1.10
76,278,463
76,341,836
1.54
1.54
1.05
75,542,455
75,595,581
See accompanying notes to consolidated financial statements.
67
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 (gains) included in net income
Net unrealized gains (losses) on available-for-sale securities
Tax effect
Net of tax amount
Unrealized gains (losses) on derivatives used for cash flow hedges
Reclassification adjustment for losses included in net income
Net unrealized gains (losses) on derivatives used for
cash flow hedges
Tax effect
Net of tax amount
Total other comprehensive income (loss), net of tax
December 31,
2017
Years ended
December 31,
2016
December 31,
2015
$
116,377
121,131
116,127
3,428
636
4,064
(1,563)
2,501
444
4,892
5,336
(2,083)
3,253
5,754
(21,407)
1,335
(20,072)
7,776
(12,296)
(1,643)
6,417
4,774
(1,849)
2,925
(22,845)
(69)
(22,914)
8,904
(14,010)
(7,857)
5,025
(2,832)
1,087
(1,745)
(9,371)
(15,755)
Total Comprehensive Income
$
122,131
111,760
100,372
See accompanying notes to consolidated financial statements.
68
GLACIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Years ended December 31, 2017, 2016 and 2015
(Dollars in thousands, except per share data)
Common Stock
Shares
Amount
Paid-in
Capital
Retained
Earnings
Substantially
Restricted
Accumulated
Other Comp-
rehensive
Income
(Loss)
Total
Balance at December 31, 2014
75,026,092
$
Net income
Other comprehensive loss
Cash dividends declared ($1.05 per share)
Stock issued in connection with acquisitions
Stock issuances under stock incentive plans
Stock-based compensation and related taxes
Balance at December 31, 2015
Net income
Other comprehensive loss
Cash dividends declared ($1.10 per share)
Stock issued in connection with acquisitions
Stock issuances under stock incentive plans
Stock-based compensation and related taxes
Balance at December 31, 2016
Net income
Other comprehensive income
Cash dividends declared ($1.14 per share)
Stock issued in connection with acquisitions
Stock issuances under stock incentive plans
Stock-based compensation and related taxes
Balance at December 31, 2017
—
—
—
997,850
62,346
—
76,086,288
—
—
—
349,545
89,569
—
76,525,402
—
—
—
1,381,661
99,893
—
78,006,956
$
$
$
750
—
—
—
10
1
—
761
—
—
—
3
1
—
765
—
—
—
14
1
—
780
708,356
301,197
17,744
1,028,047
—
—
—
25,929
16
2,067
736,368
—
—
—
10,462
(1)
2,278
749,107
—
—
—
46,659
(1)
2,232
797,997
116,127
—
(79,792)
—
—
—
337,532
121,131
—
(84,284)
—
—
—
374,379
116,377
351
(88,848)
—
—
—
402,259
—
(15,755)
—
—
—
—
1,989
—
(9,371)
—
—
—
—
(7,382)
—
5,403
—
—
—
—
(1,979)
116,127
(15,755)
(79,792)
25,939
17
2,067
1,076,650
121,131
(9,371)
(84,284)
10,465
—
2,278
1,116,869
116,377
5,754
(88,848)
46,673
—
2,232
1,199,057
See accompanying notes to consolidated financial statements.
69
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
Net (accretion) amortization of purchase accounting adjustments
Amortization of debt modification costs
Loans held for sale originated or acquired
Proceeds from sales of loans held for sale
Gain on sale of loans
Loss (gain) on sale of investments
Bank-owned life insurance income, net
Stock-based compensation, net of tax benefits
Depreciation of premises and equipment
(Gain) loss on sale of other real estate owned and write-downs, net
Deferred tax expense (benefit)
Amortization of core deposit intangibles
Amortization of investments in variable interest entities
Net decrease (increase) in accrued interest receivable
Net decrease in other assets
Net (decrease) increase in accrued interest payable
Net (decrease) increase 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 additions to premises and equipment
Proceeds from sale of other real estate owned
Proceeds from sale of non-marketable equity securities
Purchases of non-marketable equity securities
Proceeds from bank-owned life insurance
Investments in variable interest entities
Net cash (paid) received in acquisitions
Net cash provided by (used in) investing activities
December 31,
2017
Years ended
December 31,
2016
December 31,
2015
$
116,377
121,131
116,127
10,824
20,026
(5,131)
471
(889,212)
984,506
(30,439)
660
(1,395)
2,952
14,758
(1,641)
25,887
2,494
4,692
2,466
1,139
(135)
(4,558)
254,741
247,748
446,695
(36,239)
25,187
—
2,099,292
(2,740,281)
(10,128)
12,335
68,610
(71,396)
437
(14,514)
(4,091)
23,655
2,333
26,210
(2,252)
—
(1,098,864)
1,155,186
(33,606)
1,463
(1,142)
1,844
15,294
1,217
(82)
2,970
2,578
(1,144)
6,621
60
(6,730)
193,087
62,817
662,003
(585,064)
25,405
(1,222)
1,781,534
(2,375,136)
(8,306)
10,145
73,611
(67,594)
437
(6,644)
6,701
(421,313)
2,284
26,709
1,264
—
(888,676)
925,353
(26,389)
(19)
(1,137)
1,695
14,365
938
(4,080)
2,964
3,297
(2,377)
2,701
(828)
2,580
176,771
136,777
663,828
(961,224)
20,997
(203,554)
1,736,198
(2,112,154)
(18,224)
10,278
38,607
(10,837)
1,143
(4,576)
21,427
(681,314)
See accompanying notes to consolidated financial statements.
70
GLACIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
Financing Activities
Net (decrease) increase in deposits
Net (decrease) increase in securities sold under agreements to repurchase
Net increase (decrease) in short-term Federal Home Loan Bank advances
Proceeds from long-term Federal Home Loan Bank advances
Repayments of long-term Federal Home Loan Bank advances
Net increase (decrease) in other borrowed funds
Cash dividends paid
Tax withholding payments for stock-based compensation
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
Sale and refinancing of other real estate owned
Transfer of loans to other real estate owned
Dividends declared but not paid
Acquisitions
Fair value of common stock shares issued
Cash consideration for outstanding shares
Fair value of assets acquired
Liabilities assumed
December 31,
2017
Years ended
December 31,
2016
December 31,
2015
$
$
$
$
(89,397)
(111,077)
137,200
150,000
(208,192)
3,784
(111,720)
(1,531)
(230,933)
47,463
152,541
368,006
50,236
(100,000)
—
(45,567)
(521)
(84,040)
(600)
187,514
(40,712)
193,253
215,895
24,951
140,000
49,816
(94,621)
(709)
(79,456)
(489)
255,387
(249,156)
442,409
200,004
152,541
193,253
30,000
40,219
553
4,466
265
46,673
17,342
355,230
321,824
29,576
36,225
728
5,198
23,137
10,465
3,475
69,750
62,225
30,103
39,622
446
7,989
22,893
25,939
28,364
434,963
391,592
See accompanying notes to consolidated financial statements.
71
GLACIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Operations and Summary of Significant Accounting Policies
General
Glacier Bancorp, Inc. (“Company”) is a Montana corporation headquartered in Kalispell, Montana. The Company provides a full range
of banking services to individuals and businesses in Montana, Idaho, Utah, Washington, Wyoming, Colorado and Arizona through its
wholly-owned bank subsidiary, Glacier Bank (“Bank”). The Company offers a wide range of banking products and services, including:
1) retail banking; 2) business banking; 3) real estate, commercial, agriculture and consumer loans; and 4) mortgage origination services.
The Company serves individuals, small to medium-sized businesses, community organizations and public entities.
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 fourteen
bank divisions, a treasury division, an information technology division and a centralized mortgage division. The treasury division includes
the Bank’s investment portfolio and wholesale borrowings, the information technology division includes the Bank’s internal data
processing, and the centralized mortgage division includes mortgage loan servicing and secondary market sales. The Bank divisions
operate under separate names, management teams and advisory directors. The Company considers the Bank to be its sole operating
segment as the Bank 1) engages in similar bank business activity from which it earns revenues and incurs expenses; 2) the operating
results of the Bank are regularly reviewed by the Chief Executive Officer (“CEO”) (i.e., the chief operating decision maker) who makes
decisions about resources to be allocated to the Bank; and 3) financial information is available for the Bank. All significant inter-company
transactions have been eliminated in consolidation.
The Bank has subsidiary interests in variable interest entities (“VIE”) for which the Bank has both the power to direct the VIE’s significant
activities and the obligation to absorb losses or right to receive benefits of the VIE that could potentially be significant to the VIE. These
subsidiary interests are included in the Company’s consolidated financial statements. The Bank also has subsidiary interests in VIEs for
which the Bank does not have a controlling financial interest and is not the primary beneficiary. These subsidiary interests are not included
in the Company’s consolidated financial statements.
The parent holding company owns non-bank subsidiaries that have issued trust preferred securities as Tier 1 capital instruments. The
trust subsidiaries are not included in the Company’s consolidated financial statements. The Company's investments in the trust subsidiaries
are included in non-marketable equity securities on the Company's statements of financial condition.
In April 2017, the Company completed its acquisition of TFB Bancorp, Inc. and its wholly-owned subsidiary, The Foothills Bank, a
community bank based in Yuma, Arizona (collectively, “Foothills”). In August 2016, the Company completed its acquisition of Treasure
State Bank (“TSB”), a community bank based in Missoula, Montana. In October 2015, the Company completed its acquisition of Cañon
Bank Corporation and its wholly-owned subsidiary, Cañon National Bank, a community bank based in Cañon City, Colorado (collectively,
“Cañon”). In February 2015, the Company completed its acquisition of Montana Community Banks, Inc. and its wholly-owned subsidiary,
Community Bank, Inc., a community bank based in Ronan, Montana (collectively, “CB”). 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. For additional information relating to recent mergers and acquisitions, see Note 22.
In January 2018, the Company acquired the outstanding common stock of Columbine Capital Corp., and its wholly-owned subsidiary,
Collegiate Peaks Bank, a community bank based in Buena Vista, Colorado (collectively, “Collegiate”). As of December 31, 2017,
Collegiate had total assets of $532,958,000, gross loans of $345,687,000 and total deposits of $463,970,000. For additional information
relating to this subsequent event, see Note 23.
72
Note 1. Nature of Operations and Summary of Significant Accounting Policies (continued)
In October 2017, the Company announced the signing of a definitive agreement to acquire Inter-Mountain Bancorp, Inc. and its wholly-
owned subsidiary, First Security Bank, a community bank based in Bozeman, Montana (collectively, “FSB”). FSB provides banking
services to individuals and businesses throughout Montana with banking offices located in Bozeman, Belgrade, Big Sky, Choteau,
Fairfield, Fort Benton, Three Forks, Vaughn and West Yellowstone. As of December 31, 2017, FSB had total assets of $1,027,685,000,
gross loans of $639,880,000 and total deposits of $891,390,000. Upon closing of the transaction, which is anticipated to take place in
February 2018, FSB will become a new bank division headquartered in Bozeman. Big Sky Western Bank, the Bank’s existing Bozeman-
based division will combine with the new FSB division. The agriculture-focused northern branches of FSB, located in the area known
as the Golden Triangle, will combine with the Bank’s First Bank of Montana division.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, cash held as demand deposits at various banks and the Federal Reserve Bank (“FRB”),
interest bearing deposits, federal funds sold, and liquid investments with original maturities of three months or less. The Bank is required
to maintain an average reserve balance with either the FRB or in the form of cash on hand. The required reserve balance at December 31,
2017 was $10,916,000.
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 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 (“OCI”). 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 2.
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.
73
Note 1. Nature of Operations and Summary of Significant Accounting Policies (continued)
In evaluating debt securities for other-than-temporary impairment losses, management assesses whether the Company intends to sell the
security or if it is more-likely-than-not that the Company will be required to sell the debt security. In so doing, management considers
contractual constraints, liquidity, capital, asset/liability management and securities portfolio objectives. If impairment is determined to
be other-than-temporary and the Company does not intend to sell a debt security, and it is more-likely-than-not the Company will not be
required to sell the security before recovery of its cost basis, it recognizes the credit component of an other-than-temporary impairment
of a debt security in earnings and the remaining portion (noncredit portion) in OCI, net of tax. For held-to-maturity debt securities, the
amount of an other-than-temporary impairment recorded in OCI for the noncredit portion of a previous other-than-temporary impairment
is amortized prospectively, as an increase to the carrying amount of the security, over the remaining life of the security on the basis of
the timing of future estimated cash flows of the security.
If impairment is determined to be other-than-temporary and the Company intends to sell a debt security or it is more-likely-than-not the
Company will be required to sell the security before recovery of its cost basis, it recognizes the entire amount of the other-than-temporary
impairment in earnings.
For debt securities with other-than-temporary impairment, the previous amortized cost basis less the other-than-temporary impairment
recognized in earnings shall be the new amortized cost basis of the security. In subsequent periods, the Company accretes into interest
income the difference between the new amortized cost basis and cash flows expected to be collected prospectively over the life of the
debt security.
Loans Held for Sale
Loans held for sale generally consist of long-term, fixed rate, conforming, single-family residential real estate loans intended to be sold
on the secondary market. Loans held for sale may be carried at the lower of cost or estimated fair value in the aggregate basis, or at fair
value where the Company has elected the fair value option. When an election is made to carry the loans held for sale at fair value, the
fair value includes the servicing value of the loans and any change in fair value is recognized in non-interest income. Fair value elections
are made at the time of origination or purchase based on the Company’s fair value election policy. Beginning in 2017, the Company
elected fair value accounting for all of its loans held for sale.
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.
74
Note 1. Nature of Operations and Summary of Significant Accounting Policies (continued)
The Company considers impaired loans to be the primary credit quality indicator for monitoring the credit quality of the loan portfolio.
Loans are designated impaired when, based upon current information and events, it is probable that the Company will be unable to collect
the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement and, therefore, the
Company has serious doubts as to the ability of such borrowers to fulfill the contractual obligation. Impaired loans include non-performing
loans (i.e., non-accrual loans and accruing loans ninety days or more past due) and accruing loans under ninety days past due where it is
probable payments will not be received according to the loan agreement (e.g., troubled debt restructuring). Interest income on accruing
impaired loans is recognized using the interest method. The Company measures impairment on a loan-by-loan basis in the same manner
for each class within the loan portfolio. An insignificant delay or shortfall in the amounts of payments would not cause a loan or lease
to be considered impaired. The Company determines the significance of payment delays and shortfalls on a case-by-case basis, taking
into consideration all of the facts and circumstances surrounding the loan and the borrower, including the length and reasons for the delay,
the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest due.
A restructured loan is considered a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s
financial difficulties, grants a concession to the debtor that it would not otherwise consider. The Company periodically enters into
restructure agreements with borrowers whereby the loans were previously identified as TDRs. When such circumstances occur, the
Company carefully evaluates the facts of the subsequent restructure to determine the appropriate accounting and under certain
circumstances it may be acceptable not to account for the subsequently restructured loan as a TDR. When assessing whether a concession
has been granted by the Company, any prior forgiveness on a cumulative basis is considered a continuing concession. A TDR loan is
considered an impaired loan and a specific valuation allowance is established when the fair value of the collateral-dependent loan or
present value of the loan’s expected future cash flows (discounted at the loan’s effective interest rate based on the original contractual
rate) is lower than the carrying value of the impaired loan. The Company has made the following types of loan modifications, some of
which were considered a TDR:
•
•
•
reduction of the stated interest rate for the remaining term of the debt;
extension of the maturity date(s) at a stated rate of interest lower than the current market rate for newly originated debt having
similar risk characteristics; and
reduction of the face amount of the debt as stated in the debt agreements.
The Company recognizes that while borrowers may experience deterioration in their financial condition, many continue to be creditworthy
customers who have the willingness and capacity for debt repayment. In determining whether non-restructured or unimpaired loans
issued to a single or related party group of borrowers should continue to accrue interest when the borrower has other loans that are
impaired or are TDRs, the Company on a quarterly or more frequent basis performs an updated and comprehensive assessment of the
willingness and capacity of the borrowers to timely and ultimately repay their total debt obligations, including contingent obligations.
Such analysis takes into account current financial information about the borrowers and financially responsible guarantors, if any, including
for example:
•
•
•
analysis of global, i.e., aggregate debt service for total debt obligations;
assessment of the value and security protection of collateral pledged using current market conditions and alternative market
assumptions across a variety of potential future situations; and
loan structures and related covenants.
For additional information relating to loans, see Note 3.
Allowance for Loan and Lease Losses
Based upon management’s analysis of the Company’s loan portfolio, the balance of the ALLL is an estimate of probable credit losses
known and inherent within the Bank’s loan portfolio as of the date of the consolidated financial statements. The ALLL is analyzed at
the loan class level and is maintained within a range of estimated losses. Determining the adequacy of the ALLL involves a high degree
of judgment and is inevitably imprecise as the risk of loss is difficult to quantify. The determination of the ALLL and the related provision
for loan losses is a critical accounting estimate that involves management’s judgments about known relevant internal and external
environmental factors that affect loan losses. The balance of the ALLL is highly dependent upon management’s evaluations of borrowers’
current and prospective performance, appraisals and other variables affecting the quality of the loan portfolio. Individually significant
loans and major lending areas are reviewed periodically to determine potential problems at an early date. Changes in management’s
estimates and assumptions are reasonably possible and may have a material impact upon the Company’s consolidated financial statements,
results of operations or capital.
75
Note 1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Risk characteristics considered in the ALLL analysis applicable to each loan class within the Company's loan portfolio are as follows:
Residential Real Estate. Residential real estate loans are secured by owner-occupied 1-4 family residences. Repayment of these loans
is primarily dependent on the personal income and credit rating of the borrowers. Credit risk in these loans is impacted by economic
conditions within the Company’s market areas that affect the value of the property securing the loans and affect the borrowers' personal
incomes. Mitigating risk factors for this loan class include a large number of borrowers, geographic dispersion of market areas and the
loans are originated for relatively smaller amounts.
Commercial Real Estate. Commercial real estate loans typically involve larger principal amounts, and repayment of these loans is
generally dependent on the successful operation of the property securing the loan and/or the business conducted on the property securing
the loan. Credit risk in these loans is impacted by the creditworthiness of a borrower, valuation of the property securing the loan and
conditions within the local economies in the Company’s diverse, geographic market areas.
Commercial. Commercial loans consist of loans to commercial customers for use in financing working capital needs, equipment purchases
and business expansions. The loans in this category are repaid primarily from the cash flow of a borrower’s principal business operation.
Credit risk in these loans is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow stability
from business operations across the Company’s diverse, geographic market areas.
Home Equity. Home equity loans consist of junior lien mortgages and first and junior lien lines of credit (revolving open-end and
amortizing closed-end) secured by owner-occupied 1-4 family residences. Repayment of these loans is primarily dependent on the
personal income and credit rating of the borrowers. Credit risk in these loans is impacted by economic conditions within the Company’s
market areas that affect the value of the residential property securing the loans and affect the borrowers' personal incomes. Mitigating
risk factors for this loan class are a large number of borrowers, geographic dispersion of market areas and the loans are originated for
terms that range from 10 years to 15 years.
Other Consumer. The other consumer loan portfolio consists of various short-term loans such as automobile loans and loans for other
personal purposes. Repayment of these loans is primarily dependent on the personal income of the borrowers. Credit risk is driven by
consumer economic factors (such as unemployment and general economic conditions in the Company’s diverse, geographic market area)
and the creditworthiness of a borrower.
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.
76
Note 1. Nature of Operations and Summary of Significant Accounting Policies (continued)
The changes in trends and conditions evaluated for each class within the loan portfolio include the following:
•
•
•
•
•
•
•
•
•
changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery
practices not considered elsewhere in estimating credit losses;
changes in global, national, regional, and local economic and business conditions and developments that affect the collectability
of the portfolio, including the condition of various market segments;
changes in the nature and volume of the portfolio and in the terms of loans;
changes in experience, ability, and depth of lending management and other relevant staff;
changes in the volume and severity of past due and nonaccrual loans;
changes in the quality of the Company’s loan review system;
changes in the value of underlying collateral for collateral-dependent loans;
the existence and effect of any concentrations of credit, and changes in the level of such concentrations; and
the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit
losses in the Company’s existing portfolio.
The ALLL is increased by provisions for loan losses which are charged to expense. The portions of loan and overdraft balances determined
by management to be uncollectible are charged off as a reduction of the ALLL and recoveries of amounts previously charged off are
credited as an increase to the ALLL. The Company’s charge-off policy is consistent with bank regulatory standards. Consumer loans
generally are charged off when the loan becomes over 120 days delinquent. Real estate acquired as a result of foreclosure or by deed-
in-lieu of foreclosure is classified as OREO until such time as it is sold.
At acquisition date, the assets and liabilities of acquired banks are recorded at their estimated fair values which results in no ALLL carried
over from acquired banks. Subsequent to acquisition, an allowance will be recorded on the acquired loan portfolios for further credit
deterioration, if any.
Premises and Equipment
Premises and equipment are accounted for at cost less depreciation. Depreciation is computed on a straight-line method over the estimated
useful lives or the term of the related lease. The estimated useful life for office buildings is 15 - 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 4.
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 4.
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, 2017 and 2016, no long-lived assets were considered materially impaired.
77
Note 1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Business Combinations and Intangible Assets
Acquisition accounting requires the total purchase price to be allocated to the estimated fair values of assets acquired and liabilities
assumed, including certain intangible assets. Goodwill is recorded if the purchase price exceeds the net fair value of assets acquired and
a bargain purchase gain is recorded in other income if the net fair value of assets acquired exceeds the purchase price.
Adjustment of the allocated purchase price may be related to fair value estimates for which all information has not been obtained of the
acquired entity known or discovered during the allocation period, the period of time required to identify and measure the fair values of
the assets and liabilities acquired in the business combination. The allocation period is generally limited to one year following
consummation of a business combination.
Core deposit intangible represents the intangible value of depositor relationships resulting from deposit liabilities assumed in acquisitions
and is amortized using an accelerated method based on an estimated runoff of the related deposits. The core deposit intangible is evaluated
for impairment and recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable,
with any changes in estimated useful life accounted for prospectively over the revised remaining life. For additional information relating
to core deposit intangibles, see Note 5.
The Company tests goodwill for impairment at the reporting unit level annually during the third quarter. The Company has identified
that each of the Bank divisions are reporting units (i.e., components of the Glacier Bank operating segment) given that each division has
a separate management team that regularly reviews its respective division financial information; however, the reporting units are aggregated
into a single reporting unit due to the reporting units having similar economic characteristics.
The goodwill of a reporting unit is tested for impairment between annual tests if an event occurs or circumstances change that would
more-likely-than-not reduce the fair value of a reporting unit below its carrying amount. Examples of events and circumstances that
could trigger the need for interim impairment testing include:
•
•
•
•
•
•
a significant change in legal factors or in the business climate;
an adverse action or assessment by a regulator;
unanticipated competition;
a loss of key personnel;
a more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise
disposed of; and
the testing for recoverability of a significant asset group within a reporting unit.
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 2017 and 2016 annual
goodwill impairment testing and proceed directly to the two-step goodwill impairment test. The goodwill impairment two-step process
requires the Company to make assumptions and judgments regarding fair value. In the first step, the Company calculates an implied fair
value based on a control premium analysis. If the implied fair value is less than the carrying value, the second step is completed to
compute the impairment amount, if any, by determining the “implied fair value” of goodwill. This determination requires the allocation
of the estimated fair value of the reporting units to the assets and liabilities of the reporting units. Any remaining unallocated fair value
represents the “implied fair value” of goodwill, which is compared to the corresponding carrying value of goodwill to compute impairment,
if any.
For additional information relating to goodwill, see Note 5.
Non-Marketable Equity Securities
Non-marketable equity securities primarily consist of Federal Home Loan Bank (“FHLB”) stock. FHLB stock is restricted because such
stock may only be sold to FHLB at its par value. Due to restrictive terms, and the lack of a readily determinable 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 is jointly and severally liable for repayment of each other’s debt.
78
Note 1. Nature of Operations and Summary of Significant Accounting Policies (continued)
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, 2017 and 2016, the carrying value associated
with these policies is $59,351,000 and $50,451,000, 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 OCI 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, 2017, 2016, and 2015, the Company’s cash
flow hedges were determined to be fully effective.
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 hedge 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.
At December 31, 2017, the Company also had residential real estate derivatives for 1) commitments to fund certain residential real estate
loans (interest rate locks) of $67,861,000 to be sold into the secondary market; and 2) 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 the fair values of these derivatives are not recorded as gains on
sale of loans because the changes were not significant.
Stock-based Compensation
Stock-based compensation awards granted are valued at fair value and compensation cost is recognized on a straight-line basis over the
requisite service period of each award. The impact of forfeitures of stock-based compensation awards on compensation expense is
recognized as forfeitures occur. For additional information relating to stock-based compensation, see Note 12.
Advertising and Promotion
Advertising and promotion costs are recognized in the period incurred.
Income Taxes
The Company’s income tax expense consists of current and deferred income tax expense. Current income tax expense reflects taxes to
be paid or refunded for the current period by applying the provisions of enacted tax law to earnings or losses. Deferred income tax
expense results from changes in deferred assets and liabilities between periods. The Company recognizes interest and penalties related
to income tax matters in income tax expense.
79
Note 1. Nature of Operations and Summary of Significant Accounting Policies (continued)
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 OCI. OCI includes unrealized gains and losses, net of tax effect, on available-for-
sale securities and derivatives used for cash flow hedges. For additional information relating to OCI, see Note 16.
Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding
during the period presented. Diluted earnings per share is computed by including the net increase in shares as if dilutive outstanding
stock options were exercised and restricted stock awards were vested, using the treasury stock method. For additional information relating
to earnings per share, see Note 17.
Reclassifications
Certain reclassifications have been made to the 2016 and 2015 financial statements to conform to the 2017 presentation.
Accounting Guidance Adopted in 2017
The Accounting Standards Codification™ (“ASC”) is the Financial Accounting Standards Board’s (“FASB”) officially recognized source
of authoritative GAAP applicable to all public and non-public non-governmental entities. Rules and interpretive releases of the Securities
and Exchange Commission (“SEC”) under the authority of the federal securities laws are also sources of authoritative GAAP for the
Company as an SEC registrant. All other accounting literature is non-authoritative. The following paragraphs provide descriptions of
recently adopted accounting standards that may have had a material effect on the Company’s financial position or results of operations.
Comprehensive Income. In February 2018, FASB amended ASC Topic 220 to allow a reclassification from accumulated other
comprehensive income (“AOCI”) to retained earnings for stranded tax effects resulting from the newly enacted Tax Cuts and Jobs Act
(“Tax Act”). The amount of the reclassification consists of the difference between the historical corporate income tax rates and the newly
enacted 21 percent corporate income tax rate. The amendments are effective for all entities for the interim and annual reporting periods
beginning after December 15, 2018 and early adoption is permitted, including interim periods in those years. The Company adopted the
amendments as of December 31, 2017, which resulted in a net reclassification of $351,000 between AOCI and retained earnings. The
Company’s policy is to release material stranded tax effects on a specific identification basis.
Stock Compensation. In March 2016, FASB amended ASC Topic 718 to address certain aspects of the accounting for share-based payment
transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification of awards
on the statements of cash flows. The amendments were effective for public business entities for the first interim and annual reporting
periods beginning after December 15, 2016 and the Company adopted the amendments as of January 1, 2017. The amendments require
entities to recognize all income tax effects related to share-based payment awards in the statements of operations when the awards vest
or are settled. Previously, income tax benefits at the settlement of awards were reported as increases (or decreases) to additional paid-in
capital to the extent that those benefits were greater than (or less than) the income tax benefits recognized in earnings during the awards’
vesting periods. Such amounts are to be classified as an operating activity in the statements of cash flows instead of the prior accounting
treatment, which required it to be classified as both an operating and a financing activity. The Company has elected to apply this
classification change on a retrospective basis. Also in connection with the adoption of the Update, the Company has elected to change
its accounting policy to recognize forfeitures as they occur. The requirement to report income tax effects in earnings has been applied
to the settlement of awards on a prospective basis and the impact of applying the guidance reduced reported income tax expense for the
year ended December 31, 2017 by $553,000, or approximately $0.01 per diluted common share. The implementation of the remaining
provisions of the Update did not have a significant impact on the Company’s consolidated financial statements.
80
Note 1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Accounting Guidance Pending Adoption at December 31, 2017
The following paragraphs provide descriptions of newly issued but not yet effective accounting standards that could have a material effect
on the Company’s financial position or results of operations.
Derivatives and Hedging. In August 2017, FASB amended ASC Topic 815 to improve the financial reporting of hedging relationships
to better portray the economic results of an entity’s risk management activities in its financial statements. In addition, the amendments
made targeted improvements to simplify the application of the hedge accounting guidance. The amendments are effective for public
business entities for the first interim and annual reporting periods beginning after December 15, 2018 and early adoption is permitted.
The Company is currently evaluating the full impact of the amendments on its existing interest rate swaps and whether it will early adopt.
The Company does not expect there to be an impact to the Company’s financial position and results of operations, although, there may
be additional financial statement disclosures. The accounting policies and procedures will be modified after the Company has fully
evaluated the standard, although significant changes are not expected. For additional information on derivatives, see Note 10.
Receivables - Nonrefundable Fees and Other Costs. In March 2017, FASB amended ASC Subtopic 310-20 to shorten the amortization
period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the
earliest call date instead of the maturity date. The amendments do not require an accounting change for securities held at a discount;
the discount continues to be amortized to maturity. The amendments are effective for public business entities for the first interim and
annual reporting periods beginning after December 15, 2018. Early adoption is permitted and if adopted in an interim period, any
adjustments should be reflected as of the beginning of the year that includes the interim period. The entity should apply the amendments
on a modified retrospective basis through a cumulative-effective adjustment directly to retained earnings as of the beginning of the period
of adoption. The Company has premiums on debt securities that are currently being amortized to the maturity date, primarily in the state
and local governments category. If the Company were to adopt these amendments as of January 1, 2018, the Company estimates that
$21,219,000 of the premium associated with debt securities would be adjusted to retained earnings. The Company is still determining
when it will adopt these amendments and accounting policies and procedures will be modified upon adoption of the standard.
Goodwill and Other Intangibles. In January 2017, FASB amended ASC Topic 350 to simplify the measurement of goodwill by eliminating
Step 2 from the goodwill impairment test. Instead, under these amendments, an entity should perform its annual, or interim, goodwill
impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment
charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss should not exceed the total
amount of goodwill allocated to that reporting unit. The amendments are effective for public business entities for the first interim and
annual reporting periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment
tests performed on testing dates after January 1, 2017. The Company has goodwill from prior business combinations and performs an
annual impairment test or more frequently if changes or circumstances occur that would more-likely-than-not reduce the fair value of
the reporting unit below its carrying value. During the third quarter of 2017, the Company performed its impairment assessment and
determined the fair value of the aggregated reporting units exceed the carrying value, such that the Company’s goodwill was not considered
impaired. Although the Company cannot anticipate future goodwill impairment assessments, based on the most recent assessment, it is
unlikely that an impairment amount would need to be calculated and, therefore, the Company does not anticipate a material impact from
these amendments to the Company’s financial position and results of operations. The current accounting policies and processes are not
anticipated to change, except for the elimination of the Step 2 analysis. For additional information regarding goodwill impairment testing,
see Note 5.
Financial Instruments. In June 2016, FASB amended ASC Topic 326 to replace the incurred loss model with a methodology that reflects
expected credit losses over the life of the loan and requires consideration of a broader range of reasonable and supportable information
to calculate credit loss estimates. The amendments are effective for public business entities for the first interim and annual reporting
periods beginning after December 15, 2019. The Company is currently evaluating the impact of these amendments to the Company’s
financial position and results of operations and currently does not know or cannot reasonably quantify the impact of the adoption of the
amendments as a result of the complexity and extensive changes from the amendments. The ALLL is a material estimate of the Company
and given the change from an incurred loss model to a methodology that considers the credit loss over the life of the loan, there is the
potential for an increase in the ALLL at adoption date. The Company is anticipating a significant change in the processes and procedures
to calculate the ALLL, including changes in assumptions and estimates to consider expected credit losses over the life of the loan versus
the current accounting practice that utilizes the incurred loss model. The Company will also develop new procedures for determining an
allowance for credit losses relating to held-to-maturity investment securities. In addition, the current accounting policy and procedures
for other-than-temporary impairment on available-for-sale investment securities will be replaced with an allowance approach. The
Company has formed a project team and is actively reviewing the standard for developing and implementing processes and procedures
during the next two years to ensure it is fully compliant with the amendments at adoption date. For additional information on the ALLL,
see Note 3.
81
Note 1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Leases. In February 2016, FASB amended ASC Topic 842 to address several aspects of lease accounting with the significant change
being the recognition of lease assets and lease liabilities for leases previously classified as operating leases. The amendments are effective
for public business entities for the first interim and annual reporting periods beginning after December 15, 2018, and early adoption is
permitted. The Company has several lease agreements for which the amendments will require the Company to recognize a lease liability
to make lease payments and a right-of-use asset which will represent its right to use the underlying asset for the lease term. The Company
is currently reviewing the amendments to ensure it is fully compliant by the adoption date and doesn’t expect to early adopt. As permitted
by the amendments, the Company is anticipating electing an accounting policy to not recognize lease assets and lease liabilities for leases
with a term of twelve months or less. The impact is not expected to have a material effect on the Company’s financial position or results
of operations since the Company does not have a material amount of lease agreements. The Company is currently in the process of
fully evaluating the amendments and will subsequently implement new processes, which are not expected to significantly change, since
the Company already has processes for certain lease agreements that recognize the lease assets and lease liabilities. In addition, the
Company will change its current accounting policies to comply with the amendments with such changes as mentioned above. For
additional information on the Company’s leases, see Note 4.
Financial Instruments. In January 2016, FASB amended ASC Topic 825 to address certain aspects of recognition, measurement,
presentation, and disclosure of financial instruments. The amendments are effective for public business entities for the first interim and
annual reporting periods beginning after December 15, 2017. Early adoption is only permitted under certain circumstances outlined in
the amendments. A reporting entity should apply the amendments by means of a cumulative-effect adjustment to the Company’s statements
of financial condition as of the beginning of the reporting year of adoption. The amendments will impact the Company in a few areas
including requiring equity investments (with certain exclusions) to be measured at fair value with the changes recognized in net income,
requirement to utilize an exit price when measuring the fair value of financial instruments, additional disclosures related to OCI, evaluation
of a valuation allowance on a deferred tax asset related to available-for-sale investment securities in combination with the entity’s other
deferred tax assets, and other disclosure changes. The Company is currently evaluating the impact of these amendments, but does not
expect them to have a material effect on the Company’s equity securities, financial position or results of operations. However, the
amendments will have an impact on certain items that are disclosed at fair value that are not currently utilizing the exit price notion when
measuring fair value. As of December 31, 2017, the Company cannot quantify the change in the fair value of such disclosures since the
Company is currently finalizing the full impact of the Update. The Company has developed processes to comply with the disclosure
requirements of such amendments and accounting policies and procedures will be updated and implemented upon adoption of the standard.
For additional information on fair value of assets and liabilities, see Note 20.
Revenue Recognition. In May 2014, FASB amended ASC Topic 606 to clarify the principles for recognizing revenue and develop a
common revenue standard among industries. The new guidance establishes the following core principle: recognize revenue to depict the
transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled
in exchange for goods or services. Five steps are provided for a company or organization to follow to achieve such core principle. The
new guidance also includes a cohesive set of disclosure requirements that will provide users of financial statements with comprehensive
information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The
entity should apply the amendments using one of two retrospective methods described in the amendment. Accounting Standards Update
No. 2015-14, Revenue from Contracts with Customers (Topic 606) delayed the effective date for public entities to annual reporting periods
beginning after December 15, 2017, including interim reporting periods within that reporting period. Several subsequent amendments
have been issued that provide clarifying guidance and are effective with the adoption of the original Update. The Company has finalized
its assessment of the Update and has identified the revenue line items within the scope of the new guidance. The majority of the Company’s
revenue sources, such as interest income from investment securities and loans, fee income from loans and gain on sale of loans, are not
within the scope of Topic 606. Conversely, the Company has evaluated the revenue sources determined to be in scope of Topic 606,
including service charges and fee income on deposits and gain or loss on sale of OREO. The Company has determined the adoption of
this guidance will not have a significant impact to the Company’s financial position or results of operations; however, beginning January
2018, updated policies and procedures on the sale of OREO will be implemented and additional quantitative and qualitative disclosures
about the Company’s revenue may need to be incorporated into the notes to the financial statements.
82
Note 2. Investment Securities
The following tables present the amortized cost, the gross unrealized gains and losses and the fair value of the Company’s investment
securities:
Amortized
Cost
December 31, 2017
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
Commercial mortgage-backed securities
Total available-for-sale
Held-to-maturity
State and local governments
Total held-to-maturity
(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
Commercial mortgage-backed securities
Total available-for-sale
Held-to-maturity
State and local governments
Total held-to-maturity
$
31,216
19,195
614,366
216,443
785,960
104,324
1,771,504
648,313
648,313
$
39,554
19,557
775,395
471,569
1,014,518
102,209
2,422,802
675,674
675,674
Fair
Value
31,127
19,091
629,501
216,762
779,283
102,479
1,778,243
(143)
(104)
(5,164)
(483)
(7,930)
(1,870)
(15,694)
(8,573)
(8,573)
660,086
660,086
(24,267)
2,438,329
Fair
Value
39,407
19,570
786,373
471,951
1,007,515
100,661
2,425,477
(162)
(42)
(9,963)
(793)
(9,747)
(1,578)
(22,285)
(7,985)
(7,985)
689,089
689,089
(30,270)
3,114,566
54
—
20,299
802
1,253
25
22,433
20,346
20,346
42,779
15
55
20,941
1,175
2,744
30
24,960
21,400
21,400
46,360
Total investment securities
$
2,419,817
Amortized
Cost
December 31, 2016
Gross Unrealized
Gains
Losses
Total investment securities
$
3,098,476
83
Note 2. 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, 2017. Actual maturities may differ from expected or contractual maturities since issuers have the right to prepay
obligations with or without prepayment penalties.
December 31, 2017
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
Mortgage-backed securities 1
Total
$
$
69,596
228,415
228,766
354,443
881,220
890,284
1,771,504
69,650
228,881
236,318
361,632
896,481
881,762
1,778,243
—
2,108
86,741
559,464
648,313
—
648,313
—
2,136
88,264
569,686
660,086
—
660,086
______________________________
1 Mortgage-backed securities, which have prepayment provisions, are not assigned to maturity categories due to fluctuations in their prepayment speeds.
Proceeds from sales and calls of investment securities and the associated gains and losses that have been included in earnings are listed
below:
(Dollars in thousands)
Available-for-sale
Proceeds from sales and calls of investment securities
Gross realized gains 1
Gross realized losses 1
Held-to-maturity
Proceeds from calls of investment securities
Gross realized gains 1
Gross realized losses 1
December 31,
2017
Years ended
December 31,
2016
December 31,
2015
$
280,783
3,369
(4,005)
23,020
204
(228)
212,140
2,459
(3,794)
25,405
97
(225)
167,660
1,877
(1,808)
20,997
50
(100)
______________________________
1 The gain or loss on the sale or call of each investment security is determined by the specific identification method.
At December 31, 2017 and 2016, the Company had investment securities with carrying values of $1,447,808,000 and $1,878,739,000,
respectively, pledged as collateral for FHLB advances, FRB discount window borrowings, securities sold under agreements to repurchase
(“repurchase agreements”), interest rate swap agreements and deposits of several local government units.
84
Note 2. Investment Securities (continued)
Investment securities with an unrealized loss position are summarized as follows:
(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
Commercial mortgage-backed securities
Total available-for-sale
Held-to-maturity
State and local governments
Total held-to-maturity
$
$
$
$
(Dollars in thousands)
Available-for-sale
Less than 12 Months
Fair
Value
Unrealized
Loss
December 31, 2017
12 Months or More
Fair
Value
Unrealized
Loss
Total
Fair
Value
Unrealized
Loss
1,208
14,926
61,126
99,636
372,175
37,650
586,721
(5)
(56)
(689)
(264)
(3,050)
(469)
(4,533)
13,179
3,425
121,181
29,034
254,721
62,968
484,508
(138)
(48)
(4,475)
(219)
(4,880)
(1,401)
(11,161)
14,387
18,351
182,307
128,670
626,896
100,618
1,071,229
(143)
(104)
(5,164)
(483)
(7,930)
(1,870)
(15,694)
21,207
21,207
(186)
(186)
105,486
105,486
(8,387)
(8,387)
126,693
126,693
(8,573)
(8,573)
Less than 12 Months
Fair
Value
Unrealized
Loss
December 31, 2016
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
Residential mortgage-backed securities
Commercial mortgage-backed securities
Total available-for-sale
$
6,718
6,049
222,700
174,821
688,811
89,298
$ 1,188,397
(24)
(42)
(4,949)
(774)
(9,079)
(1,578)
(16,446)
26,239
—
81,783
6,141
29,957
—
144,120
(138)
—
(5,014)
(19)
(668)
—
(5,839)
32,957
6,049
304,483
180,962
718,768
89,298
1,332,517
(162)
(42)
(9,963)
(793)
(9,747)
(1,578)
(22,285)
Held-to-maturity
State and local governments
Total held-to-maturity
$
$
117,912
117,912
(1,712)
(1,712)
86,601
86,601
(6,273)
(6,273)
204,513
204,513
(7,985)
(7,985)
Based on an analysis of its investment securities with unrealized losses as of December 31, 2017 and 2016, the Company determined
that none of such securities had other-than-temporary impairment and the unrealized losses were primarily the result of interest rate
changes and market spreads subsequent to acquisition. The fair value of the investment securities is expected to recover as payments are
received and the securities approach maturity. At December 31, 2017, management determined that it did not intend to sell investment
securities with unrealized losses, and there was no expected requirement to sell any of its investment securities with unrealized losses
before recovery of their amortized cost.
85
Note 3. Loans Receivable, Net
The Company’s loan portfolio is comprised of three segments: residential real estate, commercial, and consumer and other loans. The
loan segments are further disaggregated into the following classes: residential real estate, commercial real estate, other commercial, home
equity and other consumer loans. The following table presents loans receivable for each portfolio class of loans:
(Dollars in thousands)
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
Loans receivable, net
Net deferred origination (fees) costs included in loans receivable
Net purchase accounting (discounts) premiums included in loans receivable
Weighted-average interest rate on loans (tax-equivalent)
The following tables summarize the activity in the ALLL by portfolio segment:
At or for the Years ended
December 31,
2017
December 31,
2016
$
720,728
674,347
3,577,139
1,579,353
5,156,492
457,918
242,686
700,604
2,990,141
1,342,250
4,332,391
434,774
242,951
677,725
6,577,824
5,684,463
(129,568)
6,448,256
(129,572)
5,554,891
(2,643)
(16,325)
(1,228)
(12,144)
4.81%
4.77%
$
$
$
(Dollars in thousands)
Balance at beginning of period
Provision for loan losses
Charge-offs
Recoveries
Balance at end of period
(Dollars in thousands)
Balance at beginning of period
Provision for loan losses
Charge-offs
Recoveries
Balance at end of period
Year ended December 31, 2017
Total
Residential
Real Estate
Commercial
Real Estate
Other
Commercial
Home
Equity
Other
Consumer
129,572
10,824
(19,331)
8,503
129,568
12,436
(1,521)
(199)
82
10,798
65,773
7,152
(6,188)
1,778
68,515
37,823
2,545
(2,856)
1,791
39,303
7,572
(1,103)
(489)
224
6,204
5,968
3,751
(9,599)
4,628
4,748
Year ended December 31, 2016
Total
Residential
Real Estate
Commercial
Real Estate
Other
Commercial
Home
Equity
Other
Consumer
129,697
2,333
(11,496)
9,038
129,572
14,427
(1,734)
(464)
207
12,436
86
67,877
(2,686)
(3,082)
3,664
65,773
32,525
5,164
(1,778)
1,912
37,823
8,998
(520)
(1,185)
279
7,572
5,870
2,109
(4,987)
2,976
5,968
$
$
$
$
Note 3. Loans Receivable, Net (continued)
(Dollars in thousands)
Balance at beginning of period
Provision for loan losses
Charge-offs
Recoveries
Balance at end of period
Year ended December 31, 2015
Total
Residential
Real Estate
Commercial
Real Estate
Other
Commercial
Home
Equity
Other
Consumer
$
$
129,753
2,284
(7,002)
4,662
129,697
14,680
640
(985)
92
14,427
67,799
(696)
(1,920)
2,694
67,877
30,891
3,030
(2,322)
926
32,525
9,963
(480)
(809)
324
8,998
6,420
(210)
(966)
626
5,870
The following tables disclose the recorded investment in loans and the balance in the ALLL by portfolio segment:
(Dollars in thousands)
Loans receivable
Total
Residential
Real Estate
December 31, 2017
Other
Commercial
Commercial
Real Estate
Home
Equity
Other
Consumer
Individually evaluated for impairment
Collectively evaluated for impairment
Total loans receivable
ALLL
Individually evaluated for impairment
Collectively evaluated for impairment
Total ALLL
$
119,994
6,457,830
$ 6,577,824
$
$
5,223
124,345
129,568
12,399
708,329
720,728
77,536
3,499,603
3,577,139
23,032
1,556,321
1,579,353
246
10,552
10,798
500
68,015
68,515
3,851
35,452
39,303
3,755
454,163
457,918
56
6,148
6,204
3,272
239,414
242,686
570
4,178
4,748
(Dollars in thousands)
Loans receivable
Total
Residential
Real Estate
December 31, 2016
Other
Commercial
Commercial
Real Estate
Home
Equity
Other
Consumer
Individually evaluated for impairment
Collectively evaluated for impairment
Total loans receivable
ALLL
Individually evaluated for impairment
Collectively evaluated for impairment
Total ALLL
$
130,263
5,554,200
$ 5,684,463
$
$
6,881
122,691
129,572
11,612
662,735
674,347
85,634
2,904,507
2,990,141
23,950
1,318,300
1,342,250
856
11,580
12,436
922
64,851
65,773
4,419
33,404
37,823
5,934
428,840
434,774
296
7,276
7,572
3,133
239,818
242,951
388
5,580
5,968
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, 2017 and 2016. No borrower had outstanding loans
or commitments exceeding 10 percent of the Company’s consolidated stockholders’ equity as of December 31, 2017.
At December 31, 2017, the Company had $4,189,489,000 in variable rate loans and $2,388,335,000 in fixed rate loans. At December 31,
2017, the Company had loans of $3,836,190,000 pledged as collateral for FHLB advances and FRB discount window. There were no
significant purchases or sales of portfolio loans during 2017, 2016 and 2015.
87
Note 3. Loans Receivable, Net (continued)
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, 2017 and 2016 was $82,350,000 and $58,438,000, respectively. During 2017, new
loans to such related parties were $33,322,000 and repayments were $9,410,000. 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.
The following tables disclose information related to impaired loans by portfolio segment:
(Dollars in thousands)
Loans with a specific valuation allowance
At or for the Year ended December 31, 2017
Total
Residential
Real Estate
Commercial
Real Estate
Other
Commercial
Home
Equity
Other
Consumer
Recorded balance
Unpaid principal balance
Specific valuation allowance
Average balance
$
17,689
18,400
5,223
18,986
Loans without a specific valuation
allowance
Recorded balance
Unpaid principal balance
Average balance
Total
Recorded balance
Unpaid principal balance
Specific valuation allowance
Average balance
102,305
122,833
107,945
119,994
141,233
5,223
126,931
2,978
3,046
246
2,928
9,421
10,380
9,834
12,399
13,426
246
12,762
4,545
4,573
500
5,851
72,991
89,839
76,427
77,536
94,412
500
82,278
8,183
8,378
3,851
8,477
14,849
16,931
15,129
23,032
25,309
3,851
23,606
186
199
56
359
3,569
4,098
4,734
3,755
4,297
56
5,093
1,797
2,204
570
1,371
1,475
1,585
1,821
3,272
3,789
570
3,192
(Dollars in thousands)
Loans with a specific valuation allowance
At or for the Year ended December 31, 2016
Total
Residential
Real Estate
Commercial
Real Estate
Other
Commercial
Home
Equity
Other
Consumer
Recorded balance
Unpaid principal balance
Specific valuation allowance
Average balance
$
22,128
22,374
6,881
26,745
Loans without a specific valuation
allowance
Recorded balance
Unpaid principal balance
Average balance
Total
Recorded balance
Unpaid principal balance
Specific valuation allowance
Average balance
108,135
131,059
108,827
130,263
153,433
6,881
135,572
2,759
2,825
856
4,942
8,853
9,925
12,858
11,612
12,750
856
17,800
9,129
9,130
922
10,441
76,505
94,180
72,323
85,634
103,310
922
82,764
8,814
8,929
4,419
9,840
15,136
17,724
15,537
23,950
26,653
4,419
25,377
334
345
296
257
5,600
7,120
6,004
5,934
7,465
296
6,261
1,092
1,145
388
1,265
2,041
2,110
2,105
3,133
3,255
388
3,370
Interest income recognized on impaired loans for the years ended December 31, 2017, 2016, and 2015 was not significant.
88
Note 3. Loans Receivable, Net (continued)
The following tables present an aging analysis of the recorded investment in loans by portfolio segment:
(Dollars in thousands)
Total
Residential
Real Estate
December 31, 2017
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
$
26,375
11,312
6,077
44,833
88,597
6,489,227
$ 6,577,824
6,252
794
2,366
4,924
14,336
706,392
720,728
12,546
5,367
609
27,331
45,853
3,531,286
3,577,139
3,634
3,502
2,973
8,298
18,407
1,560,946
1,579,353
2,142
987
—
3,338
6,467
451,451
457,918
1,801
662
129
942
3,534
239,152
242,686
(Dollars in thousands)
Total
Residential
Real Estate
December 31, 2016
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
$
20,599
5,018
1,099
49,332
76,048
5,608,415
$ 5,684,463
6,338
1,398
266
4,528
12,530
661,817
674,347
5,079
754
145
30,216
36,194
2,953,947
2,990,141
5,388
1,352
283
8,817
15,840
1,326,410
1,342,250
2,439
844
191
5,240
8,714
426,060
434,774
1,355
670
214
531
2,770
240,181
242,951
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 $2,162,000, $2,364,000, and $2,471,000 for the years ended December 31, 2017, 2016, and 2015, respectively.
The following tables present TDRs that occurred during the periods presented and the TDRs that occurred within the previous twelve
months that subsequently defaulted during the periods presented:
(Dollars in thousands)
TDRs that occurred during the period
Number of loans
Pre-modification recorded balance
Post-modification recorded balance
TDRs that subsequently defaulted
Number of loans
Recorded balance
Year ended December 31, 2017
Total
Residential
Real Estate
Commercial
Real Estate
Other
Commercial
Home
Equity
Other
Consumer
32
41,521
38,838
1
18
$
$
$
5
841
841
—
—
13
31,109
28,426
—
—
11
9,403
9,403
1
18
2
158
158
—
—
1
10
10
—
—
89
Note 3. Loans Receivable, Net (continued)
(Dollars in thousands)
TDRs that occurred during the period
Number of loans
Pre-modification recorded balance
Post-modification recorded balance
TDRs that subsequently defaulted
Number of loans
Recorded balance
(Dollars in thousands)
TDRs that occurred during the period
Number of loans
Pre-modification recorded balance
Post-modification recorded balance
TDRs that subsequently defaulted
Number of loans
Recorded balance
Year ended December 31, 2016
Total
Residential
Real Estate
Commercial
Real Estate
Other
Commercial
Home
Equity
Other
Consumer
34
22,907
22,848
1
6
—
—
—
—
—
10
8,454
8,415
—
—
21
14,183
14,166
1
6
3
270
267
—
—
—
—
—
—
—
Year ended December 31, 2015
Total
Residential
Real Estate
Commercial
Real Estate
Other
Commercial
Home
Equity
Other
Consumer
64
22,316
23,110
7
2,556
3
2,259
2,203
1
1,947
25
8,877
9,927
1
78
22
10,545
10,325
4
529
1
137
157
—
—
13
498
498
1
2
$
$
$
$
$
$
The modifications for the TDRs that occurred during the years ended December 31, 2017, 2016 and 2015 included one or a combination
of the following: an extension of the maturity date, a reduction of the interest rate or a reduction in the principal amount.
In addition to the TDRs that occurred during the period provided in the preceding tables, the Company had TDRs with pre-modification
loan balances of $5,987,000, $5,331,000 and $8,893,000 for the years ended December 31, 2017, 2016 and 2015, respectively, for which
OREO was received in full or partial satisfaction of the loans. The majority of such TDRs were in commercial real estate for the years
ended December 31, 2017 and 2015 and in residential real estate for the year ended December 31, 2016. At December 31, 2017 and
2016, the Company had $743,000 and $1,770,000, respectively, of consumer mortgage loans secured by residential real estate properties
for which formal foreclosure proceedings are in process. At December 31, 2017 and 2016, the Company had $893,000 and $2,699,000,
respectively, of OREO secured by residential real estate properties.
There were $1,960,000 and $4,785,000 of additional unfunded commitments on TDRs outstanding at December 31, 2017 and 2016,
respectively. The amount of charge-offs on TDRs during 2017, 2016 and 2015 was $2,984,000, $557,000 and $1,310,000, respectively.
90
Note 4. 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,
2017
December 31,
2016
$
$
31,370
182,592
83,177
8,085
(127,876)
177,348
29,648
173,886
84,559
7,853
(119,748)
176,198
Depreciation expense for the years ended December 31, 2017, 2016, and 2015 was $14,758,000, $15,294,000, and $14,365,000,
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, 2017, 2016, and 2015 was $3,629,000, $3,255,000, and $3,137,000, 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, 2017, 2016, and 2015 was $164,000, $153,000, and $150,000, 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, 2017 are as follows:
(Dollars in thousands)
Years ending December 31,
2018
2019
2020
2021
2022
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
2,633
2,502
2,039
1,593
953
5,541
15,261
2,725
2,594
2,131
1,604
953
5,541
15,548
$
$
92
92
92
11
—
—
287
27
260
79
181
91
Note 5. 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
Estimated amortization expense for the years ending December 31,
2018
2019
2020
2021
2022
At or for the Years ended
December 31,
2017
December 31,
2016
December 31,
2015
21,943
(9,596)
12,347
2,970
38,527
(23,972)
14,555
2,964
$
$
$
$
21,649
(7,465)
14,184
2,494
2,209
2,100
2,027
1,952
1,871
Core deposit intangibles increased $4,331,000, $762,000 and $6,619,000 during 2017, 2016 and 2015, 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 and adjustments
Net carrying value at end of period
December 31,
2017
$
$
147,053
30,758
177,811
Years ended
December 31,
2016
December 31,
2015
140,638
6,415
147,053
129,706
10,932
140,638
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 2017 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
2017 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, 2017. Changes in the economic environment, operations of the aggregated reporting units, or other
factors could result in the decline in the fair value of the aggregated reporting units which could result in a goodwill impairment in the
future. Accumulated impairment charges were $40,159,000 as of December 31, 2017 and 2016.
92
Note 6. Variable Interest Entities
A VIE is a partnership, limited liability company, trust or other legal entity that meets one of the following criteria: 1) the entity’s equity
investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from
other parties; 2) the holders of the equity investment at risk, as a group, lack the characteristics of a controlling financial interest; and 3)
the voting rights of some holders of the equity investment at risk are disproportionate to their obligation to absorb losses or receive returns,
and substantially all of the activities are conducted on behalf of the holder of equity investment at risk with disproportionately few voting
rights. A VIE must be consolidated by the Company if it is deemed to be the primary beneficiary, which is the party involved with the
VIE that has both: 1) the power to direct the activities of the VIE that most significantly affect the VIE’s economic performance; and 2)
the obligation to absorb the losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE
that could potentially be significant to the VIE.
The Company’s VIEs are regularly monitored to determine if any reconsideration events have occurred that could cause the primary
beneficiary status to change. A previously unconsolidated VIE is consolidated when the Company becomes the primary beneficiary. A
previously consolidated VIE is deconsolidated when the Company ceases to be the primary beneficiary or the entity is no longer a VIE.
Consolidated Variable Interest Entities
The Company has equity investments in Certified Development Entities (“CDE”) which have received allocations of New Markets Tax
Credits (“NMTC”). The NMTC program provides federal tax incentives to investors to make investments in distressed communities and
promotes economic improvements through the development of successful businesses in these communities. The NMTC is available to
investors over a seven-year period and is subject to recapture if certain events occur during such period. The maximum exposure to loss
in the CDEs is the amount of equity invested and credit extended by the Company. However, the Company has credit protection in the
form of indemnification agreements, guarantees, and collateral arrangements. The Company has evaluated the variable interests held by
the Company in each CDE (NMTC) investment and determined the Company does not individually meet the characteristics of a primary
beneficiary; however, the related-party group does meet the criteria as a group and substantially all of the activities of the CDEs either
involve or are conducted on behalf of the Company. As a result, the Company is the primary beneficiary of the CDEs and their assets,
liabilities, and results of operations are included in the Company’s consolidated financial statements. The primary activities of the CDEs
are recognized in commercial loans interest income and other borrowed funds interest expense on the Company’s statements of operations
and the federal income tax credit allocations from the investments are recognized in the Company’s statements of operations as a component
of income tax expense. Such related cash flows are recognized in loans originated, principal collected on loans and change in other
borrowed funds.
The following table summarizes the carrying amounts of the consolidated VIEs’ assets and liabilities included in the Company’s statements
of financial condition and are adjusted for intercompany eliminations. All assets presented can be used only to settle obligations of the
consolidated VIEs and all liabilities presented consist of liabilities for which creditors and other beneficial interest holders therein have
no recourse to the general credit of the Company.
(Dollars in thousands)
Assets
Loans receivable
Accrued interest receivable
Other assets
Total assets
Liabilities
Other borrowed funds
Accrued interest payable
Other liabilities
Total liabilities
December 31,
2017
December 31,
2016
$
$
$
$
57,796
94
15,885
73,775
7,964
1
98
8,063
36,950
120
10,024
47,094
4,105
2
27
4,134
93
Note 6. Variable Interest Entities (continued)
Unconsolidated Variable Interest Entities
The Company has equity investments in Low-Income Housing Tax Credit (“LIHTC”) partnerships with carrying values of $9,169,000
and $7,282,000 as of December 31, 2017 and 2016, respectively. The LIHTCs are indirect federal subsidies to finance low-income
housing and are used in connection with both newly constructed and renovated residential rental buildings. Once a project is placed in
service, it is generally eligible for the tax credit for ten consecutive years. To continue generating the tax credit and to avoid tax credit
recapture, a LIHTC building must satisfy specific low-income housing compliance rules for a full fifteen-year period. The maximum
exposure to loss in the VIEs is the amount of equity invested and credit extended by the Company. However, the Company has credit
protection in the form of indemnification agreements, guarantees, and collateral arrangements. The Company has evaluated the variable
interests held by the Company in each LIHTC investment and determined that the Company does not have controlling financial interests
in such investments, and is not the primary beneficiary. The Company reports the investments in the unconsolidated LIHTCs as other
assets on the Company’s statements of financial condition. Total unfunded contingent commitments related to the Company’s LIHTC
investments totaled $27,831,000 at December 31, 2017, and the Company expects to fulfill these commitments during 2018. There were
no impairment losses on the Company’s LIHTC investments during the years ended December 31, 2017, 2016, and 2015.
The Company has elected to use the proportional amortization method, and more specifically the practical expedient method, for the
amortization of all eligible LIHTC investments and amortization expense is recognized as a component of income tax expense. The
following table summarizes the amortization expense and the amount of tax credits and other tax benefits recognized for qualified
affordable housing project investments during the periods presented.
(Dollars in thousands)
Amortization expense
Tax credits and other tax benefits recognized
December 31,
2017
$
2,507
3,827
Years ended
December 31,
2016
December 31,
2015
1,125
1,515
974
1,552
The Company also owns the following trust subsidiaries, each of which issued trust preferred securities as Tier 1 capital instruments:
Glacier Capital Trust II, Glacier Capital Trust III, Glacier Capital Trust IV, Citizens (ID) Statutory Trust I, Bank of the San Juans
Bancorporation Trust I, First Company Statutory Trust 2001, and First Company Statutory Trust 2003. The trust subsidiaries have no
assets, operations, revenues or cash flows other than those related to the issuance, administration and repayment of the securities held by
third parties. The trust subsidiaries are not included in the Company’s consolidated financial statements because the sole asset of each
trust subsidiary is a receivable from the Company, even though the Company owns all of the voting equity shares of the trust subsidiaries,
has fully guaranteed the obligations of the trust subsidiaries and may have the right to redeem the third party securities under certain
circumstances. The Company reports the trust preferred securities issued to the trust subsidiaries as subordinated debentures on the
Company’s statements of financial condition. For additional information on the Company’s investments in trust subsidiaries, see Note
9.
94
Note 7. Deposits
Time deposits that meet or exceed the Federal Deposit Insurance Corporation Insurance (“FDIC”) limit of $250,000 at December 31,
2017 and 2016 were $193,962,000 and $254,611,000, respectively.
The scheduled maturities of time deposits are as follows:
(Dollars in thousands)
Years ending December 31,
2018
2019
2020
2021
2022
Thereafter
Amount
557,693
120,657
65,284
45,409
27,974
242
817,259
$
$
The Company reclassified $4,402,000 and $3,618,000 of overdraft demand deposits to loans as of December 31, 2017 and 2016,
respectively. The Company has entered into deposit transactions with its executive officers, directors and their affiliates. The aggregate
amount of deposits with such related parties at December 31, 2017 and 2016 was $25,641,000 and $27,977,000, respectively.
Note 8. Borrowings
The Company’s repurchase agreements totaled $362,573,000 and $473,650,000 at December 31, 2017 and 2016, respectively, and are
secured by investment securities with carrying values of $475,601,000 and $472,239,000, respectively. Securities are pledged to customers
at the time of the transaction in an amount at least equal to the outstanding balance and are held in custody accounts by third parties. The
fair value of collateral is continually monitored and additional collateral is provided as deemed appropriate. The following tables
summarize the carrying value of the Company’s repurchase agreements by remaining contractual maturity and category of collateral:
(Dollars in thousands)
Residential mortgage-backed securities
Commercial mortgage-backed securities
Total
(Dollars in thousands)
Residential mortgage-backed securities
Commercial mortgage-backed securities
Total
December 31, 2017
Remaining Contractual Maturity of the Agreements
Overnight and
Continuous
$
$
360,751
1,822
362,573
Up to 30 Days
Total
—
—
—
360,751
1,822
362,573
December 31, 2016
Remaining Contractual Maturity of the Agreements
Overnight and
Continuous
$
$
471,706
1,301
473,007
Up to 30 Days
Total
643
—
643
472,349
1,301
473,650
95
Note 8. Borrowings (continued)
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. During the year ended December 31, 2017, the Company modified the
majority of its long-term FHLB advances, including prepaying higher cost advances, to strategically manage its asset size. 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, 2017
December 31, 2016
Amount
Weighted
Rate
Amount
Weighted
Rate
$
$
200,869
887
1,651
148,721
945
922
353,995
1.64% $
2.05%
3.58%
2.69%
5.25%
5.42%
2.11% $
41,099
70,983
927
1,728
135,000
2,012
251,749
0.84%
1.42%
2.16%
3.66%
3.08%
5.33%
2.27%
The Company’s other borrowings consisted of capital lease obligations and other debt obligations through consolidation of certain VIEs.
At December 31, 2017, the Company had $230,000,000 in unsecured lines of credit which are typically renewed on an annual basis with
various correspondent entities.
Note 9. Subordinated Debentures
Trust preferred securities were issued by the Company’s trust subsidiaries, the common stock of which is wholly-owned by the Company,
in conjunction with the Company issuing subordinated debentures to the trust subsidiaries. The terms of the subordinated debentures are
the same as the terms of the trust preferred securities. The Company guaranteed the payment of distributions and payments for redemption
or liquidation of the trust preferred securities to the extent of funds held by the trust subsidiaries. The obligations of the Company under
the subordinated debentures together with the guarantee and other back-up obligations, in the aggregate, constitute a full and unconditional
guarantee by the Company of the obligations of all trusts under the trust preferred securities.
The trust preferred securities are subject to mandatory redemption upon repayment of the subordinated debentures at their stated maturity
date or the earlier redemption in an amount equal to their liquidation amount plus accumulated and unpaid distributions to the date of
redemption. Interest distributions are payable quarterly. The Company may defer the payment of interest at any time for a period not
exceeding 20 consecutive quarters provided that the deferral period does not extend past the stated maturity. During any such deferral
period, distributions on the trust preferred securities will also be deferred and the Company’s ability to pay dividends on its common
shares will be restricted.
Subject to prior approval by the FRB, the trust preferred securities may be redeemed at par prior to maturity at the Company’s option on
or after the redemption date. All of the Company’s trust preferred securities have reached the redemption date and could be redeemed
at the Company’s option. The trust preferred securities may also be redeemed at any time in whole (but not in part) for the Trusts in the
event of unfavorable changes in laws or regulations that result in 1) subsidiary trusts becoming subject to federal income tax on income
received on the subordinated debentures; 2) interest payable by the Company on the subordinated debentures becoming non-deductible
for federal tax purposes; 3) the requirement for the trusts to register under the Investment Company Act of 1940, as amended; or 4) loss
of the ability to treat the trust preferred securities as Tier 1 capital under the FRB capital adequacy guidelines.
For regulatory capital purposes, the FRB has allowed bank holding companies to continue to include trust preferred securities in Tier 1
capital up to a certain limit. Provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”)
require the FRB to exclude trust preferred securities from Tier 1 capital, but a permanent grandfather provision applicable to the Company
permits bank holding companies with consolidated assets of less than $15 billion to continue counting existing trust preferred securities
as Tier 1 capital until they mature, even after the Company’s total assets exceed $15 billion. All of the Company’s trust preferred securities
qualified as Tier 1 capital instruments at December 31, 2017. For additional information on regulatory capital, see Note 11.
96
Note 9. Subordinated Debentures (continued)
The terms of the subordinated debentures, arranged by maturity date, are reflected in the table below. The amounts include fair value
adjustments from acquisitions.
(Dollars in thousands)
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
Note 10. Derivatives and Hedging Activities
December 31, 2017
Rate
Balance
Variable Rate
Structure
$
$
3,269
2,407
46,393
5,155
36,083
30,928
1,900
126,135
4.680% 3 month LIBOR plus 3.30%
4.925% 3 month LIBOR plus 3.25%
4.109% 3 month LIBOR plus 2.75%
4.250% 3 month LIBOR plus 2.65%
2.649% 3 month LIBOR plus 1.29%
3.158% 3 month LIBOR plus 1.57%
3.301% 3 month 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 terms and conditions 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, 2017 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
$
160,000
100,000
3 month LIBOR
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.
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.
97
Note 10. Derivatives and Hedging Activities (continued)
The interest rate swaps with the $160,000,000 and $100,000,000 notional amounts began their payment terms in October 2014 and
November 2015, respectively. The Company designated wholesale deposits and FHLB advances as the cash flow hedge and these hedged
items were determined to be fully effective during current and prior years. As such, no amount of ineffectiveness has been included in
the Company’s statements of operations for the years ended December 31, 2017, 2016 and 2015. Therefore, the aggregate fair value of
the interest rate swaps was recorded in other liabilities with changes recorded in OCI. The Company expects the hedges to remain highly
effective during the remaining terms of the interest rate swaps. Interest expense recorded on the interest rate swaps totaled $8,013,000,
$8,035,000 and $5,695,000 during 2017, 2016 and 2015, respectively, and is reported as a component of interest expense on deposits
and FHLB advances. Unless the interest rate swaps are terminated during the next year, the Company expects $4,228,000 of the unrealized
loss reported in OCI at December 31, 2017 to be reclassified to interest expense during the next twelve months.
The following table presents the pre-tax gains or losses recorded in OCI and the Company’s statements of operations relating to the
interest rate swap derivative financial instruments:
(Dollars in thousands)
Interest rate swaps
December 31,
2017
Years ended
December 31,
2016
December 31,
2015
Amount of gain (loss) 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)
$
444
(4,892)
—
(1,643)
(6,417)
—
(7,857)
(5,025)
—
The following table discloses the offsetting of financial liabilities and interest rate swap derivative liabilities. There were no interest rate
swap derivative assets at the dates presented.
(Dollars in thousands)
Gross Amounts
of Recognized
Liabilities
December 31, 2017
December 31, 2016
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
$
9,389
—
9,389
14,725
—
14,725
Pursuant to the interest rate swap agreements, the Company pledged collateral to the counterparty in the form of investment securities
totaling $23,692,000 at December 31, 2017. There was $0 collateral pledged from the counterparty to the Company as of December 31,
2017. There is the possibility that the Company may need to pledge additional collateral in the future if there were declines in the fair
value of the interest rate swap derivative financial instruments versus the collateral pledged.
98
Note 11. Regulatory Capital
The Federal Reserve has adopted capital adequacy guidelines that are used to assess the adequacy of capital in supervising a bank holding
company. The federal banking agencies implemented final rules (“Final Rules”) to establish a new comprehensive regulatory capital
framework with a phase-in period beginning on January 1, 2015 and ending on January 1, 2019. The Final Rules implemented certain
regulatory amendments based on the recommendation of the Basel Committee on Banking Supervision and certain requirements of the
Dodd-Frank Act and substantially amended the regulatory risk-based capital rules applicable to the Company. The Final Rules require
the Company to hold a conservation buffer designed to absorb losses during periods of economic stress. The capital conservation buffer
for 2017 is 1.25 percent. The Company has elected to opt-out of the requirement to include most components of AOCI. As of December 31,
2017, management believes the Company and Bank meet all capital adequacy requirements to which they are subject.
Prompt corrective action regulations provide the following classifications: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized. If undercapitalized, capital distributions (including payment of a dividend)
are generally restricted, as is paying management fees to its bank holding company. Failure to meet minimum capital requirements set
forth in the table below can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Company’s and Bank’s financial condition. The Company’s and Bank’s capital amounts and
classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
At December 31, 2017 and 2016, the most recent regulatory notifications categorized the Company and Bank as well capitalized under
the regulatory framework for prompt corrective action. To be well capitalized, the Bank must maintain minimum total capital, Tier 1
capital, Common Tier 1 capital and Tier 1 Leverage ratios as set forth in the table below. There are no conditions or events since
December 31, 2017 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.
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
Common Equity Tier 1 (to risk-weighted assets)
Consolidated
Glacier Bank
Tier 1 capital (to average assets)
Consolidated
Glacier Bank
December 31, 2017
Required for Capital
Adequacy Purposes
To Be Well Capitalized
Under Prompt Corrective
Action Regulations
Actual
Amount
Ratio
Amount
Ratio
Amount
Ratio
$ 1,232,089
1,182,509
15.64% $
15.04%
630,109
628,823
8.00%
8.00% $
N/A
786,029
N/A
10.00%
1,133,125
1,083,744
1,009,276
1,083,744
1,133,125
1,083,744
14.39%
13.79%
12.81%
13.79%
11.90%
11.47%
472,582
471,617
354,437
353,713
380,770
377,809
6.00%
6.00%
4.50%
4.50%
4.00%
4.00%
N/A
628,823
N/A
510,919
N/A
472,261
N/A
8.00%
N/A
6.50%
N/A
5.00%
99
Note 11. Regulatory Capital (continued)
(Dollars in thousands)
Total capital (to risk-weighted assets)
Consolidated
Glacier Bank
Tier 1 capital (to risk-weighted assets)
Consolidated
Glacier Bank
Common Equity Tier 1 (to risk-weighted assets)
Consolidated
Glacier Bank
Tier 1 capital (to average assets)
Consolidated
Glacier Bank
______________________________
N/A - Not applicable
Note 12. Stock-based Compensation Plan
December 31, 2016
Required for Capital
Adequacy Purposes
To Be Well Capitalized
Under Prompt Corrective
Action Regulations
Actual
Amount
Ratio
Amount
Ratio
Amount
Ratio
$ 1,179,673
1,131,949
16.38% $
15.76%
576,092
574,658
8.00%
8.00% $
N/A
718,323
N/A
10.00%
1,089,142
1,041,640
966,701
1,041,640
1,089,142
1,041,640
15.12%
14.50%
13.42%
14.50%
11.90%
11.45%
432,069
430,994
324,052
323,245
365,994
363,945
6.00%
6.00%
4.50%
4.50%
4.00%
4.00%
N/A
574,658
N/A
466,910
N/A
454,932
N/A
8.00%
N/A
6.50%
N/A
5.00%
The Company has two stock-based compensation plans in effect at December 31, 2017. The 2005 Stock Incentive Plan expired in April
2015, but still has non-vested restricted stock awards at December 31, 2017. The 2015 Stock Incentive Plan provides incentives and
awards to select employees and directors of the Company and permits the granting of stock options, share appreciation rights, restricted
shares, restricted share units, unrestricted shares and performance awards. At December 31, 2017, the number of shares available to
award to employees and directors under the 2015 Stock Incentive Plan was 2,249,767.
Restricted Stock Awards
The Company has awarded restricted stock to select employees and directors under the 2005 and 2015 Stock Incentive Plans. Common
stock is issued as vesting restrictions lapse, which may be immediately or according to the terms of a vesting schedule. Restricted stock
awards may not be sold, pledged or otherwise transferred until restrictions have lapsed. Under the 2005 Stock Incentive Plan, the recipient
does not have the right to vote until the restricted stock award has vested but does have the right to receive dividends. Under the 2015
Stock Incentive Plan, the recipient does not have the right to vote or to receive dividends 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, 2017, 2016 and 2015 was $3,764,000,
$2,870,000 and $2,470,000, respectively, and the recognized income tax benefit related to this expense was $1,452,000, $1,112,000 and
$957,000. As of December 31, 2017, total unrecognized compensation expense of $3,288,000 related to restricted stock awards is expected
to be recognized over a weighted-average period of 1.8 years.
The fair value of restricted stock awards that vested during the years ended December 31, 2017, 2016 and 2015 was $3,746,000, $2,624,000
and $1,761,000, respectively, and the income tax benefit related to these awards was $1,998,000, $1,053,000 and $795,000, respectively.
Upon vesting of restricted stock awards, the shares are issued from the Company’s authorized stock balance.
100
Note 12. Stock-based Compensation Plan (continued)
The following table summarizes the restricted stock award activity for the year ended December 31, 2017:
Non-vested at December 31, 2016
Granted
Vested
Forfeited
Non-vested at December 31, 2017
Restricted
Stock
Weighted-
Average
Grant Date
Fair Value
$
222,732
104,836
(141,864)
(2,526)
183,178
24.46
36.59
26.41
29.07
29.84
The average remaining contractual term on non-vested restricted stock awards at December 31, 2017 is 0.8 years. The aggregate intrinsic
value of the non-vested restricted stock awards at December 31, 2017 was $7,215,000.
Note 13. Employee Benefit Plans
The Company provides its qualified employees with a comprehensive benefit program, including health, dental and vision insurance,
life and accident insurance, short- and long-term disability coverage, vacation and sick leave, 401(k) plan, profit sharing plan, stock-
based compensation plan, deferred compensation plans, and supplemental executive retirement plan. The Company has elected to self-
insure certain costs related to employee health, dental and vision benefit programs. Costs resulting from 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.
401(k) Plan and Profit Sharing Plan
The Company’s 401(k) plan and profit sharing plan have safe harbor and employer discretionary components. To be considered eligible
for the 401(k) and safe harbor components of the profit sharing plan, an employee must be 21 years of age and employed for three full
months. Employees are eligible to participate in the 401(k) plan the first day of the month once they have met the eligibility requirements.
To be considered eligible for the employer discretionary contribution of the profit sharing plan, an employee must be 21 years of age,
worked one full calendar quarter, worked 501 hours in the plan year and be employed as of the last day of the plan year. Participants are
at all times fully vested in all contributions.
The profit sharing plan contributions consists of a 3 percent non-elective safe harbor contribution fully funded by the Company and an
employer discretionary contribution. The employer discretionary contribution depends on the Company’s profitability. The total profit
sharing plan expense for the years ended December 31, 2017, 2016, and 2015 was $10,100,000, $9,041,000 and $8,017,000 respectively.
The 401(k) plan allows eligible employees under the age of 50 to contribute up to 60 percent, and those 50 and older to contribute up to
100 percent of their eligible annual compensation up to the limit set annually by the Internal Revenue Service (“IRS”). The Company
matches an amount equal to 50 percent of the first 6 percent of an employee’s contribution. The Company’s contribution to the 401(k)
for the years ended December 31, 2017, 2016 and 2015 was $3,224,000, $2,946,000, and $2,629,000, respectively.
Deferred Compensation Plans
The Company has non-funded deferred compensation plans for directors, senior officers and certain nonemployee service providers. The
plans provide for participants’ elective deferral of cash payments of up to 50 percent of a participants’ salary and 100 percent of bonuses
and directors fees. The total amount deferred for the plans was $739,000, $967,000, and $720,000, for the years ending December 31,
2017, 2016, and 2015, 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, 2017, 2016, and 2015 for the plans was $481,000, $431,000 and
$386,000, respectively. In connection with several acquisitions, the Company assumed the obligations of deferred compensation plans
for certain key employees. As of December 31, 2017 and 2016, the liability related to the obligations was $11,275,000 and $11,273,000,
respectively, and was included in other liabilities. The total earnings for the years ended December 31, 2017, 2016, and 2015 for the
acquired plans was insignificant.
101
Note 13. Employee Benefit Plans (continued)
Supplemental Executive Retirement Plan
The Company has a Supplemental Executive Retirement Plan (“SERP”) which is intended to supplement payments due to participants
upon retirement under the Company’s other qualified plans. The Company credits the participant’s account on an annual basis for an
amount equal to employer contributions that would have otherwise been allocated to the participant’s account under the tax-qualified
plans were it not for limitations imposed by the IRS or the participation in the non-funded deferred compensation plan. Eligible employees
include participants of the non-funded deferred compensation plan and employees whose benefits were limited as a result of IRS
regulations. The Company’s required contribution to the SERP for the years ended December 31, 2017, 2016 and 2015 was $287,000,
$299,000, and $224,000, 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, 2017, 2016, and 2015 for this plan was $105,000, $85,000, and
$69,000, respectively.
Note 14. Other Expenses
Other expenses consists of the following:
(Dollars in thousands)
Debit card expenses
Consulting and outside services
Employee expenses
Telephone
VIE amortization and other expenses
Loan expenses
Postage
Printing and supplies
Mergers and acquisition expenses
Business development
Accounting and audit fees
Checking and operating expenses
ATM expenses
Legal fees
Other
Total other expenses
December 31,
2017
Years ended
December 31,
2016
December 31,
2015
$
$
7,189
5,331
4,160
3,891
3,109
3,080
2,684
2,661
2,130
1,929
1,848
1,760
1,720
1,106
4,447
47,045
8,462
5,683
3,573
3,828
2,702
3,611
2,785
2,800
1,732
1,847
1,613
2,942
880
1,027
4,085
47,570
6,153
3,845
2,425
3,318
4,528
2,824
3,716
3,529
2,459
1,526
1,331
3,553
1,082
866
3,892
45,047
102
Note 15. Federal and State Income Taxes
The Tax Act was enacted on December 22, 2017 and resulted in a decrease in the federal marginal tax rate from 35 percent to 21 percent
beginning in 2018. As a result of the Tax Act, the Company incurred a one-time tax expense adjustment of $19,699,000 during 2017 due
to the Company’s revaluation of its net deferred tax assets. This adjustment is reflected in the following tables.
The following table is a summary of consolidated income tax expense:
(Dollars in thousands)
Current
Federal
State
Total current income tax expense
Deferred 1
Federal
State
Total deferred income tax expense (benefit)
December 31,
2017
Years ended
December 31,
2016
December 31,
2015
$
29,555
9,183
38,738
22,246
3,641
25,887
30,461
9,283
39,744
(70)
(12)
(82)
28,705
9,374
38,079
(3,451)
(629)
(4,080)
Total income tax expense
$
64,625
39,662
33,999
______________________________
1 Includes tax benefit of operating loss carryforwards of $644,000, $571,000 and $391,000 for the years ended December 31, 2017, 2016, and 2015,
respectively.
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 rate change
Tax-exempt interest income
Tax credits
Other, net
Effective tax rate
December 31,
2017
Years ended
December 31,
2016
December 31,
2015
35.0 %
4.6 %
10.9 %
(10.5)%
(3.2)%
(1.1)%
35.7 %
35.0 %
3.8 %
— %
(12.2)%
(2.1)%
0.2 %
24.7 %
35.0 %
3.7 %
— %
(12.6)%
(3.0)%
(0.5)%
22.6 %
103
Note 15. Federal and State Income Taxes (continued)
The tax effect of temporary differences which give rise to a significant portion of deferred tax assets and deferred tax liabilities are as
follows:
(Dollars in thousands)
Deferred tax assets
Allowance for loan and lease losses
Deferred compensation
Other real estate owned
Acquisition fair market value adjustments
Net operating loss carryforwards
Employee benefits
Interest rate swap agreements
Other
Total gross deferred tax assets
Deferred tax liabilities
Deferred loan costs
Intangibles
Depreciation of premises and equipment
FHLB stock dividends
Available-for-sale securities
Debt modification costs
Other
Total gross deferred tax liabilities
December 31,
2017
December 31,
2016
$
32,890
5,640
5,126
4,139
2,841
2,615
2,379
3,673
59,303
(5,854)
(4,161)
(2,863)
(2,602)
(1,707)
(1,591)
(2,181)
(20,959)
50,172
8,320
8,309
4,763
4,737
3,927
5,705
5,569
91,502
(8,061)
(5,477)
(3,111)
(3,976)
(1,036)
—
(2,720)
(24,381)
Net deferred tax asset
$
38,344
67,121
The Company has federal net operating loss carryforwards of $10,635,000 expiring between 2030 and 2035. The Company has Colorado
net operating loss carryforwards of $13,987,000 expiring between 2031 and 2032. The net operating loss carryforwards originated from
bank acquisitions. The Company has federal tax credit carryforwards with no expiration dates of $411,000.
The Company and the Bank file consolidated income tax returns in the following jurisdictions: federal, Montana, Idaho, Utah, Colorado
and Arizona. 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, 2017:
Federal
Montana
Idaho
Utah
Colorado
Arizona
Years ended December 31,
2013, 2014, 2015 and 2016
2014, 2015 and 2016
2014, 2015 and 2016
2014, 2015 and 2016
2013, 2014, 2015 and 2016
2013, 2014, 2015 and 2016
104
Note 15. Federal and State Income Taxes (continued)
The Company had no unrecognized income tax benefits as of December 31, 2017 and 2016. 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, 2017, 2016, and 2015 was not significant. The Company
had no accrued liabilities for the payment of interest or penalties at December 31, 2017 and 2016.
The Company has assessed the need for a valuation allowance and determined that a valuation allowance was not necessary at December 31,
2017 and 2016. 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.
Note 16. Accumulated Other Comprehensive Income (Loss)
The following table illustrates the activity within accumulated other comprehensive income (loss) by component, net of tax:
(Dollars in thousands)
Balance at December 31, 2014
Other comprehensive loss before reclassifications
Reclassification adjustments for (losses) gains included in net income
Net current period other comprehensive loss
Balance at December 31, 2015
Other comprehensive loss before reclassifications
Reclassification adjustments for gains included in net income
Net current period other comprehensive (loss) income
Balance at December 31, 2016
Other comprehensive income before reclassifications
Reclassification adjustments for gains included in net income
Reclassifications from accumulated other comprehensive income
(loss) to retained earnings 1
Net current period other comprehensive income
Balance at December 31, 2017
Gains on
Available-For-
Sale Securities
Losses on
Derivatives
Used for Cash
Flow Hedges
Total
$
$
$
$
27,945
(10,201)
17,744
(13,968)
(42)
(14,010)
13,935
(13,113)
817
(12,296)
1,639
2,110
391
891
3,392
5,031
(4,823)
3,078
(1,745)
(11,946)
(1,006)
3,931
2,925
(9,021)
248
3,005
(1,242)
2,011
(7,010)
(18,791)
3,036
(15,755)
1,989
(14,119)
4,748
(9,371)
(7,382)
2,358
3,396
(351)
5,403
(1,979)
______________________________
1 Reclassifications were due to the one-time revaluation of the deferred tax assets and deferred tax liabilities as a result of the Tax Act. For additional
information relating to this reclassification, see Note 1.
105
Note 17. Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding
during the period presented. Diluted earnings per share is computed by including the net increase in shares as if dilutive outstanding
restricted stock 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,
2017
Years ended
December 31,
2016
December 31,
2015
Net income available to common stockholders, basic and diluted
$
116,377
121,131
116,127
Average outstanding shares - basic
Add: dilutive restricted stock awards
Average outstanding shares - diluted
Basic earnings per share
Diluted earnings per share
77,537,664
69,941
77,607,605
76,278,463
63,373
76,341,836
75,542,455
53,126
75,595,581
$
$
1.50
1.50
1.59
1.59
1.54
1.54
There were no restricted stock awards excluded from the diluted average outstanding share calculation for the years ended December 31,
2017, 2016, and 2015. Anti-dilution occurs when the unrecognized compensation cost per share of a restricted stock award exceeds the
market price of the Company’s stock.
Note 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 loss
Total stockholders’ equity
December 31,
2017
December 31,
2016
$
$
$
9,304
38,420
47,724
—
8,871
1,281,392
1,337,987
265
126,135
12,530
138,930
780
797,997
402,259
(1,979)
1,199,057
5,906
57,700
63,606
36
10,764
1,201,667
1,276,073
23,137
125,991
10,076
159,204
765
749,107
374,379
(7,382)
1,116,869
Total liabilities and stockholders’ equity
$
1,337,987
1,276,073
106
Note 18. Parent Holding Company Information (Condensed) (continued)
Condensed Statements of Operations and Comprehensive Income
(Dollars in thousands)
Income
Dividends from subsidiaries
Gain on sale of investments
Intercompany charges for services
Other income
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
Net Income
Comprehensive Income
Condensed Statements of Cash Flows
December 31,
2017
Years ended
December 31,
2016
December 31,
2015
$
$
$
119,000
3
14,299
225
133,527
17,864
10,425
28,289
105,238
2,983
108,221
8,156
116,377
122,131
108,350
—
12,248
311
120,909
15,665
7,701
23,366
97,543
4,040
101,583
19,548
121,131
111,760
109,000
—
10,562
196
119,758
13,205
7,313
20,518
99,240
3,105
102,345
13,782
116,127
100,372
December 31,
2017
Years ended
December 31,
2016
December 31,
2015
$
116,377
121,131
116,127
(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
Amortization of purchase accounting adjustments
Gain on sale of investments
Stock-based compensation, net of tax benefits
Net change in other assets and other liabilities
Net cash provided by operating activities
Investing Activities
Sales of available-for-sale securities
Net (increase) decrease of premises and equipment
Proceeds from sale of non-marketable equity securities
Equity contributions to subsidiaries
Net cash used in by investing activities
Financing Activities
Cash dividends paid
Tax withholding payments for stock-based compensation
Net cash used in financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
(8,156)
143
(3)
1,460
5,051
114,872
27
(79)
114
(17,565)
(17,503)
(111,720)
(1,531)
(113,251)
(15,882)
63,606
47,724
(19,548)
143
—
804
(297)
102,233
—
771
55
(3,475)
(2,649)
(84,040)
(600)
(84,640)
14,944
48,662
63,606
(13,782)
143
—
695
118
103,301
—
(1,405)
22
(28,457)
(29,840)
(79,456)
(489)
(79,945)
(6,484)
55,146
48,662
$
107
Note 19. Unaudited Quarterly Financial Data (Condensed)
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 2017
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
$
$
$
$
$
$
$
$
87,628
7,366
80,262
1,598
78,664
25,689
63,344
41,009
9,754
31,255
0.41
0.41
94,032
7,774
86,258
3,013
83,245
27,656
65,309
45,592
11,905
33,687
0.43
0.43
96,464
7,652
88,812
3,327
85,485
31,185
68,552
48,118
11,639
36,479
0.47
0.47
96,898
7,072
89,826
2,886
86,940
27,709
68,366
46,283
31,327
14,956
0.19
0.19
Quarters ended 2016
March 31
June 30
September 30
December 31
84,381
7,675
76,706
568
76,138
24,252
62,356
38,034
9,352
28,682
0.38
0.38
86,069
7,424
78,645
—
78,645
26,759
64,461
40,943
10,492
30,451
0.40
0.40
85,944
7,318
78,626
626
78,000
28,293
65,180
41,113
10,156
30,957
0.40
0.40
87,759
7,214
80,545
1,139
79,406
28,014
66,717
40,703
9,662
31,041
0.41
0.41
108
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, 2017 and 2016.
Recurring Measurements
The following is a description of the inputs and valuation methodologies used for assets and liabilities measured at fair value on a recurring
basis, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy. There have been no significant
changes in the valuation techniques during the period ended December 31, 2017.
Investment securities, available-for-sale: fair value for available-for-sale securities is estimated by obtaining quoted market prices for
identical assets, where available. If such prices are not available, fair value is based on independent asset pricing services and models,
the inputs of which are market-based or independently sourced market parameters, including but not limited to, yield curves, interest
rates, volatilities, market spreads, prepayments, defaults, recoveries, cumulative loss projections, and cash flows. Such securities are
classified in Level 2 of the valuation hierarchy. Where Level 1 or Level 2 inputs are not available, such securities are classified as Level
3 within the hierarchy.
Fair value determinations of available-for-sale securities are the responsibility of the Company’s corporate accounting and treasury
departments. The Company obtains fair value estimates from independent third party vendors on a monthly basis. The vendors’ pricing
system methodologies, procedures and system controls are reviewed to ensure they are appropriately designed and operating effectively.
The Company reviews the vendors’ inputs for fair value estimates and the recommended assignments of levels within the fair value
hierarchy. The review includes the extent to which markets for investment securities are determined to have limited or no activity, or are
judged to be active markets. The Company reviews the extent to which observable and unobservable inputs are used as well as the
appropriateness of the underlying assumptions about risk that a market participant would use in active markets, with adjustments for
limited or inactive markets. In considering the inputs to the fair value estimates, the Company places less reliance on quotes that are
judged to not reflect orderly transactions, or are non-binding indications. In assessing credit risk, the Company reviews payment
performance, collateral adequacy, third party research and analyses, credit rating histories and issuers’ financial statements. For those
markets determined to be inactive or limited, the valuation techniques used are models for which management has verified that discount
rates are appropriately adjusted to reflect illiquidity and credit risk.
Loans held for sale: loans held for sale measured at fair value, for which an active secondary market and readily available market prices
exist, are initially valued at the transaction price and are subsequently valued by using quoted prices for similar assets, adjusted for specific
attributes of that loan or other observable market data, such as outstanding commitments from third party investors. Loans held for sale
measured at fair value are classified within Level 2. Included in gain on sale of loans were net gains of $994,000, $0 and $0 for the years
ended December 31, 2017, 2016 and 2015, respectively, from the changes in fair value of these loans held for sale measured at fair value.
Electing to measure loans held for sale at fair value reduces certain timing differences and better matches changes in fair value of these
assets with changes in the value of the derivative instruments used to economically hedge them without the burden of complying with
the requirements for hedge accounting.
109
Note 20. Fair Value of Assets and Liabilities (continued)
Interest rate swap derivative financial instruments: fair values for interest rate swap derivative financial instruments are based upon the
estimated amounts to settle the contracts considering current interest rates and are calculated using discounted cash flows that are observable
or that can be corroborated by observable market data and, therefore, are classified within Level 2 of the valuation hierarchy. The inputs
used to determine fair value include the 3 month LIBOR forward curve to estimate variable rate cash inflows and the Fed Funds Effective
Swap Rate to estimate the discount rate. The estimated variable rate cash inflows are compared to the fixed rate outflows and such
difference is discounted to a present value to estimate the fair value of the interest rate swaps. The Company also obtains and compares
the reasonableness of the pricing from an independent third party.
The following tables disclose the fair value measurement of assets and liabilities measured at fair value on a recurring basis:
(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
Commercial mortgage-backed securities
Loans held for sale
Total assets measured at fair value
on a recurring basis
Interest rate swaps
Total 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)
—
—
—
—
—
—
—
—
—
—
31,127
19,091
629,501
216,762
779,283
102,479
38,833
1,817,076
9,389
9,389
—
—
—
—
—
—
—
—
—
—
Fair Value
December 31,
2017
$
$
$
$
31,127
19,091
629,501
216,762
779,283
102,479
38,833
1,817,076
9,389
9,389
110
Note 20. Fair Value of Assets and Liabilities (continued)
(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
Commercial 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
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)
—
—
—
—
—
—
—
—
—
39,407
19,570
786,373
471,951
1,007,515
100,661
2,425,477
14,725
14,725
—
—
—
—
—
—
—
—
—
Fair Value
December 31,
2016
$
$
$
$
39,407
19,570
786,373
471,951
1,007,515
100,661
2,425,477
14,725
14,725
Non-recurring Measurements
The following is a description of the inputs and valuation methodologies used for assets recorded at fair value on a non-recurring basis,
as well as the general classification of such assets pursuant to the valuation hierarchy. There have been no significant changes in the
valuation techniques during the period ended December 31, 2017.
Other real estate owned: OREO is carried at the lower of fair value at acquisition date or current estimated fair value, less estimated cost
to sell. Estimated fair value of OREO is based on appraisals or evaluations (new or updated). OREO is classified within Level 3 of the
fair value hierarchy.
Collateral-dependent impaired loans, net of ALLL: loans included in the Company’s loan portfolio for which it is probable that the
Company will not collect all principal and interest due according to contractual terms are considered impaired. Estimated fair value of
collateral-dependent impaired loans is based on the fair value of the collateral, less estimated cost to sell. Collateral-dependent impaired
loans are classified within Level 3 of the fair value hierarchy.
The Company’s credit department reviews appraisals for OREO and collateral-dependent loans, giving consideration to the highest and
best use of the collateral. The appraisal or evaluation (new or updated) is considered the starting point for determining fair value. The
valuation techniques used in preparing appraisals or evaluations (new or updated) include the cost approach, income approach, sales
comparison approach, or a combination of the preceding valuation techniques. The key inputs used to determine the fair value of the
collateral-dependent loans and OREO include selling costs, discounted cash flow rate or capitalization rate, and adjustment to comparables.
Valuations and significant inputs obtained by independent sources are reviewed by the Company for accuracy and reasonableness. The
Company also considers other factors and events in the environment that may affect the fair value. The appraisals or evaluations (new
or updated) are reviewed at least quarterly and more frequently based on current market conditions, including deterioration in a borrower’s
financial condition and when property values may be subject to significant volatility. After review and acceptance of the collateral
appraisal or evaluation (new or updated), adjustments to the impaired loan or OREO may occur. The Company generally obtains appraisals
or evaluations (new or updated) annually.
111
Note 20. Fair Value of Assets and Liabilities (continued)
The following tables disclose the fair value measurement of assets with a recorded change during the period resulting from re-measuring
the assets at fair value on a non-recurring basis:
(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)
—
—
—
—
—
—
2,296
6,339
8,635
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)
—
—
—
—
—
—
7,839
5,664
13,503
Fair Value
December 31,
2017
$
$
2,296
6,339
8,635
Fair Value
December 31,
2016
$
$
7,839
5,664
13,503
Non-recurring Measurements Using Significant Unobservable Inputs (Level 3)
The following tables present additional quantitative information about assets measured at fair value on a non-recurring basis and for
which the Company has utilized Level 3 inputs to determine fair value:
(Dollars in thousands)
Fair Value
December 31,
2017
Quantitative Information about Level 3 Fair Value Measurements
Valuation Technique
Unobservable Input
Range (Weighted-
Average) 1
Other real estate owned
$
2,296 Sales comparison approach Selling costs
0.0% - 10.0% (6.0%)
Collateral-dependent
impaired loans, net of ALLL $
$
238 Cost approach
Selling costs
2,541 Sales comparison approach Selling costs
3,560 Combined approach
Selling costs
6,339
10.0% - 20.0% (10.6%)
8.0% - 10.0% (9.4%)
10.0% - 10.0% (10.0%)
112
Note 20. Fair Value of Assets and Liabilities (continued)
(Dollars in thousands)
Other real estate owned
Fair Value
December 31,
2016
Quantitative Information about Level 3 Fair Value Measurements
Valuation Technique
Unobservable Input
$
$
7,767 Sales comparison approach Selling costs
72 Combined approach
7,839
Adjustment to comparables
Selling costs
Adjustment to comparables
Range (Weighted-
Average) 1
6.0% - 10.0% (6.9%)
0.0% - 10.0% (0.1%)
10.0% - 10.0% (10.0%)
10.0% - 10.0% (10.0%)
Collateral-dependent
impaired loans, net of ALLL $
110 Cost approach
Selling costs
1,982 Sales comparison approach Selling costs
Selling costs
3,572 Combined approach
Adjustment to comparables
6.0% - 20.0% (6.6%)
8.0% - 10.0% (9.6%)
10.0% - 10.0% (10.0%)
20.0% - 20.0% (20.0%)
$
5,664
______________________________
1 The range for selling costs and adjustments to comparables indicate reductions to the fair value.
Fair Value of Financial Instruments
The following is a description of the methods used to estimate the fair value of all other assets and liabilities recognized at amounts other
than fair value.
Cash and cash equivalents: fair value is estimated at book value.
Investment securities, held-to-maturity: fair value for held-to-maturity securities is estimated in the same manner as available-for-sale
securities, which is described above.
Loans held for sale: fair value of loans held for sale for which the fair value election has not been made 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 deposits such as NOW, DDA, savings,
and money market deposit accounts is the book value since rates are regularly adjusted to market rates and transactions are executed at
book value daily. Therefore, such deposits are classified in Level 1 of the valuation hierarchy. Certificate accounts and wholesale deposits
are classified as Level 2 within the hierarchy.
Federal Home Loan Bank advances: fair value of non-callable 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.
113
Note 20. Fair Value of Assets and Liabilities (continued)
Securities sold under agreements to repurchase and other borrowed funds: fair value of term repurchase agreements and other term
borrowings is estimated based on current repurchase rates and borrowing rates currently available to the Company for repurchases and
borrowings with similar terms and maturities. The estimated fair value for overnight repurchase agreements and other borrowings is
book value.
Subordinated debentures: fair value of the subordinated debt is estimated by discounting the estimated future cash flows using current
estimated market rates. The market rates used were averages of currently traded trust preferred securities with similar characteristics to
the Company’s issuances and obtained from an independent third party.
Accrued interest payable: fair value is estimated at book value.
Off-balance sheet financial instruments: unused lines of credit and letters of credit represent the principal categories of off-balance sheet
financial instruments. The fair value of commitments is based on fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of unused lines of credit and letters
of credit is not material; therefore, such commitments are not included in the following tables.
The following tables 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
Fair Value Measurements
At the End of the Reporting Period Using
Carrying
Amount
December 31,
2017
Quoted Prices
in Active
Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
$
$
$
200,004
1,778,243
648,313
38,833
6,448,256
44,462
29,884
9,187,995
7,579,747
353,995
370,797
126,135
3,450
9,389
8,443,513
200,004
—
—
—
—
44,462
—
244,466
6,602,445
—
—
—
3,450
—
6,605,895
—
1,778,243
660,086
38,833
6,219,515
—
29,884
8,726,561
978,803
352,886
370,797
98,023
—
9,389
1,809,898
—
—
—
—
114,771
—
—
114,771
—
—
—
—
—
—
—
114
Note 20. Fair Value of Assets and Liabilities (continued)
(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
Note 21. Contingencies and Commitments
Fair Value Measurements
At the End of the Reporting Period Using
Carrying
Amount
December 31,
2016
Quoted Prices
in Active
Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
$
$
$
152,541
2,425,477
675,674
72,927
5,554,891
45,832
25,550
8,952,892
7,372,279
251,749
478,090
125,991
3,584
14,725
8,246,418
152,541
—
—
72,927
—
45,832
—
271,300
6,090,879
—
—
—
3,584
—
6,094,463
—
2,425,477
689,089
—
5,380,286
—
25,550
8,520,402
1,283,532
257,643
478,090
85,557
—
14,725
2,119,547
—
—
—
—
123,382
—
—
123,382
—
—
—
—
—
—
—
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)
Unused lines of credit
Letters of credit
Total outstanding commitments
December 31,
2017
December 31,
2016
$
$
1,565,112
40,082
1,605,194
1,325,236
26,162
1,351,398
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.
115
Note 22. Mergers and Acquisitions
On April 30, 2017, the Company acquired 100 percent of the outstanding common stock of TFB Bancorp, Inc. and its wholly-owned
subsidiary, The Foothills Bank, a community bank based in Yuma, Arizona. Foothills provides banking services to individuals and
businesses in Arizona, with banking offices located in Yuma, Prescott and Casa Grande, Arizona. The acquisition expands the Company’s
market into the state of Arizona and further diversifies the Company’s loan, customer and deposit base. Foothills merged into the Bank
and operates as a separate Bank division under its existing name and management team. The Foothills acquisition was valued at
$64,015,000 and resulted in the Company issuing 1,381,661 shares of its common stock and $17,342,000 in cash in exchange for all of
Foothills’ outstanding common stock shares. The fair value of the Company shares issued was determined on the basis of the closing
market price of the Company’s common stock on the April 30, 2017 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 Foothills. None of the goodwill is
deductible for income tax purposes as the acquisition was accounted for as a tax-free exchange.
On August 31, 2016, the Company acquired 100 percent of the outstanding common stock of Treasure State Bank, a community bank
based in Missoula, Montana. TSB provides banking services to individuals and businesses in the greater Missoula market. TSB merged
into the Bank and became a part of the First Security Bank of Missoula bank division. The TSB acquisition was valued at $13,940,000
and resulted in the Company issuing 349,545 shares of its common stock and $3,475,000 in cash in exchange for all of TSB’s outstanding
common stock shares. The fair value of the Company shares issued was determined on the basis of the closing market price of the
Company’s common stock on the August 31, 2016 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 TSB. 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 Foothills and TSB were recorded on the Company’s consolidated statements of financial condition at their
estimated fair values as of the April 30, 2017 and August 31, 2016 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 goodwill arising from the
Foothills and TSB acquisitions:
(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 1
Accrued income and other assets
Total identifiable assets acquired
Liabilities assumed
Deposits
FHLB advances
Accrued expenses and other liabilities
Total liabilities assumed
Total identifiable net assets
Goodwill recognized
______________________________
1 The core deposit intangible for each acquisition was determined to have an estimated life of 10 years.
116
Foothills
April 30,
2017
TSB
August 31,
2016
$
$
46,673
17,342
—
64,015
13,251
25,420
292,529
4,331
19,699
355,230
296,760
22,800
2,264
321,824
33,406
30,609
10,465
3,475
—
13,940
10,176
—
51,875
762
6,937
69,750
58,364
3,260
601
62,225
7,525
6,415
Note 22. Mergers and Acquisitions (continued)
The fair value of the Foothills and TSB assets acquired includes loans with fair values of $292,529,000 and $51,875,000, respectively.
The gross principal and contractual interest due under the Foothills and TSB contracts is $303,527,000 and $54,819,000, respectively.
The Company evaluated the principal and contractual interest due at each of the acquisition dates and determined that insignificant
amounts were not expected to be collectible.
The Company incurred $1,127,000 of third-party acquisition-related costs in connection with the Foothills acquisition during the year
ended December 31, 2017. The Company incurred $456,000 of third-party acquisition-related costs in connection with the TSB acquisition
during the year ended December 31, 2016. 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 Foothills was approximately
$13,625,000 and net income was approximately $2,626,000 from April 30, 2017 to December 31, 2017. The following unaudited pro
forma summary presents consolidated information of the Company as if the Foothills acquisition had occurred on January 1, 2016:
(Dollars in thousands)
Net interest income and non-interest income
Net income
Years ended
December 31,
2017
December 31,
2016
$
462,603
114,187
436,678
124,373
Total income consisting of net interest income and non-interest income of the acquired operations of TSB was approximately $1,800,000
and net income was approximately $897,000 from August 31, 2016 to December 31, 2016. The following unaudited pro forma summary
presents consolidated information of the Company as if the TSB acquisition had occurred on January 1, 2015:
(Dollars in thousands)
Net interest income and non-interest income
Net income
Note 23. Subsequent Events
Years ended
December 31,
2016
December 31,
2015
$
424,242
120,929
392,252
116,577
On January 31, 2018, the Company acquired 100 percent of the outstanding common stock of Columbine Capital Corp., and its wholly-
owned subsidiary, Collegiate Peaks Bank, a community bank based in Buena Vista, Colorado. Collegiate provides banking services to
businesses and individuals in the Mountain and Front Range communities of Colorado, with banking offices located in Aurora, Buena
Vista, Denver and Salida. Collegiate will operate as a division of the Bank under the name “Collegiate Peaks Bank, division of Glacier
Bank.” The Collegiate acquisition was valued at $96,083,000 and resulted in the Company issuing common stock and paying cash and
other considerations in exchange for all of Collegiate's outstanding common stock shares. The fair value of the Company shares issued
was determined on the basis of the closing market price of the Company's common stock shares on the January 31, 2018 acquisition date.
The initial accounting for the Collegiate acquisition has not been completed because the fair value of financial assets, financial liabilities
and goodwill have not yet been determined.
As a result of the closing of the Collegiate acquisition, the Company crossed the $10 billion asset threshold and will now be subject to
heightened regulations required by the Dodd-Frank Act. The Company will be required to, among other requirements: 1) perform annual
stress tests; 2) calculate its FDIC deposit assessment base using a performance score and a loss-severity score system; and 3) be examined
for compliance with federal consumer protection laws primarily by the Consumer Financial Protection Bureau (the “CFPB”). The
Company will also be subject to the interchange fee cap imposed by the Durbin Amendment to the Dodd-Frank Act, which is expected
to have a significant financial impact to the Company’s earnings.
117
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There have been no changes or disagreements with accountants on accounting and financial disclosure.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation was carried out under the supervision and with the participation of the Company’s management, including the CEO and
Chief Financial Officer (“CFO”), of the effectiveness of the disclosure controls and procedures. Based on that evaluation, the CEO and
CFO have concluded that as of the end of the period covered by this report, the disclosure controls and procedures are effective to provide
reasonable assurance that information required to be disclosed by the Company in reports that are filed or submitted under the Securities
Exchange Act of 1934 are recorded, processed, summarized and timely reported as provided in the SEC’s rules and forms. As a result
of this evaluation, there were no significant changes in the internal control over financial reporting during the year ended December 31,
2017 that have materially affected, or are reasonable likely to materially affect, the internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining effective internal control over financial reporting as it relates to its financial
statements presented in conformity with GAAP. The Company’s internal control system was designed to provide reasonable assurance
to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements
in accordance with GAAP. Internal control over financial reporting includes self monitoring mechanisms and actions are taken to correct
deficiencies as they are identified.
There are inherent limitations in any internal control, no matter how well designed, misstatements due to error or fraud may occur and
not be detected, including the possibility of circumvention or overriding of controls. Accordingly, even an effective internal control
system can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions,
the effectiveness of an internal control system may vary over time.
Management assessed its internal control structure over financial reporting as of December 31, 2017. This assessment was based on
criteria for effective internal control over financial reporting described in the “2013 Internal Control – Integrated Framework” issued by
the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management asserts that the
Company maintained effective internal control over financial reporting as it relates to its financial statements presented in conformity
with GAAP.
BKD, LLP, the independent registered public accounting firm that audited the financial statements for the year ended December 31, 2017,
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, 2017 and is included in “Item
8. Financial Statements and Supplementary Data.”
Item 9B. Other Information
None
118
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 –
Named Executive Officers who are not Directors” of the Company’s 2018 Annual Meeting Proxy Statement (“Proxy Statement”) and is
incorporated herein by reference.
Information regarding “Compliance with Section 16(a) of the Exchange Act” is set forth under the section “Section 16(a) Beneficial
Ownership Reporting Compliance” of the Company’s Proxy Statement and is incorporated herein by reference.
Information regarding the Company’s 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 herein by reference.
Consistent with the requirements of the Sarbanes-Oxley Act, the Company has adopted a code of ethics applicable to its senior financial
officers. The code of ethics can be accessed electronically by visiting the Company’s website at www.glacierbancorp.com and is
incorporated by reference to the Company’s 2016 annual report on 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 the heading “Compensation of
Directors - Compensation Committee Interlocks and Insider Participation” of the Company’s Proxy Statement and is incorporated herein
by reference.
Information regarding the “Compensation Committee Report” is set forth under the heading “Report of Compensation Committee” of
the Company’s Proxy Statement and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Information regarding “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” is set forth
under the headings “Voting Securities and Principal Holders Thereof,” “Compensation Discussion and Analysis” and “Compensation of
Directors” of the Company’s Proxy Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information regarding “Certain Relationships and Related Transactions, and Director Independence” is set forth under the headings
“Transactions with Management” and “Corporate Governance – Director Independence” of the Company’s Proxy Statement and is
incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
Information regarding “Principal Accounting Fees and Services” is set forth under the heading “Auditors – Fees Paid to Independent
Registered Public Accounting Firm” of the Company’s Proxy Statement and is incorporated herein by reference.
119
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.
3(i)
3(ii)
10(a) *
10(b) *
10(c) *
10(d) *
10(e) *
10(f) *
10(g) *
10(h) *
10(i) *
10(j) *
10(k) *
10(l) *
14
21
23 ~
31.1 ~
31.2 ~
32 ~
101 ~
Exhibit
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 3
2005 Stock Option Award Agreement 3
2005 Restricted Shares Award Agreement 3
2015 Stock Incentive Plan 4
2015 Stock Option Award Agreement 4
2015 Restricted Shares Award Agreement 4
Employment Agreement effective January 1, 2017 between the Company and Ron J. Copher 5
Employment Agreement effective January 1, 2017 between the Company and Don J. Chery 5
Employment Agreement dated June 18, 2015 between the Company and Randall M. Chesler 6
Nonemployee Service Provider Deferred Compensation Plan 7
Code of Ethics 8
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, 2017 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 99.1 through 99.3 of the Company’s S-8 Registration Statement (No. 333-204023).
5 Incorporated by reference to Exhibits 10.1 and 10.2 included in the Company’s Form 8-K filed by the Company on January 4, 2017.
6 Incorporated by reference to Exhibit 10.1 included in the Company’s Form 8-K filed by the Company on June 22, 2015.
7 Incorporated by reference to Exhibit 10.1 included in the Company’s Form 8-K filed by the Company on October 31, 2012.
8 Incorporated by reference to Exhibit 14 included in the Company’s Form 10-K for the year ended December 31, 2016.
* Compensatory Plan or Arrangement.
~ Exhibit omitted from the 2017 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.
Item 16. Form 10-K Summary
None
120
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 22, 2018.
SIGNATURES
GLACIER BANCORP, INC.
By: /s/ Randall M. Chesler
Randall M. Chesler
President and CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on February 22, 2018, by the
following persons on behalf of the registrant and in the capacities indicated.
/s/ Randall M. Chesler
Randall M. Chesler
/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/ 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
/s/ Mark J. Semmens
Mark J. Semmens
/s/ George R. Sutton
George R. Sutton
President, CEO, and Director
(Principal Executive Officer)
Executive Vice President and CFO
(Principal Financial Accounting Officer)
Chairman
Director
Director
Director
Director
Director
Director
Director
Director
121
(This page intentionally left blank.)
122
DIRECTORS AND OFFICERS
Board of Directors
Dallas I. Herron, Chairman
CEO of CityServiceValcon, LLC
Randall M. Chesler
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
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
Mark J. Semmens
Retired Managing Director of Investment
Banking, D.A. Davidson
George R. Sutton
Attorney/Jones Waldo Holbrook & McDonough, PC/
Former Utah Commissioner of Financial Institutions
Corporate Officers
Randall M. Chesler
President/Chief Executive Officer
David L. Langston
Senior Vice President/Human Resources Director
Ron J. Copher, CPA
Executive Vice President/Chief Financial Officer/Secretary
Mark D. MacMillan
Senior Vice President/Chief Information Officer
Don J. Chery
Executive Vice President/Chief Administrative Officer
Donald B. McCarthy
Senior Vice President/Controller
Angela L. Dose, CPA
Senior Vice President/Principal Accounting Officer
Paul W. Peterson
Senior Vice President/Corporate Real Estate Manager
T.J. Frickle
Senior Vice President/Enterprise Risk Manager
Byron J. Pollan
Senior Vice President/Treasurer
Marcia L. Johnson
Senior Vice President/Chief Operating Officer
Casey L. Ries
Senior Vice President/Internal Audit Director
Barry L. Johnston
Senior Vice President/Chief Credit Officer
Ryan T. Screnar, CPA, CGMA
Senior Vice President/Compliance Director
Cover photo by Blake Passmore
www.climbglacier.com
Beargrass and Angel Wing
Glacier National Park, Montana
2017
________________
ANNUAL REPORT
2017 ANNUAL REPORT