Glacier Bancorp(GBCI) - 2018 Q4 - Annual Report

Business and Risk Factors This section provides an overview of the company's business operations, recent acquisitions, regulatory environment, and key risk factors. Business Overview Glacier Bancorp, Inc. is a regional bank holding company providing commercial banking services through its 14 bank divisions across seven states in the Rocky Mountain region, with recent acquisitions pushing assets over $10 billion, subjecting it to new regulatory scrutiny. - 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[19] - The company operates a decentralized model with fourteen bank divisions, each with its own management team and advisory directors, all under the Glacier Bank charter[19][24] Recent and Pending Acquisitions | Acquisition | Date | Total Assets Acquired (in millions) | Gross Loans Acquired (in millions) | Total Deposits Acquired (in millions) | | :--- | :--- | :--- | :--- | :--- | | Inter-Mountain Bancorp., Inc. (FSB) | Feb 28, 2018 | $1,109.7 | $627.8 | $877.6 | | Columbine Capital Corp. (Collegiate) | Jan 31, 2018 | $551.2 | $354.3 | $437.2 | | TFB Bancorp, Inc. (Foothills) | Apr 30, 2017 | $385.8 | $292.5 | $296.8 | | FNB Bancorp (Pending) | Q2 2019 (Anticipated) | $335.0 | $247.0 | $286.0 | - As a result of exceeding $10 billion in assets, the company will be subject to the Durbin Amendment's interchange fee cap, which is expected to reduce pre-tax annual earnings by $17 to $20 million, effective July 2019[62][85] Supervision and Regulation The company and its bank subsidiary are subject to extensive federal and state regulations, primarily from the Federal Reserve, FDIC, and state banking divisions, with direct supervision by the CFPB due to exceeding $10 billion in total assets. - The Company is regulated by the Federal Reserve as a bank holding company, while the Bank is regulated by the FDIC and state banking divisions[36] - The Dodd-Frank Act subjects the company to heightened requirements, including direct supervision by the CFPB, due to its asset size exceeding $10 billion[59][69] - The Crapo Bill, enacted in May 2018, increased the asset threshold for annual company-run stress tests from $10 billion to $250 billion, exempting the company from this requirement for the time being[61] Minimum Capital Requirements (Basel III) | Ratio | Minimum Requirement | | :--- | :--- | | Common Equity Tier 1 to Risk-Based Assets | 4.5% | | Tier 1 Capital to Risk-Based Assets | 6.0% | | Total Capital to Risk-Based Assets | 8.0% | | Tier 1 Capital to Total Assets (Leverage) | 4.0% | Risk Factors The company identifies several key risks, including adverse economic conditions in its specific market areas, heightened regulatory requirements from exceeding $10 billion in assets, cybersecurity threats, potential inadequacy of the allowance for loan losses, intense competition, and fluctuating interest rates. - Economic conditions in the bank's primary markets (MT, ID, UT, WA, WY, CO, AZ) could adversely impact earnings and credit quality[83] - The company faces heightened regulatory requirements after exceeding $10 billion in assets, including the Durbin Amendment's interchange fee cap and direct examination by the CFPB[85][86] - A high concentration of loans secured by real estate exposes the company to risks from deterioration in real estate markets, which could require material increases to the ALLL[91][93] - The upcoming implementation of the Current Expected Credit Losses (CECL) accounting standard (ASU 2016-13) is expected to be a significant challenge and could materially impact the company's financial statements[111][112] Properties As of December 31, 2018, the company operated from 167 properties across its seven-state footprint, with 136 owned and 31 leased, totaling a net book value of $211.1 million. Properties by State (as of Dec 31, 2018) | State | Properties Leased | Properties Owned | Net Book Value (in millions) | | :--- | :--- | :--- | :--- | | Montana | 8 | 61 | $125.012 | | Idaho | 8 | 20 | $28.080 | | Utah | 1 | 3 | $2.085 | | Washington | 4 | 10 | $5.657 | | Wyoming | 2 | 15 | $16.196 | | Colorado | 2 | 25 | $28.669 | | Arizona | 6 | 2 | $5.376 | | Total | 31 | 136 | $211.075 | Financial Information This section provides detailed financial information, including common stock and dividend data, selected financial highlights, management's discussion and analysis of financial condition and results of operations, market risk disclosures, and audited financial statements. Common Stock and Dividend Information The company's common stock trades on the NASDAQ Global Select Market under the symbol GBCI, with total dividends declared increasing to $1.31 per share in 2018, and no stock repurchases made during the year. Dividends Declared Per Share | Period | 2018 | 2017 | | :--- | :--- | :--- | | First quarter | $0.23 | $0.21 | | Second quarter | $0.26 | $0.21 | | Third quarter | $0.26 | $0.21 | | Fourth quarter | $0.26 | $0.21 | | Special | $0.30 | $0.30 | | Total | $1.31 | $1.14 | - The company made no stock repurchases during 2018[124] Selected Financial Data This section presents a five-year summary of key financial data, highlighting significant growth, with total assets reaching $12.1 billion in 2018 and net income growing 33.7% to $181.9 million (non-GAAP basis for comparison). - The company provides non-GAAP financial measures for 2017 to adjust for a one-time net tax expense of $19.7 million resulting from the revaluation of deferred tax assets due to the Tax Cuts and Jobs Act[129] Selected Financial Highlights (2018 vs. 2017) | Metric (in thousands, except per share) | 2018 | 2017 | % Change | | :--- | :--- | :--- | :--- | | Total Assets | $12,115,484 | $9,706,349 | 24.8% | | Loans Receivable, net | $8,156,310 | $6,448,256 | 26.5% | | Deposits | $9,493,767 | $7,579,747 | 25.3% | | Stockholders' Equity | $1,515,854 | $1,199,057 | 26.4% | | Net Income (Non-GAAP for 2017) | $181,878 | $136,076 | 33.7% | | Diluted EPS (Non-GAAP for 2017) | $2.17 | $1.75 | 24.0% | - Asset quality continued to improve, with non-performing assets as a percentage of subsidiary assets decreasing from 1.08% in 2014 to 0.47% in 2018[135] Management's Discussion and Analysis (MD&A) The MD&A details the company's strong performance in 2018, driven by two bank acquisitions and organic growth, which pushed total assets to $12.1 billion, resulting in record net income and improved asset quality, while also discussing the upcoming impact of the Durbin Amendment and capital management. Highlights and Overview (2018 vs 2017) 2018 was a pivotal year, with the completion of two bank acquisitions increasing assets by approximately 15% and pushing the company over the $10 billion asset threshold, leading to record net income of $182 million and strong organic loan growth. - Completed two bank acquisitions in Q1 2018 (Collegiate and FSB), increasing asset size by approximately 15%[142] - Total assets ended the year at $12.115 billion, a 25% increase, driven by acquisitions, organic growth, and bringing back $395 million in deposits that had been sold in 2017 to remain under the $10 billion asset threshold[143] - Net income for 2018 was a record $182 million, a 34% increase over 2017's adjusted net income, with diluted EPS at $2.17, up 24% from $1.75 (adjusted) in 2017[147] - Non-performing assets decreased by $8.4 million (13%) from the prior year-end[145] Financial Condition Analysis As of December 31, 2018, total assets grew 25% to $12.1 billion, fueled by a 26% increase in net loans receivable to $8.2 billion and an 18% increase in debt securities, while total deposits rose 25% to $9.5 billion, and tangible stockholders' equity increased by 17% to $1.18 billion. Financial Condition Highlights (December 31, 2018 vs 2017) | (Dollars in thousands) | 2018 | 2017 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Assets | $12,115,484 | $9,706,349 | $2,409,135 | 25% | | Loans Receivable, net | $8,156,310 | $6,448,256 | $1,708,054 | 26% | | Total Deposits | $9,493,767 | $7,579,747 | $1,914,020 | 25% | | Total Stockholders' Equity | $1,515,854 | $1,199,057 | $316,797 | 26% | | Tangible Stockholders' Equity | $1,177,026 | $1,007,062 | $169,964 | 17% | - Excluding loans from acquisitions, the loan portfolio grew organically by $728 million, or 11%, driven by commercial real estate[153] Results of Operations (2018 vs 2017) For the year ended December 31, 2018, net interest income increased 26% to $433.5 million, driven by strong loan growth and an expanded net interest margin, while non-interest income grew 6% and non-interest expense rose 21% due to acquisition-related costs. Income Statement Highlights (2018 vs 2017) | (Dollars in thousands) | 2018 | 2017 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $433,465 | $345,158 | $88,307 | 26% | | Provision for loan losses | $9,953 | $10,824 | ($871) | (8)% | | Non-interest Income | $118,824 | $112,239 | $6,585 | 6% | | Non-interest Expense | $320,127 | $265,571 | $54,556 | 21% | - The net interest margin (tax-equivalent) increased by 9 basis points to 4.21% in 2018, resulting from a remix of earning assets to higher-yielding loans and stable funding costs[160] - The efficiency ratio increased slightly to 54.73% from 53.94% in 2017, but adjusting for the lower 2018 tax rate, the efficiency ratio would have been 53.77%, an improvement over the prior year[164] Investment and Lending Activities The company's investment portfolio stood at $2.87 billion, primarily in state/local government and mortgage-backed securities, while the loan portfolio reached $8.3 billion, with commercial loans constituting 80% of the total, and credit quality continued to improve. Loan Portfolio Composition (December 31, 2018) | Loan Type | Amount (in thousands) | Percent of Total | | :--- | :--- | :--- | | Commercial Real Estate | $4,657,561 | 57% | | Other Commercial | $1,911,171 | 23% | | Residential Real Estate | $887,742 | 11% | | Home Equity & Other Consumer | $831,075 | 11% | | Total Loans | $8,287,549 | 102% | | ALLL | ($131,239) | (2)% | | Loans Receivable, Net | $8,156,310 | 100% | Asset Quality Trends | Metric | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Non-performing assets to subsidiary assets | 0.47% | 0.68% | 0.76% | | ALLL as a % of total loans | 1.58% | 1.97% | 2.28% | | Net charge-offs as a % of average loans | 0.11% | 0.17% | 0.05% | - The ALLL decreased as a percentage of loans to 1.58% from 1.97% a year ago, primarily driven by stabilizing credit quality[247] Sources of Funds Deposits are the company's primary funding source, totaling $9.5 billion at year-end 2018, a 25% increase from 2017, with a significant 32% being non-interest bearing, supplemented by FHLB advances, repurchase agreements, and subordinated debentures. Deposit Composition (December 31, 2018) | Deposit Type | Amount (in thousands) | Percent of Total | | :--- | :--- | :--- | | Non-interest bearing deposits | $3,001,178 | 32% | | NOW and DDA accounts | $2,391,307 | 25% | | Money market deposit accounts | $1,684,284 | 18% | | Savings accounts | $1,346,790 | 14% | | Certificate accounts & Wholesale | $1,070,208 | 11% | | Total Deposits | $9,493,767 | 100% | - The company utilizes other funding sources including FHLB advances ($440.2 million), securities sold under agreements to repurchase ($396.2 million), and subordinated debentures ($134.1 million)[256][257][260] Liquidity and Capital Resources The company maintains a strong liquidity position with significant available borrowing capacity from the FHLB ($1.66 billion) and the FRB discount window ($876 million), supported by $1.54 billion in unencumbered securities, and robust capital ratios well exceeding regulatory requirements. Available Liquidity Sources (December 31, 2018) | Source | Amount Available (in thousands) | | :--- | :--- | | FHLB Advances | $1,659,111 | | FRB Discount Window | $875,936 | | Unsecured Lines of Credit | $230,000 | | Unencumbered Debt Securities | $1,536,123 | Consolidated Capital Ratios (December 31, 2018) | Ratio | Actual | Required for Adequacy (incl. buffer) | | :--- | :--- | :--- | | Total Capital (to risk-weighted assets) | 14.70% | 9.875% (10.50% in 2019) | | Tier 1 Capital (to risk-weighted assets) | 13.37% | 7.875% (8.50% in 2019) | | Common Equity Tier 1 (to risk-weighted assets) | 12.10% | 6.375% (7.00% in 2019) | | Tier 1 Capital (to average assets) | 11.35% | 4.00% | Market Risk Disclosures The company's primary market risk is interest rate risk, managed through NII simulation and EVE analysis, with the balance sheet slightly liability-sensitive in the short term, and all sensitivity measures remaining within board-approved policy limits. Net Interest Income (NII) Sensitivity Analysis (as of Dec 31, 2018) | Rate Scenario | Estimated One-Year Sensitivity | Policy Limit | | :--- | :--- | :--- | | +300 bps Rate shock | (2.4)% | (20.0)% | | +200 bps Rate shock | (1.7)% | (10.0)% | | +100 bps Rate shock | (0.6)% | (10.0)% | | -100 bps Rate shock | (2.9)% | (10.0)% | Economic Value of Equity (EVE) Sensitivity Analysis (as of Dec 31, 2018) | Rate Scenario | Post Shock Ratio | Policy Limit | | :--- | :--- | :--- | | +300 bps Rate shock | (6.5)% | (30.0)% | | +200 bps Rate shock | (2.8)% | (20.0)% | | +100 bps Rate shock | 0.3% | (10.0)% | | -100 bps Rate shock | (6.1)% | (10.0)% | Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for the three years ended December 31, 2018, along with the independent auditor's report, providing a comprehensive view of the company's financial position, results of operations, and cash flows. Consolidated Financial Statements The core audited financial statements show significant year-over-year growth, with total assets at $12.1 billion and net income of $181.9 million for 2018, reflecting strong financial performance. Key Financial Statement Data (Year Ended Dec 31, 2018) | Metric | Amount (in thousands) | | :--- | :--- | | Balance Sheet | | | Total Assets | $12,115,484 | | Loans Receivable, Net | $8,156,310 | | Total Deposits | $9,493,767 | | Total Stockholders' Equity | $1,515,854 | | Income Statement | | | Net Interest Income | $433,465 | | Net Income | $181,878 | | Diluted EPS | $2.17 (per share) | | Cash Flow | | | Net Cash from Operating Activities | $280,711 | Notes to Consolidated Financial Statements The notes provide critical details on accounting policies and financial statement line items, including the impact of acquisitions, loan and securities portfolio composition, ALLL methodology, regulatory capital compliance, and pending adoption of new accounting standards like CECL. - Note 1 (Accounting Policies): The company adopted ASU 2014-09 (Revenue from Contracts with Customers) on Jan 1, 2018, with no significant impact, and is preparing for the adoption of ASU 2016-13 (CECL), which is expected to have a material impact and potentially increase the ALLL[398][403] - Note 3 (Loans): The ALLL stood at $131.2 million, with $3.2 million in specific valuation allowances and $128.0 million in general allowances, resulting in an ALLL as a percentage of total loans of 1.58%[415][420] - Note 22 (Acquisitions): Details the 2018 acquisitions of FSB and Collegiate, which added a combined $111.8 million in goodwill and $41.3 million in core deposit intangibles[524][526][528] - Note 23 (Subsequent Event): On January 16, 2019, the company announced a definitive agreement to acquire FNB Bancorp in Utah, with total assets of $335 million[536] Controls and Procedures Company management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of December 31, 2018, and asserted the effectiveness of internal control over financial reporting, which was also affirmed by the independent auditor. - Management concluded that disclosure controls and procedures are effective to provide reasonable assurance that required information is recorded, processed, summarized, and reported in a timely manner[539] - Based on an assessment using the "2013 Internal Control – Integrated Framework" from COSO, management asserts that the Company maintained effective internal control over financial reporting as of December 31, 2018[542]