2018
________________
ANNUAL REPORT
INVESTOR INFORMATION
2018 Cash Dividends Declared
Frequency
Quarterly (1)
Quarterly (2)
Quarterly (3)
Quarterly (4)
Special
Record Date
April 10, 2018
July 10, 2018
October 9, 2018
December 11, 2018
January 8, 2019
Payment Date
April 19, 2018
July 19, 2018
October 18, 2018
December 20, 2018
January 17, 2019
Per Share Amount
$0.23
$0.26
$0.26
$0.26
$0.30
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Ten-Year Common Stock Price and Dividend History
High
$19.61
$19.00
$16.00
$16.33
$30.88
$30.79
$30.29
$37.87
$41.23
$47.67
Common Stock Price
Low
$11.80
$12.84
$8.95
$12.12
$14.76
$24.27
$22.16
$21.90
$31.38
$35.77
Close
$13.72
$15.11
$12.03
$14.71
$29.79
$27.77
$26.53
$36.23
$39.39
$39.62
Cash Dividends
Declared Per Share
$0.52
$0.52
$0.52
$0.53
$0.60
$0.98
$1.05
$1.10
$1.14
$1.31
2019 Anticipated Dividend Dates 1
Quarter
1
2
3
4
Record Date
April 9, 2019
July 9, 2019
October 8, 2019
December 10, 2019
Payment Date
April 18, 2019
July 18, 2019
October 17, 2019
December 19, 2019
2019 Anticipated Earnings Dates 1
Quarter
1
2
3
4
Announcement Date
April 18, 2019
July 18, 2019
October 17, 2019
January 23, 2020
___________________________
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 1,725 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 24, 2019 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
Miller Nash Graham & Dunn LLP
Seattle, Washington
www.millernash.com
Moore, Cockrell, Goicoechea & Johnson, P.C.
Kalispell, Montana
www.mcgalaw.com
Dear Shareholder,
LETTER TO SHAREHOLDERS
I am extremely pleased to report that 2018 was another record year for your Company in many areas. Our team
of talented employees now numbers 2,723 across our 7 states in the West. Through 167 locations spanning almost
1,500 miles, this team serves our customers with quality, personalized service and has once again done a fantastic
job of growing the business and building long-term franchise value.
Our Western U.S. markets continued to experience strong economic growth, welcoming new residents and
businesses with lower taxes, lower cost of living, and a high quality of life with ample outdoor activities to meet
a wide range of interests. We see the attractiveness of the West as solid and believe these attributes will prove to
be a continued draw over the long haul.
Net income, earnings per share, and the tangible book value of the Company all reached record levels.
In early 2018 we surpassed $10 billion in assets when we closed the two acquisitions we announced in 2017,
Collegiate Peaks Bank in Colorado and First Security Bank in Montana. By waiting to close these acquisitions
until early 2018, we were able to keep the Company’s total asset size below $10 billion at year end 2017, delaying
a significant reduction in fee income associated with crossing that threshold until mid-2019. As a result of organic
growth and adding Collegiate Peaks and First Security, the Company grew by almost $2 billion, representing the
largest quarter of asset growth in the Company’s history. The Glacier team did a fantastic job of closing, converting
and integrating these banks into our Company.
Our Division Presidents and their teams, with the support of our Senior Staff, delivered best in class results in each
of the 14 Divisions across the West. Bank Director Magazine and Forbes recognized this performance once again
and ranked your Company among the top 20 performing banks in the country.
As I noted last year, we operate in a constantly changing industry and environment, but despite this your Company
remains strong. Our Directors, Bank Division Presidents, Senior Staff, and employees are all committed to serving
our customers and communities with excellence.
Notable Legislative and Regulatory Changes
Tax Cut and Jobs Act
We received a significant tax cut as a result of the Tax Cuts and Jobs Act of 2017 (Tax Act) which resulted in the
federal corporate income tax rate decreasing from 35% to 21% beginning on January 1, 2018. This reduction in
our tax rate helped improve our profitability and performance against most of our key performance metrics.
Economic Growth, Regulatory Relief, and Consumer Protection Act
We also received some welcome regulatory relief in 2018 with the enactment of legislation which included a
number of changes for banks large and small. For us, the legislation eliminated mandatory capital stress testing
previously required under the Dodd-Frank Act. The timing of this legislation was especially fortunate for our
Company as mandatory stress testing would have become a requirement for us in 2019 with significant
implementation costs to be incurred in 2018. Passage of this legislation has allowed us to forgo the costly
implementation of mandatory Dodd-Frank stress testing while giving the Company the flexibility to develop a
more efficient, cost-effective, and value-added approach to stress testing better aligned with our risk management
objectives.
i
Key Performance Measurements
A Record year
Tangible stockholders’ equity of your Company at the end of 2018 increased by $170 million, or 17%, to $1.177
billion, and tangible book value per common share increased $1.02, or 8%, from a year ago to $13.93.
Net income for 2018 was a record $182 million, an increase of $45.8 million, or 34%, from the $136 million in
2017, excluding the revaluation of the net deferred tax asset from the Tax Act. As a reminder, the Tax Act required
us to make one time adjustments in 2017 that reduced income. For a more accurate year over year comparison,
we exclude the impact of these one time adjustments.
Return on assets improved to end the year at 1.59%, and return on equity for the year was a very strong 12.56%.
The Company declared and paid a regular dividend of $0.26 per share in the fourth quarter of 2018, which was
the 135th consecutive quarterly dividend paid by the Company. For the full year we paid regular dividends of $1.01
per share and a special dividend of $0.30 per share for a total of $1.31 per share, a 15% increase over 2017.
In 2018 we added Total Shareholder Return (TSR) as a performance metric to our long-term incentive plan, which
pays out in the form of Company stock, to better align with shareholder interests. We encourage shareholders to
view TSR over a long term period (see the chart provided on page 21 of this Annual Report). Our TSR over the
last 5 years was 41%. Compared to our peer group, we rank in the 95th percentile of performance for TSR over
this period. While TSR may move into negative territory at times in the short term, we are confident in a positive
long term trend.
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
21,000 volunteer hours to over 500 non-profits, donating or investing over $60 million, and investing over $200
million in Community Development loans. We remain absolutely committed to making the communities we serve
better places to live.
Key Initiatives and Operating Results
Consistent and Sustainable
We ended 2018 with $12.115 billion in assets, an increase of 25% over 2017, driven by organic growth and by
bank acquisitions.
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 in 2018, saving the Company from an annual reduction in fee income of
about $17 to $20 million. The Durbin Amendment was part of the Dodd-Frank Act passed in 2010 which effectively
transfers debit card interchange income from banks to retailers. This reduction in fee income will now begin in
July of 2019. Because of our growth to over $10 billion in assets, the Consumer Financial Protection Bureau will
begin a regular examination process of the Company focused mainly in the area of consumer compliance. We will
continue to take steps to further strengthen the Company to do well under the more rigorous regulatory expectations
that come with being a bigger bank.
Excluding acquisitions, total core deposits increased $591 million, or 8%, from the prior year end to $9.325 billion.
We were very pleased to see our non-interest bearing balance accounts increase by $218 million, or 9%, to $3.001
billion at year end. Stable, low-cost deposits are an important part of our business, and good growth in non-interest
bearing accounts are a big help. We believe our focus on relationship based transaction accounts is an important
ii
core competency. Competition for deposits increased significantly in 2018 as a number of banks had to scramble
to attract deposits to enable them to continue to fund loans and avoid borrowing funds at higher rates. For the most
part we were able to keep our funding costs stable by keeping our focus on relationship accounts and by serving
our customers with a strong overall value proposition. It is unclear what direction rates will head in 2019, but we
feel we are well positioned to do well in most any rate environment.
Organic loan growth for the year was $728 million, or 11%, and our portfolio of loans grew to $8.3 billion. This
increase primarily came from growth in commercial real estate lending. 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. As I noted last year, 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. While many of us in the
industry feel we may see the economy slow down in the near future, we don’t see signs of stress on our customers
and our credit metrics continue to improve. Still, caution more accurately reflects our mindset than full speed
ahead.
Another bright spot was the net interest margin which increased 9 basis points during 2018. The net interest margin
as a percentage of earning assets was 4.21% for 2018 compared to 4.12% for 2017. The increase in the margin
was primarily attributable to a shift in earning assets to higher yielding loans, increased yields on the loan portfolio,
and the stable cost of funds. The Federal Reserve increased rates 4 times in 2018, and we benefit from rising rates
given we are able to increase our yield on new and renewing loans. We saw this positive impact in 2018 as older
loans in our portfolio came up for repricing and our new loans were priced at higher rates.
We were successful in managing total funding costs (including non-interest bearing deposits) to 36 basis points,
which is unchanged from 2017. This remarkable performance reflects the very stable nature of our core deposits
that I touched on earlier. These stable deposits will continue to serve us well.
The efficiency ratio measures expenses as a percent of revenues and was 54.73% for 2018, an increase from the
prior year of 53.94%. This was one of the few performance metrics negatively impacted by the Tax Act. Applying
the same 35% federal corporate income tax rate that was in effect during 2017, the 2018 efficiency ratio would
have been 53.77% for 2018, or 17 basis points lower than 2017. This is because the lower tax rate negatively
impacted the earnings from tax exempt assets in our investment portfolio. We keep a close watch on expenses as
well as revenues and expect to see continual improvement in our efficiency over the next few years.
We benefited this year from our Bank Divisions’ continued focus on resolving problem credits and we ended the
year with non-performing assets of $56.8 million, a decrease of $8.4 million, or 13%, from the prior year. Non-
performing assets as a percentage of assets at year end were 0.47%, which was a decrease of 21 basis points from
the prior year end of 0.68%. This was a tremendous outcome and a good demonstration of the experienced credit
talent in our Company. Working through and successfully resolving problem credits takes time, patience, and
experience. We are very fortunate to have the credit leadership in each of our Bank Divisions to make results like
this possible. Credit quality trends generally are positive and credit risk appears to be low at this point, but we
still spend time carefully reviewing the loans we are making and scanning the lending landscape for signs of asset
bubbles or borrower fatigue.
The allowance for loan and lease losses as a percent of total loans outstanding at December 31, 2018 was 1.58%,
a decrease of 39 basis points from 1.97% at December 31, 2017. This decrease was primarily driven by loan
growth and stabilizing credit quality. While our reserve level is one of the highest among our peers, we continue
to think that it is prudent to carry a loan loss provision that reflects our conservative nature and outlook. This area
will undergo a significant change starting in 2020 with the adoption of a new accounting standard, Current Expected
Credit Loss, or CECL. CECL will require the allowance to reflect losses over the life of a loan, rather than reflect
losses incurred at the reporting date under the current practice. Our team is working diligently to ensure we have
iii
the appropriate CECL models in place so that our allowance properly reflects expected credit losses and we are
ready to adopt the new standard starting in 2020. Why the new standard? The Financial Accounting Standards
Board (FASB) decided to review how banks estimate losses in the allowance calculation after the financial crisis
in 2007. The CECL requirement will result in more uniform transparency across banks. Whether or not the standard
will help all banks avoid surprises in the next economic downturn remains to be seen.
We closed on our acquisitions of Collegiate Peaks Bank and First Security Bank in early 2018. The integration
into Glacier and the conversion onto our core processing system were completed in 2018. We worked hard to
make the conversions as seamless as possible for employees and customers. The Denver and Bozeman markets
continue to be among the strongest in our geographic footprint and we couldn’t be happier with both of these
additions.
We continue to talk to a number of banks that are considering a sale but stay focused on our disciplined approach
to acquisitions. We look for good banks in good markets with good people and a track record of solid, consistent
high performance. Sticking to our proven formula makes sorting through the long list of interested sellers much
easier. We end up saying no a lot more than yes.
One of our most important assets is our talented team of employees. We are very proud of our employee profit
sharing program that is available to all full time employees of the Company. The funds distributed to employees
are deposited in the Company retirement plan so that we can help with saving in this important area. Our simple
strategy is for all employees to benefit when the Company does well. Over the last 5 years, the Company has
contributed close to $50 million to employees as part of this program.
The Year Ahead
We are going to continue to stay focused on our core business in 2019. And we will work to ensure our customer
service experience is best in class and further strengthen our unique and very successful business model. We
believe we have a very strong foundation in place, and we are focused on positioning your Company to continue
to be the first choice for the primary banking relationship in all of our markets.
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. Under the guidance of our
terrific Board of Directors, and with the commitment of our Bank Division Presidents and Senior Staff, I am very
confident that our entire team will make 2019 another record year for Glacier Bancorp.
Our annual meeting will be held in Kalispell, Montana, at 9:00 a.m. on April 24th so please stop by the Hilton
Garden Inn and join us if you are in town.
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
Debt 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
Selected Ratios and Other Data
Return on average assets 1
Return on average equity 1
Dividend payout ratio 1
Average equity to average asset ratio
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
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 2
Allowance for loan and lease losses as a percent of loans
Allowance for loan and lease losses as a percent of
nonperforming loans
Non-performing assets as a percentage of subsidiary assets
Non-performing assets
Loans originated and acquired
Number of full time equivalent employees
Number of locations
2018
$ 12,115,484
2,869,578
8,156,310
(131,239)
338,828
9,493,767
440,175
410,859
1,515,854
17.93
12.51%
At or for the Years ended December 31,
2015
2016
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%
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%
2014
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%
$
$
$
$
$
468,996
35,531
433,465
9,953
118,824
320,127
222,209
40,331
181,878
2.18
2.17
1.31
1.59%
12.56%
60.09%
12.67%
14.70%
13.37%
12.10%
11.35%
4.21%
54.73%
1.58%
266%
0.47%
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%
$
56,750
$ 4,301,678
2,623
167
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
______________________________
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 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
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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, 2018 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 every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such
files).
Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company,
or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging
growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes
No
The aggregate market value of the voting common equity held by non-affiliates at June 30, 2018 (the last business day of the registrant’s most
recently completed second fiscal quarter), was $3,255,486,651 (based on the average bid and asked price as quoted on the NASDAQ Global
Select Market as of the close of business on that date).
The number of shares of registrant’s common stock outstanding on January 30, 2019 was 84,521,692. No preferred shares are issued or
outstanding.
Document Incorporated by Reference
Portions of the 2019 Annual Meeting Proxy Statement dated on or about March 14, 2019 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
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20
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25
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67
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70
72
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119
119
120
120
120
120
120
121
121
122
2
ABBREVIATIONS/ACRONYMS
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
GLBA – Gramm-Leach-Bliley Financial Services
Modernization Act of 1999
Interstate Act – Riegle-Neal Interstate Banking and Branching
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
OREO – other real estate owned
Patriot Act – Uniting and Strengthening America by Providing Appropriate
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
to repurchase
S&P – Standard and Poor’s
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
TBA – to-be-announced
TDR – troubled debt restructuring
VIE – variable interest entity
ALCO – Asset Liability Committee
ALLL or allowance – allowance for loan and lease losses
ASC – Accounting Standards CodificationTM
ASU – Accounting Standards Update
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
CEO – Chief Executive Officer
CECL – current expected credit losses
CFO – Chief Financial Officer
CFPB – Consumer Financial Protection Bureau
Collegiate – Columbine Capital Corp. and its subsidiary,
Collegiate Peaks Bank
Company – Glacier Bancorp, Inc.
COSO – Committee of Sponsoring Organizations of the
Treadway Commission
CRA – Community Reinvestment Act of 1977
Crapo Bill – Economic Growth, Regulatory Relief, and Consumer
Protection Act
DDA – demand deposit account
DIF – federal Deposit Insurance Fund
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
FNB – FNB Bancorp and its subsidiary, The First National Bank
of Layton
Foothills – TFB Bancorp, Inc. and its subsidiary,
The Foothills Bank
FRB – Federal Reserve Bank
Freddie Mac – Federal Home Loan Mortgage Corporation
3
Item 1. Business
PART I
General
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
167 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, consumer and municipal 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.”
The Company includes the parent holding company and the Bank. As of December 31, 2018, 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;
•
First Security 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;
First Bank (Powell, Wyoming) with operations in Wyoming and Utah;
•
•
First State Bank (Wheatland, Wyoming) with operations in Wyoming;
• North Cascades Bank (Chelan, Washington) with operations in Washington;
• Bank of the San Juans (Durango, Colorado) with operations in Colorado;
• Collegiate Peaks Bank (Buena Vista, Colorado) with operations in Colorado; and
• The Foothills Bank (Yuma, Arizona) with operations in Arizona.
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 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 other assets on the Company's statements of financial condition.
As of December 31, 2018, 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)
Inter-Mountain Bancorp., Inc. and its wholly-owned subsidiary,
First Security Bank (collectively, “FSB”)
Columbine Capital Corp., and its wholly-owned subsidiary,
Collegiate Peaks Bank (collectively, “Collegiate”)
TFB Bancorp, Inc. and its subsidiary, The Foothills Bank
(collectively, “Foothills”)
Date
Total
Assets
Gross
Loans
Total
Deposits
February 28, 2018
$ 1,109,684
627,767
877,586
January 31, 2018
551,198
354,252
437,171
April 30, 2017
385,839
292,529
296,760
Treasure State Bank
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
February 28, 2015
175,774
84,689
237,326
August 31, 2014
349,167
137,488
309,641
On January 16, 2019, the Company announced the signing of a definitive agreement to acquire FNB Bancorp and its wholly-owned
subsidiary, The First National Bank of Layton, a community bank based in Layton, Utah (collectively, “FNB”). FNB provides banking
services to individuals and businesses throughout Utah with locations in Layton, Bountiful, Clearfield, and Draper. As of December 31,
2018, FNB had total assets of $335 million, gross loans of $247 million and total deposits of $286 million. The acquisition is subject to
required regulatory approvals and other customary conditions of closing and is anticipated to take place in the second quarter of 2019.
Upon closing of the transaction, the branches of FNB, along with the Bank’s four existing branches operating in Utah, will operate as a
new division of the Bank.
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 and Competition
The Company and the Bank have 167 locations, which consists of 149 branches and 18 loan or administration offices, in 63 counties
within 7 states including Montana, Idaho, Utah, Washington, Wyoming, Colorado, and 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.
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
locations. Competition is also increasing for deposit and lending services from internet-based competitors. Non-depository financial
service institutions, primarily in the securities, insurance and retail industries, have also become competitors for retail savings, investment
funds and lending activities. In addition to offering competitive interest rates, the principal methods used by the Bank to attract deposits
include the offering of a variety of services including on-line banking, mobile banking and convenient office locations and business hours.
The primary factors in competing for loans are interest rates and rate adjustment provisions, loan maturities, loan fees, and the quality
of service.
5
The following table summarizes the Bank’s number of locations, the number of counties the Bank serves and the percentage of Federal
Deposit Insurance Corporation (“FDIC”) insured deposits the Bank has in those counties for each of the seven states it operates in.
Percentages of deposits are based on the FDIC summary of deposits survey as of June 30, 2018.
Montana
Idaho
Utah
Washington
Wyoming
Colorado
Arizona
Number of
Locations
Number of
Counties Served
Percent of
Deposits
69
28
4
14
17
27
8
167
18
9
3
7
8
13
5
63
26%
7%
11%
2%
24%
2%
1%
Employees
As of December 31, 2018, the Company and the Bank employed 2,723 persons, 2,525 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 2019
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.
6
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.
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, or retaining or acquiring shares in a company engaged in, other activities closely related to the business of banking. In addition, the
Company must also file reports with and provide additional information to the Federal Reserve.
Holding Company Bank Ownership. The BHCA requires every bank holding company to obtain the prior approval of the Federal Reserve
before: 1) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after
such acquisition, it would own or control more than 5 percent of such shares; 2) acquiring all or substantially all of the assets of another
bank or bank holding company; or 3) merging or consolidating with another bank holding company.
Holding Company Control of Non-banks. With some exceptions, the BHCA prohibits a bank holding company from acquiring or retaining
direct or indirect ownership or control of more than 5 percent of the voting shares of any company that is not a bank or bank holding
company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing
services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities that, by federal statute,
agency regulation, or order, have been identified as activities closely related to the business of banking or managing or controlling banks.
Transactions with Affiliates. Bank subsidiaries of a bank holding company are subject to restrictions imposed by the Federal Reserve
Act on extensions of credit to the holding company or its subsidiaries, on investments in securities, and on the use of securities as collateral
for loans to any borrower. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) further
extended the definition of an “affiliate” and treats credit exposure arising from derivative transactions, securities lending, and borrowing
transactions as covered transactions under the regulations. It also 1) expands the scope of covered transactions required to be collateralized;
2) requires collateral to be maintained at all times for covered transactions required to be collateralized; and 3) places limits on acceptable
collateral. These regulations and restrictions may limit the Company’s ability to obtain funds from the Bank for its cash needs, including
funds for payments of dividends, interest, and operational expenses.
Tying Arrangements. 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 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 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.
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.
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. Because
the Company's total consolidated assets exceed $10 billion, it is 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.
9
Stress Testing
In May 2018, President Trump signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act (“Crapo Bill”),
which is bipartisan legislation that rolls back certain provisions of the Dodd-Frank Act to provide regulatory relief to certain financial
institutions. In relevant part, the Crapo Bill increased the asset threshold at which banks are subject to annual company-run stress tests
from $10 billion to $250 billion. As a result, the Company is not currently subject to the Dodd-Frank Act stress testing requirements.
Interchange Fees
Under the Durbin Amendment to the Dodd-Frank Act, the Federal Reserve adopted rules establishing standards for assessing whether
the interchange fees that may be charged with respect to certain electronic transactions are "reasonable and proportional" to the costs
incurred by issuers for processing such transactions. Notably, the Federal Reserve's rules set a maximum permissible interchange fee,
among other requirements. Because the Company's total consolidated assets exceed $10 billion, it is subject to this interchange fee cap.
Effective July of 2019, the interchange fee cap is expected to have a $17 to $20 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. Failure to
comply with this buffer requirement may result in constraints on capital distributions (e.g., dividends, equity repurchases, and certain
bonus compensation for executive officers). The Final Rules change the risk-weights of certain assets for purposes of the risk-based
capital ratios and phase out certain instruments as qualifying capital.
The Final Rules also contain revisions to the prompt corrective action framework, which is designed to place restrictions on an insured
depository institution if its capital levels begin to show signs of weakness. Under the prompt corrective action requirements, which are
designed to complement the capital conservation buffer, insured depository institutions will be required to meet the following increased
capital level requirements to qualify as “well capitalized”: 1) a Tier 1 common equity capital ratio of at least 6.5 percent; 2) a Tier 1
capital ratio of at least 8 percent; 3) a total capital ratio of at least 10 percent; 4) a Tier 1 leverage ratio of at least 5 percent; and 5) not
be subject to any order or written directive requiring a specific capital level. The FDIC’s rules (as amended by the Final Rules) contain
other capital classification categories, such as “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and
“critically undercapitalized,” each of which are based on certain capital ratios. An institution may be downgraded to a category lower
than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition, or if the institution receives an unsatisfactory
examination rating.
The application of the Final Rules may result in lower returns on invested capital, require the raising of additional capital or require
regulatory action if the Bank were unable to comply with such requirements. In addition, management may be required to modify its
business strategy due to the changes to the asset risk-weights for risk-based capital calculations and the requirement to meet the capital
conservation buffers. The imposition of liquidity requirements in connection with these rules could also cause the Bank to increase its
holdings of liquid assets, change its business strategy, and make other changes to the terms of its funding.
Regulatory Oversight and Examination
Inspections. The Federal Reserve conducts periodic inspections of bank holding companies, 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.
10
Examinations. Banks are subject to periodic examinations by their primary regulators. In assessing a bank's condition, bank examinations
have evolved from reliance on transaction testing to a risk-focused approach. These examinations are extensive and cover the entire
breadth of the operations of a bank. Generally, safety and soundness examinations occur on an 18-month cycle for banks under $3 billion
in total assets that are well capitalized and without regulatory issues, and 12-months otherwise. Examinations alternate between the
federal and state bank regulatory agencies, and in some cases they may occur on a combined schedule. The frequency of consumer
compliance and CRA examinations is linked to the size of the institution and its compliance and CRA ratings at its most recent examinations.
However, the examination authority of the Federal Reserve and the FDIC allows them to examine supervised institutions as frequently
as deemed necessary based on the condition of the institution or as a result of certain triggering events. Because the Company's total
consolidated assets exceed $10 billion, it is also subject to the direct supervision of the CFPB.
Commercial Real Estate Ratios. The federal banking regulators recently issued guidance reminding financial institutions to reexamine
the existing regulations regarding concentrations in commercial real estate lending. The purpose of the guidance is to guide banks in
developing risk management practices and capital levels commensurate with the level and nature of real estate concentrations. The
banking regulators are directed to examine each bank’s exposure to commercial real estate loans that are dependent on cash flow from
the real estate held as collateral and to focus their supervisory resources on institutions that may have significant commercial real estate
loan concentration risk. The guidance provides that the strength of an institution’s lending and risk management practices with respect
to such concentrations will be taken into account in evaluating capital adequacy and does not specifically limit a bank’s commercial real
estate lending to a specified concentration level.
Corporate Governance and Accounting
The Sarbanes-Oxley Act of 2002 (“SOX Act”) addresses, among other things, corporate governance, auditing and accounting, enhanced
and timely disclosure of corporate information, and penalties for non-compliance. In general, the SOX Act 1) requires chief executive
officers and chief financial officers to certify to the compliance of periodic reports filed with the SEC; 2) imposes specific and enhanced
corporate disclosure requirements; 3) accelerates the time frame for reporting insider transactions and periodic disclosures by public
companies; 4) requires companies to adopt and disclose information about corporate governance practices, including whether or not they
have adopted a code of ethics for senior financial officers and whether the audit committee includes at least one “audit committee financial
expert”; and 5) requires the SEC, based on certain enumerated factors, to regularly and systematically review corporate filings. As a
publicly reporting company, the Company is subject to the requirements of the SOX Act and related rules and regulations issued by the
SEC and NASDAQ.
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.
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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, such as the Bank,
responsible for the increase from 1.15 percent to 1.35 percent. On September 30, 2018, the DIF reserve ratio reached 1.36 percent, ahead
of the Dodd-Frank Act’s 2020 deadline to meet the 1.35 percent reserve ratio. As a result, certain institutions, such as the Bank, will
receive credits for the portions of their regular assessments that contributed to growth in the reserve ratio between 1.15 percent and 1.35
percent, to be applied when the reserve ratio is at or above 1.38 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.
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 Large Bank Holding Companies and Banks
As mentioned above, the Dodd-Frank Act imposed heightened requirements on large bank holding companies and banks, and the Crapo
Bill has rolled back certain provisions of the Dodd-Frank Act. In particular, the Crapo Bill increased the asset threshold for certain rules
that previously applied to bank holding companies and banks with at least $10 billion in total consolidated assets. As a result of the Crapo
Bill, the Company is not currently subject to several of those heightened requirements (e.g., stress testing and a dedicated risk committee),
but the Company will remain subject to other requirements of the Dodd-Frank Act left unaffected by the Crapo Bill, such as the requirement
that the Company be examined, primarily by the CFPB, for compliance with federal consumer protection laws.
The Company has established a comprehensive compliance system to ensure compliance with these rules.
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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.
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 United States presidential administration and new tax and economic policies associated therewith, the uncertain
future relationship of the United Kingdom with the European Union (e.g., Brexit), and the ever-changing landscape of the energy and
medical industries. Future economic conditions cannot be predicted, and any renewed deterioration in the economies of the nation as a
whole or in 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 related to its having exceeded $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.
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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.
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.
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The Bank’s loan portfolio mix increases the exposure to credit risks tied to deteriorating conditions.
The loan portfolio contains a high percentage of commercial, commercial real estate, real estate acquisition and development loans in
relation to the total loans and total assets. These types of loans have historically been viewed as having more risk of default than residential
real estate loans or certain other types of loans or investments. In fact, the FDIC has issued pronouncements alerting banks of its concern
about banks with a heavy concentration of commercial real estate loans. These types of loans also typically are larger than residential
real estate loans and other commercial loans. Because the Bank’s loan portfolio contains a significant number of commercial and
commercial real estate loans with relatively large balances, the deterioration of one or more of these loans may cause a significant increase
in non-performing loans. An increase in non-performing loans could result in a loss of earnings from these loans, an increase in the
provision for loan losses, or an increase in charge-offs, which could have a material adverse impact on 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.
Fluctuating interest rates can adversely affect profitability.
The Bank’s profitability is dependent to a large extent upon net interest income, which is the difference (or “spread”) between the interest
earned on loans, investment securities and other interest earning assets and interest paid on deposits, borrowings, and other interest bearing
liabilities. Because of the differences in maturities and repricing characteristics of interest earning assets and interest bearing liabilities,
changes in interest rates do not produce equivalent changes in interest income earned on interest earning assets and interest paid on interest
bearing liabilities. Accordingly, fluctuations in interest rates could adversely affect the Bank’s interest rate spread, and, in turn, profitability.
The Bank seeks to manage its interest rate risk within well established policies and guidelines. Generally, the Bank seeks an asset and
liability structure that insulates net interest income from large deviations attributable to changes in market rates. However, the Bank’s
structures and practices to manage interest rate risk may not be effective in a highly volatile rate environment. Over the course of 2017
and 2018, the Federal Reserve increased the federal funds target range in increments of 0.25 percent a total of seven times - three in 2017
and four in 2018 - to its current range of 2.25 to 2.50 percent. The Federal Reserve has stated it will be patient as it determines what
future adjustments may be appropriate to foster maximum employment and price stability.
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 2018 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.
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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.
A decline in the fair value of the Bank’s investment portfolio could adversely affect earnings and capital.
The fair value of the Bank’s debt securities could decline as a result of factors including changes in market interest rates, tax reform,
credit quality and credit ratings, lack of market liquidity and other economic conditions. A debt security is impaired if the fair value of
the security is less than the carrying value. When a security is impaired, the Bank determines whether the impairment is temporary or
other-than-temporary. If an impairment is determined to be other-than-temporary, an impairment loss is recognized by reducing the
amortized cost only for the credit loss associated with the other-than-temporary loss with a corresponding charge to earnings for a like
amount. Any such impairment charge would have an adverse effect, which could be material, on 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 24 percent and 25 percent of total assets at
December 31, 2018 and 2017, respectively. 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, debt securities present a different type
of asset quality risk than the loan portfolio. At December 31, 2018, the investment portfolio consisted of 90 percent available-for-sale
and 10 percent held-to-maturity designated debt 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 with notional amounts totaling $260 million 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, 2018 and 2017; 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.
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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.
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
Changes in accounting standards could materially impact the Company’s financial statements.
From time to time, the Financial Accounting Standards Board (“FASB”) and the SEC change the financial accounting and reporting
standards that govern the preparation of the Company’s financial statements. These changes can materially impact how the Company
records and report its financial condition and results of operations.
In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Measurement of Credit Losses on Financial Instruments.
The ASU introduces a new impairment model based on current expected credit losses (“CECL”) rather than incurred losses. The CECL
model will apply to most debt instruments, including loan receivables and loan commitments.
Under the CECL model, the Company would recognize an impairment allowance equal to its current estimate of expected credit losses
for financial instruments as of the end of the reporting period. Measuring expected credit losses will likely be a significant challenge for
all entities, including the Company. Additionally, to estimate expected credit losses, the Company could incur one-time and recurring
costs, some of which may be related to system changes and data collection. Further, the impairment allowance measured under a CECL
model could differ materially from the impairment allowance measured under the Company’s incurred loss model. To initially apply the
CECL amendments, for most debt instruments, the Company would record a cumulative-effect adjustment to its statement of financial
condition as of the beginning of the first reporting period in which the guidance is effective (a modified retrospective approach). The
amendments in ASU 2016-13 are effective for fiscal years beginning after December 15, 2019, including interim periods within those
fiscal years, and are required to be adopted through a modified retrospective approach, with a cumulative-effect adjustment to retained
earnings as of the beginning of the first reporting period in which the ASU is effective.
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On December 21, 2018, federal bank regulatory agencies approved a final rule, effective as of April 1, 2019, modifying their regulatory
capital rules and providing an option to phase in over a three-year period the initial regulatory capital effects of the CECL methodology.
The Company is currently evaluating the rule to determine if the phase-in option will be elected.
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.
Item 1B. Unresolved Staff Comments
None
18
Item 2. Properties
The following schedule provides information on the Company’s 167 properties as of December 31, 2018:
(Dollars in thousands)
Montana
Idaho
Utah
Washington
Wyoming
Colorado
Arizona
Total
Properties
Leased
Properties
Owned
Net Book
Value
8
8
1
4
2
2
6
31
61
20
3
10
15
25
2
136
$
$
125,012
28,080
2,085
5,657
16,196
28,669
5,376
211,075
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, 2018, there were
approximately 1,725 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
2018
2017
High
Low
High
Low
$
41.24
41.47
46.28
47.67
36.72
35.77
38.37
36.84
38.17
37.41
38.18
41.23
31.70
31.56
31.38
35.50
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,
2018
December 31,
2017
$
$
0.23
0.26
0.26
0.26
0.30
1.31
0.21
0.21
0.21
0.21
0.30
1.14
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 2018.
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; 2) the SNL Bank Index
comprised of banks and bank holding companies with total assets between $5 billion and $10 billion (“SNL Bank $5B-$10B Index”);
and 3) the KBW NASDAQ Regional Banking Index (“KBW Regional Banking Index”). Because the Company's total consolidated assets
exceeded $10 billion during 2018, the SNL Bank $5B-$10B Index that had been used in the past has been replaced by the KBW Regional
Banking Index going forward. The KBW Regional Banking Index is frequently used by investors when comparing the Company’s stock
performance to that of similarly sized institutions in the Company’s region. 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.
Glacier Bancorp, Inc.
Russell 2000 Index
SNL Bank $5B-$10B Index
KBW Regional Banking Index
12/31/13
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
Period Ending
100.00
100.00
100.00
100.00
95.53
104.89
103.01
102.42
94.90
100.26
117.34
108.48
135.02
121.63
168.11
150.80
152.82
139.44
167.48
153.45
157.52
124.09
151.57
126.59
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 and comparing the Company’s financial performance, performance trends, and financial position. While the Company
uses these non-GAAP measures in its analysis of the Company’s performance, this information should not be considered an alternative
to measurements required by GAAP. The following table provides a reconciliation of certain GAAP financial measures to non-GAAP
financial measures.
(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 income 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 due to the one-time net tax expense of $19.7 million
during the year ended December 31, 2017. The one-time net tax expense was driven by The Tax Cuts and Jobs Act (“Tax Act”) and the
change in the federal marginal corporate income tax rate from 35 percent to 21 percent for 2018 and future years, which resulted in the
revaluation of its deferred tax assets and deferred tax liabilities (“net deferred tax asset”). The Company believes the financial results
are more comparable excluding the impact of the revaluation of the net deferred tax asset.
Basic earnings per share is calculated by dividing net income by average outstanding shares and diluted earnings per share is calculated
by dividing net income by diluted average outstanding shares. The one-time net tax expense of $19.7 million was included in determining
income for both the GAAP basic earnings per share and the GAAP diluted earnings per share. Conversely, the one-time net tax expense
of $19.7 million was excluded in determining income for both the non-GAAP basic earnings per share and the non-GAAP diluted earnings
per share. Average outstanding shares of 77,537,664 was used in the GAAP and non-GAAP basic earnings per share for the year ended
December 31, 2017. Diluted average outstanding shares of 77,607,605 was used in the GAAP and non-GAAP diluted earnings per share
for the year ended December 31, 2017.
The return on average assets ratio is calculated by dividing net income by average assets and the return on average equity ratio is calculated
by dividing net income by average equity. The one-time net tax expense of $19.7 million was included in determining income for both
the GAAP return on average assets and the GAAP return on average equity. Conversely, the one-time net tax expense of $19.7 million
was excluded in determining income for both the non-GAAP return on average assets and the non-GAAP return on average equity.
Average assets of $9.678 billion was used in the GAAP and non-GAAP return on average assets ratios for the year ended December 31,
2017. Average equity of $1.188 billion was used in the GAAP and non-GAAP return on average equity ratios for the year ended December
31, 2017.
The dividend payout ratio is calculated by dividing dividends declared per share by basic earnings per share. The non-GAAP dividend
payout ratio uses the non-GAAP basic earnings per share for calculating the ratio.
The effective income tax rate is calculated by dividing federal and state income tax expense by income before income taxes. The non-
GAAP effective income tax rate uses the non-GAAP federal and state income tax expense of $44.9 million for calculating the rate.
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)
2018
2017
December 31,
2016
2015
2014
Compounded Annual
Growth Rate
1-Year
5-Year
Selected Statements of Financial
Condition Information
Total assets
Debt securities
$12,115,484
$9,706,349
$9,450,600
$9,089,232
$8,306,507
2,869,578
2,426,556
3,101,151
3,312,832
2,908,425
Loans receivable, net
8,156,310
6,448,256
5,554,891
4,948,984
4,358,342
Allowance for loan and lease losses
(131,239)
(129,568)
(129,572)
(129,697)
(129,753)
Goodwill and intangibles
338,828
191,995
159,400
155,193
140,606
Deposits
9,493,767
7,579,747
7,372,279
6,945,008
6,345,212
Federal Home Loan Bank advances
440,175
353,995
251,749
394,131
296,944
Securities sold under agreements to
repurchase and other borrowed funds
Stockholders’ equity
Equity per share
Equity as a percentage of total assets
410,859
370,797
478,090
430,016
404,418
1,515,854
1,199,057
1,116,869
1,076,650
1,028,047
17.93
12.51%
15.37
12.35%
14.59
11.82%
14.15
11.85%
13.70
12.38%
24.8%
18.3%
26.5%
1.3%
76.5%
25.3%
24.3%
10.8%
26.4%
16.7%
1.3%
7.8 %
(0.3)%
13.4 %
0.2 %
19.2 %
8.4 %
8.2 %
0.3 %
8.1 %
5.5 %
0.2 %
(Dollars in thousands, except per share data)
2018
Summary Statements of Operations
Years ended December 31,
2016
2015
2017
Compounded Annual
Growth Rate
1-Year
5-Year
2014
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
$
468,996
$
375,022
$
344,153
$
319,681
$
299,919
35,531
433,465
9,953
118,824
320,127
222,209
40,331
181,878
2.18
2.17
1.31
$
$
$
$
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
$
$
$
$
25.1 %
19.0 %
25.6 %
(8.0)%
5.9 %
20.5 %
22.8 %
(10.2)%
33.7 %
24.6 %
24.0 %
14.9 %
9.4%
5.7%
9.7%
39.1%
5.6%
8.5%
8.4%
2.3%
10.0%
7.6%
7.5%
6.0%
23
(Dollars in thousands)
2018
At or for the Years ended December 31,
2016
2017
2015
Selected Ratios and Other Data
Return on average assets 1
Return on average equity 1
Dividend payout ratio 1
Average equity to average asset ratio
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
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 2
Allowance for loan and lease losses as a
percent of loans
Allowance for loan and lease losses as a
percent of nonperforming loans
Non-performing assets as a percentage of
subsidiary assets
Non-performing assets
1.59%
12.56%
60.09%
12.67%
14.70%
13.37%
12.10%
11.35%
4.21%
54.73%
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%
2014
1.42%
11.11%
64.90%
12.81%
18.93%
17.67%
N/A
12.45%
3.98%
54.31%
1.58%
1.97%
2.28%
2.55%
2.89%
266%
255%
257%
244%
209%
0.47%
$56,750
0.68%
65,179
0.76%
71,385
0.88%
80,079
1.08%
89,900
Loans originated and acquired
$4,301,678
3,629,493
3,474,000
3,000,830
2,404,299
Number of full time equivalent employees
Number of locations
2,623
167
2,278
145
2,222
142
2,149
144
1,943
129
______________________________
1 Excludes a one-time revaluation of the deferred tax assets and deferred tax liabilities as a result of the Tax Act for the year ended December 31, 2017.
For additional information on the revaluation, see the “Non-GAAP Financial Measures” section.
2 Non-interest expense before OREO expenses, core deposit intangibles amortization, goodwill impairment charges, and non-recurring expense items
as a percentage of tax-equivalent net interest income and non-interest income, excluding gains or losses on sale of investments, OREO income, and
non-recurring income items.
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;
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, 2018 COMPARED TO DECEMBER 31, 2017
Highlights and Overview
During the first quarter of 2018, the Company completed two bank acquisitions which increased the asset size of the Company
approximately 15 percent. The first acquisition was Collegiate, a community bank based in Buena Vista, Colorado. Collegiate provides
banking services to individuals and businesses in the Mountain and Front Range communities of Colorado with locations in Aurora,
Buena Vista, Denver and Salida. Collegiate became the Company’s fourteenth bank division. The second acquisition was FSB, a
community bank based in Bozeman, Montana. FSB provides banking services to individuals and businesses throughout Montana with
locations in Bozeman, Belgrade, Big Sky, Choteau, Fairfield, Fort Benton, Three Forks, Vaughn and West Yellowstone. FSB became a
new bank division headquartered in Bozeman and Big Sky Western Bank, the Bank’s existing Bozeman-based division combined with
the FSB division. The agriculture-focused northern branches of FSB, located in the area known as the Golden Triangle, combined with
the Bank’s First Bank of Montana division. On January 16, 2019, the Company announced the signing of a definitive agreement to
acquire FNB, a community bank based in Layton, Utah. FNB provides banking services to individuals and business throughout Utah
with locations in Layton, Bountiful, Clearfield and Draper. As of December 31, 2018, FNB had total assets of $335 million, gross loans
of $247 million and total deposits of $286 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.
The Company successfully executed its strategy to stay below $10 billion in total assets as of December 31, 2017 to delay the impact of
the Durbin Amendment for one additional year. 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. As part of its strategy, the Company sold $395 million in deposits through a third party vendor. The
Company ended the year at $12.115 billion in assets, which was a 25 percent increase over the prior year. The increase was due to the
Company bringing back the deposits that were sold, acquiring Collegiate and FSB and organic growth. The impact of the Durbin
Amendment on interchange fees will impact the Company starting in July of 2019 and is estimated to decrease service charge fees by
$17 to $20 million (pre-tax) on an annual basis.
The Company experienced a strong year for organic loan growth, which increased $728 million, or 11 percent, with the primary increases
in the commercial loan portfolio. Excluding acquisitions, total core deposits increased $591 million, or 8 percent, during the current
year, including an increase in non-interest bearing deposits of $218 million, or 9 percent, from the prior year. Tangible stockholders’
equity increased $170 million, or $1.02 per share, as a result of earnings retention and Company stock issued in connection with the
current year acquisitions, all of which offset the increases in goodwill and intangibles from the acquisitions. The Company increased its
total dividends declared from $1.14 per share during 2017 to $1.31 per share in 2018.
The Company continued to reduce its non-performing assets and ended the year at $56.8 million which was a decrease of $8.4 million
or, 13 percent, from the prior year end. The allowance as a percentage of total loans as of December 31, 2018 was 1.58 percent, a decrease
of 39 basis points (“bps”) from 1.97 percent at December 31, 2017. Loan portfolio growth, composition, average loan size, credit quality
considerations, and other environmental factors will continue to determine the ALLL.
The Tax Act resulted in a decrease in the federal marginal corporate income tax rate from 35 percent to 21 percent beginning January 1,
2018. As a result of the Tax Act, the Company incurred a one-time tax expense adjustment of $19.7 million during the fourth quarter
2017 due to the Company’s revaluation of its net deferred tax asset. The Company experienced a significant tax expense reduction during
2018 which resulted in an effective income tax rate of 18 percent during 2018 compared to 25 percent in 2017, excluding the revaluation
of the net deferred tax asset.
The Company had record net income for the year of $182 million, which was an increase of $45.8 million, or 34 percent, over the 2017
net income of $136 million, excluding the revaluation of the net deferred tax asset. Pre-tax income of $222 million for the current year
was an increase of $41.2 million, or 23 percent over the prior year. Diluted earnings per share for the year was $2.17, an increase of
$0.42 per share, or 24 percent, from 2017 diluted earnings per share of $1.75, excluding the revaluation of the net deferred tax asset. The
improvement in net income for 2018 was due to the acquisitions, organic growth, the significant increase in commercial interest income,
the decrease in tax expense and controlled operating expenses. For additional information on the revaluation of net deferred tax asset,
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 managing regulatory burden.
26
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,
2018
December 31,
2017
$
$
$
$
$
$
$
181,878
2.18
2.17
1.31
39.62
47.67
35.77
136,076
1.75
1.75
1.14
39.39
41.23
31.38
84,521,692
83,603,515
83,677,185
78,006,956
77,537,664
77,607,605
1.59%
12.56%
54.73%
60.09%
87.64%
2,623
167
216
1.41%
11.46%
53.94%
65.14%
87.29%
2,278
145
200
______________________________
1 Excludes a one-time revaluation of the net deferred tax asset 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.”
Recent Acquisitions
The Company completed the following acquisitions during the last two years:
•
Inter-Mountain Bancorp., Inc. and its wholly-owned subsidiary, First Security Bank
• Columbine Capital Corp., and its wholly-owned subsidiary, Collegiate Peaks Bank
• TFB Bancorp, Inc. and its subsidiary, The Foothills Bank
The business combinations were accounted for using the acquisition method with the results of operations included in the Company’s
consolidated financial statements as of the acquisition dates. For additional information regarding acquisitions, see Note 22 to the
Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.” The following table discloses the fair
value of selected classifications of assets and liabilities acquired:
(Dollars in thousands)
Total assets
Debt securities
Loans receivable
Non-interest bearing deposits
Interest bearing deposits
Borrowings
FSB
February 28,
2018
Collegiate
January 31,
2018
Foothills
April 30,
2017
$
1,109,684
271,865
627,767
301,468
576,118
36,880
551,198
42,177
354,252
170,022
267,149
12,509
385,839
25,420
292,529
97,527
199,233
22,800
27
Assets
The following table summarizes the Company’s assets as of the dates indicated:
Financial Condition Analysis
(Dollars in thousands)
December 31,
2018
December 31,
2017
$ Change
% Change
Cash and cash equivalents
$
203,790
$
200,004
$
3,786
Debt securities, available-for-sale
Debt securities, held-to-maturity
Total debt securities
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
2,571,663
297,915
2,869,578
1,778,243
648,313
2,426,556
887,742
4,657,561
1,911,171
544,688
286,387
8,287,549
(131,239)
8,156,310
720,728
3,577,139
1,579,353
457,918
242,686
6,577,824
(129,568)
6,448,256
793,420
(350,398)
443,022
167,014
1,080,422
331,818
86,770
43,701
1,709,725
(1,671)
1,708,054
Other assets
Total assets
885,806
12,115,484
$
$
631,533
9,706,349
$
254,273
2,409,135
2 %
45 %
(54)%
18 %
23 %
30 %
21 %
19 %
18 %
26 %
1 %
26 %
40 %
25 %
The Company successfully executed its strategy to stay below $10 billion in total assets as of December 31, 2017 to delay the impact of
the Durbin Amendment for one additional year. The Durbin Amendment, which was passed as part of 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. As a result, the Company’s annual service charge fee income is expected to decline by approximately
$17 to $20 million (pre-tax) beginning July 2019. During the year, the Company surpassed $10 billion in total assets and ended the year
at $12.115 billion, which was an increase of $2.409 billion, or 25 percent, from the prior year end, resulting from current year acquisitions
along with organic growth.
Total debt securities of $2.870 billion at December 31, 2018 increased $443 million, or 18 percent, from the prior year end. Debt securities
represented 24 percent of total assets at December 31, 2018 compared to 25 percent of total assets at December 31, 2017.
Excluding the $982 million of loans from the FSB and Collegiate acquisitions, the loan portfolio of $8.288 billion increased $728 million,
or 11 percent, since December 31, 2017, with the largest increase in commercial real estate loans, which increased $463 million, or 13
percent.
28
Liabilities
The following table summarizes the Company’s liabilities as of the dates indicated:
(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,
2018
December 31,
2017
$ Change
% Change
$
$
3,001,178
2,391,307
1,346,790
1,684,284
901,484
9,325,043
168,724
9,493,767
396,151
440,175
14,708
134,051
120,778
10,599,630
$
$
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
$
$
689,276
696,061
264,186
171,591
84,225
1,905,339
8,681
1,914,020
33,578
86,180
6,484
7,916
44,160
2,092,338
30%
41%
24%
11%
10%
26%
5%
25%
9%
24%
79%
6%
58%
25%
The Company brought back $395 million of deposits during the first quarter of 2018 that were previously sold as part of its strategy to
say below $10 billion in total assets through December 31, 2017. Excluding acquisitions, total core deposits increased $591 million, or
8 percent, during the current year, including an increase in non-interest bearing deposits of $218 million, or 9 percent, from the prior
year.
Federal Home Loan Bank (“FHLB”) advances of $440 million at December 31, 2018 increased $86 million over the prior year end to
assist in funding asset growth.
Stockholders’ Equity
The following table summarizes the stockholders’ equity balances as of the dates indicated:
(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,
2018
December 31,
2017
$ Change
% Change
$
$
$
$
1,525,281
(9,427)
1,515,854
(338,828)
1,177,026
12.51%
9.99%
17.93
13.93
$
$
$
$
1,201,036
(1,979)
1,199,057
(191,995)
1,007,062
12.35%
10.58%
15.37
12.91
$
$
$
$
324,245
(7,448)
316,797
(146,833)
169,964
2.56
1.02
27 %
376 %
26 %
76 %
17 %
1 %
(6)%
17 %
8 %
Tangible stockholders’ equity of $1.177 billion at December 31, 2018 increased $170 million over the prior year end which was the result
of earnings retention and $181 million and $69.8 million of Company stock issued for the acquisitions of FSB and Collegiate, respectively.
These increases more than offset the increase in goodwill and core deposit intangibles associated with the acquisitions and the decrease
in accumulated other comprehensive income in 2018. Tangible book value per common share at year end increased $1.02 per share from
a year ago.
29
Income Summary
The following table summarizes income for the periods indicated:
Results of Operations
(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,
2018
December 31,
2017
$
$
468,996
35,531
433,465
$
375,022
29,864
345,158
74,887
6,805
27,134
(1,113)
11,111
118,824
67,717
4,360
30,439
(660)
10,383
112,239
$ Change
% Change
93,974
5,667
88,307
7,170
2,445
(3,305)
(453)
728
6,585
25 %
19 %
26 %
11 %
56 %
(11)%
69 %
7 %
6 %
21 %
Total income
$
552,289
$
457,397
$
94,892
Net interest margin (tax-equivalent)
4.21%
4.12%
Net Interest Income
Interest income of $469 million for 2018 increased $94.0 million, or 25 percent, from 2017 and was principally due to a $76.8 million
increase in interest income from commercial loans. Interest expense of $35.5 million for the current year increased $5.7 million over
the prior year same period. The Company has maintained stable funding costs through its focus on growing non-interest bearing deposits
and continued pricing discipline. The total funding cost (including non-interest bearing deposits) for 2018 and 2017 was 36 basis points.
The net interest margin as a percentage of earning assets, on a tax-equivalent basis, for 2018 was 4.21 percent, a 9 basis points increase
from the net interest margin of 4.12 percent for 2017. Included in the current year net interest margin was a 14 basis points decrease
compared to the prior year driven by the reduction in the federal marginal corporate income tax rate. The increase in the net interest
margin from the prior year resulted from the remix of earning assets to higher yielding loans, increased yields on the loan portfolio, and
stable funding costs.
Non-interest Income
Non-interest income of $119 million for the current year increased $6.6 million, or 6 percent, over the prior year. Service charges and
other fees of $74.9 million for 2018 increased $7.2 million, or 11 percent, from the prior year as a result of the increased number of
deposit accounts from organic growth and acquisitions. Miscellaneous loan fees and charges for 2018 increased $2.4 million, or 56
percent from the prior year as a result of the acquisitions and increased loan growth. Gain on sale of loans for the current year decreased
$3.3 million, or 11 percent, from the prior year due to the decrease in purchase and refinance activity. Other income of $11.1 million,
increased $728 thousand, or 7 percent, from the prior year with increases of $1.9 million from the sale of bank assets and a decrease of
$2.1 million from the gain on sale of OREO.
30
Non-interest Expense
The following table summarizes non-interest expense for the periods indicated:
(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,
2018
December 31,
2017
$
$
195,056
30,734
9,566
15,911
3,221
5,075
6,270
54,294
320,127
$
$
160,506
26,631
8,405
14,150
1,909
4,431
2,494
47,045
265,571
$
$
$ Change
% Change
34,550
4,103
1,161
1,761
1,312
644
3,776
7,249
54,556
22%
15%
14%
12%
69%
15%
151%
15%
21%
Total non-interest expense of $320 million for 2018 increased $54.6 million, or 21 percent, over the prior year. Compensation and
employee benefits for 2018 increased $34.6 million, or 22 percent, from the same period last year primarily due to the increased number
of employees from acquisitions. Occupancy and equipment expense for 2018 increased $4.1 million, or 15 percent from the prior year
primarily as a result of increased costs from acquisitions. Data processing expense for the current year increased $1.8 million, or 12
percent, from the prior year as a result of increased costs from the acquisitions and organic growth. Current year other expenses of $54.3
million increased $7.2 million, or 15 percent, from the prior year due to an increase in acquisition-related expenses and increased costs
from acquired banks and organic growth. Acquisition-related expenses were $6.6 million during 2018 compared to $2.1 million in 2017.
Efficiency Ratio
For 2018, the efficiency ratio was 54.73 percent, a 79 basis points increase over the prior year efficiency ratio of 53.94 percent. Applying
the same 35 percent federal marginal corporate income tax rate that was in effect during the prior year, the efficiency ratio would be 53.77
percent for 2018, or 17 basis points lower than 2017.
Provision for Loan Losses
The following table summarizes the provision for loan losses, net charge-offs and select ratios relating to the provision for loan losses
for the previous eight quarters:
(Dollars in thousands)
Fourth quarter 2018
Third quarter 2018
Second quarter 2018
First quarter 2018
Fourth quarter 2017
Third quarter 2017
Second quarter 2017
First quarter 2017
Provision
for Loan
Losses
Net
Charge-Offs
ALLL
as a Percent
of Loans
Accruing
Loans 30-89
Days Past Due
as a Percent of
Loans
Non-
Performing
Assets to
Total Sub-
sidiary Assets
$
$
1,246
3,194
4,718
795
2,886
3,327
3,013
1,598
2,542
2,223
762
2,755
2,894
3,628
2,362
1,944
1.58%
1.63%
1.66%
1.66%
1.97%
1.99%
2.05%
2.20%
0.41%
0.31%
0.50%
0.59%
0.57%
0.45%
0.49%
0.67%
0.47%
0.61%
0.71%
0.64%
0.68%
0.67%
0.70%
0.75%
The provision for loan losses was $10.0 million for 2018, a decrease of $871 thousand from 2017 provision for loan loss of $10.8 million.
Net charge-offs during the 2018 were $8.3 million compared to $10.8 million during 2017. 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, 2017 COMPARED TO DECEMBER 31, 2016
Income Summary
The following table summarizes income for the periods indicated:
(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
$ Change
% Change
9 %
1 %
10 %
9 %
(5)%
(9)%
(55)%
27 %
5 %
8 %
Net Interest Income
Interest income for 2017 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 2017 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 securities sold under agreements to repurchase
(“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 net interest 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 growth
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 the prior 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 the 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 the
prior year and was the result of an increase on gain on sale of OREO.
32
Non-interest Expense
The following table summarizes non-interest expense for the periods indicated:
(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 2017 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 prior 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. Other expenses for 2017 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 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.
33
ADDITIONAL MANAGEMENT’S DISCUSSION AND ANALYSIS
Investment Activity
The Company’s investment securities primarily consist of debt securities classified as available-for-sale or held-to-maturity. Non-
marketable equity securities primarily consist of capital stock issued by the FHLB of Des Moines and are carried at cost less impairment.
Debt Securities
On November 30, 2018, the Company early adopted FASB ASU 2017-12, Derivatives and Hedging, and in doing so redesignated state
and local government securities with a carrying value of $270,331,000, from held-to-maturity classification to available-for-sale
classification. The Company considers the available-for-sale classification of these debt securities to be appropriate since it no longer
had the intent to hold them to maturity. Debt securities classified as available-for-sale are carried at estimated fair value and debt securities
classified as held-to-maturity are carried at amortized cost. Unrealized gains or losses, net of tax, on available-for-sale debt securities
are reflected as an adjustment to other comprehensive income (“OCI”). The Company’s debt 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
December 31, 2018
December 31, 2017
December 31, 2016
December 31, 2015
December 31, 2014
Carrying
Amount
Percent
Carrying
Amount
Percent
Carrying
Amount
Percent
Carrying
Amount
Percent
Carrying
Amount
Percent
$
23,649
1% $
31,127
1% $
39,407
1% $
47,451
1% $
44
—%
120,208
4%
19,091
1%
19,570
1%
93,167
3%
21,945
1%
852,250
290,817
30%
10%
629,501
216,762
26%
9%
786,373
471,951
25%
15%
885,019
384,163
27%
12%
997,969
314,854
34%
11%
792,915
28%
779,283
32% 1,007,515
33% 1,198,549
36% 1,049,575
36%
491,824
17%
102,479
4%
100,661
3%
2,411
—%
3,041
—%
2,571,663
90% 1,778,243
73% 2,425,477
78% 2,610,760
79% 2,387,428
82%
297,915
297,915
10%
10%
648,313
648,313
27%
27%
675,674
675,674
22%
22%
702,072
702,072
21%
21%
520,997
520,997
18%
18%
Total debt securities
$2,869,578
100% $2,426,556
100% $3,101,151
100% $3,312,832
100% $2,908,425
100%
The Company’s debt securities are primarily comprised of state and local government securities and mortgage-backed securities. State
and local government securities are largely exempt from federal income tax and the Company’s federal statutory income tax rate is used
in calculating the tax-equivalent yields on the tax-exempt securities. As a result of the Tax Act, the federal statutory income tax rate
decreased from 35 percent in 2017 to 21 percent beginning in 2018. Mortgage-backed securities 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, 2018
December 31, 2017
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
$
$
299,275
643,023
163,041
4,208
31,954
1,050
1,142,551
296,027
640,736
167,779
4,382
30,532
1,050
1,140,506
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
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, 2018
December 31, 2017
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
$
$
657,051
173,973
290,106
14,174
7,247
1,142,551
658,062
177,275
283,939
14,463
6,767
1,140,506
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
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
Ohio
All other states
Total
December 31, 2018
December 31, 2017
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
$
$
179,691
157,978
144,378
109,106
53,698
497,700
1,142,551
179,808
157,706
147,386
111,492
53,615
490,499
1,140,506
184,491
170,786
157,240
92,733
65,207
592,222
1,262,679
189,932
175,217
163,332
97,234
66,840
597,032
1,289,587
35
The following table presents the carrying amount and weighted-average yield of available-for-sale and held-to-maturity debt securities
by contractual maturity at December 31, 2018. Weighted-average yields are based upon the amortized cost of securities and are calculated
using the interest method which takes into consideration premium amortization, discount accretion and mortgage-backed securities’
prepayment provisions. Weighted-average yields on tax-exempt debt securities exclude the federal income tax benefit.
(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 1
Total
Available-for-sale
U.S. government and federal
agency
$
U.S. government sponsored
enterprises
—
—
—% $
2,391
2.86% $ 10,390
2.92% $
10,868
1.48% $
—% 112,589
2.54%
7,619
6.06%
—
—%
State and local governments
6,271
1.69%
44,065
2.48% 296,952
3.64%
504,962
4.30%
—
—
—
—
—% $
23,649
2.26%
—%
—%
—%
120,208
2.57%
852,250
3.96%
290,817
2.88%
Corporate bonds
135,085
2.34% 155,732
3.35%
Residential mortgage-backed
securities
Commercial mortgage-backed
securities
—
—
—%
—%
—
—
—%
—%
—
—
—
—%
—%
—%
—
—
—
—%
—%
792,915
2.32%
792,915
2.32%
—%
491,824
3.13%
491,824
3.13%
Total available-for-sale
141,356
2.31% 314,777
2.94% 314,961
3.61%
515,830
4.24% 1,284,739
2.63% 2,571,663
3.09%
Held-to-maturity
State and local governments
Total held-to-maturity
—
—
—%
—%
6,457
2.41%
75,204
2.89%
216,254
3.63%
6,457
2.41%
75,204
2.89%
216,254
3.63%
—
—
—%
—%
297,915
3.42%
297,915
3.42%
Total debt securities
$141,356
2.31% $321,234
2.93% $390,165
3.47% $ 732,084
4.06% $1,284,739
2.63% $2,869,578
3.12%
______________________________
1 Mortgage-backed securities, which have prepayment provisions, are not assigned to maturity categories due to fluctuations in their prepayment speeds.
Interest income from debt securities consisted of the following:
(Dollars in thousands)
Taxable interest
Tax-exempt interest
Total interest income
December 31,
2018
$
$
46,554
39,945
86,499
Years ended
December 31,
2017
December 31,
2016
38,433
43,535
81,968
40,366
50,026
90,392
For additional information on debt securities, see Notes 1 and 2 to the Consolidated Financial Statements in “Item 8. Financial Statements
and Supplementary Data.”
36
Other-Than-Temporary Impairment on Securities Analysis
Debt securities. In evaluating debt securities for other-than-temporary impairment losses, management assesses whether the Company
intends to sell the security or if it is more-likely-than-not that the Company will be required to sell the debt security. In so doing,
management considers contractual constraints, liquidity, capital, asset/liability management and securities portfolio objectives. For debt
securities with limited or inactive markets, the impact of macroeconomic conditions in the U.S. upon fair value estimates includes higher
risk-adjusted discount rates and changes in credit ratings provided by NRSRO. S&P, Moody's and Fitch have all issued stable outlooks
of U.S. government long-term debt and have similar credit ratings and outlooks with respect to certain long-term debt instruments issued
by Federal National Mortgage Association (“Fannie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”) and other U.S.
government agencies linked to the long-term U.S. debt.
The following table separates debt securities with an unrealized loss position at December 31, 2018 into two categories: securities
purchased prior to 2018 and those purchased during 2018. Of those securities purchased prior to 2018, the fair market value and unrealized
gain or loss at December 31, 2017 is also presented.
(Dollars in thousands)
Temporarily impaired securities
purchased prior to 2018
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 2018
U.S. government sponsored enterprises
State and local governments
Corporate bonds
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, 2018
December 31, 2017
Fair Value
Unrealized
Loss
Unrealized
Loss as a
Percent of
Fair Value
Fair Value
Unrealized
Loss
Unrealized
Loss as a
Percent of
Fair Value
20,183
(1)% $
19,092
(1)%
520,204
(4)%
124,608
(1)%
728,315
(3)%
(2)%
101,348
(3)% $ 1,513,750
$
$
(114)
(104)
(7,593)
(416)
(7,389)
(1,809)
(17,425)
(1)%
(1)%
(1)%
— %
(1)%
(2)%
(1)%
— %
(2)%
(1)%
(1)%
(1)%
(1)%
(1)%
(1)%
(4)%
(1)%
(2)%
(1)%
(3)%
$
14,806
19,013
501,413
122,263
559,231
77,211
$ 1,293,937
$
$
59,931
16,529
111,648
110,376
82,411
380,895
$
14,806
78,944
517,942
233,911
669,607
159,622
$ 1,674,832
$
$
$
$
$
$
(162)
(251)
(21,954)
(686)
(15,556)
(1,830)
(40,439)
(263)
(407)
(927)
(694)
(526)
(2,817)
(162)
(514)
(22,361)
(1,613)
(16,250)
(2,356)
(43,256)
37
With respect to severity, the following table provides the number of debt securities and amount of unrealized loss in the identified ranges
of unrealized loss as a percent of book value at December 31, 2018:
(Dollars in thousands)
Greater than 10.0%
5.1% to 10.0%
0.1% to 5.0%
Total
Number of
Debt
Securities
Unrealized
Loss
31
82
901
1,014
$
$
(7,737)
(8,720)
(26,799)
(43,256)
With respect to the valuation history of the impaired debt securities, the Company identified 642 securities which have been continuously
impaired for the twelve months ending December 31, 2018. The valuation history of such securities in the prior year(s) was also reviewed
to determine the number of months in the prior year(s) in which the identified securities were in an unrealized loss position.
The following table provides details of the 642 debt securities which have been continuously impaired for the twelve months ended
December 31, 2018, 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
14
374
39
165
34
642
$
$
(135) $
(411)
(18,661)
(676)
(15,417)
(1,954)
(37,254)
(25)
(69)
(1,545)
(90)
(616)
(318)
Based on the Company's analysis of its impaired debt securities as of December 31, 2018, the Company determined that none of such
securities had other-than-temporary impairment and the unrealized losses were primarily the result of interest rate changes and market
spreads subsequent to acquisition. A substantial portion of the debt securities with unrealized losses at December 31, 2018 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, 2018 have been determined by the Company to be investment grade.
Equity securities. Non-marketable equity securities and marketable equity securities without readily determinable fair values are evaluated
for impairment whenever events or circumstances suggest the carrying value may not be recoverable. Based on the Company’s evaluation
of its investments in non-marketable equity securities and marketable equity securities without readily determinable fair values as of
December 31, 2018, the Company determined that none of such securities were impaired.
38
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, 2018
December 31, 2017
December 31, 2016
December 31, 2015
December 31, 2014
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
$
887,742
11 % $
720,728
11 % $
674,347
12 % $
688,912
14 % $
611,463
14 %
4,657,561
1,911,171
6,568,732
57 % 3,577,139
23 % 1,579,353
80 % 5,156,492
55 %
25 %
80 %
2,990,141
1,342,250
4,332,391
54 %
24 %
78 %
2,633,953
1,099,564
3,733,517
53 % 2,337,548
22 %
925,900
75 % 3,263,448
544,688
286,387
831,075
7 %
4 %
457,918
242,686
7 %
4 %
434,774
242,951
8 %
4 %
420,901
235,351
9 %
5 %
394,670
218,514
11 %
700,604
11 %
677,725
12 %
656,252
14 %
613,184
8,287,549
102 % 6,577,824
102 %
5,684,463
102 %
5,078,681
103 % 4,488,095
54 %
21 %
75 %
9 %
5 %
14 %
103 %
ALLL
(131,239)
(2)%
(129,568)
(2)%
(129,572)
(2)%
(129,697)
(3)%
(129,753)
(3)%
Loans receivable, net
$ 8,156,310
100 % $ 6,448,256
100 % $ 5,554,891
100 % $ 4,948,984
100 % $ 4,358,342
100 %
The stated maturities or first repricing term (if applicable) for the loan portfolio at December 31, 2018 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
$
$
134,264
325,058
85,872
102,088
136,862
103,598
887,742
1,590,495
2,281,323
247,226
850,955
1,171,322
427,411
6,568,732
277,273
231,694
8,707
110,776
174,875
27,750
831,075
2,002,032
2,838,075
341,805
1,063,819
1,483,059
558,759
8,287,549
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.
39
Consumer Land or Lot Loans
The Company originates land and lot acquisition loans to borrowers who intend to construct their primary residence on the respective
land or lot. These loans are generally for a term of three to five years and are secured by the developed land or lot with the loan-to-value
limited to the lesser of 75 percent of the appraised value or 75 percent of the cost.
Unimproved Land and Land Development Loans
Although the Company has originated very few unimproved land and land development loans since the economic downturn in 2008, the
Company may originate such loans on properties intended for residential and commercial use where improved real estate market conditions
have occurred. These loans are typically made for a term of 18 months to two years and are secured by the developed property with a
loan-to-value not to exceed the lesser of 75 percent of cost or 65 percent of the appraised discounted bulk sale value upon completion of
the improvements. The projects under development are inspected on a regular basis and advances are made on a percentage-of-completion
basis. The loans are made to borrowers with real estate development experience and appropriate financial strength. Generally, the
Company requires that a certain percentage of the development be pre-sold or that construction and term take-out commitments are in
place prior to funding the loan. Loans made on unimproved land are generally made for a term of five to ten years with a loan-to-value
not to exceed the lesser of 50 percent of appraised value or 50 percent of cost.
Residential Builder Guidance Lines
The Company provides Builder Guidance Lines that are comprised of pre-sold and spec-home construction and lot acquisition loans.
The spec-home construction and lot acquisition loans are limited to a specific number and maximum amount. Generally, the individual
loans will not exceed a one year maturity. The homes under construction are inspected on a regular basis and advances made on a
percentage-of-completion basis.
Construction Loans
During the construction loan term, all construction loan collateral properties are inspected at least monthly, or more frequently as needed,
until completion. Draws on construction loans are predicated upon the results of the inspection and advanced based upon a percentage-
of-completion basis versus original budget percentages. When construction loans become non-performing and the associated project is
not complete, the Company on a case-by-case basis makes the decision to advance additional funds or to initiate collection/foreclosure
proceedings. Such decision includes obtaining “as-is” and “at completion” appraisals for consideration of potential increases or decreases
in the collateral’s value. The Company also considers the increased costs of monitoring progress to completion, and the related collection/
holding period costs should collateral ownership be transferred to the Company.
Commercial Real Estate Loans
Loans are made to purchase, construct and finance commercial real estate properties. These loans are generally made to borrowers who
will own and occupy the property, but may include loans to finance investment or income properties. Commercial real estate loans
generally have a loan-to-value up to the lesser of 75 percent of the appraised value or 75 percent of the cost and require a minimum 1.2
times debt service coverage margin.
Agricultural Lending
Agricultural lending is conducted on a conservative basis and consists of operating credits, term real estate loans for the acquisition or
refinance of agricultural real estate or equipment, and term livestock loans for the acquisition or refinance of livestock. Loan-to-value
on equipment, livestock and agricultural real estate is generally limited to 75 percent.
Home Equity Loans
The Company’s home equity loans of $545 million and $458 million as of December 31, 2018 and 2017, 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, 2018, the home
equity loan portfolio consisted of 92 percent variable interest rate and 8 percent fixed interest rate loans. Approximately 56 percent of
the home equity loans were in a first lien status with the remaining 44 percent in junior lien status. Approximately 6 percent of the home
equity loans were closed-end amortizing loans and 94 percent were open-end, revolving home equity lines of credit. 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.
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.
40
Consumer Lending
The majority of consumer loans are secured by real estate, automobiles, or other assets. The Company intends to continue making such
loans because of their short-term nature, generally between three months and five years. Moreover, interest rates on consumer loans are
generally higher than on residential mortgage loans. The Company also originates second mortgage and home equity loans, especially
to existing customers in instances where the first and second mortgage loans are less than 80 percent of the current appraised value of
the property.
States and Political Subdivisions Lending
The Company lends directly to state and local political subdivisions. The loans are typically secured by the full faith and credit of the
municipality or a specific revenue stream such as water or sewer fees. In general, state and local political subdivision loans carry a low
risk of default and offer other complimentary business opportunities such as deposits and cash management. The loans are generally
long-term in nature and interest on many of these loans is tax-exempt for federal income tax purposes.
Credit Risk Management
The Company is committed to a conservative management of the credit risk within the loan portfolio, including the early recognition of
problem loans. The Company’s credit risk management includes stringent credit policies, individual loan approval limits, limits on
concentrations of credit, and committee approval of larger loan requests. Management practices also include regular internal and external
credit examinations, identification and review of individual loans and leases experiencing deterioration of credit quality, procedures for
the collection of non-performing assets, quarterly monitoring of the loan portfolio, semi-annual review of loans by industry, and periodic
stress testing of the loans secured by real estate. Federal and state regulatory safety and soundness examinations are conducted annually.
The Company’s loan policy and credit administration practices establish standards and limits for all extensions of credit that are secured
by interests in or liens on real estate, or made for the purpose of financing the construction of real property or other improvements.
Ongoing monitoring and review of the loan portfolio is based on current information, including: the borrowers’ and guarantors’
creditworthiness, value of the real estate and other collateral, the project’s performance against projections, and monthly inspections by
Company employees or external parties until the real estate project is complete.
Monitoring of the junior lien and home equity lines of credit portfolios includes evaluating payment delinquency, collateral values,
bankruptcy notices and foreclosure filings. Additionally, the Company places junior lien mortgages and junior lien home equity lines of
credit on non-accrual status when there is evidence that the associated senior lien is 90 days past due or is in the process of foreclosure,
regardless of the junior lien delinquency status.
Loan Approval Limits
Individual loan approval limits have been established for each lender based on the loan types and experience of the individual. There
are four additional loan approval levels: 1) the Bank divisions’ Officer Loan Committees, consisting of senior lenders and members of
senior management; 2) the Bank divisions’ advisory boards; 3) the Bank’s Executive Loan Committee, consisting of the Bank divisions’
senior loan officers and the Company’s Chief Credit Administrator; and 4) Bank’s Board of Directors. Under banking laws, loans to one
borrower and related entities are limited to a prescribed percentage of the unimpaired capital and surplus of the Bank.
Interest Reserves
Interest reserves are used to periodically advance loan funds to pay interest charges on the outstanding balance of the related loan. As
with any extension of credit, the decision to establish a loan-funded interest reserve upon origination of construction loans, including
residential construction and land, lot and other construction loans, is based on prudent underwriting, including the feasibility of the project,
expected cash flow, creditworthiness of the borrower and guarantors, and the protection provided by the real estate and other underlying
collateral. Interest reserves provide an effective means for addressing the cash flow characteristics of construction loans. In response to
the downturn in the housing market and potential impact upon construction lending, the Company discourages the creation or continued
use of interest reserves.
Interest reserves are advanced provided the related construction loan is performing as expected. Loans with interest reserves may be
extended, renewed or restructured only when the related loan continues to perform as expected and meets the prudent underwriting
standards identified above. Such renewals, extension or restructuring are not permitted in order to keep the related loan current.
In monitoring the performance and credit quality of a construction loan, the Company assesses the adequacy of any remaining interest
reserve, and whether the use of an interest reserve remains appropriate in the presence of emerging weakness and associated risks in the
construction loan.
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.
41
The Company had $179 million and $36.4 million of loans with remaining interest reserves of $7.1 million and $921 thousand as of
December 31, 2018 and 2017, respectively. During 2018, the Company extended, renewed or restructured 9 loans with interest reserves,
such loans having an aggregate outstanding principal balance of $11.6 million as of December 31, 2018. Such actions were based on
prudent underwriting standards and not to keep the loans current. The Company did not extend, renew or restructure any loans with
interest reserves during 2017. As of December 31, 2018, the Company had no construction loans with interest reserves that are currently
non-performing or which are potential problem loans.
Loan Purchases and Sales
Fixed rate, long-term mortgage loans are generally sold in the secondary market. The Company is active in the secondary market,
primarily through the origination of conventional, Rural Development, Federal Housing Administration and Department of Veterans
Affairs residential mortgages. The sale of loans in the secondary mortgage market reduces the Company’s risk of holding long-term,
fixed rate loans during periods of rising interest rates. In connection with conventional loan sales, the Company typically sells the majority
of mortgage loans originated with servicing released. The Company has also been very active in generating commercial Small Business
Administration loans, and other commercial loans, with a portion of those loans sold to investors. The Company has not originated any
type of subprime mortgages, either for the loan portfolio or for sale to investors. In addition, the Company has not purchased debt
securities collateralized with subprime mortgages. The Company does not actively purchase loans from other financial institutions, and
substantially all of the Company’s loans receivable are with customers in the Company’s geographic market areas.
Loan Origination and Other Fees
In addition to interest earned on loans, the Company receives fees for originating loans. Loan fees generally are a percentage of the
principal amount of the loan and are charged to the borrower, and are normally deducted from the proceeds of the loan. Loan origination
fees are generally 1.0 to 1.5 percent on residential mortgages and 0.5 to 1.5 percent on commercial loans. Consumer loans generally
require a fixed fee amount. The Company also receives other fees and charges relating to existing loans, which include charges and fees
collected in connection with loan modifications.
Appraisal and Evaluation Process
The Company’s loan policy and credit administration practices have adopted and implemented the applicable legal and regulatory
requirements, which establishes criteria for obtaining appraisals or evaluations (new or updated), including transactions that are otherwise
exempt from the appraisal requirements.
Each of the Bank divisions monitor conditions, including supply and demand factors, in the real estate markets served so they can react
quickly to changing market conditions to mitigate potential losses from specific credit exposures within the loan portfolio. Evidence of
the following real estate market conditions and trends is obtained from lending personnel and third party sources:
•
•
•
•
•
•
demographic indicators, including employment and population trends;
foreclosures, vacancy, construction and absorption rates;
property sales prices, rental rates, and lease terms;
current tax assessments;
economic indicators, including trends within the lending areas; and
valuation trends, including discount and capitalization rates.
Third party information sources include federal, state, and local governments and agencies thereof, private sector economic data vendors,
real estate brokers, licensed agents, sales, rental and foreclosure data tracking services.
The time between ordering an appraisal or evaluation and receipt from third party vendors is typically two to six weeks for residential
property depending on geographic market and four to six weeks for non-residential property. For real estate properties that are of highly
specialized or limited use, significantly complex or large, additional time beyond the typical times may be required for new appraisals
or evaluations (new or updated).
42
As part of the Company’s credit administration and portfolio monitoring practices, the Company’s regular internal and external credit
examinations review a significant number of individual loan files. Appraisals and evaluations (new or updated) are reviewed to determine
whether the timeliness, methods, assumptions, and findings are reasonable and in compliance with the Company’s loan policy and credit
administration practices. Such reviews include the adequacy of the steps taken by the Company to ensure that the individuals who perform
appraisals and evaluations (new or updated) are appropriately qualified and are not subject to conflicts of interest. If there are any
deficiencies noted in the reviews, they are reported to Bank management and prompt corrective action is taken.
Non-performing Assets
The following table summarizes information regarding non-performing assets at the dates indicated:
(Dollars in thousands)
December 31,
2018
December 31,
2017
December 31,
2016
December 31,
2015
December 31,
2014
At or for the Years ended
Other real estate owned
$
7,480
14,269
20,954
26,815
27,804
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
788
492
738
2,018
8,021
35,883
3,348
47,252
Total non-performing assets
$
56,750
2,366
3,582
129
6,077
4,924
35,629
4,280
44,833
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
89,900
Non-performing assets as a percentage of
subsidiary assets
ALLL as a percentage of non-performing loans
0.47%
266%
0.68%
255%
0.76%
257%
0.88%
244%
1.08%
209%
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
$
$
$
$
$
33,567
25,833
10,660
4,811
2,340
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
______________________________
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.
The Company benefited this year from the Bank divisions’ continued focus on reducing non-performing assets and resolving specific
troubled credits. Non-performing assets at December 31, 2018 were $56.8 million, a decrease of $8.4 million, or 13 percent, from the
prior year end. Non-performing assets as a percentage of subsidiary assets at December 31, 2018 was 0.47 percent, a decrease of 21
basis points from the prior year end. Early stage delinquencies (accruing loans 30-89 days past due) of $33.6 million at December 31,
2018 decreased $4.1 million from prior year end. Early stage delinquencies as a percentage of loans at December 31, 2018 was 0.41
percent which was a decrease of 16 basis points from prior year end.
43
Most of the Company’s non-performing assets are secured by real estate, and based on the most current information available to
management, including updated appraisals or evaluations (new or updated), the Company believes the value of the underlying real estate
collateral is adequate to minimize significant charge-offs or losses to the Company. The Company evaluates the level of its non-performing
loans, the values of the underlying real estate and other collateral, and related trends in internal and external environmental factors and
net charge-offs in determining the adequacy of the ALLL. Through pro-active credit administration, the Company works closely with
its borrowers to seek favorable resolution to the extent possible, thereby attempting to minimize net charge-offs or losses to the Company.
With very limited exceptions, the Company does not disburse additional funds on non-performing loans. Instead, the Company proceeds
to collection and foreclosure actions in order to reduce the Company’s exposure to loss on such loans.
For additional information on accounting policies relating to non-performing assets and impaired loans, see Note 1 to the Consolidated
Financial Statements in “Item 8. Financial Statements and Supplementary Data.”
Impaired Loans
Loans are designated impaired when, based upon current information and events, it is probable that the Company will be unable to collect
the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement and therefore, the
Company has serious doubts as to the ability of such borrowers to fulfill the contractual obligation. Impaired loans include non-performing
loans (i.e., non-accrual loans and accruing loans ninety days or more past due) and accruing loans under ninety days past due where it is
probable payments will not be received according to the loan agreement (e.g., troubled debt restructuring). Impaired loans were $109
million and $120 million as of December 31, 2018 and December 31, 2017, respectively. The ALLL includes specific valuation allowances
of $3.2 million and $5.2 million of impaired loans as of December 31, 2018 and December 31, 2017, 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 $36.5 million and $62.2 million as of December 31, 2018 and December 31, 2017, 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 2018 was $6.8 million. The fair
value of the loan collateral acquired in foreclosure during 2018 was $4.9 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,
2018
December 31,
2017
Years ended
December 31,
2016
December 31,
2015
December 31,
2014
$
$
14,269
187
4,924
21
(2,727)
(9,194)
7,480
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
44
Allowance for Loan and Lease Losses
Determining the adequacy of the ALLL involves a high degree of judgment and is inevitably imprecise as the risk of loss is difficult to
quantify. The ALLL methodology is designed to reasonably estimate the probable loan and lease losses within the Company’s loan
portfolio. Accordingly, the ALLL is maintained within a range of estimated losses. The determination of the ALLL, including the provision
for loan losses and net charge-offs, is a critical accounting estimate that involves management’s judgments about all known relevant
internal and external environmental factors that affect loan losses, including the credit risk inherent in the loan portfolio, economic
conditions nationally and in the local markets in which the Company operates, trends and changes in collateral values, delinquencies,
non-performing assets, net charge-offs and credit-related policies and personnel. Although the Company continues to actively monitor
economic trends, soft economic conditions combined with potential declines in the values of real estate that collateralize most of the
Company’s loan portfolio may adversely affect the credit risk and potential for loss to the Company.
The ALLL evaluation is well documented and approved by the Company’s Board. In addition, the policy and procedures for determining
the balance of the ALLL are reviewed annually by the Company’s Board, the internal audit department, independent credit reviewers and
state and federal bank regulatory agencies.
At the end of each quarter, the Company analyzes its loan portfolio and maintains an ALLL at a level that is appropriate and determined
in accordance with GAAP. The allowance consists of a specific valuation allowance component and a general valuation allowance
component. The specific valuation allowance component relates to loans that are determined to be impaired. A specific valuation allowance
is established when the fair value of a collateral-dependent loan or the present value of the loan’s expected future cash flows (discounted
at the loan’s effective interest rate) is lower than the carrying value of the impaired loan. The general valuation allowance component
relates to probable credit losses inherent in the balance of the loan portfolio based on historical loss experience, adjusted for changes in
trends and conditions of qualitative or environmental factors.
The Bank divisions’ credit administration reviews their respective loan portfolios to determine which loans are impaired and estimates
the specific valuation allowance. The impaired loans and related specific valuation allowance are then provided to the Company’s credit
administration for further review and approval. The Company’s credit administration also determines the estimated general valuation
allowance and reviews and approves the overall ALLL. The credit administration of the Company exercises significant judgment when
evaluating the effect of applicable qualitative or environmental factors on the Company’s historical loss experience for loans not identified
as impaired. Quantification of the impact upon the Company’s ALLL is inherently subjective as data for any factor may not be directly
applicable, consistently relevant, or reasonably available for management to determine the precise impact of a factor on the collectability
of the Company’s loans collectively evaluated for impairment as of each evaluation date. The Company’s credit administration documents
its conclusions and rationale for changes that occur in each applicable factor’s weight (i.e., measurement) and ensures that such changes
are directionally consistent based on the underlying current trends and conditions for the factor. To have directional consistency, the
provision for loan losses and credit quality should generally move in the same direction.
The Company’s model includes 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.”
45
The following table summarizes the allocation of the ALLL as of the dates indicated:
December 31, 2018
Percent
of Loans
in
Category
ALLL
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
$ 10,631
11% $ 10,798
11% $ 12,436
12% $ 14,427
13% $ 14,680
72,448
56%
68,515
54%
65,773
52%
67,877
52%
67,799
38,160
5,811
23%
7%
39,303
6,204
24%
7%
37,823
7,572
24%
8%
32,525
8,998
22%
8%
30,891
9,963
13%
52%
21%
9%
4,189
$131,239
3%
4,748
100% $129,568
4%
5,968
100% $129,572
4%
5,870
100% $129,697
5%
6,420
100% $129,753
5%
100%
(Dollars in
thousands)
Residential
real estate
Commercial
real estate
Other
commercial
Home equity
Other
consumer
Total
The following table summarizes the ALLL experience for the periods indicated:
(Dollars in thousands)
December 31,
2018
December 31,
2017
At or for the Years ended
December 31,
2016
December 31,
2015
December 31,
2014
Balance at beginning of period
Provision for loan losses
$
129,568
9,953
129,572
10,824
129,697
2,333
129,753
2,284
130,351
1,912
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
(728)
(8,514)
(8,565)
(17,807)
87
5,045
4,393
9,525
(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
Charge-offs, net of recoveries
(8,282)
(10,828)
(2,458)
(2,340)
(2,510)
Balance at end of period
$
131,239
129,568
129,572
129,697
129,753
ALLL as a percentage of total loans
Net charge-offs as a percentage of average
loans
1.58%
0.11%
1.97%
0.17%
2.28%
0.05%
2.55%
0.05%
2.89%
0.06%
The ALLL as a percent of total loans outstanding at December 31, 2018 was 1.58 percent, which was a decrease of 39 basis points from
a year ago. The decrease from the prior year was primarily driven by stabilizing credit quality. The Company’s ALLL of $131 million
is considered adequate to absorb losses from any class of its loan portfolio. For the periods ended December 31, 2018 and 2017, 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.
46
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 2018, the provision for loan losses exceeded charge-offs, net of recoveries, by $1.7 million. During the same period in 2017,
charge-offs, net of recoveries, exceeded the provision for loan losses by $4 thousand.
The Company provides commercial services to individuals, small to medium-sized businesses, community organizations and public
entities from 167 locations, including 149 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.
Overall, the economic environment and housing markets throughout the Company’s footprint continue to show positive signs of
improvement. Home prices continue to increase in all of the states within the Company’s footprint. Four of the Company’s states are
ranked in the top 10 nationally for house price appreciation. Home ownership in the United States is at 64 percent as of the fourth quarter
of 2018 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 65.2 percent. Quarterly personal income growth remains in positive territory for each of the Company’s states, while all of the
states except Wyoming exceed the national average. The Federal Reserve Bank of Philadelphia’s composite state coincident indices
projects steady growth throughout the Company’s footprint. The third quarter of 2018 was the sixth consecutive quarter the United States
economy grew at or above 2.0 percent. All of the states in the Company’s footprint have unemployment rates 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. In general, the Company sees positive signs in the various economic indices; however, given the significant
recession experienced during the late 2000s and the current lack of housing supply within the Company’s footprint, the Company is
cautiously optimistic about the housing market. The Company will continue to actively monitor the economy’s impact on its lending
portfolio.
In evaluating the need for a specific or general valuation allowance for impaired and unimpaired loans, respectively, within the Company’s
construction loan portfolio (i.e., regulatory classification), including residential construction and land, lot and other construction loans,
the credit risk related to such loans was considered in the ongoing monitoring of such loans, including assessments based on current
information, including appraisals or evaluations (new or updated) of the underlying collateral, expected cash flows and the timing thereof,
as well as the estimated cost to sell when such costs are expected to reduce the cash flows available to repay or otherwise satisfy the
construction loan. Construction loans were 14 percent and 13 percent of the Company’s total loan portfolio and accounted for 21 percent
and 24 percent of the Company’s non-accrual loans at December 31, 2018 and December 31, 2017, 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,
2018
December 31,
2017
$
$
3,223
128,016
131,239
5,223
124,345
129,568
During 2018, the ALLL increased by $1.7 million, the net result of a $2.0 million decrease in the specific valuation allowance and a $3.7
million increase in the general valuation allowance. Although loans individually evaluated for impairment with a specific impairment
increased from the prior year, the specific valuation allowance decreased primarily as a result of the improvement of a single loan. The
increase in the general valuation allowance since the prior year end was a result of an increase of $737 million in loans collectively
evaluated for impairment, excluding the current year acquisitions, and was driven primarily from growth in the loan portfolio.
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:
(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
December 31,
2018
December 31,
2017
$ Change
% Change
$
$
126,595
121,938
248,533
137,814
127,775
83,579
17,061
34,096
520,005
920,330
$
109,555
72,160
181,715
82,398
102,289
65,753
14,592
23,770
391,835
680,637
1,343,563
1,605,960
2,949,523
1,132,833
1,186,066
2,318,899
17,040
49,778
66,818
55,416
25,486
17,826
2,469
10,326
128,170
239,693
210,730
419,894
630,624
Commercial and industrial
907,340
751,221
156,119
Agriculture
1st lien
Junior lien
Total 1-4 family
Multifamily residential
Home equity lines of credit
Other consumer
Total consumer
646,822
450,616
196,206
1,108,227
56,689
1,164,916
877,335
51,155
928,490
230,892
5,534
236,426
247,457
189,342
58,115
539,938
165,865
705,803
440,105
148,247
588,352
99,833
17,618
117,451
States and political subdivisions
404,671
383,252
21,419
Other
125,310
144,133
(18,823)
Total loans receivable, including loans held for sale
8,320,705
6,616,657
1,704,048
Less loans held for sale 1
(33,156)
(38,833)
5,677
Total loans receivable
$
8,287,549
$
6,577,824
$
1,709,725
______________________________
1 Loans held for sale are primarily 1st lien 1-4 family loans.
48
16 %
69 %
37 %
67 %
25 %
27 %
17 %
43 %
33 %
35 %
19 %
35 %
27 %
21 %
44 %
26 %
11 %
25 %
31 %
23 %
12 %
20 %
6 %
(13)%
26 %
(15)%
26 %
The following table summarizes the Company’s non-performing assets by regulatory classification:
(Dollars in thousands)
Non-performing Assets,
by Loan Type
December 31,
2018
December 31,
2017
Non-
Accruing
Loans
December 31,
2018
Accruing
Loans 90
Days
or More Past
Due
December 31,
2018
Other
Real Estate
Owned
December 31,
2018
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
Home equity lines of credit
Other consumer
Total consumer
States and political subdivisions
Other
Total
—
463
463
2,166
1,428
9,338
68
1,046
120
14,166
5,940
10,567
16,507
3,914
7,040
10,290
565
10,855
2,770
456
3,226
—
579
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
—
—
463
463
786
675
7,806
43
—
9
9,319
4,706
10,294
15,000
3,462
6,682
8,992
531
9,523
2,188
338
2,526
—
277
—
—
—
—
—
—
—
—
—
—
—
—
—
210
208
788
34
822
394
82
476
—
302
—
—
—
1,380
753
1,532
25
1,046
111
4,847
1,234
273
1,507
242
150
510
—
510
188
36
224
—
—
$
56,750
65,179
47,252
2,018
7,480
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
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
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,
2018
December 31,
2017
$ Change
% Change
$
1,661
887
2,548
228
200
579
122
203
4,170
5,502
2,981
1,245
4,226
3,374
6,455
5,384
118
5,502
3,562
1,650
5,212
229
519
$
$
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
1,361
785
2,146
228
(153)
(83)
115
95
4,170
4,372
(1,745)
(1,154)
(2,899)
(3,098)
3,250
(5,481)
(4,230)
(9,711)
1,600
(459)
1,141
229
450
$
33,567
$
37,687
$
(4,120)
454 %
770 %
534 %
n/m
(43)%
(13)%
1,643 %
88 %
n/m
387 %
(37)%
(48)%
(41)%
(48)%
101 %
(50)%
(97)%
(64)%
82 %
(22)%
28 %
n/m
652 %
(11)%
50
The following table summarizes the Company’s charge-offs and recoveries by regulatory classification:
(Dollars in thousands)
Net Charge-Offs (Recoveries),
Years ended, By Loan Type
December 31,
2018
December 31,
2017
Charge-Offs
December 31,
2018
Recoveries
December 31,
2018
(352)
(116)
(146)
(445)
33
1
(19)
(692)
1,320
853
2,173
2,449
16
577
(371)
206
(649)
(97)
261
164
4,967
8,282
(23)
(143)
222
(304)
(107)
(6)
389
51
3,908
368
4,276
883
9
(23)
719
696
(230)
272
505
777
17
—
307
—
33
7
—
347
1,545
929
2,474
3,276
50
836
1,017
1,853
—
147
597
744
4,389
10,828
9,046
17,807
369
116
453
445
—
6
19
1,039
225
76
301
827
34
259
1,388
1,647
649
244
336
580
4,079
9,525
Pre-sold and spec 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
$
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 debt 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. During 2017, the Company utilized a third party
vendor to transfer deposits off-balance sheet. All of such deposits were brought back onto the Company’s balance sheet during 2018.
The Company’s deposits are summarized below:
(Dollars in thousands)
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
December 31, 2018
December 31, 2017
December 31, 2016
December 31, 2015
December 31, 2014
Non-interest bearing
deposits
$3,001,178
32% $2,311,902
31% $2,041,852
28% $1,918,310
28% $1,632,403
26%
NOW and DDA accounts
2,391,307
25% 1,695,246
22% 1,588,550
22% 1,516,026
22% 1,328,130
Savings accounts
1,346,790
14% 1,082,604
14%
996,061
13%
838,274
12%
693,714
Money market deposit
accounts
Certificate accounts
Wholesale deposits
Total interest bearing
deposits
1,684,284
18% 1,512,693
20% 1,464,415
20% 1,382,028
20% 1,274,525
901,484
168,724
9%
2%
817,259
160,043
11%
2%
948,714
332,687
13% 1,060,650
15% 1,167,228
4%
229,720
3%
249,212
6,492,589
68% 5,267,845
69% 5,330,427
72% 5,026,698
72% 4,712,809
74%
21%
11%
20%
18%
4%
Total deposits
$9,493,767
100% $7,579,747
100% $7,372,279
100% $6,945,008
100% $6,345,212
100%
The following table summarizes the amounts outstanding at December 31, 2018 for deposits of $100,000 and greater, according to the
time remaining to maturity. Included in demand deposits are brokered deposits of $169 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
$
$
90,798
141,725
124,071
151,718
508,312
5,281,102
—
—
—
5,281,102
Total
5,371,900
141,725
124,071
151,718
5,789,414
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. The Bank enters into repurchase agreements with local
municipalities, and certain customers, and has adopted procedures designed to ensure proper transfer of title and safekeeping of the
underlying securities. In addition to retail repurchase agreements, the Company periodically enters into wholesale repurchase agreements
as additional funding sources. The Company has not entered into reverse repurchase agreements.
The Bank is a member of the FHLB of Des Moines, which is one of eleven banks that comprise the FHLB system. The Bank is required
to maintain a certain level of activity-based stock in order to borrow or to engage in other transactions with the FHLB of Des Moines.
Additionally, the Bank is subject to a membership capital stock requirement that is based upon an annual calibration tied to the total assets
of the Bank. The borrowings are collateralized by eligible categories of loans and debt securities (principally, securities which are
obligations of, or guaranteed by, the U.S. government and its agencies), provided certain standards related to credit-worthiness have been
met. Advances are made pursuant to several different credit programs, each of which has its own interest rates and range of maturities.
The Bank’s maximum amount of FHLB advances is limited to the lesser of a fixed percentage of the Bank’s total assets or the discounted
value of eligible collateral. FHLB advances fluctuate to meet seasonal and other withdrawals of deposits and to expand lending or
investment opportunities of the Company.
Additionally, the Company has other sources of secured and unsecured borrowing lines from various sources that may be used from time
to time.
For additional information concerning the Company’s borrowings, see Note 8 to the Consolidated Financial Statements in “Item 8.
Financial Statements and Supplementary Data.”
Short-term borrowings
A critical component of the Company’s liquidity and capital resources is access to short-term borrowings to fund its operations. Short-
term borrowings are accompanied by increased risks managed by the Bank’s Asset Liability Committee (“ALCO”) such as rate increases
or unfavorable change in terms which would make it more costly to obtain future short-term borrowings. The Company’s short-term
borrowing sources include FHLB advances, federal funds purchased and retail and wholesale repurchase agreements. The Company
also has access to the short-term discount window borrowing programs (i.e., primary credit) of the Federal Reserve Bank (“FRB”). FHLB
advances and certain other short-term borrowings may be renewed as long-term borrowings to decrease certain risks such as liquidity or
interest rate risk; however, the reduction in risks are weighed against the increased cost of funds and other risks.
The following table provides information relating to significant short-term borrowings, which consists of borrowings that mature within
one year of period end:
(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,
2018
At or for the Years ended
December 31,
2017
December 31,
2016
$
$
$
396,151
0.87%
408,754
383,791
0.59%
362,573
0.53%
497,187
413,873
0.45%
473,650
0.34%
473,650
384,066
0.31%
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. Subordinated debentures
were issued in conjunction with the trust preferred securities and the terms of the subordinated debentures and trust preferred securities
are the same. For regulatory capital purposes, the trust preferred securities are included in Tier 1 capital up to a certain limit. The
Company also assumed subordinated debt that qualifies as Tier 2 capital from the FSB acquisition. The subordinated debentures
outstanding as of December 31, 2018 were $134 million, including fair value adjustments from acquisitions. For additional information
regarding the subordinated debentures, see Note 9 to the Consolidated Financial Statements in “Item 8. Financial Statements and
Supplementary Data.”
Contractual Obligations and Off-Balance Sheet Arrangements
In the normal course of business, there may be various outstanding commitments to obtain funding and to extend credit, such as letters
of credit and un-advanced loan commitments, which are not reflected in the accompanying condensed consolidated financial statements.
The Company does not anticipate any material losses as a result of these transactions.
Off-balance sheet arrangements also include any obligation related to a variable interest held in an unconsolidated entity. The Company
does not anticipate any material losses as a result of these transactions. For additional information regarding the Company’s interests in
unconsolidated VIEs, see Note 6 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.”
The following table represents the Company’s contractual obligations as of December 31, 2018:
(Dollars in thousands)
Total
$
9,493,767
396,151
440,175
14,527
134,051
191
Deposits
Repurchase agreements
FHLB advances
Other borrowed funds
Subordinated debentures
Capital lease obligations
Operating lease
obligations
Total
Indeter-
minate
Maturity 1
8,592,283
—
—
—
—
—
Payments Due by Period
2019
2020
2021
2022
2023
Thereafter
634,197
396,151
285,847
—
—
92
147,320
—
1,572
—
—
92
2,682
151,666
71,500
—
150,370
—
—
7
2,145
224,022
28,138
—
918
178
—
—
1,427
30,661
20,310
—
204
1,048
—
—
943
22,505
19
—
1,264
13,301
134,051
—
5,352
153,987
15,741
$ 10,494,603
—
8,592,283
3,192
1,319,479
______________________________
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., debt securities), both unencumbered and pledged, as well as borrowing capacity, both secured and unsecured,
including off-balance sheet funding sources. The Company evaluates its potential funding needs across alternative scenarios and maintains
contingency funding plans consistent with the Company’s access to diversified sources of contingent funding.
The following table identifies certain liquidity sources and capacity available to the Company as of the dates indicated:
(Dollars in thousands)
FHLB advances
Borrowing capacity
Amount utilized
Amount available
FRB discount window
Borrowing capacity
Amount utilized
Amount available
Unsecured lines of credit available
Unencumbered debt 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 debt securities
December 31,
2018
December 31,
2017
2,103,860
(444,749)
1,659,111
1,807,787
(360,185)
1,447,602
875,936
—
875,936
230,000
23,649
108,952
618,613
290,817
220,653
273,439
1,536,123
1,054,103
—
1,054,103
230,000
29,097
3,358
769,786
5,982
115,527
54,998
978,748
$
$
$
$
$
$
$
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 84,521,692 have been issued as of December 31, 2018. 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, 2018. 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 2018 is
1.875%. As of December 31, 2018, management believes the Company and Bank meet all capital adequacy requirements to which they
are subject and there are no conditions or events subsequent to this date that management believes have changed the Company’s or Bank’s
risk-based capital category.
The following table illustrates the Bank’s regulatory capital ratios and the Federal Reserve’s current capital adequacy guidelines as of
December 31, 2018. The Federal Reserve’s fully phased-in capital 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)
14.35%
8.00%
10.00%
13.10%
6.00%
8.00%
13.10%
4.50%
6.50%
11.08%
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, 6.9 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, 2018 and 2017 was $40.3 million and $64.6 million, respectively. The Company’s
effective income tax rate for the years ended December 31, 2018 and 2017 was 18.2 percent and 35.7 percent, respectively. The current
year effective income tax rate was significantly lower than the prior year and was attributable to the decrease in the federal marginal
corporate income tax rate and the prior year $19.7 million revaluation of the net deferred tax asset driven by the Tax Act. The prior year
federal statutory income tax rate was 35 percent and was decreased to 21 percent beginning January 1, 2018. Furthermore, the current
year and prior year’s effective income tax rates are lower due to income from tax-exempt debt securities, municipal loans and leases and
benefits from federal income tax credits. Income from tax-exempt debt securities, loans and leases was $56.1 million and $56.0 million
for the years ended December 31, 2018 and 2017, respectively. Benefits from federal income tax credits were $9.2 million and $5.6
million for the years ended December 31, 2018 and 2017, respectively.
The Company has equity investments in Certified Development Entities (“CDE”) which have received allocations of New Markets Tax
Credits (“NMTC”). Administered by the Community Development Financial Institutions Fund (“CDFI Fund”) of the U.S. Department
of the Treasury, the NMTC program is aimed at stimulating economic and community development and job creation in low-income
communities. The federal income tax credits received are claimed over a seven-year credit allowance period. The Company also has
equity investments in Low-Income Housing Tax Credits (“LIHTC”) which are indirect federal subsidies used to finance the development
of affordable rental housing for low-income households. The federal income tax credits are claimed over a ten-year credit allowance
period. The Company has investments of $20.5 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
debt securities are subject to federal and state income tax.
Following is a list of expected federal income tax credits to be received in the years indicated.
(Dollars in thousands)
2019
2020
2021
2022
2023
Thereafter
New
Markets
Tax Credits
Low-Income
Housing
Tax Credits
Debt
Securities
Tax Credits
Total
$
$
4,153
4,475
4,712
3,944
3,348
1,416
22,048
6,422
6,418
5,601
5,572
5,572
21,907
51,492
850
813
759
695
663
1,565
5,345
11,425
11,706
11,072
10,211
9,583
24,888
78,885
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, 2018
Years ended
December 31, 2017
December 31, 2016
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
$
868,467
6,134,018
774,813
$ 40,041
308,263
38,292
4.61% $ 744,523
5.03% 4,792,720
684,129
4.94%
$ 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
Total loans 2
Tax-exempt investment
securities 3
Taxable investment securities 4
Total earning assets
Goodwill and intangibles
Non-earning assets
Total assets
Liabilities
7,777,298
386,596
4.97% 6,221,372
299,442
4.81% 5,404,229
257,959
1,083,999
50,239
4.63% 1,160,182
66,077
5.70% 1,325,810
47,771
484,606
1,802,704
10,664,001
311,321
453,394
$11,428,716
39,727
405,246
2.65% 1,722,264
4.54% 9,103,818
180,014
394,363
$9,678,195
2.31% 1,874,240
4.45% 8,604,279
155,981
392,353
$9,152,613
75,907
41,775
375,641
Non-interest bearing deposits
NOW and DDA accounts
Savings accounts
$
$ 2,829,916
2,242,935
1,298,985
Money market deposit accounts
Certificate accounts
Wholesale deposits 5
FHLB advances
1,704,269
919,356
156,022
231,158
—
3,862
862
3,377
6,497
3,761
8,880
$
—% $2,175,750
0.17% 1,656,865
0.07% 1,055,688
0.20% 1,547,659
888,887
0.71%
2.41%
3.79%
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
4.50%
4.84%
4.69%
4.77%
5.73%
2.23%
4.37%
—%
0.07%
0.05%
0.15%
0.59%
2.59%
2.07%
526,623
8,292
1.57%
547,307
6,323
1.16%
515,254
5,008
0.97%
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 (loss) income
Total stockholders’ equity
9,909,264
71,901
9,981,165
836
1,014,559
452,996
(20,840)
1,447,551
Total liabilities and
stockholders’ equity
$11,428,716
Net interest income
(tax-equivalent)
Net interest spread
(tax-equivalent)
Net interest margin
(tax-equivalent)
35,531
0.36% 8,406,488
83,991
8,490,479
29,864
0.36% 7,933,097
96,392
8,029,489
29,631
0.37%
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
$ 449,075
$ 375,382
$ 346,010
4.18%
4.21%
4.09%
4.12%
4.00%
4.02%
______________________________
1 Includes tax effect of $4.1 million, $6.4 million and $4.2 million on tax-exempt municipal loan and lease income for the years ended December 31,
2018, 2017 and 2016, respectively.
2 Total loans are gross of the allowance for loan and lease losses, net of unearned income and include loans held for sale. Non-accrual loans were included
in the average volume for the entire period.
3 Includes tax effect of $10.3 million, $22.5 million and $25.9 million on tax-exempt debt securities income for the years ended December 31, 2018,
2017 and 2016, respectively.
4 Includes tax effect of $1.2 million, $1.3 million and $1.4 million on federal income tax credits for the years ended December 31, 2018, 2017 and 2016,
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,
2018 vs. 2017
Increase (Decrease) Due to:
Rate
Volume
Year ended December 31,
2017 vs. 2016
Increase (Decrease) Due to:
Rate
Net
Net
Volume
5,513
65,416
4,319
157
75,405
496
144
244
175
(3,147)
(714)
(239)
(3,041)
1,414
9,103
1,389
(7,951)
3,955
1,964
94
726
1,208
(338)
2,846
2,208
8,708
6,927
74,519
5,708
(7,794)
79,360
2,460
238
970
1,383
(3,485)
2,132
1,969
5,667
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
$
78,446
(4,753)
73,693
29,531
(159)
29,372
Net interest income (tax-equivalent) increased $73.7 million for the year ended December 31, 2018 compared to the same period in 2017.
The interest income for 2018 increased over the same period last year primarily from increased loan growth in all categories, with the
largest increase in the Company’s commercial loan portfolio. Furthermore, increases in interest rates on existing variable rate loans and
new loans also increased the loan interest income. The decrease in interest income on the debt securities portfolio was primarily the
result of a decrease in the tax benefit related to the tax-exempt debt securities. Total interest expense increased from the prior year
primarily from an increase in deposit and FHLB interest rates, which was partially offset by the decrease in wholesale deposits.
Net interest income (tax-equivalent) increased $29.4 million during 2017 compared to 2016. The interest income for 2017 increased
over the prior 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 debt securities portfolio was the result of continuing to redeploy cash flow from
debt 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 down a portion of its higher cost funding. 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 hedges ($260
million notional). The increase in rates on other borrowed funds resulted from the increased rates on the Company’s variable rate
subordinated debentures.
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 2018 or 2017
includes amendments to:
•
•
•
•
•
FASB Accounting Standards CodificationTM (“ASC”) Topic 815, Derivatives and Hedging; and
FASB ASC Topic 825, Financial Instruments; and
FASB ASC Topic 606, Revenue from Contracts with Customers
FASB ASC Topic 220, Income Statement - Reporting Comprehensive Income;
FASB ASC Topic 718, Compensation - Stock Compensation;
Authoritative accounting guidance that may possibly have a material impact on the Company that is pending adoption at December 31,
2018 includes amendments to:
•
•
•
•
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; and
FASB ASC Topic 842, Leases
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, policy limits have been
established only for a downward shift in interest rates of 100 bps. Other non-parallel rate movement scenarios are also modeled to
determine the potential impact on net interest income. The additional scenarios are adjusted as the economic environment changes and
provide ALCO additional interest rate risk monitoring tools to evaluate current market conditions.
61
The following is indicative of the Company’s overall NII sensitivity analysis as of December 31, 2018 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, 2018.
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)%
(2.9)%
(0.6)%
(1.7)%
(1.2)%
(2.4)%
(3.6)%
(0.8)%
(15.0)%
(15.0)%
(15.0)%
(15.0)%
(20.0)%
(20.0)%
(20.0)%
(4.9)%
1.4 %
2.0 %
0.8 %
2.9 %
3.3 %
0.2 %
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, 2018:
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)%
(6.1)%
0.3 %
(2.8)%
(6.5)%
(10.8)%
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, 2018 and 2017, 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, 2018, 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, 2018 and 2017, and the
results of its operations and its cash flows for each of the years in the three-year period ended
December 31, 2018, 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, 2018, 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, 2019, expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on the Company’s financial statements based on our audits.
We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement, whether due to error or fraud. Our audits included performing procedures
to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures include examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audits provide a
reasonable basis for our opinion.
We have served as the Company’s auditor since 2005.
Denver, Colorado
February 22, 2019
63
Report of Independent Registered Public Accounting Firm
To the Stockholders, Board of Directors and Audit Committee
Glacier Bancorp, Inc.
Kalispell, Montana
Opinion on Internal Control Over Financial Reporting
We have audited Glacier Bancorp, Inc.’s (the Company) internal control over financial reporting as of
December 31, 2018, 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, 2018, based on criteria established in Internal Control – Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States) (PCAOB), the consolidated financial statements of the Company and our report
dated February 22, 2019, 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 To the Stockholders, Board of Directors and Audit Committee
Glacier Bancorp, Inc.
Page 2
Definitions and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of reliable financial
statements in accordance with accounting principles generally accepted in the United States of America.
A company’s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention, or timely detection
and correction of unauthorized acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the
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, 2019
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
Debt securities, available-for-sale
Debt securities, held-to-maturity
Total debt securities
Loans held for sale, at fair value
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
Bank-owned life insurance
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
Total liabilities and stockholders’ equity
Number of common stock shares issued and outstanding
December 31,
2018
December 31,
2017
$
$
$
161,782
42,008
203,790
2,571,663
297,915
2,869,578
33,156
8,287,549
(131,239)
8,156,310
241,528
7,480
54,408
23,564
49,242
289,586
27,871
82,320
76,651
12,115,484
3,001,178
6,492,589
396,151
440,175
14,708
134,051
4,252
116,526
10,599,630
—
845
1,051,253
473,183
(9,427)
1,515,854
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
59,351
37,047
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
$
12,115,484
9,706,349
84,521,692
78,006,956
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 on sale of debt securities
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,
2018
Years ended
December 31,
2017
December 31,
2016
$
$
$
$
$
86,499
40,041
304,164
38,292
468,996
18,359
2,248
8,880
95
5,949
35,531
433,465
9,953
423,512
74,887
6,805
27,134
(1,113)
11,111
118,824
195,056
30,734
9,566
15,911
3,221
5,075
6,270
54,294
320,127
222,209
40,331
181,878
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
2.18
2.17
1.31
83,603,515
83,677,185
1.50
1.50
1.14
77,537,664
77,607,605
1.59
1.59
1.10
76,278,463
76,341,836
See accompanying notes to consolidated financial statements.
67
GLACIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
Net Income
Other Comprehensive (Loss) Income, Net of Tax
Unrealized (losses) gains on available-for-sale securities
Reclassification adjustment for losses included in net income
Net unrealized (losses) gains 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 on derivatives used for
cash flow hedges
Tax effect
Net of tax amount
Total other comprehensive (loss) income, net of tax
December 31,
2018
Years ended
December 31,
2017
December 31,
2016
$
181,878
116,377
121,131
(15,608)
12
(15,596)
3,952
(11,644)
3,286
2,334
5,620
(1,424)
4,196
(7,448)
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
(9,371)
Total Comprehensive Income
$
174,430
122,131
111,760
See accompanying notes to consolidated financial statements.
68
GLACIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Years ended December 31, 2018, 2017 and 2016
(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 January 1, 2016
76,086,288
$
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
Net income
Other comprehensive loss
Cash dividends declared ($1.31 per share)
Stock issued in connection with acquisitions
Stock issuances under stock incentive plans
Stock-based compensation and related taxes
Balance at December 31, 2018
—
—
—
349,545
89,569
—
76,525,402
—
—
—
1,381,661
99,893
—
78,006,956
—
—
—
6,432,868
81,868
—
84,521,692
$
$
$
761
—
—
—
3
1
—
765
—
—
—
14
1
—
780
—
—
—
64
1
—
845
736,368
337,532
1,989
1,076,650
—
—
—
10,462
(1)
2,278
749,107
—
—
—
46,659
(1)
2,232
797,997
—
—
—
250,743
(1)
2,514
1,051,253
121,131
—
(84,284)
—
—
—
374,379
116,377
351
(88,848)
—
—
—
402,259
181,878
—
(110,954)
—
—
—
473,183
—
(9,371)
—
—
—
—
(7,382)
—
5,403
—
—
—
—
(1,979)
—
(7,448)
—
—
—
—
(9,427)
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
181,878
(7,448)
(110,954)
250,807
—
2,514
1,515,854
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 debt securities
Net accretion of purchase accounting adjustments
Amortization of debt modification costs
Origination of loans held for sale
Proceeds from loans held for sale
Gain on sale of loans
Loss on sale of debt securities
Bank-owned life insurance income, net
Stock-based compensation, net of tax benefits
Depreciation of premises and equipment
Loss (gain) on sale and write-downs of other real estate owned, net
Deferred tax expense (benefit)
Amortization of core deposit intangibles
Amortization of investments in variable interest entities
Net (increase) decrease in accrued interest receivable
Net decrease in other assets
Net increase (decrease) in accrued interest payable
Net increase (decrease) in other liabilities
Net cash provided by operating activities
Investing Activities
Sales of available-for-sale debt securities
Maturities, prepayments and calls of available-for-sale debt securities
Purchases of available-for-sale debt securities
Maturities, prepayments and calls of held-to-maturity debt securities
Purchases of held-to-maturity debt securities
Principal collected on loans
Loan originations
Net additions to premises and equipment
Proceeds from sale of other real estate owned
Proceeds from redemption of non-marketable equity securities
Purchases of non-marketable equity securities
Proceeds from bank-owned life insurance
Investments in variable interest entities
Net cash received from (paid in) acquisitions
Net cash (used in) provided by investing activities
December 31,
2018
Years ended
December 31,
2017
December 31,
2016
$
181,878
116,377
121,131
9,953
13,095
(3,963)
1,649
(841,451)
896,145
(27,134)
1,113
(2,234)
3,122
16,019
2,130
6,861
6,270
7,639
(2,741)
348
357
11,655
280,711
226,842
357,876
(820,333)
76,832
—
2,691,953
(3,460,227)
(18,637)
9,385
87,221
(87,975)
1,331
(37,956)
101,268
(872,420)
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)
See accompanying notes to consolidated financial statements.
70
GLACIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
Financing Activities
Net increase (decrease) in deposits
Net increase (decrease) 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 (decrease) increase in other borrowed funds
Cash dividends paid
Tax withholding payments for stock-based compensation
Net cash provided by (used in) financing activities
Net increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of period
Cash, cash equivalents and restricted cash at end of period
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for interest
Cash paid during the period for income taxes
Supplemental Disclosure of Non-Cash Investing Activities
Transfer of debt securities from held-to-maturity to available-for-sale
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
Effective settlement of pre-existing receivable
Fair value of assets acquired
Liabilities assumed
December 31,
2018
Years ended
December 31,
2017
December 31,
2016
$
$
$
$
599,037
4,398
85,000
—
(1,198)
(5,059)
(85,493)
(1,190)
595,495
3,786
200,004
(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
203,790
200,004
152,541
35,174
26,489
270,331
406
4,924
25,726
250,807
16,265
10,054
1,660,882
1,383,756
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
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 debt securities; 3) the valuation of real estate acquired in connection with foreclosures
or in satisfaction of loans; and 4) the evaluation of goodwill impairment. For the determination of the ALLL and real estate valuation
estimates, management obtains independent appraisals (new or updated) for significant items. Estimates relating to investment valuations
are obtained from independent third parties. Estimates relating to the evaluation of goodwill for impairment are determined based on
internal calculations using significant independent party inputs.
Principles of Consolidation
The consolidated financial statements of the Company include the parent holding company and the Bank. The Bank consists of 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 other assets on the Company's statements of financial condition.
In February 2018, the Company completed its acquisition of Inter-Mountain Bancorp., Inc. and its wholly-owned subsidiary, First Security
Bank, a community bank based in Bozeman, Montana (collectively, “FSB”). In January 2018, the Company completed its acquisition
of Columbine Capital Corp., and its wholly-owned subsidiary, Collegiate Peaks Bank, a community bank based in Buena Vista, Colorado
(collectively, “Collegiate”). In April 2017, the Company completed its acquisition of TFB Bancorp, Inc. and its wholly-owned subsidiary,
The Foothills Bank, a community bank based in Yuma, Arizona (collectively, “Foothills”). In August 2016, the Company completed its
acquisition of Treasure State Bank, a community bank based in Missoula, Montana. The business combinations were accounted for
using the acquisition method, with the results of operations included in the Company’s consolidated financial statements as of the
acquisition dates. For additional information relating to recent mergers and acquisitions, see Note 22.
72
Note 1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, cash held as demand deposits at various banks and the Federal Reserve Bank (“FRB”),
interest bearing deposits, federal funds sold, and liquid investments with original maturities of three months or less. 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,
2018 was $53,626,000.
Debt Securities
Debt securities for which the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and are
carried at amortized cost. Debt securities held primarily for the purpose of selling in the near term are classified as trading securities and
are reported at fair value, with unrealized gains and losses included in income. Debt securities not classified as held-to-maturity or trading
are classified as available-for-sale and are reported at fair value with unrealized gains and losses, net of income taxes, as a separate
component of other comprehensive income (“OCI”). Premiums and discounts on debt securities are amortized or accreted into income
using a method that approximates the interest method. The objective of the interest method is to calculate periodic interest income at a
constant effective yield. The Company does not have any debt securities classified as trading securities.
The Company reviews and analyzes the various risks that may be present within the investment portfolio on an ongoing basis, including
market risk and credit risk. Market risk is the risk to an entity’s financial condition resulting from adverse changes in the value of its
holdings arising from movements in interest rates, foreign exchange rates, equity prices or commodity prices. The Company assesses
the market risk of individual debt securities as well as the investment portfolio as a whole. Credit risk, broadly defined, is the risk that
an issuer or counterparty will fail to perform on an obligation. A debt security is investment grade if the issuer has an adequate capacity
to meet its commitment over the expected life of the investment, i.e., the risk of default is low and full and timely repayment of interest
and principal is expected. To determine investment grade status for debt securities, the Company conducts due diligence of the
creditworthiness of the issuer or counterparty prior to acquisition and ongoing thereafter consistent with the risk characteristics of the
security and the overall risk of the investment portfolio. Credit quality due diligence takes into account the extent to which a security is
guaranteed by the U.S. government and other agencies of the U.S. government. The depth of the due diligence is based on the complexity
of the structure, the size of the security, and takes into account material positions and specific groups of securities or stratifications for
analysis and review of similar risk positions. The due diligence includes consideration of payment performance, collateral adequacy,
internal analyses, third party research and analytics, external credit ratings and default statistics.
For additional information relating to debt securities, see Note 2.
Temporary versus Other-Than-Temporary Impairment
The Company assesses individual debt securities in its investment portfolio for impairment at least on a quarterly basis, and more frequently
when economic or market conditions warrant. A debt security is impaired if the fair value of the security is less than its carrying value
at the financial statement date. If impairment is determined to be other-than-temporary, an impairment loss is recognized by reducing
the amortized cost for the credit loss portion of the impairment with a corresponding charge to earnings for a like amount.
In evaluating impaired debt securities for other-than-temporary impairment losses, management considers 1) the severity and duration
of the impairment; 2) the credit ratings of the security; and 3) the overall deal structure, including the Company’s position within the
structure, the overall and near term financial performance of the issuer and underlying collateral, delinquencies, defaults, loss severities,
recoveries, prepayments, cumulative loss projections, discounted cash flows and fair value estimates.
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 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 other real estate owned (“OREO”) until such time as it is sold.
At acquisition date, the assets and liabilities of acquired banks are recorded at their estimated fair values which results in no ALLL carried
over from acquired banks. Subsequent to acquisition, an allowance will be recorded on the acquired loan portfolios for further credit
deterioration, if any.
Premises and Equipment
Premises and equipment are accounted for at cost less depreciation. Depreciation is computed on a straight-line method over the estimated
useful lives or the term of the related lease. The estimated useful life for office buildings is 15 to 40 years and the estimated useful life
for furniture, fixtures, and equipment is 3 to 10 years. Interest is capitalized for any significant building projects. For additional information
relating to premises and equipment, see Note 4.
Leases
The Company leases certain land, premises and equipment from third parties 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 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, 2018 and 2017, 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 2018 and 2017 annual
goodwill impairment testing and proceed directly to the two-step goodwill impairment test. The goodwill impairment two-step process
requires the Company to make assumptions and judgments regarding fair value. In the first step, the Company calculates an implied fair
value based on a control premium analysis. If the implied fair value is less than the carrying value, the second step is completed to
compute the impairment amount, if any, by determining the “implied fair value” of goodwill. This determination requires the allocation
of the estimated fair value of the reporting units to the assets and liabilities of the reporting units. Any remaining unallocated fair value
represents the “implied fair value” of goodwill, which is compared to the corresponding carrying value of goodwill to compute impairment,
if any.
For additional information relating to goodwill, see Note 5.
Equity Securities
Non-marketable equity securities primarily consist of Federal Home Loan Bank (“FHLB”) stock. FHLB stock is restricted because such
stock may only be sold to FHLB at its par value. Due to restrictive terms, and the lack of a readily determinable fair value, FHLB stock
is carried at cost and evaluated for impairment. The investments in FHLB stock are required investments related to the Company’s
borrowings from FHLB. FHLB obtains its funding primarily through issuance of consolidated obligations of the FHLB system. The
U.S. government does not guarantee these obligations, and each of the regional FHLBs is jointly and severally liable for repayment of
each other’s debt.
78
Note 1. Nature of Operations and Summary of Significant Accounting Policies (continued)
The Company also has an insignificant amount of marketable equity securities that are included in other assets on the Company’s statements
of financial condition. Marketable equity securities with readily determinable fair values are measured at fair value and changes in fair
value are recognized in other income. Marketable equity securities without readily determinable fair values are carried at cost, minus
impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar
investment.
Bank-Owned Life Insurance
The Company maintains bank-owned life insurance policies on certain current and former employees and directors, which are recorded
at their cash surrender values as determined by the insurance carriers. The appreciation in the cash surrender value of the policies is
recognized as a component of other non-interest income in the Company’s statements of operations.
Derivatives and Hedging Activities
For asset and liability management purposes, the Company 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. For highly effective hedges, the ineffective
portion of the gain or loss on derivative instruments, if any, would be amortized over the remaining life the hedging instrument using a
systematic and rational method. For the years ended December 31, 2018, 2017, and 2016, 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.
Revenue Recognition
The Company recognizes revenue when services or products are transferred to customers in an amount that reflects the consideration to
which the Company expects to be entitled. The Company’s principal source of revenue is interest income from debt securities and loans.
Revenue from contracts with customers within the scope of Accounting Standards Codification™ (“ASC”) Topic 606 was $76,664,000,
$69,808,000, and $64,722,000 for the years ended December 31, 2018, 2017, and 2016, respectively, and largely consisted of revenue
from service charges and other fees from deposits (e.g., overdraft fees, ATM fees, debit card fees). Due to the short-term nature of the
Company’s contracts with customers, an insignificant amount of receivables related to such revenue was recorded at December 31, 2018
and 2017 and there were no impairment losses recognized. Policies specific to revenue from contracts with customers include the
following:
Service Charges. Revenue from service charges consists of service charges and fees on deposit accounts under depository agreements
with customers to provide access to deposited funds and, when applicable, pay interest on deposits. Service charges on deposit accounts
may be transactional or non-transactional in nature. Transactional service charges occur in the form of a service or penalty and are charged
upon the occurrence of an event (e.g., overdraft fees, ATM fees, wire transfer fees). Transactional service charges are recognized as
services are delivered to and consumed by the customer, or as penalty fees are charged. Non-transactional service charges are charges
that are based on a broader service, such as account maintenance fees and dormancy fees, and are recognized on a monthly basis.
79
Note 1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Debit Card Fees. Revenue from debit card fees includes interchange fee income from debit cards processed through card association
networks. Interchange fees represent a portion of a transaction amount that the Company and other involved parties retain to compensate
themselves for giving the cardholder immediate access to funds. Interchange rates are generally set by the card association networks and
are based on purchase volumes and other factors. The Company records interchange fees as services are provided.
Stock-based Compensation
Stock-based compensation awards granted, comprised of restricted stock awards and stock options, are valued at fair value and
compensation cost is recognized on a straight-line basis over the requisite service period of each award. The impact of forfeitures of
stock-based compensation awards on compensation expense is recognized as forfeitures occur. For additional information relating to
stock-based compensation, see Note 12.
Advertising and Promotion
Advertising and promotion costs are recognized in the period incurred.
Income Taxes
The Company’s income tax expense consists of current and deferred income tax expense. Current income tax expense reflects taxes to
be paid or refunded for the current period by applying the provisions of enacted tax law to earnings or losses. Deferred income tax
expense results from changes in deferred assets and liabilities between periods. The Company recognizes interest and penalties related
to income tax matters in income tax expense.
Deferred tax assets and liabilities are recognized for estimated future income tax consequences attributable to differences between the
financial statement carrying amounts of assets and liabilities and their respective tax bases. The effect on deferred tax assets and liabilities
of a change in income tax rates is recognized in income in the period that includes the enactment date.
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 2017 and 2016 financial statements to conform to the 2018 presentation.
80
Note 1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Accounting Guidance Adopted in 2018
The ASC is the Financial Accounting Standards Board’s (“FASB”) officially recognized source of authoritative GAAP applicable to all
public and non-public non-governmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”)
under the authority of the federal securities laws are also sources of authoritative GAAP for the Company as an SEC registrant. All other
accounting literature is non-authoritative. The following paragraphs provide descriptions of recently adopted Accounting Standards
Updates (“ASU”) that may have had a material effect on the Company’s financial position or results of operations.
ASU 2017-12 - 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 were effective
for public business entities for the first interim and annual reporting periods beginning after December 15, 2018 and early adoption was
permitted. The Company early adopted the amendments effective November 30, 2018 and determined the impact of these amendments
did not have a significant impact on the Company’s financial position or results of operations. As a result of the adoption of the amendments,
the Company redesignated state and local government securities with a carrying value of $270,331,000 from held-to-maturity classification
to available-for-sale classification; such securities are eligible to be hedged under the last-of-layer method under the amendments and,
therefore, qualified for such reclassification. The Company’s accounting procedures were modified upon adoption of the amendments
to include the assessment of on-going hedge effectiveness utilizing qualitative measurement tests. For additional information on
derivatives, see Note 10.
ASU 2016-01 - Financial Instruments - Overall. In January 2016, FASB amended ASC Topic 825 to address certain aspects of recognition,
measurement, presentation, and disclosure of financial instruments. The amendments were effective for public business entities for the
first interim and annual reporting periods beginning after December 15, 2017. Amendments were to be applied 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
impacted the Company as follows: 1) equity investments (with certain exclusions) are to be measured at fair value with the changes
recognized in net income; 2) an exit price must be utilized when measuring the fair value of financial instruments; and 3) additional
disclosures are required relating to OCI, the evaluation of a valuation allowance on a deferred tax asset related to available-for-sale debt
securities in combination with the entity’s other deferred tax assets, and other disclosures. The Company adopted the amendments
effective January 1, 2018 and determined that the impact of these amendments did not have a significant impact on the Company’s equity
securities, fair value disclosures, financial position or results of operations. The amendments changed the method utilized to disclose
the fair value of the loan portfolio to an exit price notion when measuring fair value. The Company developed processes to comply with
the disclosure requirements of such amendments and accounting policies and procedures were updated accordingly. For additional
information on fair value of assets and liabilities, see Note 20.
ASU 2014-09 - Revenue from Contracts With Customers. 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 established 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 were provided for a company or organization to
follow to achieve such core principle. The new guidance also included a cohesive set of disclosure requirements that provided 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 Company adopted the new revenue recognition guidance effective January 1, 2018 and determined
the majority of the Company’s revenue sources, such as interest income from debt securities and loans, fee income from loans and gain
on sale of loans, were not within the scope of Topic 606. The Company 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 and determined the adoption of the guidance
did not have a significant impact to the Company’s financial position or results of operations; however, OREO policies and procedures
were updated and implemented and new disclosures about the Company’s revenue have been incorporated into the notes to the financial
statements.
81
Note 1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Accounting Guidance Pending Adoption at December 31, 2018
The following paragraphs provide descriptions of newly issued but not yet effective ASUs that could have a material effect on the
Company’s financial position or results of operations.
ASU 2017-08 - Receivables - Nonrefundable Fees and Other Costs. In March 2017, FASB amended ASC Subtopic 310-20 to shorten
the amortization period for certain callable debt securities held at a premium. Specifically, the amendments 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 will 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. When the Company adopts these amendments on January 1, 2019, the Company will adjust $24,102,000
of the premium associated with debt securities to retained earnings. The Company has finalized its review of the amendments and has
updated its accounting policies and procedures.
ASU 2017-04 - Intangibles - Goodwill and Other. In January 2017, FASB amended ASC Topic 350 to simplify the measurement of
goodwill by eliminating Step 2 from the goodwill impairment test. Instead, under these amendments, an entity should perform its annual,
or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize
an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss should not
exceed the total amount of goodwill allocated to that reporting unit. The amendments are effective for public business entities for the
first interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill
impairment tests performed on testing dates after January 1, 2017. The Company has goodwill from prior business combinations and
performs an annual impairment test or more frequently if changes or circumstances occur that would more-likely-than-not reduce the
fair value of the reporting unit below its carrying value. During the third quarter of 2018, the Company performed its impairment
assessment and determined the fair value of the aggregated reporting units exceeded the carrying value, such that the Company’s goodwill
was not considered impaired. Although the Company cannot anticipate future goodwill impairment assessments, based on the most recent
assessment, it is unlikely that an impairment amount would need to be calculated and, therefore, the Company does not anticipate a
material impact from these amendments to the Company’s financial position and results of operations. The current accounting policies
and processes are not anticipated to change, except for the elimination of the Step 2 analysis. For additional information regarding
goodwill impairment testing, see Note 5.
ASU 2016-13 - Financial Instruments - Credit Losses. In June 2016, FASB amended ASC Topic 326 to replace the incurred loss model
with a methodology that reflects expected credit losses over the life of the loan and requires consideration of a broader range of reasonable
and supportable information to calculate credit loss estimates. The amendments are effective for public business entities for the first
interim and annual reporting periods beginning after December 15, 2019. 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 debt securities. In addition, the current
accounting policy and procedures for other-than-temporary impairment on available-for-sale debt securities will be replaced with an
allowance approach. The Company has engaged a third-party vendor solution and is currently in the implementation phase and evaluating
the appropriate models, loan pools and assumptions to be utilized. The project team anticipates running parallel models during 2019 to
refine its processes and procedures. For additional information on the ALLL, see Note 3.
82
Note 1. Nature of Operations and Summary of Significant Accounting Policies (continued)
ASU 2016-02 - Leases. In February 2016, FASB amended ASC Topic 842 to address several aspects of lease accounting with the significant
change being the recognition of lease assets and lease liabilities for leases previously classified as operating leases. The amendments
are effective for public business entities for the first interim and annual reporting periods beginning after December 15, 2018. The
Company has lease agreements for which the amendments will require the recognition of 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. An entity is permitted to elect not to restate
its comparative periods in the period of adoption when transitioning to ASC Topic 842 and the Company expects to make this election.
As a result, a cumulative-effect adjustment to retained earnings will be recognized as of the effective date. In addition, the Company
expects to make the following elections: 1) to not use hindsight in determining lease terms and in assessing impairment of right-of-use
assets; 2) to use the practical expedient package, which would require no reassessment of whether existing contracts are or contain leases
as well as no reassessment of lease classification for existing leases; 3) to account for lease and nonlease components together as a single
combined lease component; and 4) to exclude short-term leases from ASC Topic 842 guidance. When the Company adopts these
amendments on January 1, 2019, the Company expects to recognize a right-of-use asset and related lease liability on the Company’s
statement of financial condition of $36,042,000 and $37,384,000, respectively. The Company has finalized its review of the amendments
and has updated its accounting policies and procedures.
Note 2. Debt Securities
The following tables present the amortized cost, the gross unrealized gains and losses and the fair value of the Company’s debt securities:
(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
Amortized
Cost
December 31, 2018
Gross Unrealized
Gains
Losses
$
23,757
120,670
844,636
292,052
808,537
490,868
2,580,520
297,915
297,915
54
52
18,936
378
628
3,312
23,360
1,380
1,380
Fair
Value
23,649
120,208
852,250
290,817
792,915
491,824
2,571,663
(162)
(514)
(11,322)
(1,613)
(16,250)
(2,356)
(32,217)
(11,039)
(11,039)
288,256
288,256
Total debt securities
$
2,878,435
24,740
(43,256)
2,859,919
83
Note 2. Debt Securities (continued)
(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
Amortized
Cost
December 31, 2017
Gross Unrealized
Gains
Losses
$
31,216
19,195
614,366
216,443
785,960
104,324
1,771,504
648,313
648,313
54
—
20,299
802
1,253
25
22,433
20,346
20,346
42,779
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
Total debt securities
$
2,419,817
On November 30, 2018, the Company early adopted FASB ASU 2017-12, Derivatives and Hedging, and in doing so redesignated state
and local government securities with a carrying value of $270,331,000, from held-to-maturity classification to available-for-sale
classification. The Company considers the available-for-sale classification of these debt securities to be appropriate since it no longer
had the intent to hold them to maturity. No gain or loss was recorded at the time of transfer. For additional information on FASB ASU
2017-12, Derivatives and Hedging, see Note 1.
The following table presents the amortized cost and fair value of available-for-sale and held-to-maturity debt securities by contractual
maturity at December 31, 2018. Actual maturities may differ from expected or contractual maturities since issuers have the right to
prepay obligations with or without prepayment penalties.
December 31, 2018
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
$
$
141,771
316,311
311,194
511,839
1,281,115
1,299,405
2,580,520
141,356
314,777
314,961
515,830
1,286,924
1,284,739
2,571,663
—
6,457
75,204
216,254
297,915
—
297,915
—
6,527
74,100
207,629
288,256
—
288,256
______________________________
1 Mortgage-backed securities, which have prepayment provisions, are not assigned to maturity categories due to fluctuations in their prepayment speeds.
84
Note 2. Debt Securities (continued)
Proceeds from sales and calls of debt 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 debt securities
Gross realized gains 1
Gross realized losses 1
Held-to-maturity
Proceeds from calls of debt securities
Gross realized gains 1
Gross realized losses 1
December 31,
2018
Years ended
December 31,
2017
December 31,
2016
$
265,587
443
(455)
79,000
101
(1,202)
280,783
3,369
(4,005)
23,020
204
(228)
212,140
2,459
(3,794)
25,405
97
(225)
______________________________
1 The gain or loss on the sale or call of each debt security is determined by the specific identification method.
At December 31, 2018 and 2017, the Company had debt securities with carrying values of $1,333,455,000 and $1,447,808,000,
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.
Debt 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
$
$
$
$
Less than 12 Months
Fair
Value
Unrealized
Loss
December 31, 2018
12 Months or More
Fair
Value
Unrealized
Loss
Total
Fair
Value
Unrealized
Loss
4,287
43,400
72,080
119,111
132,405
73,118
444,401
(27)
(103)
(922)
(937)
(833)
(402)
(3,224)
10,519
35,544
232,244
114,800
537,202
86,504
1,016,813
(135)
(411)
(10,400)
(676)
(15,417)
(1,954)
(28,993)
14,806
78,944
304,324
233,911
669,607
159,622
1,461,214
(162)
(514)
(11,322)
(1,613)
(16,250)
(2,356)
(32,217)
87,392
87,392
(2,778)
(2,778)
126,226
126,226
(8,261)
(8,261)
213,618
213,618
(11,039)
(11,039)
85
Note 2. Debt Securities (continued)
(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
$
$
$
$
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)
Based on an analysis of its debt securities with unrealized losses as of December 31, 2018 and 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. The fair value of the debt securities is expected to recover as payments are received and the
securities approach maturity. At December 31, 2018, management determined that it did not intend to sell debt securities with unrealized
losses, and there was no expected requirement to sell any of its debt securities with unrealized losses before recovery of their amortized
cost.
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
At or for the Years ended
December 31,
2018
December 31,
2017
$
887,742
720,728
4,657,561
1,911,171
6,568,732
544,688
286,387
831,075
3,577,139
1,579,353
5,156,492
457,918
242,686
700,604
8,287,549
6,577,824
(131,239)
8,156,310
(5,685)
(25,172)
$
$
$
(129,568)
6,448,256
(2,643)
(16,325)
Weighted-average interest rate on loans (tax-equivalent)
4.97%
4.81%
86
Note 3. Loans Receivable, Net (continued)
At December 31, 2018, the Company had $5,181,912,000 in variable rate loans and $3,105,637,000 in fixed rate loans. At December 31,
2018, the Company had loans of $4,483,373,000 pledged as collateral for FHLB advances and FRB discount window. The Company is
subject to regulatory limits for the amount of loans to any individual borrower and the Company is in compliance with this regulation as
of December 31, 2018 and 2017. No borrower had outstanding loans or commitments exceeding 10 percent of the Company’s
consolidated stockholders’ equity as of December 31, 2018.
Loans that are serviced for others are not reported as assets. The principal balances of these loans were $181,281,000 and $4,042,000 at
December 31, 2018 and 2017, respectively, with the increase almost entirely due to loans serviced for others assumed with the FSB
acquisition. The fair value of servicing rights was insignificant at December 31, 2018 and 2017. There were no significant purchases
or sales of portfolio loans during 2018, 2017 and 2016.
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, 2018 and 2017 was $59,528,000 and $82,350,000, respectively. During 2018, new
loans to such related parties were $17,830,000, repayments were $38,276,000 and the effect of changes in composition of related parties
was $(2,376,000). 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.
Allowance for Loan and Lease Losses
The ALLL is a valuation allowance for probable incurred credit losses. The following tables summarize the activity in the ALLL by loan
class:
(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
(Dollars in thousands)
Balance at beginning of period
Provision for loan losses
Charge-offs
Recoveries
Balance at end of period
Year ended December 31, 2018
Total
Residential
Real Estate
Commercial
Real Estate
Other
Commercial
Home
Equity
Other
Consumer
129,568
9,953
(17,807)
9,525
131,239
10,798
474
(728)
87
10,631
68,515
4,343
(3,469)
3,059
72,448
39,303
1,916
(5,045)
1,986
38,160
6,204
(471)
(210)
288
5,811
4,748
3,691
(8,355)
4,105
4,189
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
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
$
$
$
$
$
$
87
Note 3. Loans Receivable, Net (continued)
The following tables disclose the recorded investment in loans and the balance in the ALLL by loan class:
(Dollars in thousands)
Loans receivable
Total
Residential
Real Estate
December 31, 2018
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
$
108,788
8,178,761
$ 8,287,549
$
$
3,223
128,016
131,239
12,685
875,057
887,742
68,837
4,588,724
4,657,561
20,975
1,890,196
1,911,171
83
10,548
10,631
568
71,880
72,448
2,313
35,847
38,160
3,497
541,191
544,688
39
5,772
5,811
2,794
283,593
286,387
220
3,969
4,189
(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
Substantially all of the Company’s loans receivable are with customers in the Company’s geographic market areas. Although the Company
has a diversified loan portfolio, a substantial portion of its customers’ ability to honor their obligations is dependent upon the economic
performance in the Company’s market areas.
Aging Analysis
The following tables present an aging analysis of the recorded investment in loans by loan class:
(Dollars in thousands)
Total
Residential
Real Estate
December 31, 2018
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
$
24,312
9,255
2,018
47,252
82,837
8,204,712
$ 8,287,549
5,251
860
788
8,021
14,920
872,822
887,742
9,477
3,231
—
27,264
39,972
4,617,589
4,657,561
4,282
3,838
492
8,619
17,231
1,893,940
1,911,171
3,213
735
428
2,575
6,951
537,737
544,688
2,089
591
310
773
3,763
282,624
286,387
88
Note 3. Loans Receivable, Net (continued)
(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
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 $2,340,000, $2,162,000, and $2,364,000 for the years ended December 31, 2018, 2017, and 2016, respectively.
Impaired Loans
Loans are designated impaired when, based upon current information and events, it is probable that the Company will be unable to collect
the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement and therefore, the
Company has serious doubts as to the ability of such borrowers to fulfill the contractual obligation. The following tables disclose
information related to impaired loans by loan class:
(Dollars in thousands)
Loans with a specific valuation allowance
At or for the Year ended December 31, 2018
Total
Residential
Real Estate
Commercial
Real Estate
Other
Commercial
Home
Equity
Other
Consumer
Recorded balance
Unpaid principal balance
Specific valuation allowance
Average balance
$
19,197
19,491
3,223
19,519
Loans without a specific valuation
allowance
Recorded balance
Unpaid principal balance
Average balance
Total
Recorded balance
Unpaid principal balance
Specific valuation allowance
Average balance
89,591
107,486
106,747
108,788
126,977
3,223
126,266
9,345
9,345
568
8,498
59,492
71,300
73,889
68,837
80,645
568
82,387
7,268
7,268
2,313
7,081
13,707
17,689
17,376
20,975
24,957
2,313
24,457
120
120
39
82
3,377
3,986
3,465
3,497
4,106
39
3,547
507
538
220
1,172
2,287
2,522
1,748
2,794
3,060
220
2,920
1,957
2,220
83
2,686
10,728
11,989
10,269
12,685
14,209
83
12,955
89
Note 3. Loans Receivable, Net (continued)
(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
Interest income recognized on impaired loans for the years ended December 31, 2018, 2017, and 2016 was not significant.
Restructured Loans
A restructured loan is considered a troubled debt restructuring if the creditor, for economic or legal reasons related to the debtor’s financial
difficulties, grants a concession to the debtor that it would not otherwise consider. The following tables present TDRs that occurred
during the periods presented and the TDRs that occurred within the previous twelve months that subsequently defaulted during the periods
presented:
(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, 2018
Total
Residential
Real Estate
Commercial
Real Estate
Other
Commercial
Home
Equity
Other
Consumer
25
21,995
21,881
1
47
$
$
$
4
724
724
1
47
8
12,901
12,787
—
—
10
7,813
7,813
—
—
2
252
252
—
—
1
305
305
—
—
90
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, 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
—
—
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
—
—
—
—
—
—
—
$
$
$
$
$
$
The modifications for the TDRs that occurred during the years ended December 31, 2018, 2017 and 2016 included one or a combination
of the following: an extension of the maturity date, a reduction of the interest rate or a reduction in the principal amount.
In addition to the TDRs that occurred during the period provided in the preceding tables, the Company had TDRs with pre-modification
loan balances of $6,793,000, $5,987,000 and $5,331,000 for the years ended December 31, 2018, 2017 and 2016, 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, 2018 and 2017 and in residential real estate for the year ended December 31, 2016. At December 31, 2018 and
2017, the Company had $350,000 and $743,000, respectively, of consumer mortgage loans secured by residential real estate properties
for which formal foreclosure proceedings are in process. At December 31, 2018 and 2017, the Company had $698,000 and $893,000,
respectively, of OREO secured by residential real estate properties.
There were $5,335,000 and $1,960,000 of additional unfunded commitments on TDRs outstanding at December 31, 2018 and 2017,
respectively. The amount of charge-offs on TDRs during 2018, 2017 and 2016 was $1,685,000, $2,984,000 and $557,000, respectively.
91
Note 4. Premises and Equipment
Premises and equipment, net of accumulated depreciation, consist of the following:
(Dollars in thousands)
Land
Buildings and construction in progress
Furniture, fixtures and equipment
Leasehold improvements
Accumulated depreciation
Net premises and equipment
December 31,
2018
December 31,
2017
$
$
47,511
231,854
90,030
9,370
(137,237)
241,528
31,370
182,592
83,177
8,085
(127,876)
177,348
Depreciation expense for the years ended December 31, 2018, 2017, and 2016 was $16,019,000, $14,758,000, and $15,294,000,
respectively.
Operating and Capital Leases
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, 2018, 2017, and 2016 was $4,224,000, $3,629,000, and $3,255,000, respectively. The Company has
included capital leases in premises and equipment and amortization 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, 2018, 2017, and 2016 was
$12,000, $164,000, and $153,000, 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, 2018 are as follows:
(Dollars in thousands)
Years ending December 31,
2019
2020
2021
2022
2023
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
3,192
2,682
2,145
1,427
943
5,352
15,741
3,284
2,774
2,152
1,427
943
5,352
15,932
$
$
92
92
7
—
—
—
191
10
181
84
97
92
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,
2019
2020
2021
2022
2023
At or for the Years ended
December 31,
2018
December 31,
2017
December 31,
2016
21,649
(7,465)
14,184
2,494
21,943
(9,596)
12,347
2,970
$
$
$
$
62,977
(13,735)
49,242
6,270
6,768
6,598
6,407
6,187
5,711
Core deposit intangibles increased $41,328,000, $4,331,000 and $762,000 during 2018, 2017 and 2016, 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,
2018
$
$
177,811
111,775
289,586
Years ended
December 31,
2017
December 31,
2016
147,053
30,758
177,811
140,638
6,415
147,053
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 2018 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
2018 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, 2018. 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, 2018 and 2017.
93
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 Bank is also the sole member of certain tax credit funds that make direct investments in qualified affordable housing projects (e.g.,
Low-Income Housing Tax Credit [“LIHTC”] partnerships). As such, the Company is the primary beneficiary of these tax credit funds
and their assets, liabilities, and results of operations are included in the Company’s consolidated financial statements.
The following table summarizes the carrying amounts of the consolidated VIEs’ assets and liabilities included in the Company’s statements
of financial condition and are adjusted for intercompany eliminations. All assets presented can be used only to settle obligations of the
consolidated VIEs and all liabilities presented consist of liabilities for which creditors and other beneficial interest holders therein have
no recourse to the general credit of the Company.
(Dollars in thousands)
Assets
Loans receivable
Accrued interest receivable
Other assets
Total assets
Liabilities
Other borrowed funds
Accrued interest payable
Other liabilities
Total liabilities
December 31,
2018
December 31,
2017
$
$
$
$
80,123
96
45,779
125,998
14,527
1
125
14,653
57,796
94
15,885
73,775
7,964
1
98
8,063
94
Note 6. Variable Interest Entities (continued)
Unconsolidated Variable Interest Entities
The Company has equity investments in LIHTC partnerships, both directly and through tax credit funds, with carrying values of
$35,112,000 and $9,169,000 as of December 31, 2018 and 2017, 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 $11,484,000 at December 31, 2018, and the Company expects to fulfill the majority of these
commitments during 2019. There were no impairment losses on the Company’s LIHTC investments during the years ended December 31,
2018, 2017, and 2016.
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,
2018
$
4,926
6,550
Years ended
December 31,
2017
December 31,
2016
2,507
3,827
1,125
1,515
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.
95
Note 7. Deposits
Time deposits that meet or exceed the Federal Deposit Insurance Corporation Insurance (“FDIC”) limit of $250,000 at December 31,
2018 and 2017 were $244,999,000 and $193,962,000, respectively.
The scheduled maturities of time deposits are as follows:
(Dollars in thousands)
Years ending December 31,
2019
2020
2021
2022
2023
Thereafter
Amount
634,197
147,320
71,500
28,138
20,310
19
901,484
$
$
The Company reclassified $5,992,000 and $4,402,000 of overdraft demand deposits to loans as of December 31, 2018 and 2017,
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, 2018 and 2017 was $26,260,000 and $25,641,000, respectively.
Note 8. Borrowings
The Company’s repurchase agreements totaled $396,151,000 and $362,573,000 at December 31, 2018 and 2017, respectively, and are
secured by debt securities with carrying values of $511,294,000 and $475,601,000, 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, 2018
Remaining Contractual Maturity of the Agreements
Overnight and
Continuous
$
$
328,174
66,339
394,513
Up to 30 Days
Total
—
1,638
1,638
328,174
67,977
396,151
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
96
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 debt 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, 2018
December 31, 2017
Amount
Weighted
Rate
Amount
Weighted
Rate
$
$
285,847
1,572
150,370
918
204
1,264
440,175
2.63% $
3.50%
3.77%
5.25%
5.45%
4.82%
3.03% $
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%
The Company’s other borrowings consisted of capital lease obligations and other debt obligations through consolidation of certain VIEs.
At December 31, 2018, the Company had $230,000,000 in unsecured lines of credit which are typically renewed on an annual basis with
various correspondent entities.
Note 9. Subordinated Debentures
The Company’s subordinated debentures are reflected in the table below. The amounts include fair value adjustments from acquisitions.
(Dollars in thousands)
Subordinated debentures owed to trust
subsidiaries
December 31, 2018
Rate
Balance
Rate Structure
$
First Company Statutory Trust 2001
First Company Statutory Trust 2003
Glacier Capital Trust II
Citizens (ID) Statutory Trust I
Glacier Capital Trust III
Glacier Capital Trust IV
Bank of the San Juans Bancorporation Trust I
Total subordinated debentures owed to
trust subsidiaries
3,332
2,452
46,393
5,155
36,083
30,928
1,935
126,278
5.827% 3 month LIBOR plus 3.30%
6.072% 3 month LIBOR plus 3.25%
5.186% 3 month LIBOR plus 2.75%
5.438% 3 month LIBOR plus 2.65%
3.726% 3 month LIBOR plus 1.29%
4.358% 3 month LIBOR plus 1.57%
4.558% 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
Tier 2 subordinated debentures
7,773
6.625%
Fixed
10/01/2025
Total subordinated debentures
$
134,051
Subordinated Debentures Owed to Trust Subsidiaries
Trust preferred securities were issued by the Company’s trust subsidiaries, the common stock of which is wholly-owned by the Company,
in conjunction with the Company issuing subordinated debentures to the trust subsidiaries. The terms of the subordinated debentures are
the same as the terms of the trust preferred securities. The Company guaranteed the payment of distributions and payments for redemption
or liquidation of the trust preferred securities to the extent of funds held by the trust subsidiaries. The obligations of the Company under
the subordinated debentures together with the guarantee and other back-up obligations, in the aggregate, constitute a full and unconditional
guarantee by the Company of the obligations of all trusts under the trust preferred securities.
97
Note 9. Subordinated Debentures (continued)
The trust preferred securities are subject to mandatory redemption upon repayment of the subordinated debentures at their stated maturity
date or the earlier redemption in an amount equal to their liquidation amount plus accumulated and unpaid distributions to the date of
redemption. Interest distributions are payable quarterly. The Company may defer the payment of interest at any time for a period not
exceeding 20 consecutive quarters provided that the deferral period does not extend past the stated maturity. During any such deferral
period, distributions on the trust preferred securities will also be deferred and the Company’s ability to pay dividends on its common
shares will be restricted.
Subject to prior approval by the FRB, the trust preferred securities may be redeemed at par prior to maturity at the Company’s option on
or after the redemption date. All of the Company’s trust preferred securities have reached the redemption date and could be redeemed
at the Company’s option. The trust preferred securities may also be redeemed at any time in whole (but not in part) for the Trusts in the
event of unfavorable changes in laws or regulations that result in 1) subsidiary trusts becoming subject to federal income tax on income
received on the subordinated debentures; 2) interest payable by the Company on the subordinated debentures becoming non-deductible
for federal tax purposes; 3) the requirement for the trusts to register under the Investment Company Act of 1940, as amended; or 4) loss
of the ability to treat the trust preferred securities as Tier 1 capital under the FRB capital adequacy guidelines.
For regulatory capital purposes, the FRB has allowed bank holding companies to continue to include trust preferred securities in Tier 1
capital up to a certain limit. Provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”)
require the FRB to exclude trust preferred securities from Tier 1 capital, but a permanent grandfather provision applicable to the Company
permits bank holding companies with consolidated assets of less than $15 billion to continue counting existing trust preferred securities
as Tier 1 capital until they mature, even after the Company’s total assets exceed the $15 billion threshold as a result of organic growth.
Once the Company has crossed the $15 billion threshold, any subsequent merger or acquisition would result in disqualification of the
Company’s combined trust preferred securities as Tier 1 capital; however, the trust preferred securities would be included in Tier 2 capital.
If the Company crosses the $15 billion threshold as a direct result of an acquisition, neither the Company’s nor the acquired institution’s
trust preferred securities would continue to qualify as Tier 1 capital, but instead would be included in Tier 2 capital. All of the Company’s
trust preferred securities qualified as Tier 1 capital instruments at December 31, 2018.
Tier 2 Subordinated Debentures
The Company acquired subordinated debentures with the FSB acquisition that qualify as Tier 2 capital under the applicable capital
adequacy rules and regulations promulgated by the FRB. The Tier 2 subordinated debentures are not deposits and are not insured by the
FDIC or any other government agency. Such obligations are subordinated to the claims of general creditors, are unsecured and are
ineligible as collateral. The principal amount is due at maturity and interest distributions are payable quarterly. The Tier 2 subordinated
debentures shall not be prepaid prior to the fifth anniversary of the closing date, which is September 30, 2020, except in the event the
obligation no longer qualifies as Tier 2 capital (“Tier 2 capital event”) or the interest payable is no longer deductible (“tax event”). Any
prepayment made in connection with a Tier 2 capital event or a tax event will be subject to obtaining the prior approval of the FRB.
Prepayment on or after the fifth anniversary of the closing date is allowed at any time with notice.
For additional information on regulatory capital, see Note 11.
Note 10. Derivatives and Hedging Activities
Interest Rate Swap Derivatives
The Company is exposed to certain risk relating to its ongoing business operations. The primary risk managed by using derivative
instruments is interest rate risk. Interest rate swaps are entered into to manage interest rate risk associated with 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.
98
Note 10. Derivatives and Hedging Activities (continued)
The Company’s interest rate swap derivative financial instruments as of December 31, 2018 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.
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 periods. 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, $8,013,000 and
$8,035,000 during 2018, 2017 and 2016, 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 $1,663,000 of the unrealized loss reported in
OCI at December 31, 2018 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,
2018
Years ended
December 31,
2017
December 31,
2016
Amount of gain (loss) recognized in OCI
Amount of loss reclassified from OCI to interest expense
$
3,286
(2,334)
444
(4,892)
(1,643)
(6,417)
The following table discloses the offsetting of financial assets and interest rate swap derivative assets.
(Dollars in thousands)
Gross Amount
of Recognized
Assets
December 31, 2018
December 31, 2017
Gross Amount
Offset in the
Statements of
Financial
Position
Net Amounts of
Assets
Presented in the
Statements of
Financial
Position
Gross Amount
of Recognized
Assets
Gross Amount
Offset in the
Statements of
Financial
Position
Net Amounts of
Assets
Presented in the
Statements of
Financial
Position
Interest rate swaps
$
139
(139)
—
—
—
—
99
Note 10. Derivatives and Hedging Activities (continued)
The following table discloses the offsetting of financial liabilities and interest rate swap derivative liabilities.
(Dollars in thousands)
Gross Amounts
of Recognized
Liabilities
December 31, 2018
December 31, 2017
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
$
3,908
(139)
3,769
9,389
—
9,389
Pursuant to the interest rate swap agreements, the Company pledged collateral to the counterparty in the form of debt securities totaling
$4,730,000 at December 31, 2018. There was $0 collateral pledged from the counterparty to the Company as of December 31, 2018.
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.
Residential Real Estate Derivatives
At December 31, 2018, the Company had residential real estate derivatives for commitments (“interest rate locks”) to fund certain
residential real estate loans to be sold into the secondary market. At December 31, 2018 and 2017, loans with interest rate lock commitments
totaled $59,974,000 and $67,861,000, respectively, and the fair value of the related derivatives was included in other assets with
corresponding changes recorded in gain on sale of loans. It has been the Company’s practice to enter into “best efforts” forward sales
commitments for the future delivery of residential real estate loans to third party investors when interest rate lock commitments are
entered into in order to economically hedge the effect of changes in interest rates resulting from its commitments to fund the loans.
Forward sales commitments on a “best efforts” basis are not designated in hedge relationships until the loan is funded. Due to the forward
sales commitments being short-term in nature, the corresponding derivatives are not significant. During 2018, the Company also began
to enter into free-standing derivatives to mitigate the interest rate risk associated with certain residential real estate loans to be sold. These
derivatives include forward commitments to sell to-be-announced securities (“TBA”) which are used to economically hedge the interest
rate risk associated with certain residential real estate loans held for sale and unfunded commitments. At December 31, 2018, TBA
commitments were $40,750,000 and the fair value of the related derivatives was included in other liabilities with corresponding changes
recorded in gain on sale of loans.
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 2018 is 1.875 percent. The Company has elected to opt-out of the requirement to include most components of accumulated other
comprehensive income. As of December 31, 2018, 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, 2018 and 2017, 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, 2018 that management believes have changed the Company’s or Bank’s risk-based capital category.
100
Note 11. Regulatory Capital
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:
December 31, 2018
Required for Capital
Adequacy Purposes
To Be Well Capitalized
Under Prompt Corrective
Action Regulations
Actual
Amount
Ratio
Amount
Ratio
Amount
Ratio
$ 1,437,889
1,401,991
14.70% $
14.35%
782,453
781,430
8.00%
8.00% $
N/A
976,787
N/A
10.00%
1,308,017
1,279,778
1,183,517
1,279,778
1,308,017
1,279,778
13.37%
13.10%
12.10%
13.10%
11.35%
11.08%
586,840
586,072
440,130
439,554
461,130
462,072
6.00%
6.00%
4.50%
4.50%
4.00%
4.00%
N/A
781,430
N/A
634,911
N/A
577,590
N/A
8.00%
N/A
6.50%
N/A
5.00%
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%
(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
(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
101
Note 12. Stock-based Compensation Plan
The Company’s stock-based compensation plan, The 2015 Stock Incentive Plan, provides incentives and awards to select employees and
directors of the Company and permits the granting of stock options, share appreciation rights, restricted shares, restricted share units,
unrestricted shares and performance awards. At December 31, 2018, the number of shares available to award to employees and directors
under the 2015 Stock Incentive Plan was 2,139,518.
During 2018, the Company also assumed a stock-based compensation plan through the Collegiate acquisition. This plan has an insignificant
amount of stock options outstanding at December 31, 2018 and no additional shares may be awarded from the plan.
Restricted Stock Awards
The Company has awarded restricted stock to select employees and directors under the 2015 Stock Incentive Plan. Common stock is
issued as vesting restrictions lapse, which may be immediately or according to the terms of a vesting schedule. Restricted stock awards
may not be sold, pledged or otherwise transferred until restrictions have lapsed. The recipient does not have the right to vote or to receive
dividends until the restricted stock 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, 2018, 2017 and 2016 was $3,703,000,
$3,764,000 and $2,870,000, respectively, and the recognized income tax benefit related to this expense was $934,000, $1,452,000 and
$1,112,000. As of December 31, 2018, total unrecognized compensation expense of $4,013,000 related to restricted stock awards is
expected to be recognized over a weighted-average period of 2.0 years.
The fair value of restricted stock awards that vested during the years ended December 31, 2018, 2017 and 2016 was $3,319,000, $3,746,000
and $2,624,000, respectively, and the income tax benefit related to these awards was $1,126,000, $1,998,000 and $1,053,000, respectively.
Upon vesting of restricted stock awards, the shares are issued from the Company’s authorized stock balance.
The following table summarizes the restricted stock award activity for the year ended December 31, 2018:
Non-vested at December 31, 2017
Granted
Vested
Forfeited
Non-vested at December 31, 2018
Restricted
Stock
Weighted-
Average
Grant Date
Fair Value
$
183,178
114,366
(111,273)
(4,288)
181,983
29.84
39.92
29.82
37.64
36.03
The average remaining contractual term on non-vested restricted stock awards at December 31, 2018 is 0.9 years. The aggregate intrinsic
value of the non-vested restricted stock awards at December 31, 2018 was $7,210,000.
102
Note 13. Employee Benefit Plans
The Company provides its qualified employees with a comprehensive benefit program, including health, dental and vision insurance,
life and accident insurance, short- and long-term disability coverage, vacation and sick leave, 401(k) plan, profit sharing plan, stock-
based compensation plan, deferred compensation plans, and supplemental executive retirement plan. The Company has elected to self-
insure certain costs related to employee health, dental and vision benefit programs. Costs resulting from non-insured losses are expensed
as incurred. The Company has purchased insurance that limits its exposure on an individual claim basis for the employee health benefit
programs.
401(k) Plan and Profit Sharing Plan
The Company’s 401(k) plan and profit sharing plan have safe harbor and employer discretionary components. To be considered eligible
for the 401(k) and safe harbor components of the profit sharing plan, an employee must be 21 years of age and employed for three full
months. Employees are eligible to participate in the 401(k) plan the first day of the month once they have met the eligibility requirements.
To be considered eligible for the employer discretionary contribution of the profit sharing plan, an employee must be 21 years of age,
worked one full calendar quarter, worked 501 hours in the plan year and be employed as of the last day of the plan year. Participants are
at all times fully vested in all contributions.
The profit sharing plan contributions consists of a 3 percent non-elective safe harbor contribution fully funded by the Company and an
employer discretionary contribution. The employer discretionary contribution depends on the Company’s profitability. The total profit
sharing plan expense for the years ended December 31, 2018, 2017, and 2016 was $15,406,000, $10,100,000 and $9,041,000 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, 2018, 2017 and 2016 was $4,037,000, $3,224,000, and $2,946,000, 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 $803,000, $739,000, and $967,000, for the years ending December 31,
2018, 2017, and 2016, 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, 2018, 2017, and 2016 for the plans was $502,000, $481,000 and
$431,000, respectively.
In connection with several acquisitions, the Company assumed the obligations of deferred compensation plans for certain key employees.
As of December 31, 2018 and 2017, the liability related to the obligations was $13,651,000 and $11,275,000, respectively, and was
included in other liabilities. The total earnings for the years ended December 31, 2018, 2017, and 2016 for the acquired plans was
$801,000, $588,000 and $632,000, respectively.
Supplemental Executive Retirement Plan
The Company has a Supplemental Executive Retirement Plan (“SERP”) which is intended to supplement payments due to participants
upon retirement under the Company’s other qualified plans. The Company credits the participant’s account on an annual basis for an
amount equal to employer contributions that would have otherwise been allocated to the participant’s account under the tax-qualified
plans were it not for limitations imposed by the IRS or the participation in the non-funded deferred compensation plan. Eligible employees
include participants of the non-funded deferred compensation plan and employees whose benefits were limited as a result of IRS
regulations. The Company’s required contribution to the SERP for the years ended December 31, 2018, 2017 and 2016 was $423,000,
$287,000, and $299,000, 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, 2018, 2017, and 2016 for this plan was $122,000, $105,000, and
$85,000, respectively.
103
Note 14. Other Expenses
Other expenses consists of the following:
(Dollars in thousands)
Consulting and outside services
Mergers and acquisition expenses
Debit card expenses
Telephone
Employee expenses
Business development
VIE amortization and other expenses
Loan expenses
Printing and supplies
Postage
Legal fees
Accounting and audit fees
Checking and operating expenses
ATM expenses
Other
Total other expenses
Note 15. Federal and State Income Taxes
December 31,
2018
Years ended
December 31,
2017
December 31,
2016
$
$
7,219
6,618
5,104
4,487
4,412
4,172
3,618
3,462
3,264
3,104
1,763
1,456
1,234
1,217
3,164
54,294
5,331
2,130
7,189
3,891
4,160
3,333
3,109
3,080
2,661
2,684
1,106
1,848
1,760
1,720
3,043
47,045
5,683
1,732
8,462
3,828
3,573
3,286
2,702
3,611
2,800
2,785
1,027
1,613
2,942
880
2,646
47,570
The Tax Cuts and Jobs Act (“Tax Act”) was enacted on December 22, 2017 and resulted in a decrease in the federal marginal corporate
income tax rate from 35 percent to 21 percent beginning in 2018. As a result of the Tax Act, the Company incurred a one-time tax expense
adjustment of $19,699,000 during 2017 due to the Company’s revaluation of the deferred tax assets and deferred tax liabilities (“net
deferred tax asset”). This adjustment is reflected in the following tables.
The following table is a summary of consolidated income tax expense:
(Dollars in thousands)
Current
Federal
State
Total current income tax expense
Deferred 1
Federal
State
Total deferred income tax expense (benefit)
December 31,
2018
Years ended
December 31,
2017
December 31,
2016
$
21,510
11,960
33,470
5,372
1,489
6,861
29,555
9,183
38,738
22,246
3,641
25,887
64,625
30,461
9,283
39,744
(70)
(12)
(82)
39,662
Total income tax expense
$
40,331
______________________________
1 Includes tax benefit of operating loss carryforwards of $443,000, $644,000 and $571,000 for the years ended December 31, 2018, 2017, and 2016,
respectively.
104
Note 15. Federal and State Income Taxes (continued)
Combined federal and state income tax expense differs from that computed at the federal statutory corporate income 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 income tax rate
December 31,
2018
Years ended
December 31,
2017
December 31,
2016
21.0 %
4.8 %
— %
(5.0)%
(4.2)%
1.6 %
18.2 %
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 %
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
Acquisition fair market value adjustments
Deferred compensation
Employee benefits
Net operating loss carryforwards
Available-for-sale debt securities
Interest rate swap agreements
Other real estate owned
Other
Total gross deferred tax assets
Deferred tax liabilities
Intangibles
Depreciation of premises and equipment
Deferred loan costs
FHLB stock dividends
Debt modification costs
Available-for-sale debt securities
Other
Total gross deferred tax liabilities
December 31,
2018
December 31,
2017
$
33,313
6,380
6,251
2,939
2,525
2,244
955
801
4,798
60,206
(12,667)
(10,776)
(6,436)
(2,722)
(1,173)
—
(2,868)
(36,642)
32,890
4,139
5,640
2,615
2,841
—
2,379
5,126
3,673
59,303
(4,161)
(2,863)
(5,854)
(2,602)
(1,591)
(1,707)
(2,181)
(20,959)
Net deferred tax asset
$
23,564
38,344
The Company has federal net operating loss carryforwards of $9,337,000 expiring between 2030 and 2035. The Company has Colorado
net operating loss carryforwards of $12,988,000 expiring between 2031 and 2032. The net operating loss carryforwards originated from
acquisitions.
105
Note 15. Federal and State Income Taxes (continued)
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, 2018:
Federal
Montana
Idaho
Utah
Colorado
Arizona
Years ended December 31,
2015, 2016 and 2017
2015, 2016 and 2017
2015, 2016 and 2017
2015, 2016 and 2017
2014, 2015, 2016 and 2017
2017
The Company had no unrecognized income tax benefits as of December 31, 2018 and 2017. 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, 2018, 2017, and 2016 was not significant. The Company
had no accrued liabilities for the payment of interest or penalties at December 31, 2018 and 2017.
The Company has assessed the need for a valuation allowance and determined that a valuation allowance was not necessary at December 31,
2018 and 2017. The Company believes that it is more-likely-than-not that the Company’s deferred tax assets will be realizable by offsetting
future taxable income from reversing taxable temporary differences and anticipated future taxable income (exclusive of reversing
temporary differences). In its assessment, the Company considered its strong earnings history, no history of income tax credit carryforwards
expiring unused, and no expected future net operating losses (for tax purposes).
Note 16. Accumulated Other Comprehensive Loss
The following table illustrates the activity within accumulated other comprehensive loss by component, net of tax:
(Dollars in thousands)
Balance at January 1, 2016
Other comprehensive loss before reclassifications
Reclassification adjustments for losses included in net income
Net current period other comprehensive (loss) income
Balance at December 31, 2016
Other comprehensive income before reclassifications
Reclassification adjustments for losses included in net income
Reclassifications to retained earnings 1
Net current period other comprehensive income
Balance at December 31, 2017
Other comprehensive (loss) income before reclassifications
Reclassification adjustments for losses included in net income
Net current period other comprehensive (loss) income
Balance at December 31, 2018
Gains (Losses)
on Available-
For-Sale Debt
Securities
Losses on
Derivatives
Used for Cash
Flow Hedges
Total
$
$
$
$
13,935
(11,946)
1,989
(13,113)
817
(12,296)
1,639
2,110
391
891
3,392
5,031
(11,653)
9
(11,644)
(6,613)
(1,006)
3,931
2,925
(9,021)
248
3,005
(1,242)
2,011
(7,010)
2,453
1,743
4,196
(2,814)
(14,119)
4,748
(9,371)
(7,382)
2,358
3,396
(351)
5,403
(1,979)
(9,200)
1,752
(7,448)
(9,427)
______________________________
1 Reclassifications were due to the one-time revaluation of the net deferred tax asset as a result of the Tax Act. For additional information on the Tax
Act, see Note 15.
106
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 and stock options were exercised, 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,
2018
Years ended
December 31,
2017
December 31,
2016
Net income available to common stockholders, basic and diluted
$
181,878
116,377
121,131
Average outstanding shares - basic
Add: dilutive restricted stock awards and stock options
Average outstanding shares - diluted
Basic earnings per share
Diluted earnings per share
83,603,515
73,670
83,677,185
77,537,664
69,941
77,607,605
76,278,463
63,373
76,341,836
$
$
2.18
2.17
1.50
1.50
1.59
1.59
There were 1,357, 0 and 0 restricted stock awards and stock options excluded from the diluted average outstanding share calculation for
the years ended December 31, 2018, 2017, and 2016, respectively. Anti-dilution occurs when the unrecognized compensation cost per
share of a restricted stock award or the exercise price of a stock option exceeds the market price of the Company’s stock.
Note 18. Parent Holding Company Information (Condensed)
The following condensed financial information was the unconsolidated information for the parent holding company:
Condensed Statements of Financial Condition
(Dollars in thousands)
Assets
Cash on hand and in banks
Interest bearing cash deposits
Cash and cash equivalents
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,
2018
December 31,
2017
$
$
$
22,000
42,299
64,299
12,639
1,612,115
1,689,053
25,726
134,051
13,422
173,199
845
1,051,253
473,183
(9,427)
1,515,854
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
Total liabilities and stockholders’ equity
$
1,689,053
1,337,987
107
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
(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 investing activities
Financing Activities
Net increase in other borrowed funds
Cash dividends paid
Tax withholding payments for stock-based compensation
Net cash used in financing activities
Net increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of year
Cash, cash equivalents and restricted cash at end of year
$
108
December 31,
2018
Years ended
December 31,
2017
December 31,
2016
$
$
$
153,574
—
16,523
1,284
171,381
20,873
12,201
33,074
138,307
3,773
142,080
39,798
181,878
174,430
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
December 31,
2018
Years ended
December 31,
2017
December 31,
2016
$
181,878
116,377
121,131
(39,798)
13
—
1,219
(3,222)
140,090
—
(300)
—
(24,989)
(25,289)
(11,543)
(85,493)
(1,190)
(98,226)
16,575
47,724
64,299
(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
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 2018
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
$
$
$
$
$
$
$
$
103,066
7,774
95,292
795
94,497
26,086
73,627
46,956
8,397
38,559
0.48
0.48
117,715
9,161
108,554
4,718
103,836
31,828
81,795
53,869
9,485
44,384
0.53
0.52
122,905
9,160
113,745
3,194
110,551
32,416
82,829
60,138
10,802
49,336
0.58
0.58
125,310
9,436
115,874
1,246
114,628
28,494
81,876
61,246
11,647
49,599
0.59
0.59
Quarters ended 2017
March 31
June 30
September 30
December 31
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
109
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, 2018, 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, 2018.
Debt securities, available-for-sale: fair value for available-for-sale debt securities is estimated by obtaining quoted market prices for
identical assets, where available. If such prices are not available, fair value is based on independent asset pricing services and models,
the inputs of which are market-based or independently sourced market parameters, including but not limited to, yield curves, interest
rates, volatilities, market spreads, prepayments, defaults, recoveries, cumulative loss projections, and cash flows. Such securities are
classified in Level 2 of the valuation hierarchy. Where Level 1 or Level 2 inputs are not available, such securities are classified as Level
3 within the hierarchy.
Fair value determinations of available-for-sale debt securities are the responsibility of the Company’s corporate accounting and treasury
departments. The Company obtains fair value estimates from independent third party vendors on a monthly basis. The vendors’ pricing
system methodologies, procedures and system controls are reviewed to ensure they are appropriately designed and operating effectively.
The Company reviews the vendors’ inputs for fair value estimates and the recommended assignments of levels within the fair value
hierarchy. The review includes the extent to which markets for debt securities are determined to have limited or no activity, or are judged
to be active markets. The Company reviews the extent to which observable and unobservable inputs are used as well as the appropriateness
of the underlying assumptions about risk that a market participant would use in active markets, with adjustments for limited or inactive
markets. In considering the inputs to the fair value estimates, the Company places less reliance on quotes that are judged to not reflect
orderly transactions, or are non-binding indications. In assessing credit risk, the Company reviews payment performance, collateral
adequacy, third party research and analyses, credit rating histories and issuers’ financial statements. For those markets determined to be
inactive or limited, the valuation techniques used are models for which management has verified that discount rates are appropriately
adjusted to reflect illiquidity and credit risk.
Loans held for sale, at fair value: loans held for sale measured at fair value, for which an active secondary market and readily available
market prices exist, are initially valued at the transaction price and are subsequently valued by using quoted prices for similar assets,
adjusted for specific attributes of that loan or other observable market data, such as outstanding commitments from third party investors.
Loans held for sale measured at fair value are classified within Level 2. Included in gain on sale of loans were net losses of $155,000,
net gains of $994,000 and $0 for the years ended December 31, 2018, 2017 and 2016, respectively, from the changes in fair value of
loans held for sale measured at fair value. Electing to measure loans held for sale at fair value reduces certain timing differences and
better matches changes in fair value of these assets with changes in the value of the derivative instruments used to economically hedge
them without the burden of complying with the requirements for hedge accounting.
110
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)
Debt 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, at fair value
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)
—
—
—
—
—
—
—
—
—
—
23,649
120,208
852,250
290,817
792,915
491,824
33,156
2,604,819
3,769
3,769
—
—
—
—
—
—
—
—
—
—
Fair Value
December 31,
2018
$
$
$
$
23,649
120,208
852,250
290,817
792,915
491,824
33,156
2,604,819
3,769
3,769
111
Note 20. Fair Value of Assets and Liabilities (continued)
(Dollars in thousands)
Debt 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, at fair value
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
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, 2018.
Other real estate owned: OREO is initially recorded at fair value less estimated cost to sell, establishing a new cost basis. OREO is
subsequently accounted for at lower of cost or fair value less estimated cost to sell. Estimated fair value of OREO is based on appraisals
or evaluations (new or updated). OREO is classified within Level 3 of the fair value hierarchy.
Collateral-dependent impaired loans, net of ALLL: loans included in the Company’s loan portfolio for which it is probable that the
Company will not collect all principal and interest due according to contractual terms are considered impaired. Estimated fair value of
collateral-dependent impaired loans is based on the fair value of the collateral, less estimated cost to sell. Collateral-dependent impaired
loans are classified within Level 3 of the fair value hierarchy.
The Company’s credit department reviews appraisals for OREO and collateral-dependent loans, giving consideration to the highest and
best use of the collateral. The appraisal or evaluation (new or updated) is considered the starting point for determining fair value. The
valuation techniques used in preparing appraisals or evaluations (new or updated) include the cost approach, income approach, sales
comparison approach, or a combination of the preceding valuation techniques. The key inputs used to determine the fair value of the
collateral-dependent loans and OREO include selling costs, discounted cash flow rate or capitalization rate, and adjustment to comparables.
Valuations and significant inputs obtained by independent sources are reviewed by the Company for accuracy and reasonableness. The
Company also considers other factors and events in the environment that may affect the fair value. The appraisals or evaluations (new
or updated) are reviewed at least quarterly and more frequently based on current market conditions, including deterioration in a borrower’s
financial condition and when property values may be subject to significant volatility. After review and acceptance of the collateral
appraisal or evaluation (new or updated), adjustments to the impaired loan or OREO may occur. The Company generally obtains appraisals
or evaluations (new or updated) annually.
112
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)
—
—
—
—
—
—
1,011
6,985
7,996
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
December 31,
2018
$
$
1,011
6,985
7,996
Fair Value
December 31,
2017
$
$
2,296
6,339
8,635
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,
2018
Quantitative Information about Level 3 Fair Value Measurements
Valuation Technique
Unobservable Input
Range (Weighted-
Average) 1
Other real estate owned
$
1,011 Sales comparison approach Selling costs
8.0% - 15.0% (9.2%)
Collateral-dependent
impaired loans, net of ALLL $
$
2,384 Sales comparison approach Selling costs
4,601 Combined approach
Selling costs
6,985
8.0% - 20.0% (9.9%)
10.0% - 10.0% (10.0%)
113
Note 20. Fair Value of Assets and Liabilities (continued)
(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
Selling costs
3,560 Combined approach
6,339
10.0% - 20.0% (10.6%)
8.0% - 10.0% (9.4%)
10.0% - 10.0% (10.0%)
______________________________
1 The range for selling cost inputs represents reductions to the fair value of the assets.
Fair Value of Financial Instruments
The following tables present the carrying amounts, estimated fair values and the level within the fair value hierarchy of the Company’s
financial instruments not carried at fair value. Receivables and payables due in one year or less, equity securities without readily
determinable fair values and deposits with no defined or contractual maturities are excluded.
(Dollars in thousands)
Financial assets
Cash and cash equivalents
Debt securities, held-to-maturity
Loans receivable, net of ALLL
Total financial assets
Financial liabilities
Term deposits
FHLB advances
Repurchase agreements and other borrowed funds
Subordinated debentures
Total financial liabilities
Fair Value Measurements
At the End of the Reporting Period Using
Carrying
Amount
December 31,
2018
Quoted Prices
in Active
Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
$
$
$
203,790
297,915
8,156,310
8,658,015
1,070,208
440,175
410,859
134,051
2,055,293
203,790
—
—
203,790
—
—
—
—
—
—
288,256
—
288,256
1,069,777
439,615
410,859
120,302
2,040,553
—
—
8,079,112
8,079,112
—
—
—
—
—
114
Note 20. Fair Value of Assets and Liabilities (continued)
(Dollars in thousands)
Financial assets
Cash and cash equivalents
Debt securities, held-to-maturity
Loans receivable, net of ALLL
Total financial assets
Financial liabilities
Term deposits
FHLB advances
Repurchase agreements and other borrowed funds
Subordinated debentures
Total financial liabilities
Note 21. Contingencies and Commitments
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
648,313
6,448,256
7,296,573
977,302
353,995
370,797
126,135
1,828,229
200,004
—
—
200,004
—
—
—
—
—
—
660,086
6,219,515
6,879,601
978,803
352,886
370,797
98,023
1,800,509
—
—
114,771
114,771
—
—
—
—
—
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,
2018
December 31,
2017
$
$
1,948,516
45,263
1,993,779
1,565,112
40,082
1,605,194
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
The Company has completed the following acquisitions during the last two years:
Inter-Mountain Bancorp., Inc. and its wholly-owned subsidiary, First Security Bank
•
• Columbine Capital Corp., and its wholly-owned subsidiary, Collegiate Peaks Bank
• TFB Bancorp, Inc. and its subsidiary, The Foothills Bank
The assets and liabilities of FSB, Collegiate and Foothills were recorded on the Company’s consolidated statements of financial condition
at their estimated fair values as of their acquisition dates and their results of operations have been included in the Company’s consolidated
statements of operations since those dates. The following table discloses the calculation of the fair value of the consideration transferred,
the total identifiable net assets acquired and the resulting goodwill arising from the FSB, Collegiate and Foothills acquisitions:
(Dollars in thousands)
Fair value of consideration transferred
FSB
February 28,
2018
Collegiate
January 31,
2018
Foothills
April 30,
2017
Fair value of Company shares issued, net of equity issuance costs
Cash consideration for outstanding shares
Effective settlement of a pre-existing relationship
Total fair value of consideration transferred
$
181,043
—
—
181,043
Recognized amounts of identifiable assets acquired and liabilities assumed
Identifiable assets acquired
Cash and cash equivalents
Debt securities
Loans receivable
Core deposit intangible 1
Accrued income and other assets
Total identifiable assets acquired
Liabilities assumed
Deposits
Borrowings 2
Accrued expenses and other liabilities
Total liabilities assumed
Total identifiable net assets
Goodwill recognized
24,397
271,865
627,767
31,053
78,274
1,033,356
877,586
36,880
14,175
928,641
104,715
$
76,328
69,764
16,265
10,054
96,083
93,136
42,177
354,252
10,275
15,911
515,751
437,171
12,509
5,435
455,115
60,636
35,447
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
______________________________
1 The core deposit intangible for each acquisition was determined to have an estimated life of 10 years.
2 Borrowings assumed with the FSB acquisition include Tier 2 subordinated debentures of $7,903,000.
2018 Acquisitions
On February 28, 2018, the Company acquired 100 percent of the outstanding common stock of Inter-Mountain Bancorp., Inc. and its
wholly-owned subsidiary, First Security Bank, a community bank based in Bozeman, Montana. FSB provides banking services to
individuals and businesses throughout Montana with locations in Bozeman, Belgrade, Big Sky, Choteau, Fairfield, Fort Benton, Three
Forks, Vaughn and West Yellowstone. The acquisition expands the Company’s presence in the Bozeman and Golden Triangle markets
in Montana and further diversifies the Company’s loan, customer and deposit base. FSB merged into the Bank and became a new bank
division headquartered in Bozeman and the Bank’s existing Bozeman-based division, Big Sky Western Bank, combined with the new
FSB division. The agriculture-focused northern branches of FSB combined with the Bank’s First Bank of Montana division. The FSB
acquisition was valued at $181,043,000 and resulted in the Company issuing 4,654,091 shares of its common stock. The fair value of
the Company shares issued was determined on the basis of the closing market price of the Company’s common stock on the February
28, 2018 acquisition date. The excess of the fair value of consideration transferred over total identifiable net assets was recorded as
goodwill. The goodwill arising from the acquisition consists largely of the synergies and economies of scale expected from combining
the operations of the Company and FSB. None of the goodwill is deductible for income tax purposes as the acquisition was accounted
for as a tax-free exchange.
116
Note 22. Mergers and Acquisitions (continued)
On January 31, 2018, the Company acquired 100 percent of the outstanding common stock of Columbine Capital Corp. and its wholly-
owned subsidiary, Collegiate Peaks Bank, a community bank based in Buena Vista, Colorado. Collegiate provides banking services to
businesses and individuals in the Mountain and Front Range communities of Colorado, with locations in Aurora, Buena Vista, Denver
and Salida. The acquisition expands the Company’s presence in Colorado to the mountains and along the Front Range and further
diversifies the Company’s loan, customer and deposit base. Collegiate merged into the Bank and operates as a separate Bank division
under its existing name and management team. The Collegiate acquisition was valued at $96,083,000 and resulted in the Company
issuing 1,778,777 shares of its common stock and paying $16,265,000 in cash in exchange for all of Collegiate’s outstanding common
stock shares and $10,054,000 due to an effective settlement of pre-existing receivable from Columbine Capital Corp. The fair value of
the Company shares issued was determined on the basis of the closing market price of the Company’s common stock on the January 31,
2018 acquisition date. The excess of the fair value of consideration transferred over total identifiable net assets was recorded as goodwill.
The goodwill arising from the acquisition consists largely of the synergies and economies of scale expected from combining the operations
of the Company and Collegiate. None of the goodwill is deductible for income tax purposes as the acquisition was accounted for as a
tax-free exchange.
The fair values of the FSB and Collegiate assets acquired include loans with fair values of $627,767,000 and $354,252,000, respectively.
The gross principal and contractual interest due under the FSB and Collegiate contracts was $632,370,000 and $355,364,000, respectively.
The Company evaluated the principal and contractual interest due at each of the acquisition dates and determined that insignificant
amounts were not expected to be collectible.
The Company incurred $4,714,000 and $1,683,000 of expenses in connection with the FSB and Collegiate acquisitions, respectively,
during the year ended December 31, 2018. Mergers and acquisition expenses are included in other expense in the Company's consolidated
statements of operations and consist of third-party costs, conversion costs and employee retention and severance expenses.
Total income consisting of net interest income and non-interest income of the acquired operations of FSB was approximately $42,796,000
and net income was approximately $11,303,000 from February 28, 2018 to December 31, 2018. Total income consisting of net interest
income and non-interest income of the acquired operations of Collegiate was approximately $23,921,000 and net income was
approximately $4,962,000 from January 31, 2018 to December 31, 2018. The following unaudited pro forma summary presents
consolidated information of the Company as if the FSB and Collegiate acquisitions had occurred on January 1, 2017:
(Dollars in thousands)
Net interest income and non-interest income
Net income
Years ended
December 31,
2018
December 31,
2017
$
560,979
177,267
520,634
138,042
2017 Acquisition
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 locations 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.
The fair value of the Foothills assets acquired include loans with fair values of $292,529,000. The gross principal and contractual interest
due under the Foothills contracts was $303,527,000. The Company evaluated the principal and contractual interest due at the acquisition
date and determined that an insignificant amount was not expected to be collectible.
117
Note 22. Mergers and Acquisitions (continued)
The Company incurred $1,127,000 of expenses in connection with the Foothills acquisition during the year ended December 31, 2017.
Mergers and acquisition expenses are included in other expense in the Company's consolidated statements of operations and consist of
third-party costs, conversion costs and employee retention and severance expenses.
Total income consisting of net interest income and non-interest income of the acquired operations of 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
Note 23. Subsequent Event
Years ended
December 31,
2017
December 31,
2016
$
462,603
114,187
436,678
124,373
On January 16, 2019, the Company announced the signing of a definitive agreement to acquire FNB Bancorp and its wholly-owned
subsidiary, The First National Bank of Layton, a community bank based in Layton, Utah (collectively, “FNB”). FNB provides banking
services to individuals and businesses throughout Utah with locations in Layton, Bountiful, Clearfield, and Draper. As of December 31,
2018, FNB had total assets of $334,709,000, gross loans of $246,724,000 and total deposits of $285,752,000. The acquisition is subject
to required regulatory approvals and other customary conditions of closing and is anticipated to take place in the second quarter of 2019.
Upon closing of the transaction, the branches of FNB, along with the Bank’s existing branches operating in Utah, will operate as a new
division of the Bank.
118
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,
2018 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, 2018. 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, 2018,
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, 2018 and is included in “Item
8. Financial Statements and Supplementary Data.”
Item 9B. Other Information
None
119
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 2019 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.
The Company has adopted a Code of Ethics for Senior Financial Officers, a Director Code of Ethics and a Code of Ethics and Conduct
applicable to all employees. Each of the codes is available electronically by visiting the Company’s website at www.glacierbancorp.com
and clicking on “Governance Documents” or by writing to: Glacier Bancorp, Inc., Corporate Secretary, 49 Commons Loop, Kalispell,
Montana 59901. Waivers of the applicable code for directors or executive officers are required to be approved by the Company’s Board
of Directors. Information regarding any such waivers will be disclosed on a current report on Form 8-K within four business days after
the waiver is approved.
Item 11. Executive Compensation
Information regarding “Executive Compensation” is set forth under the headings “Compensation of Directors” 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.
120
PART IV
Item 15. Exhibits, Financial Statement Schedules
List of Financial Statements and Financial Statement Schedules
(a) The following documents are filed as a part of this report:
(1) Financial Statements and
(2) Financial Statement schedules required to be filed by Item 8 of this report.
(3) The following exhibits are required by Item 601 of Regulation S-K and are included as part of this Form 10-K:
Exhibit No.
Exhibit
3(i)
3(ii)
10(a) *
10(b) *
10(c) *
10(d) *
10(e) *
10(f) *
10(g) *~
10(h) *
10(i) *
10(j) *
10(k) *
21
23 ~
31.1 ~
31.2 ~
32 ~
101 ~
Amended and Restated Articles of Incorporation 1
Amended and Restated Bylaws 1
Amended and Restated Deferred Compensation Plan effective January 1, 2008 2
Amended and Restated Supplemental Executive Retirement Agreement effective January 1, 2008 2
Nonemployee Service Provider Deferred Compensation Plan 3
2015 Stock Incentive Plan 4
2015 Stock Option Award Agreement 4
2015 Restricted Shares Award Agreement 4
2015 Short Term Incentive Plan
Columbine Capital Corp. 2011 Executive Incentive Plan 5
Employment Agreement effective March 5, 2018 between the Company and Randall M. Chesler 6
Employment Agreement effective March 5, 2018 between the Company and Ron J. Copher 6
Employment Agreement effective March 5, 2018 between the Company and Don J. Chery 6
Subsidiaries of the Company (See item 1, “Subsidiaries”)
Consent of BKD, LLP
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes–Oxley Act of 2002
The following financial information from Glacier Bancorp, Inc.’s Annual Report on Form 10-K for the year ended
December 31, 2018 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 Exhibit 10.1 included in the Company’s Form 8-K filed by the Company on October 31, 2012.
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 Exhibit 99.1 of the Company’s S-8 Registration Statement (No. 333-224223).
6 Incorporated by reference to Exhibits 10.1 through 10.3 included in the Company’s Form 10-Q filed by the Company on May 1, 2018.
* Compensatory Plan or Arrangement
~ Exhibit omitted from the 2018 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
121
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, 2019.
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, 2019, 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/ David C. Boyles
David C. Boyles
/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
Director
122
DIRECTORS AND OFFICERS
Board of Directors
Dallas I. Herron, Chairman
CEO of CityServiceValcon, LLC
David C. Boyles
Former Chairman of Columbine Capital Corporation and
Retired President of Guaranty Bank and Trust Company
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
Barry L. Johnston
Senior Vice President/Chief Credit Officer
Ron J. Copher, CPA
Executive Vice President/Chief Financial Officer/Secretary
David L. Langston
Senior Vice President/Human Resources Director
Don J. Chery
Executive Vice President/Chief Administrative Officer
Mark D. MacMillan
Senior Vice President/Chief Information Officer
Angela L. Dose, CPA
Senior Vice President/Chief 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
Lee K. Groom
Senior Vice President/Chief Experience Officer
Casey L. Ries
Senior Vice President/Internal Audit Director
Marcia L. Johnson
Senior Vice President/Chief Operating Officer
Ryan T. Screnar, CPA, CGMA
Senior Vice President/Compliance Director
Cover photo by Blake Passmore
McDonald Creek
Glacier National Park, Montana
2018 ANNUAL REPORT