GLACIER BANCORP, INC. - Annual Report: 2010 (Form 10-K)
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2010
or
o | 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 | 81-0519541 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |
49 Commons Loop, Kalispell, Montana | 59901 | |
(Address of principal executive offices) | (Zip Code) | |
(406) 756-4200 | ||
(Registrants telephone number, including area code) | ||
Securities registered pursuant to Section 12(b) of the Act: | ||
Common Stock, $0.01 par value per share | Nasdaq Global Select Market | |
(Title of Each Class) | (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. þ Yes o 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. o Yes þ 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. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months. þ Yes o 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 registrants 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. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of large accelerated filer, accelerated filer and smaller reporting
company in Rule 12b-2 of the
Exchange Act. (Check one):
þ Large accelerated filer | o Accelerated filer | o Non-accelerated filer (Do not check if a smaller reporting company) |
o Smaller reporting company |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). o Yes þ No
The aggregate market value of the voting common equity held by non-affiliates of the Registrant at
June 30, 2010 (the last business day of the most recent second quarter), was $1,022,855,305 (based
on the average bid and ask price as quoted on the NASDAQ Global Select Market at the close of
business on that date).
As of February 15, 2011, there were issued and outstanding 71,915,073 shares of the Registrants
common stock. No preferred shares are issued or outstanding.
Document Incorporated by Reference
Portions of the 2011 Annual Meeting Proxy Statement dated March 29, 2011 are incorporated by
reference into Part III of this Form 10-K.
GLACIER BANCORP, INC.
FORM 10-K ANNUAL REPORT
For the Year ended December 31, 2010
FORM 10-K ANNUAL REPORT
For the Year ended December 31, 2010
TABLE OF CONTENTS
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EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT | ||||||||
EX-101 DEFINITION LINKBASE DOCUMENT |
Table of Contents
PART I
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 managements plans, objectives, expectations and intentions
that are not historical facts, and other statements identified by words such as expects,
anticipates, intends, plans, believes, should, projects, seeks, estimates or words
of similar meaning. These forward-looking statements are based on current beliefs and expectations
of management and are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond the Companys control. In addition, these
forward-looking statements are subject to assumptions with respect to future business strategies
and decisions that are subject to change. The following factors, among others, could cause actual
results to differ materially from the anticipated results or other expectations in the
forward-looking statements, including those set forth in this Annual Report on Form 10-K, or the
documents incorporated by reference:
▪ | the risks associated with lending and potential adverse changes of the credit quality of loans in the Companys portfolio, including as a result of declines in the housing and real estate markets in its geographic areas; | ||
▪ | increased loan delinquency rates; | ||
▪ | the risks presented by a continued economic downturn, which could adversely affect credit quality, loan collateral values, other real estate owned values, investment values, liquidity and capital levels, dividends and loan originations; | ||
▪ | changes in market interest rates, which could adversely affect the Companys net interest income and profitability; | ||
▪ | legislative or regulatory changes that adversely affect the Companys business, ability to complete pending or prospective future acquisitions, limit certain sources of revenue, or increase cost of operations; | ||
▪ | costs or difficulties related to the integration of acquisitions; | ||
▪ | the goodwill we have recorded in connection with acquisitions could become impaired, which may have an adverse impact on our earnings and capital; | ||
▪ | reduced demand for banking products and services; | ||
▪ | the risks presented by public stock market volatility, which could adversely affect the market price of our common stock and our ability to raise additional capital in the future; | ||
▪ | competition from other financial services companies in our markets; | ||
▪ | loss of services from the senior management team; and | ||
▪ | the Companys success in managing risks involved in the foregoing. |
Additional factors that could cause actual results to differ materially from those expressed in the
forward-looking statements are discussed in Risk Factors in Item 1A. Please take into account that
forward-looking statements speak only as of the date of this Annual Report on Form 10-K (or
documents incorporated by reference, if applicable). The Company does not undertake any obligation
to publicly correct or update any forward-looking statement if it later becomes aware that actual
results are likely to differ materially from those expressed in such forward-looking statement.
Item 1. Business
GENERAL DEVELOPMENT OF BUSINESS
Glacier Bancorp, Inc., headquartered in Kalispell, Montana (the Company), is a Montana
corporation incorporated in 2004 as a successor corporation to the Delaware corporation originally
incorporated in 1990. The Company is a regional multi-bank holding company providing commercial
banking services from 105 locations in Montana, Idaho, Wyoming, Colorado, Utah and Washington. The
Company offers a wide range of banking products and services, including transaction and savings
deposits, commercial, consumer, agriculture, and real estate loans, mortgage origination services,
and retail brokerage services. The Company serves individuals, small to medium-sized businesses,
community organizations and public entities.
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Subsidiaries
The Company includes the parent holding company (Parent) and the following nineteen subsidiaries
which consist of eleven bank subsidiaries (collectively referred to hereafter as the Banks) and
eight other subsidiaries.
Bank Subsidiaries
Montana
Glacier Bank (Glacier) founded in 1955
First Security Bank of Missoula (First Security) founded in 1973
Western Security Bank (Western) founded in 2001
Big Sky Western Bank (Big Sky) founded in 1990
Valley Bank of Helena (Valley) founded in 1978
First Bank of Montana (First Bank-MT) founded in 1924
Glacier Bank (Glacier) founded in 1955
First Security Bank of Missoula (First Security) founded in 1973
Western Security Bank (Western) founded in 2001
Big Sky Western Bank (Big Sky) founded in 1990
Valley Bank of Helena (Valley) founded in 1978
First Bank of Montana (First Bank-MT) founded in 1924
Colorado
Bank of the San Juans (San Juans) founded in 1998
Bank of the San Juans (San Juans) founded in 1998
Idaho
Mountain West Bank (Mountain West) founded in 1993
Citizens Community Bank (Citizens) founded in 1996
Mountain West Bank (Mountain West) founded in 1993
Citizens Community Bank (Citizens) founded in 1996
Wyoming
1st Bank (1st Bank) founded in 1989
First National Bank & Trust (First National)
founded in 1912
1st Bank (1st Bank) founded in 1989
First National Bank & Trust (First National)
founded in 1912
Other Subsidiaries
GBCI Other Real Estate (GORE)
Glacier Capital Trust II (Glacier Trust II)
Glacier Capital Trust III (Glacier Trust III)
Glacier Capital Trust IV (Glacier Trust IV)
Citizens (ID) Statutory Trust I (Citizens Trust I)
Bank of the San Juans Bancorporation Trust I (San Juans Trust I)
First Company Statutory Trust 2001 (First Co Trust 01)
First Company Statutory Trust 2003 (First Co Trust 03)
GBCI Other Real Estate (GORE)
Glacier Capital Trust II (Glacier Trust II)
Glacier Capital Trust III (Glacier Trust III)
Glacier Capital Trust IV (Glacier Trust IV)
Citizens (ID) Statutory Trust I (Citizens Trust I)
Bank of the San Juans Bancorporation Trust I (San Juans Trust I)
First Company Statutory Trust 2001 (First Co Trust 01)
First Company Statutory Trust 2003 (First Co Trust 03)
In April 2010, the Company formed a wholly-owned subsidiary, GORE, to isolate bank foreclosed
properties for legal protection and administrative purposes. During the year, foreclosed
properties were sold to GORE from bank subsidiaries at fair market value and such properties
remaining are currently held for sale.
The Company formed or acquired First Co Trust 01, First Co Trust 03, San Juans Trust I, Glacier
Trust IV, Glacier Trust III, Citizens Trust I, and Glacier Trust II as financing subsidiaries. The
trusts were formed for the purpose of issuing trust preferred securities and, in accordance with
Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 810,
Consolidation, the subsidiaries are not consolidated into the Companys financial statements. The
preferred securities entitle the shareholder to receive cumulative cash distributions from payments
on subordinated debentures of the Company. For additional information regarding the subordinated
debentures, see Note 10 to the Consolidated Financial Statements in Item 8. Financial Statements
and Supplementary Data.
The Company provides full service brokerage services (selling products such as stocks, bonds,
mutual funds, limited partnerships, annuities and other insurance products) through Raymond James
Financial Services at Glacier and Big Sky and Morgan Stanley Smith Barney at First National, both
non-affiliated companies. The Company shares in the commissions generated, without devoting
significant management and staff time to this portion of the business.
Recent Acquisitions
The Companys strategy has been to profitably grow its business through internal growth and
selective acquisitions. The Company continues to look for profitable expansion opportunities in
existing markets and new markets in the Rocky Mountain states. During the last five years, the
Company has completed the following acquisitions: On October 2, 2009, First Company and its
subsidiary, First National Bank & Trust, was acquired by the Company. On December 1, 2008, Bank of
the San Juans Bancorporation and its subsidiary, Bank of the San Juans in Durango, Colorado, was
acquired by the Company. On April 30, 2007, North Side State Bank (North Side) in Rock Springs,
Wyoming was acquired and became a part of 1st Bank. On October 1, 2006, Citizens
Development Company (CDC) and its five bank subsidiaries located across Montana were acquired by
the Company. On September 1, 2006, First National Bank of Morgan (Morgan) and its one branch
office in Mountain Green, Utah was acquired.
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Federal Deposit Insurance Corporation, Federal Home Loan Bank and Federal Reserve Bank
The Federal Deposit Insurance Corporation (FDIC) insures each bank subsidiarys deposit accounts.
All bank subsidiaries, except San Juans, are members of the Federal Home Loan Bank (FHLB) of
Seattle. San Juans is a member of the FHLB of Topeka. FHLB of Seattle and Topeka are two of
twelve banks that comprise the FHLB System. All bank subsidiaries, with the exception of Mountain
West, Citizens and San Juans, are members of the Federal Reserve Bank (FRB).
Bank Locations at December 31, 2010
The following is a list of the Parent and bank subsidiaries main office locations as of December
31, 2010. See Item 2. Properties.
Glacier Bancorp, Inc. |
49 | Commons Loop, Kalispell, MT 59901 | (406) 756-4200 | |||||||
Glacier |
202 | Main Street, Kalispell, MT 59901 | (406) 756-4200 | |||||||
Mountain West |
125 | Ironwood Drive, Coeur dAlene, Idaho 83814 | (208) 765-0284 | |||||||
First Security |
1704 | Dearborn, Missoula, MT 59801 | (406) 728-3115 | |||||||
Western |
2812 | 1st Avenue North, Billings, MT 59101 | (406) 371-8258 | |||||||
1st Bank |
1001 | Main Street, Evanston, WY 82930 | (307) 789-3864 | |||||||
Valley |
3030 | North Montana Avenue, Helena, MT 59601 | (406) 495-2400 | |||||||
Big Sky |
4150 | Valley Commons, Bozeman, MT 59718 | (406) 587-2922 | |||||||
First National |
245 | East First Street, Powell, WY 82435 | (307) 754-2201 | |||||||
Citizens |
280 | South Arthur, Pocatello, ID 83204 | (208) 232-5373 | |||||||
First BankMT |
224 | West Main, Lewistown, MT 59457 | (406) 538-7471 | |||||||
San Juans |
144 | East Eighth Street, Durango, CO 81301 | (970) 247-1818 |
FINANCIAL INFORMATION ABOUT SEGMENTS
The following abbreviated organizational chart illustrates the various existing parent and
subsidiary relationships at December 31, 2010:
![(FLOW CHART)](https://www.sec.gov/Archives/edgar/data/0000868671/000095012311019871/v57427v5742701.gif)
For information regarding the Parent, separate from the subsidiaries, see Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations and Note 17 to the
Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data.
5
Table of Contents
Business Segment Results
The Company defines operating segments and evaluates segment performance internally based on
individual bank charters, with the exception of GORE. Centrally provided services to the banks are
allocated based on estimated usage of those services. If required, variable interest entities
(VIEs) are consolidated into the operating segment which invested in such entities. Intersegment
revenues primarily represents interest income on intercompany borrowings, management fees, and data
processing fees received by individual banks or the Parent. Intersegment revenues, expenses and
assets are eliminated in order to report results in accordance with accounting principles generally
accepted in the United States of America.
On February 1, 2009, Morgan merged into 1st Bank resulting in operations being conducted
under the 1st Bank charter. On April 30, 2008, Glacier Bank of Whitefish
merged into Glacier with operations conducted under the Glacier charter. Prior period activity of
the merged banks has been combined and included in the acquiring bank subsidiaries historical
results.
Glacier | Mountain West | First Security | ||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||||||||||
Condensed Income Statements |
||||||||||||||||||||||||||||||||||||
Net interest income |
50,260 | 57,139 | 52,900 | 47,786 | 53,302 | 45,614 | 35,676 | 35,788 | 34,212 | |||||||||||||||||||||||||||
Non-interest income |
15,272 | 15,387 | 13,926 | 26,148 | 27,882 | 20,353 | 7,799 | 8,103 | 6,987 | |||||||||||||||||||||||||||
Total revenues |
65,532 | 72,526 | 66,826 | 73,934 | 81,184 | 65,967 | 43,475 | 43,891 | 41,199 | |||||||||||||||||||||||||||
Provision for loan losses |
(20,050 | ) | (32,000 | ) | (8,825 | ) | (45,000 | ) | (50,500 | ) | (11,150 | ) | (8,100 | ) | (10,450 | ) | (1,750 | ) | ||||||||||||||||||
Core deposit intangibles amortization |
(192 | ) | (330 | ) | (392 | ) | (172 | ) | (184 | ) | (196 | ) | (425 | ) | (468 | ) | (511 | ) | ||||||||||||||||||
Other non-interest expense |
(29,113 | ) | (27,325 | ) | (27,074 | ) | (51,203 | ) | (51,525 | ) | (41,922 | ) | (21,842 | ) | (18,897 | ) | (17,128 | ) | ||||||||||||||||||
Earnings (loss) before income taxes |
16,177 | 12,871 | 30,535 | (22,441 | ) | (21,025 | ) | 12,699 | 13,108 | 14,076 | 21,810 | |||||||||||||||||||||||||
Income tax (expense) benefit |
(2,989 | ) | (2,803 | ) | (10,910 | ) | 10,262 | 9,764 | (3,628 | ) | (2,798 | ) | (3,372 | ) | (7,282 | ) | ||||||||||||||||||||
Net earnings (loss) |
13,188 | 10,068 | 19,625 | (12,179 | ) | (11,261 | ) | 9,071 | 10,310 | 10,704 | 14,528 | |||||||||||||||||||||||||
Average Balance Sheet Data |
||||||||||||||||||||||||||||||||||||
Total assets |
1,331,845 | 1,249,755 | 1,165,234 | 1,198,523 | 1,219,435 | 1,105,761 | 934,513 | 916,115 | 862,203 | |||||||||||||||||||||||||||
Total loans and loans held for sale |
889,644 | 967,239 | 938,824 | 906,484 | 976,132 | 897,841 | 574,734 | 580,401 | 561,258 | |||||||||||||||||||||||||||
Total deposits |
724,076 | 605,928 | 546,569 | 804,161 | 709,834 | 662,505 | 673,633 | 567,649 | 536,400 | |||||||||||||||||||||||||||
Stockholders equity |
162,116 | 137,188 | 124,163 | 175,059 | 135,932 | 120,606 | 127,915 | 122,153 | 113,653 | |||||||||||||||||||||||||||
End of Year Balance Sheet Data |
||||||||||||||||||||||||||||||||||||
Total assets |
1,374,067 | 1,325,039 | 1,250,774 | 1,164,903 | 1,172,331 | 1,226,869 | 1,004,835 | 890,672 | 954,218 | |||||||||||||||||||||||||||
Loans and
loans held for sale, net of ALLL |
831,397 | 903,276 | 963,107 | 786,071 | 919,901 | 955,486 | 552,880 | 548,471 | 561,691 | |||||||||||||||||||||||||||
Total deposits |
740,391 | 726,403 | 609,473 | 770,058 | 793,006 | 680,404 | 713,098 | 588,858 | 545,199 | |||||||||||||||||||||||||||
Stockholders equity |
172,224 | 139,799 | 129,890 | 178,765 | 146,720 | 124,881 | 122,807 | 120,044 | 116,856 | |||||||||||||||||||||||||||
Ratios and Other |
||||||||||||||||||||||||||||||||||||
Return on average assets |
0.99 | % | 0.81 | % | 1.68 | % | -1.02 | % | -0.92 | % | 0.82 | % | 1.10 | % | 1.17 | % | 1.68 | % | ||||||||||||||||||
Return on average equity |
8.13 | % | 7.34 | % | 15.81 | % | -6.96 | % | -8.28 | % | 7.52 | % | 8.06 | % | 8.76 | % | 12.78 | % | ||||||||||||||||||
Tier I risk-based capital ratio |
16.61 | % | 12.33 | % | 11.31 | % | 18.81 | % | 13.39 | % | 10.62 | % | 15.35 | % | 14.91 | % | 14.29 | % | ||||||||||||||||||
Total risk-based capital ratio |
17.89 | % | 13.61 | % | 12.57 | % | 20.09 | % | 14.67 | % | 11.88 | % | 16.62 | % | 16.18 | % | 15.55 | % | ||||||||||||||||||
Leverage capital ratio |
11.98 | % | 10.09 | % | 9.79 | % | 13.29 | % | 10.98 | % | 8.68 | % | 10.82 | % | 11.32 | % | 11.31 | % | ||||||||||||||||||
Full time equivalent employees |
266 | 274 | 283 | 377 | 376 | 393 | 187 | 178 | 178 | |||||||||||||||||||||||||||
Locations |
16 | 17 | 17 | 28 | 29 | 29 | 13 | 13 | 13 |
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Western | 1st Bank | Valley | ||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||||||||||
Condensed Income Statements |
||||||||||||||||||||||||||||||||||||
Net interest income |
20,519 | 21,233 | 20,713 | 22,796 | 24,057 | 22,695 | 13,611 | 14,051 | 12,719 | |||||||||||||||||||||||||||
Non-interest income |
9,857 | 8,631 | 3,306 | 4,934 | 4,628 | 4,728 | 6,913 | 5,717 | 4,673 | |||||||||||||||||||||||||||
Total revenues |
30,376 | 29,864 | 24,019 | 27,730 | 28,685 | 27,423 | 20,524 | 19,768 | 17,392 | |||||||||||||||||||||||||||
Provision for loan losses |
(950 | ) | (3,200 | ) | (540 | ) | (2,150 | ) | (10,800 | ) | (2,012 | ) | (500 | ) | (1,200 | ) | (810 | ) | ||||||||||||||||||
Core deposit intangibles amortization |
(519 | ) | (571 | ) | (623 | ) | (591 | ) | (652 | ) | (712 | ) | (42 | ) | (42 | ) | (42 | ) | ||||||||||||||||||
Other non-interest expense |
(17,257 | ) | (16,342 | ) | (16,151 | ) | (17,197 | ) | (14,943 | ) | (14,143 | ) | (9,252 | ) | (9,229 | ) | (8,770 | ) | ||||||||||||||||||
Earnings (loss) before income taxes |
11,650 | 9,751 | 6,705 | 7,792 | 2,290 | 10,556 | 10,730 | 9,297 | 7,770 | |||||||||||||||||||||||||||
Income tax (expense) benefit |
(3,112 | ) | (2,813 | ) | (1,818 | ) | (2,080 | ) | (309 | ) | (3,631 | ) | (3,272 | ) | (2,740 | ) | (2,251 | ) | ||||||||||||||||||
Net earnings (loss) |
8,538 | 6,938 | 4,887 | 5,712 | 1,981 | 6,925 | 7,458 | 6,557 | 5,519 | |||||||||||||||||||||||||||
Average Balance Sheet Data |
||||||||||||||||||||||||||||||||||||
Total assets |
662,391 | 604,020 | 566,364 | 653,143 | 606,649 | 563,588 | 351,608 | 312,273 | 302,754 | |||||||||||||||||||||||||||
Total loans and loans held for sale |
315,663 | 344,456 | 347,075 | 280,954 | 312,372 | 315,007 | 189,443 | 195,007 | 199,080 | |||||||||||||||||||||||||||
Total deposits |
527,135 | 410,490 | 342,793 | 448,003 | 414,059 | 416,173 | 257,660 | 196,506 | 186,004 | |||||||||||||||||||||||||||
Stockholders equity |
88,276 | 87,837 | 83,915 | 106,426 | 97,859 | 87,948 | 32,240 | 34,246 | 29,487 | |||||||||||||||||||||||||||
End of Year Balance Sheet Data |
||||||||||||||||||||||||||||||||||||
Total assets |
766,367 | 624,077 | 609,868 | 717,120 | 650,072 | 566,869 | 394,220 | 351,228 | 298,392 | |||||||||||||||||||||||||||
Loans and
loans held for sale, net of ALLL |
298,370 | 314,613 | 354,199 | 256,038 | 286,019 | 320,370 | 178,352 | 182,916 | 195,504 | |||||||||||||||||||||||||||
Total deposits |
577,147 | 504,619 | 357,729 | 468,966 | 421,271 | 418,231 | 276,567 | 211,935 | 185,505 | |||||||||||||||||||||||||||
Stockholders equity |
86,606 | 85,259 | 83,843 | 107,234 | 101,789 | 95,200 | 31,784 | 30,585 | 31,483 | |||||||||||||||||||||||||||
Ratios and Other |
||||||||||||||||||||||||||||||||||||
Return on average assets |
1.29 | % | 1.15 | % | 0.86 | % | 0.87 | % | 0.33 | % | 1.23 | % | 2.12 | % | 2.10 | % | 1.82 | % | ||||||||||||||||||
Return on average equity |
9.67 | % | 7.90 | % | 5.82 | % | 5.37 | % | 2.02 | % | 7.87 | % | 23.13 | % | 19.15 | % | 18.72 | % | ||||||||||||||||||
Tier I risk-based capital ratio |
15.30 | % | 14.67 | % | 13.26 | % | 17.60 | % | 14.99 | % | 12.58 | % | 13.82 | % | 13.11 | % | 13.65 | % | ||||||||||||||||||
Total risk-based capital ratio |
16.56 | % | 15.93 | % | 14.52 | % | 18.87 | % | 16.26 | % | 13.83 | % | 15.08 | % | 14.37 | % | 14.91 | % | ||||||||||||||||||
Leverage capital ratio |
9.21 | % | 10.19 | % | 10.71 | % | 9.42 | % | 9.74 | % | 8.08 | % | 8.05 | % | 8.57 | % | 9.11 | % | ||||||||||||||||||
Full time equivalent employees |
163 | 161 | 161 | 144 | 141 | 148 | 85 | 85 | 83 | |||||||||||||||||||||||||||
Locations |
8 | 8 | 8 | 12 | 12 | 12 | 6 | 6 | 6 |
Big Sky | First National | Citizens | ||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2008 | 2010 | 20091 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||||||||||
Condensed Income Statements |
||||||||||||||||||||||||||||||||||||
Net interest income |
14,168 | 15,700 | 15,595 | 10,315 | 3,964 | 10,591 | 10,437 | 7,676 | ||||||||||||||||||||||||||||
Non-interest income |
3,427 | 3,564 | 3,608 | 3,072 | 4,187 | 5,003 | 4,235 | 2,855 | ||||||||||||||||||||||||||||
Total revenues |
17,595 | 19,264 | 19,203 | 13,387 | 8,151 | | 15,594 | 14,672 | 10,531 | |||||||||||||||||||||||||||
Provision for loan losses |
(3,475 | ) | (9,200 | ) | (2,200 | ) | (1,453 | ) | (1,683 | ) | (2,000 | ) | (2,800 | ) | (750 | ) | ||||||||||||||||||||
Core deposit intangibles amortization |
(23 | ) | (23 | ) | (23 | ) | (577 | ) | (144 | ) | (93 | ) | (111 | ) | (128 | ) | ||||||||||||||||||||
Other non-interest expense |
(10,411 | ) | (8,441 | ) | (7,390 | ) | (8,752 | ) | (2,011 | ) | (8,631 | ) | (7,992 | ) | (6,407 | ) | ||||||||||||||||||||
Earnings (loss) before income taxes |
3,686 | 1,600 | 9,590 | 2,605 | 4,313 | | 4,870 | 3,769 | 3,246 | |||||||||||||||||||||||||||
Income tax (expense) benefit |
(945 | ) | (121 | ) | (3,587 | ) | (498 | ) | (230 | ) | (1,700 | ) | (1,332 | ) | (1,092 | ) | ||||||||||||||||||||
Net earnings (loss) |
2,741 | 1,479 | 6,003 | 2,107 | 4,083 | | 3,170 | 2,437 | 2,154 | |||||||||||||||||||||||||||
Average Balance Sheet Data |
||||||||||||||||||||||||||||||||||||
Total assets |
366,749 | 340,827 | 325,976 | 305,977 | 72,641 | | 263,466 | 234,382 | 201,258 | |||||||||||||||||||||||||||
Total loans and loans held for sale |
262,342 | 287,338 | 283,512 | 150,029 | 39,416 | | 168,498 | 168,675 | 143,946 | |||||||||||||||||||||||||||
Total deposits |
209,786 | 178,465 | 180,860 | 245,583 | 60,832 | | 192,357 | 146,780 | 136,997 | |||||||||||||||||||||||||||
Stockholders equity |
61,063 | 45,683 | 38,220 | 38,371 | 7,870 | | 33,627 | 30,814 | 28,137 | |||||||||||||||||||||||||||
End of Year Balance Sheet Data |
||||||||||||||||||||||||||||||||||||
Total assets |
362,416 | 368,571 | 332,325 | 351,624 | 295,953 | | 289,507 | 241,807 | 217,697 | |||||||||||||||||||||||||||
Loans and
loans held for sale, net of ALLL |
239,629 | 260,433 | 287,394 | 140,697 | 151,379 | | 163,470 | 161,182 | 159,412 | |||||||||||||||||||||||||||
Total deposits |
199,599 | 184,278 | 179,834 | 258,454 | 247,256 | | 207,473 | 159,763 | 135,970 | |||||||||||||||||||||||||||
Stockholders equity |
64,656 | 51,614 | 40,384 | 40,322 | 31,364 | | 34,215 | 31,969 | 29,110 | |||||||||||||||||||||||||||
Ratios and Other |
||||||||||||||||||||||||||||||||||||
Return on average assets |
0.75 | % | 0.43 | % | 1.84 | % | 0.69 | % | 5.62 | % | | 1.20 | % | 1.04 | % | 1.07 | % | |||||||||||||||||||
Return on average equity |
4.49 | % | 3.24 | % | 15.71 | % | 5.49 | % | 51.88 | % | | 9.43 | % | 7.91 | % | 7.66 | % | |||||||||||||||||||
Tier I risk-based capital ratio |
21.95 | % | 16.06 | % | 11.89 | % | 18.74 | % | 15.98 | % | | 11.85 | % | 11.32 | % | 10.84 | % | |||||||||||||||||||
Total risk-based capital ratio |
23.23 | % | 17.34 | % | 13.15 | % | 19.98 | % | 16.89 | % | | 13.12 | % | 12.59 | % | 12.10 | % | |||||||||||||||||||
Leverage capital ratio |
17.43 | % | 13.67 | % | 11.62 | % | 11.77 | % | 10.38 | % | | 8.86 | % | 9.62 | % | 9.46 | % | |||||||||||||||||||
Full time equivalent employees |
85 | 83 | 83 | 80 | 75 | | 71 | 70 | 63 | |||||||||||||||||||||||||||
Locations |
5 | 5 | 5 | 4 | 3 | | 6 | 6 | 5 |
7
Table of Contents
First Bank-MT | San Juans | GORE | ||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2008 | 2010 | 2009 | 20082 | 2010 | 2009 | 2008 | |||||||||||||||||||||||||||
Condensed Income Statements |
||||||||||||||||||||||||||||||||||||
Net interest income |
7,457 | 7,900 | 6,676 | 7,562 | 8,021 | 575 | | | | |||||||||||||||||||||||||||
Non-interest income |
1,144 | 929 | 768 | 1,727 | 1,329 | 85 | 258 | | | |||||||||||||||||||||||||||
Total revenues |
8,601 | 8,829 | 7,444 | 9,289 | 9,350 | 660 | 258 | | | |||||||||||||||||||||||||||
Provision for loan losses |
(265 | ) | (985 | ) | (390 | ) | (750 | ) | (1,800 | ) | (53 | ) | | | | |||||||||||||||||||||
Core deposit intangibles amortization |
(312 | ) | (358 | ) | (405 | ) | (234 | ) | (233 | ) | (19 | ) | | | | |||||||||||||||||||||
Other non-interest expense |
(3,163 | ) | (3,189 | ) | (3,083 | ) | (5,419 | ) | (5,435 | ) | (397 | ) | (2,315 | ) | | | ||||||||||||||||||||
Earnings (loss) before income taxes |
4,861 | 4,297 | 3,566 | 2,886 | 1,882 | 191 | (2,057 | ) | | | ||||||||||||||||||||||||||
Income tax (expense) benefit |
(1,590 | ) | (1,426 | ) | (1,279 | ) | (1,045 | ) | (551 | ) | (75 | ) | 806 | | | |||||||||||||||||||||
Net earnings (loss) |
3,271 | 2,871 | 2,287 | 1,841 | 1,331 | 116 | (1,251 | ) | | | ||||||||||||||||||||||||||
Average Balance Sheet Data |
||||||||||||||||||||||||||||||||||||
Total assets |
209,189 | 179,885 | 152,354 | 198,415 | 175,107 | 12,983 | 12,561 | | | |||||||||||||||||||||||||||
Total loans and loans held for sale |
114,310 | 119,840 | 109,706 | 146,911 | 149,665 | 12,172 | | | | |||||||||||||||||||||||||||
Total deposits |
153,132 | 121,770 | 109,067 | 162,745 | 140,528 | 11,292 | | | | |||||||||||||||||||||||||||
Stockholders equity |
33,742 | 30,955 | 28,172 | 25,887 | 23,396 | 1,171 | 12,683 | | | |||||||||||||||||||||||||||
End of Year Balance Sheet Data |
||||||||||||||||||||||||||||||||||||
Total assets |
239,667 | 217,379 | 154,645 | 230,345 | 184,528 | 165,784 | 20,610 | | | |||||||||||||||||||||||||||
Loans held for sale, net of ALLL |
106,290 | 114,113 | 114,177 | 139,014 | 145,015 | 142,114 | | | | |||||||||||||||||||||||||||
Total deposits |
165,816 | 143,552 | 113,531 | 184,217 | 148,474 | 143,056 | | | | |||||||||||||||||||||||||||
Stockholders equity |
33,151 | 32,627 | 29,329 | 25,595 | 25,410 | 21,207 | 21,199 | | | |||||||||||||||||||||||||||
Ratios and Other |
||||||||||||||||||||||||||||||||||||
Return on average assets |
1.56 | % | 1.60 | % | 1.50 | % | 0.93 | % | 0.76 | % | 0.89 | % | ||||||||||||||||||||||||
Return on average equity |
9.69 | % | 9.27 | % | 8.12 | % | 7.11 | % | 5.69 | % | 9.91 | % | ||||||||||||||||||||||||
Tier I risk-based capital ratio |
13.93 | % | 12.73 | % | 11.70 | % | 11.76 | % | 11.11 | % | 9.26 | % | ||||||||||||||||||||||||
Total risk-based capital ratio |
15.19 | % | 13.99 | % | 12.95 | % | 13.03 | % | 12.37 | % | 10.51 | % | ||||||||||||||||||||||||
Leverage capital ratio |
9.18 | % | 9.19 | % | 10.17 | % | 8.83 | % | 10.33 | % | 9.66 | % | ||||||||||||||||||||||||
Full time equivalent employees |
39 | 40 | 37 | 46 | 41 | 31 | ||||||||||||||||||||||||||||||
Locations |
3 | 3 | 3 | 3 | 3 | 3 |
Parent | Eliminations | Total Consolidated | ||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||||||||||
Condensed Income Statements |
||||||||||||||||||||||||||||||||||||
Net interest income |
(5,973 | ) | (6,265 | ) | (6,762 | ) | | | | 234,768 | 245,327 | 212,613 | ||||||||||||||||||||||||
Non-interest income |
61,924 | 52,466 | 83,891 | (59,932 | ) | (50,584 | ) | (84,146 | ) | 87,546 | 86,474 | 61,034 | ||||||||||||||||||||||||
Total revenues |
55,951 | 46,201 | 77,129 | (59,932 | ) | (50,584 | ) | (84,146 | ) | 322,314 | 331,801 | 273,647 | ||||||||||||||||||||||||
Provision for loan losses |
| | | | | | (84,693 | ) | (124,618 | ) | (28,480 | ) | ||||||||||||||||||||||||
Core deposit intangibles amortization |
| | | | | | (3,180 | ) | (3,116 | ) | (3,051 | ) | ||||||||||||||||||||||||
Other non-interest expense |
(14,613 | ) | (13,769 | ) | (13,424 | ) | 14,400 | 13,396 | 13,031 | (184,768 | ) | (165,702 | ) | (142,858 | ) | |||||||||||||||||||||
Earnings (loss) before income taxes |
41,338 | 32,432 | 63,705 | (45,532 | ) | (37,188 | ) | (71,115 | ) | 49,673 | 38,365 | 99,258 | ||||||||||||||||||||||||
Income tax (expense) benefit |
1,374 | 1,942 | 1,952 | 244 | | | (7,343 | ) | (3,991 | ) | (33,601 | ) | ||||||||||||||||||||||||
Net earnings (loss) |
42,712 | 34,374 | 65,657 | (45,288 | ) | (37,188 | ) | (71,115 | ) | 42,330 | 34,374 | 65,657 | ||||||||||||||||||||||||
Average Balance Sheet Data |
||||||||||||||||||||||||||||||||||||
Total assets |
949,597 | 824,527 | 689,132 | (1,130,937 | ) | (1,043,687 | ) | (918,204 | ) | 6,307,040 | 5,691,929 | 5,029,403 | ||||||||||||||||||||||||
Total loans and loans held for sale |
| | | | | | 3,999,012 | 4,140,541 | 3,808,421 | |||||||||||||||||||||||||||
Total deposits |
| | | (39,887 | ) | (59,234 | ) | (28,155 | ) | 4,358,384 | 3,493,607 | 3,100,505 | ||||||||||||||||||||||||
Stockholders equity |
817,496 | 691,922 | 564,785 | (897,405 | ) | (753,933 | ) | (655,472 | ) | 817,496 | 691,922 | 564,785 | ||||||||||||||||||||||||
End of Year Balance Sheet Data |
||||||||||||||||||||||||||||||||||||
Total assets |
978,875 | 832,916 | 814,883 | (1,135,269 | ) | (962,778 | ) | (1,038,354 | ) | 6,759,287 | 6,191,795 | 5,553,970 | ||||||||||||||||||||||||
Loans and
loans held for sale, net of ALLL |
| | | (3,813 | ) | | | 3,688,395 | 3,987,318 | 4,053,454 | ||||||||||||||||||||||||||
Total deposits |
| | | (39,884 | ) | (29,263 | ) | (106,457 | ) | 4,521,902 | 4,100,152 | 3,262,475 | ||||||||||||||||||||||||
Stockholders equity |
838,583 | 685,890 | 676,940 | (918,937 | ) | (797,180 | ) | (702,183 | ) | 838,204 | 685,890 | 676,940 | ||||||||||||||||||||||||
Ratios and Other |
||||||||||||||||||||||||||||||||||||
Return on average assets |
0.67 | % | 0.60 | % | 1.31 | % | ||||||||||||||||||||||||||||||
Return on average equity |
5.18 | % | 4.97 | % | 11.63 | % | ||||||||||||||||||||||||||||||
Tier I risk-based capital ratio |
18.24 | % | 14.02 | % | 14.30 | % | ||||||||||||||||||||||||||||||
Total risk-based capital ratio |
19.51 | % | 15.29 | % | 15.55 | % | ||||||||||||||||||||||||||||||
Leverage capital ratio |
12.71 | % | 11.20 | % | 12.38 | % | ||||||||||||||||||||||||||||||
Full time equivalent employees |
131 | 119 | 111 | 1,674 | 1,643 | 1,571 | ||||||||||||||||||||||||||||||
Locations |
1 | 1 | | 105 | 106 | 101 |
1 | The average balance sheet data is based on daily averages for the entire year, with First National having been acquired October 2, 2009. | |
2 | The average balance sheet data is based on daily averages for the entire year, with San Juans having been acquired December 1, 2008. |
8
Table of Contents
INTERNET ACCESS
Copies of the Companys 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 Companys website
(www.glacierbancorp.com) as soon as reasonably practicable after the Company has filed the material
with, or furnished it to, the Securities and Exchange Commission (SEC). Copies can also be
obtained by accessing the SECs website (www.sec.gov).
MARKET AREA
The Company has 105 locations, of which 9 are loan or administration offices, in 35 counties within
6 states including Montana, Idaho, Wyoming, Colorado, Utah, and Washington. The Company has 52
locations in Montana. In Idaho there are 29 locations. In Wyoming, there are 14 locations. In
Utah, there are 4 locations. In Washington, there are 3 locations. In Colorado, there are 3
locations.
The market areas economic base primarily focuses on tourism, construction, mining, manufacturing,
service industry, and health care. The tourism industry is highly influenced by two national
parks, several ski resorts, large lakes, and rural scenic areas.
COMPETITION
Based on the FDIC summary of deposits survey as of June 30, 2010, the Company has approximately 22
percent of the total FDIC insured deposits in the 13 counties that it services in Montana. In
Idaho, the Company has approximately 7 percent of the deposits in the 9 counties that it services.
In Wyoming, the Company has 24 percent of the deposits in the 6 counties it services. In Colorado,
the Company has 12 percent of the deposits in the 2 counties it serves. In Utah, the Company has 3
percent of the deposits in the 3 counties it services.
There are a large number of depository institutions including savings banks, commercial banks, and
credit unions in the markets in which the Company has offices. The Banks, like other depository
institutions, are operating in a rapidly changing environment. Non-depository financial service
institutions, primarily in the securities and insurance industries, have become competitors for
retail savings and investment funds. Mortgage banking firms are actively competing for residential
mortgage business. In addition to offering competitive interest rates, the principal methods used
by banking institutions to attract deposits include the offering of a variety of services including
on-line banking and convenient office locations and business hours. The primary factors in
competing for loans are interest rates and rate adjustment provisions, loan maturities, loan fees,
and the quality of service to borrowers and brokers.
9
Table of Contents
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS EQUITY
Average Balance Sheet
The following three-year schedule provides 1) the total dollar amount of interest and dividend
income of the Company for earning assets and the average yield; 2) the total dollar amount of
interest expense on interest-bearing liabilities and the average rate; 3) net interest and dividend
income and interest rate spread; and 4) net interest margin and net interest margin tax-equivalent;
and 5) return on average assets and return on average equity.
Year ended December 31, 2010 | Year ended December 31, 2009 | Year ended December 31, 2008 | ||||||||||||||||||||||||||||||||||
Average | Average | Average | ||||||||||||||||||||||||||||||||||
Average | Interest & | Yield/ | Average | Interest & | Yield/ | Average | Interest & | Yield/ | ||||||||||||||||||||||||||||
(Dollars in thousands) | Balance | Dividends | Rate | Balance | Dividends | Rate | Balance | Dividends | Rate | |||||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||||||||||||||
Residential real estate loans |
$ | 772,074 | $ | 45,401 | 5.88 | % | $ | 829,348 | $ | 54,498 | 6.57 | % | $ | 746,135 | $ | 51,166 | 6.86 | % | ||||||||||||||||||
Commercial loans |
2,542,186 | 143,861 | 5.66 | % | 2,608,961 | 151,580 | 5.81 | % | 2,390,990 | 165,119 | 6.91 | % | ||||||||||||||||||||||||
Consumer and other loans |
684,752 | 42,130 | 6.15 | % | 702,232 | 44,844 | 6.39 | % | 671,296 | 47,725 | 7.11 | % | ||||||||||||||||||||||||
Total loans and loans held for sale |
3,999,012 | 231,392 | 5.79 | % | 4,140,541 | 250,922 | 6.06 | % | 3,808,421 | 264,010 | 6.93 | % | ||||||||||||||||||||||||
Tax-exempt investment securities 1 |
479,640 | 23,351 | 4.87 | % | 445,063 | 22,196 | 4.99 | % | 282,884 | 13,901 | 4.91 | % | ||||||||||||||||||||||||
Taxable investment securities 2 |
1,378,468 | 33,659 | 2.44 | % | 707,062 | 29,376 | 4.15 | % | 555,955 | 25,074 | 4.51 | % | ||||||||||||||||||||||||
Total earning assets |
5,857,120 | 288,402 | 4.92 | % | 5,292,666 | 302,494 | 5.72 | % | 4,647,260 | 302,985 | 6.52 | % | ||||||||||||||||||||||||
Goodwill and intangibles |
158,636 | 158,896 | 152,822 | |||||||||||||||||||||||||||||||||
Non-earning assets |
291,284 | 240,367 | 229,321 | |||||||||||||||||||||||||||||||||
Total assets |
$ | 6,307,040 | $ | 5,691,929 | $ | 5,029,403 | ||||||||||||||||||||||||||||||
Liabilities |
||||||||||||||||||||||||||||||||||||
NOW accounts |
$ | 718,175 | $ | 2,545 | 0.35 | % | $ | 572,260 | $ | 2,275 | 0.40 | % | $ | 467,374 | $ | 3,014 | 0.64 | % | ||||||||||||||||||
Savings accounts |
345,297 | 725 | 0.21 | % | 303,794 | 947 | 0.31 | % | 272,673 | 1,865 | 0.68 | % | ||||||||||||||||||||||||
Money market deposit accounts |
848,495 | 6,975 | 0.82 | % | 768,939 | 8,436 | 1.10 | % | 760,599 | 17,234 | 2.27 | % | ||||||||||||||||||||||||
Certificate accounts |
1,082,428 | 21,016 | 1.94 | % | 960,403 | 24,719 | 2.57 | % | 853,076 | 32,634 | 3.83 | % | ||||||||||||||||||||||||
Wholesale deposits 3 |
533,476 | 4,337 | 0.81 | % | 133,083 | 2,052 | 1.54 | % | 7,704 | 265 | 3.44 | % | ||||||||||||||||||||||||
FHLB advances |
691,969 | 9,523 | 1.38 | % | 473,038 | 7,952 | 1.68 | % | 566,933 | 15,355 | 2.71 | % | ||||||||||||||||||||||||
Securities sold under agreements to
repurchase and other borrowed funds |
407,516 | 8,513 | 2.09 | % | 995,006 | 10,786 | 1.08 | % | 752,958 | 20,005 | 2.66 | % | ||||||||||||||||||||||||
Total interest bearing liabilities |
4,627,356 | 53,634 | 1.16 | % | 4,206,523 | 57,167 | 1.36 | % | 3,681,317 | 90,372 | 2.46 | % | ||||||||||||||||||||||||
Non-interest bearing deposits |
830,513 | 755,128 | 739,079 | |||||||||||||||||||||||||||||||||
Other liabilities |
31,675 | 38,356 | 44,222 | |||||||||||||||||||||||||||||||||
Total liabilities |
5,489,544 | 5,000,007 | 4,464,618 | |||||||||||||||||||||||||||||||||
Stockholders Equity |
||||||||||||||||||||||||||||||||||||
Common stock |
697 | 615 | 548 | |||||||||||||||||||||||||||||||||
Paid-in capital |
611,577 | 495,340 | 393,158 | |||||||||||||||||||||||||||||||||
Retained earnings |
196,785 | 193,973 | 171,385 | |||||||||||||||||||||||||||||||||
Accumulated other
comprehensive income (loss) |
8,437 | 1,994 | (306 | ) | ||||||||||||||||||||||||||||||||
Total stockholders equity |
817,496 | 691,922 | 564,785 | |||||||||||||||||||||||||||||||||
Total liabilities and
stockholders equity |
$ | 6,307,040 | $ | 5,691,929 | $ | 5,029,403 | ||||||||||||||||||||||||||||||
Net Interest Income |
$ | 234,768 | $ | 245,327 | $ | 212,613 | ||||||||||||||||||||||||||||||
Net Interest Spread |
3.76 | % | 4.36 | % | 4.06 | % | ||||||||||||||||||||||||||||||
Net Interest Margin |
4.01 | % | 4.64 | % | 4.58 | % | ||||||||||||||||||||||||||||||
Net Interest Margin (tax-equivalent) |
4.21 | % | 4.82 | % | 4.70 | % |
1 | Excludes tax effect of $10,338,000, $9,827,000 and $6,155,000 on tax-exempt investment security income for the years ended December 31, 2010, 2009 and 2008 respectively. | |
2 | Excludes tax effect of $1,503,000, $0, and $0 on investment security tax credits for the years ended December 31, 2010, 2009 and 2008 respectively. | |
3 | Wholesale deposits include brokered deposits classified as NOW, money market, and Certificate accounts. |
10
Table of Contents
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 Companys interest-earning assets and
interest-bearing liabilities (Volume) and the yields earned and rates paid on such assets and
liabilities (Rate). The change in interest income and interest expense attributable to changes
in both volume and rates has been allocated proportionately to the change due to volume and the
change due to rate.
Years ended December 31, | ||||||||||||
2010 vs. 2009 | ||||||||||||
Increase (Decrease) Due to: | ||||||||||||
(Dollars in thousands) | Volume | Rate | Net | |||||||||
Interest income |
||||||||||||
Residential real estate loans |
$ | (3,764 | ) | $ | (5,333 | ) | $ | (9,097 | ) | |||
Commercial loans |
(3,880 | ) | (3,839 | ) | (7,719 | ) | ||||||
Consumer and other loans |
(1,116 | ) | (1,598 | ) | (2,714 | ) | ||||||
Investment securities |
31,601 | (26,163 | ) | 5,438 | ||||||||
Total interest income |
22,841 | (36,933 | ) | (14,092 | ) | |||||||
Interest expense |
||||||||||||
NOW accounts |
580 | (310 | ) | 270 | ||||||||
Savings accounts |
129 | (351 | ) | (222 | ) | |||||||
Money market deposit accounts |
873 | (2,333 | ) | (1,460 | ) | |||||||
Certificate accounts |
3,141 | (6,844 | ) | (3,703 | ) | |||||||
Wholesale deposits |
6,173 | (3,889 | ) | 2,284 | ||||||||
FHLB advances |
3,680 | (2,109 | ) | 1,571 | ||||||||
Repurchase agreements
and other borrowed funds |
(6,368 | ) | 4,095 | (2,273 | ) | |||||||
Total interest expense |
8,208 | (11,741 | ) | (3,533 | ) | |||||||
Net interest income |
$ | 14,633 | $ | (25,192 | ) | $ | (10,559 | ) | ||||
Net interest income decreased $11 million in 2010 over 2009. The decrease in net interest
income was primarily due to lower yield and lower volume of loans which was partially offset by an
increased volume of investments and net decrease in borrowing expense. For additional information,
see Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations.
INVESTMENT ACTIVITIES
It has generally been the Companys policy to maintain a liquid portfolio above policy limits. The
Companys investment securities are generally classified as available-for-sale and are carried at
estimated fair value with unrealized gains or losses, net of tax, reflected as an adjustment to
stockholders equity. The Companys investment portfolio is primarily comprised of residential
mortgage-backed securities and state and local government securities which are largely exempt from
federal income tax. The Company uses the federal statutory rate of 35 percent in calculating its
tax-equivalent yield. The residential mortgage-backed securities are typically short-term and
provide the Company with on-going liquidity as scheduled and pre-paid principal payments are made
on the securities. The Company assesses individual securities in its investment securities
portfolio for other-than-temporary impairment at least on a quarterly basis, and more frequently
when economic or market conditions warrant.
For additional investment activity information, see Item 7. Managements Discussion and Analysis
of Financial Condition and Results of Operations and Note 3 to the Consolidated Financial
Statements in Item 8. Financial Statements and Supplementary Data.
11
Table of Contents
LENDING ACTIVITY
General
The Banks focus their lending activity primarily on the following types of loans: 1)
first-mortgage, conventional loans secured by residential properties, particularly single-family,
2) commercial lending that concentrates on targeted businesses , and 3) installment lending for
consumer purposes (e.g., auto, home equity, etc.). Item 7. Managements Discussion and Analysis
of Financial Condition and Results of Operations and Note 4 to the Consolidated Financial
Statements in Item 8. Financial Statements and Supplementary Data provide more information about
the loan portfolio.
Loan Portfolio Composition
The following table summarizes the Companys loan portfolio:
December 31, 2010 | December 31, 2009 | December 31, 2008 | December 31, 2007 | December 31, 2006 | ||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | ||||||||||||||||||||||||||||||
Residential real estate loans |
632,877 | 17.52 | % | 743,147 | 18.95 | % | 783,399 | 19.59 | % | 685,731 | 19.50 | % | 754,708 | 24.11 | % | |||||||||||||||||||||||||
Commercial loans |
||||||||||||||||||||||||||||||||||||||||
Real estate |
1,796,503 | 49.73 | % | 1,894,690 | 48.33 | % | 1,930,849 | 48.29 | % | 1,611,178 | 45.81 | % | 1,159,384 | 37.04 | % | |||||||||||||||||||||||||
Other commercial |
654,588 | 18.12 | % | 724,579 | 18.48 | % | 644,980 | 16.13 | % | 636,125 | 18.09 | % | 691,033 | 22.07 | % | |||||||||||||||||||||||||
Total |
2,451,091 | 67.85 | % | 2,619,269 | 66.81 | % | 2,575,829 | 64.42 | % | 2,247,303 | 63.90 | % | 1,850,417 | 59.11 | % | |||||||||||||||||||||||||
Consumer and other loans |
||||||||||||||||||||||||||||||||||||||||
Home equity |
483,137 | 13.38 | % | 501,866 | 12.80 | % | 507,839 | 12.70 | % | 432,002 | 12.28 | % | 356,246 | 11.38 | % | |||||||||||||||||||||||||
Other consumer |
182,184 | 5.04 | % | 199,633 | 5.09 | % | 208,150 | 5.21 | % | 206,376 | 5.87 | % | 218,277 | 6.97 | % | |||||||||||||||||||||||||
Total |
665,321 | 18.42 | % | 701,499 | 17.89 | % | 715,989 | 17.91 | % | 638,378 | 18.15 | % | 574,523 | 18.35 | % | |||||||||||||||||||||||||
Loans receivable |
3,749,289 | 103.79 | % | 4,063,915 | 103.65 | % | 4,075,217 | 101.92 | % | 3,571,412 | 101.55 | % | 3,179,648 | 101.57 | % | |||||||||||||||||||||||||
Allowance for loan and lease losses |
(137,107 | ) | -3.79 | % | (142,927 | ) | -3.65 | % | (76,739 | ) | -1.92 | % | (54,413 | ) | -1.55 | % | (49,259 | ) | -1.57 | % | ||||||||||||||||||||
Loans receivable, net |
$ | 3,612,182 | 100.00 | % | $ | 3,920,988 | 100.00 | % | $ | 3,998,478 | 100.00 | % | $ | 3,516,999 | 100.00 | % | $ | 3,130,389 | 100.00 | % | ||||||||||||||||||||
Loan Portfolio Maturities or Repricing Term
The stated maturities or first repricing term (if applicable) for the loan portfolio at December
31, 2010 was as follows:
Residential | Consumer | |||||||||||||||
(Dollars in thousands) | Real Estate | Commercial | and Other | Totals | ||||||||||||
Variable rate maturing or repricing in |
||||||||||||||||
One year or less |
$ | 197,087 | 863,403 | 294,929 | 1,355,419 | |||||||||||
One to five years |
138,108 | 753,674 | 36,465 | 928,247 | ||||||||||||
Thereafter |
16,049 | 146,303 | 3,117 | 165,469 | ||||||||||||
Fixed rate maturing or repricing in |
||||||||||||||||
One year or less |
165,166 | 246,507 | 118,742 | 530,415 | ||||||||||||
One to five years |
93,928 | 305,224 | 188,300 | 587,452 | ||||||||||||
Thereafter |
22,539 | 135,980 | 23,768 | 182,287 | ||||||||||||
Totals |
$ | 632,877 | 2,451,091 | 665,321 | 3,749,289 | |||||||||||
12
Table of Contents
Residential Real Estate Lending
The Companys 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 Companys 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 or above 80 percent of the loan if insured by a private mortgage insurance company. The
Company also provides interim construction financing for single-family dwellings. These loans are
supported by a term take-out commitment.
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 cost or appraised value.
Unimproved Land and Land Development Loans
Where real estate market conditions warrant, the Company makes land acquisition and development
loans on properties intended for residential and commercial use. These loans are generally made
for a term of 18 months to two years and 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,
it is required 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 cost or appraised value.
Residential Builder Guidance Lines
The Company provides Builder Guidance Lines that are comprised of pre-sold and spec-home
construction and lot acquisition loans. The spec-home construction and lot acquisition loans are
limited to a specific number and maximum amount. Generally the individual loans will not exceed a
one year maturity. The homes under construction are inspected on a regular basis and advances made
on a percentage of completion basis.
Commercial Real Estate Loans
Loans are made to purchase, construct and finance commercial real estate properties. These loans
are generally made to borrowers who own and will occupy the property and generally have a
loan-to-value up to the lesser of 75 percent of cost or appraised value and require a minimum 1.2
times debt service coverage margin. Loans to finance investment or income properties are made, but
require additional equity and generally have a loan-to-value up to the lesser of 70 percent of cost
or appraised value and require a higher debt service coverage margin commensurate with the specific
property and projected income.
Consumer Lending
The majority of consumer loans are secured by real estate, automobiles, or other assets. The Banks
intend 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 Banks also originate 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.
13
Table of Contents
Loan Portfolio by Bank Subsidiary and Regulatory Classification
The following tables summarize selected information by bank and regulatory classification of the
Companys loan portfolio:
Loans Receivable and loans held for sale, Gross by Bank | ||||||||||||||||
Balance | Balance | |||||||||||||||
(Dollars in thousands) | 12/31/10 | 12/31/09 | $ Change | % Change | ||||||||||||
Glacier |
$ | 866,097 | 942,254 | (76,157 | ) | -8 | % | |||||||||
Mountain West |
821,135 | 957,451 | (136,316 | ) | -14 | % | ||||||||||
First Security |
571,925 | 566,713 | 5,212 | 1 | % | |||||||||||
Western |
305,977 | 323,375 | (17,398 | ) | -5 | % | ||||||||||
1st Bank |
266,505 | 296,913 | (30,408 | ) | -10 | % | ||||||||||
Valley |
183,003 | 187,283 | (4,280 | ) | -2 | % | ||||||||||
Big Sky |
249,593 | 270,970 | (21,377 | ) | -8 | % | ||||||||||
First National |
143,224 | 153,058 | (9,834 | ) | -6 | % | ||||||||||
Citizens |
168,972 | 166,049 | 2,923 | 2 | % | |||||||||||
First Bank-MT |
109,310 | 117,017 | (7,707 | ) | -7 | % | ||||||||||
San Juans |
143,574 | 149,162 | (5,588 | ) | -4 | % | ||||||||||
Eliminations |
(3,813 | ) | | (3,813 | ) | n/m | ||||||||||
Total |
$ | 3,825,502 | 4,130,245 | (304,743 | ) | -7 | % | |||||||||
Land, Lot and Other Construction Loans by Bank | ||||||||||||||||
Balance | Balance | |||||||||||||||
(Dollars in thousands) | 12/31/10 | 12/31/09 | $ Change | % Change | ||||||||||||
Glacier |
$ | 148,319 | 165,734 | (17,415 | ) | -11 | % | |||||||||
Mountain West |
147,991 | 217,078 | (69,087 | ) | -32 | % | ||||||||||
First Security |
72,409 | 71,404 | 1,005 | 1 | % | |||||||||||
Western |
29,535 | 32,045 | (2,510 | ) | -8 | % | ||||||||||
1st Bank |
29,714 | 36,888 | (7,174 | ) | -19 | % | ||||||||||
Valley |
12,816 | 14,704 | (1,888 | ) | -13 | % | ||||||||||
Big Sky |
53,648 | 71,365 | (17,717 | ) | -25 | % | ||||||||||
First National |
12,341 | 10,247 | 2,094 | 20 | % | |||||||||||
Citizens |
12,187 | 13,263 | (1,076 | ) | -8 | % | ||||||||||
First Bank-MT |
830 | 1,010 | (180 | ) | -18 | % | ||||||||||
San Juans |
30,187 | 39,621 | (9,434 | ) | -24 | % | ||||||||||
Total |
$ | 549,977 | 673,359 | (123,382 | ) | -18 | % | |||||||||
Land, Lot and Other Construction Loans by Bank, by Type at 12/31/10 | ||||||||||||||||||||||||
Consumer | Developed | Commercial | ||||||||||||||||||||||
Land | Land or | Unimproved | Lots for | Developed | Other | |||||||||||||||||||
(Dollars in thousands) | Development | Lot | Land | Operative Builders | Lot | Construction | ||||||||||||||||||
Glacier |
$ | 62,719 | 27,686 | 40,032 | 8,901 | 6,686 | 2,295 | |||||||||||||||||
Mountain West |
32,250 | 61,338 | 12,225 | 18,488 | 8,609 | 15,081 | ||||||||||||||||||
First Security |
26,258 | 6,666 | 19,327 | 4,510 | 497 | 15,151 | ||||||||||||||||||
Western |
14,815 | 5,234 | 3,929 | 589 | 1,815 | 3,153 | ||||||||||||||||||
1st Bank |
7,486 | 9,920 | 3,494 | 281 | 2,046 | 6,487 | ||||||||||||||||||
Valley |
2,142 | 4,925 | 1,063 | 55 | 3,381 | 1,250 | ||||||||||||||||||
Big Sky |
19,714 | 16,115 | 8,807 | 651 | 2,354 | 6,007 | ||||||||||||||||||
First National |
1,879 | 3,906 | 1,634 | 407 | 2,138 | 2,377 | ||||||||||||||||||
Citizens |
2,690 | 2,155 | 2,438 | 50 | 682 | 4,172 | ||||||||||||||||||
First Bank-MT |
| 83 | 747 | | | | ||||||||||||||||||
San Juans |
3,431 | 15,881 | 2,163 | | 7,628 | 1,084 | ||||||||||||||||||
Total |
$ | 173,384 | 153,909 | 95,859 | 33,932 | 35,836 | 57,057 | |||||||||||||||||
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Table of Contents
Custom and | ||||||||||||||||||||||||
Residential Construction Loans by Bank, by Type | Owner | Pre-Sold | ||||||||||||||||||||||
Balance | Balance | Occupied | and Spec | |||||||||||||||||||||
(Dollars in thousands) | 12/31/10 | 12/31/09 | $ Change | % Change | 12/31/10 | 12/31/10 | ||||||||||||||||||
Glacier |
$ | 34,526 | 57,183 | (22,657 | ) | -40 | % | $ | 6,993 | 27,533 | ||||||||||||||
Mountain West |
21,375 | 57,437 | (36,062 | ) | -63 | % | 7,718 | 13,657 | ||||||||||||||||
First Security |
10,123 | 19,664 | (9,541 | ) | -49 | % | 3,890 | 6,233 | ||||||||||||||||
Western |
1,350 | 2,245 | (895 | ) | -40 | % | 622 | 728 | ||||||||||||||||
1st Bank |
6,611 | 17,633 | (11,022 | ) | -63 | % | 4,342 | 2,269 | ||||||||||||||||
Valley |
4,950 | 5,170 | (220 | ) | -4 | % | 3,708 | 1,242 | ||||||||||||||||
Big Sky |
11,004 | 20,679 | (9,675 | ) | -47 | % | 459 | 10,545 | ||||||||||||||||
First National |
1,958 | 2,612 | (654 | ) | -25 | % | 1,474 | 484 | ||||||||||||||||
Citizens |
9,441 | 13,211 | (3,770 | ) | -29 | % | 4,425 | 5,016 | ||||||||||||||||
First Bank-MT |
502 | 234 | 268 | 115 | % | 502 | | |||||||||||||||||
San Juans |
7,018 | 13,811 | (6,793 | ) | -49 | % | 6,896 | 122 | ||||||||||||||||
Total |
$ | 108,858 | 209,879 | (101,021 | ) | -48 | % | $ | 41,029 | 67,829 | ||||||||||||||
Single Family Residential Loans by Bank, by Type | 1st | Junior | ||||||||||||||||||||||
Balance | Balance | Lien | Lien | |||||||||||||||||||||
(Dollars in thousands) | 12/31/10 | 12/31/09 | $ Change | % Change | 12/31/10 | 12/31/10 | ||||||||||||||||||
Glacier |
$ | 187,683 | 204,789 | (17,106 | ) | -8 | % | $ | 166,370 | 21,313 | ||||||||||||||
Mountain West |
282,429 | 278,158 | 4,271 | 2 | % | 243,890 | 38,539 | |||||||||||||||||
First Security |
92,011 | 82,141 | 9,870 | 12 | % | 78,208 | 13,803 | |||||||||||||||||
Western |
42,070 | 50,502 | (8,432 | ) | -17 | % | 39,909 | 2,161 | ||||||||||||||||
1st Bank |
59,337 | 65,555 | (6,218 | ) | -9 | % | 54,686 | 4,651 | ||||||||||||||||
Valley |
60,085 | 66,644 | (6,559 | ) | -10 | % | 49,773 | 10,312 | ||||||||||||||||
Big Sky |
32,496 | 33,308 | (812 | ) | -2 | % | 29,239 | 3,257 | ||||||||||||||||
First National |
13,948 | 19,239 | (5,291 | ) | -28 | % | 10,678 | 3,270 | ||||||||||||||||
Citizens |
19,885 | 20,937 | (1,052 | ) | -5 | % | 18,254 | 1,631 | ||||||||||||||||
First Bank-MT |
8,618 | 10,003 | (1,385 | ) | -14 | % | 7,509 | 1,109 | ||||||||||||||||
San Juans |
29,124 | 22,811 | 6,313 | 28 | % | 27,260 | 1,864 | |||||||||||||||||
Total |
$ | 827,686 | 854,087 | (26,401 | ) | -3 | % | $ | 725,776 | 101,910 | ||||||||||||||
Commercial Real Estate Loans by Bank, by Type | Owner | Non-Owner | ||||||||||||||||||||||
Balance | Balance | Occupied | Occupied | |||||||||||||||||||||
(Dollars in thousands) | 12/31/10 | 12/31/09 | $ Change | % Change | 12/31/10 | 12/31/10 | ||||||||||||||||||
Glacier |
$ | 224,215 | 232,552 | (8,337 | ) | -4 | % | $ | 117,371 | 106,844 | ||||||||||||||
Mountain West |
206,732 | 230,383 | (23,651 | ) | -10 | % | 132,051 | 74,681 | ||||||||||||||||
First Security |
227,662 | 224,425 | 3,237 | 1 | % | 152,844 | 74,818 | |||||||||||||||||
Western |
103,443 | 107,173 | (3,730 | ) | -3 | % | 56,767 | 46,676 | ||||||||||||||||
1st Bank |
58,353 | 64,008 | (5,655 | ) | -9 | % | 43,725 | 14,628 | ||||||||||||||||
Valley |
50,325 | 48,144 | 2,181 | 5 | % | 31,779 | 18,546 | |||||||||||||||||
Big Sky |
88,135 | 82,303 | 5,832 | 7 | % | 53,420 | 34,715 | |||||||||||||||||
First National |
27,609 | 26,703 | 906 | 3 | % | 21,967 | 5,642 | |||||||||||||||||
Citizens |
61,737 | 55,660 | 6,077 | 11 | % | 44,914 | 16,823 | |||||||||||||||||
First Bank-MT |
17,492 | 18,827 | (1,335 | ) | -7 | % | 11,085 | 6,407 | ||||||||||||||||
San Juans |
50,066 | 47,838 | 2,228 | 5 | % | 29,519 | 20,547 | |||||||||||||||||
Total |
$ | 1,115,769 | 1,138,016 | (22,247 | ) | -2 | % | $ | 695,442 | 420,327 | ||||||||||||||
15
Table of Contents
Consumer Loans by Bank, by Type | Home Equity | Other | ||||||||||||||||||||||
Balance | Balance | Line of Credit | Consumer | |||||||||||||||||||||
(Dollars in thousands) | 12/31/10 | 12/31/09 | $ Change | % Change | 12/31/10 | 12/31/10 | ||||||||||||||||||
Glacier |
$ | 150,082 | 162,723 | (12,641 | ) | -8 | % | $ | 136,626 | 13,456 | ||||||||||||||
Mountain West |
70,304 | 71,702 | (1,398 | ) | -2 | % | 61,935 | 8,369 | ||||||||||||||||
First Security |
71,677 | 78,345 | (6,668 | ) | -9 | % | 46,368 | 25,309 | ||||||||||||||||
Western |
43,081 | 48,946 | (5,865 | ) | -12 | % | 30,382 | 12,699 | ||||||||||||||||
1st Bank |
40,021 | 46,455 | (6,434 | ) | -14 | % | 16,566 | 23,455 | ||||||||||||||||
Valley |
23,745 | 24,625 | (880 | ) | -4 | % | 14,780 | 8,965 | ||||||||||||||||
Big Sky |
27,733 | 28,903 | (1,170 | ) | -4 | % | 24,605 | 3,128 | ||||||||||||||||
First National |
24,217 | 27,320 | (3,103 | ) | -11 | % | 14,948 | 9,269 | ||||||||||||||||
Citizens |
29,040 | 29,253 | (213 | ) | -1 | % | 23,002 | 6,038 | ||||||||||||||||
First Bank-MT |
8,005 | 7,650 | 355 | 5 | % | 3,940 | 4,065 | |||||||||||||||||
San Juans |
14,848 | 14,189 | 659 | 5 | % | 13,683 | 1,165 | |||||||||||||||||
Total |
$ | 502,753 | 540,111 | (37,358 | ) | -7 | % | $ | 386,835 | 115,918 | ||||||||||||||
n/m - not measurable
Credit Risk Management
The Companys credit risk management includes stringent credit policies, concentration limits,
individual loan approval limits and committee approval of larger loan requests. Management
practices also include regular internal and external credit examinations and an independent stress
testing of the commercial real estate portfolio, including construction loans. On a quarterly
basis, both the Banks and Parent management review loans experiencing deterioration of credit
quality. A review of loans by concentration limits is performed on a quarterly basis. Federal and
state regulatory safety and soundness examinations are conducted annually at Glacier, Mountain
West, First Security, 1st Bank and Western and every eighteen months for all other bank
subsidiaries.
Loan Approval Limits
Individual loan approval limits have been established for each lender based on the loan types and
experience of the individual. Each bank subsidiary has an Officer Loan Committee consisting of
senior lenders and members of senior management. The bank subsidiaries Officer Loan Committees
have loan approval authority between $500,000 and $1,000,000. The bank subsidiaries Board of
Directors have loan approval authority up to $2,000,000. Loans exceeding these limits and up to
$10,000,000 are subject to approval by the Companys Executive Loan Committee consisting of the
Banks senior loan officers and the Companys Credit Administrator. Loans greater than $10,000,000
are subject to approval by the Companys 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 each bank subsidiary.
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.
The Companys 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 projects
performance against projections, and monthly inspections by employees or external parties until the
real estate project is complete.
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.
16
Table of Contents
In monitoring the performance and credit quality of a construction loan, the Company assesses the
adequacy of any remaining interest reserve, and whether the use of an interest reserve remains
appropriate in the presence of emerging weakness and associated risks in the construction loan.
The ongoing accrual and recognition of uncollected interest as income continues only when facts and
circumstances continue to reasonably support the contractual payment of principal or interest.
Loans are typically designated as non-accrual when the collection of the contractual principal or
interest is unlikely and has remained unpaid for ninety days or more. For such loans, the accrual
of interest and its capitalization into the loan balance will be discontinued.
The Company had loans with interest reserves of $141.1 million and $216.4 million of which there
were remaining interest reserves of $879 thousand and $3.4 million as of December 31, 2010 and
2009, respectively. During 2010, the Company extended, renewed, or restructured 44 loans with
interest reserves, such loans having an aggregate outstanding principal balance of $50.0 million as
of December 31, 2010. However, such actions were based on prudent underwriting standards and not
to keep the loans current. As of December 31, 2010, the Company had 45 construction loans totaling
$65.3 million with interest reserves that are currently non-performing or which are potential
problem loans.
Loan Purchases and Sales
Fixed rate, long-term mortgage loans are generally sold in the secondary market. The Company is
active in the secondary market, primarily through the origination of conventional, FHA and VA
residential mortgages. The sale of loans in the secondary mortgage market reduces the Companys
risk of holding long-term, fixed rate loans during periods of rising rates. The sale of loans also
allows the Company to make loans during periods when funds are not otherwise available for lending
purposes. In connection with conventional loan sales, the Company typically sells a majority of
mortgage loans originated with servicing released. The Company has also been very active in
generating commercial SBA loans, and other commercial loans, with a portion of those loans sold to
investors. As of December 31, 2010, loans serviced for others totaled $173 million. The Company
has not originated any type of subprime mortgages, either for the loan portfolio or for sale to
investors. In addition, the Company has not purchased securities that were collateralized with
subprime mortgages. The Company has not purchased loans outside the Company or originated loans
outside the Companys geographic market area.
Loan Origination and Other Fees
In addition to interest earned on loans, the Company receives fees for originating loans. Loan
fees generally are a percentage of the principal amount of the loan and are charged to the
borrower, and are normally deducted from the proceeds of the loan. Loan origination fees are
generally 1.0 percent to 1.5 percent on residential mortgages and .5 percent to 1.5 percent on
commercial loans. Consumer loans require a fixed fee amount as well as a minimum interest amount.
The Company also receives other fees and charges relating to existing loans, which include charges
and fees collected in connection with loan modifications.
Appraisal and Evaluation Process
The Companys Loan Policy and credit administration practices adopt and implement the applicable
requirements of the Interagency Appraisal and Evaluation Guidelines (and the Interagency Guidelines
for Real Estate Lending Policies in Appendix A to Part 365 of Title 12, CFR) (collectively, the
Guidelines) and the Uniform Standards of Professional Appraisal Practice (USPAP) as established
and amended by the Appraisal Standards Board. The Companys Loan Policy establishes criteria for
obtaining appraisals or evaluations, including transactions that are otherwise exempt from the
appraisal requirements set forth within the Guidelines.
Each of the Companys eleven bank subsidiaries 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.
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The time between ordering an appraisal or evaluation and receipt from third party vendors is
typically two to three weeks for
residential property and four to six weeks for non-residential property. For real estate properties
that are of highly specialized or limited use, significantly complex or large, additional time
beyond the typical times may be required for new appraisals or evaluations.
As part of the Companys credit administration and portfolio monitoring practices, the Companys
regular internal and external credit examinations review a significant number of individual loan
files. Appraisals and evaluations are reviewed to determine whether the timeliness, methods,
assumptions, and findings are reasonable and in compliance with the Companys Loan Policy and
credit administration practices, the Guidelines and USPAP standards. Such reviews include the
adequacy of the steps taken by the Company to ensure that the individuals who perform appraisals
and evaluations are appropriately qualified and are not subject to conflicts of interest.
Deficiencies, if any, are reported to the Banks Board of Directors and prompt corrective action is
taken.
Non-Performing Assets
The following tables summarize information regarding non-performing assets at the dates indicated,
including breakouts by regulatory and bank subsidiary classification:
December 31, | ||||||||||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
Non-accrual loans |
||||||||||||||||||||
Residential real estate |
$ | 23,095 | $ | 20,093 | $ | 3,575 | $ | 934 | $ | 1,806 | ||||||||||
Commercial |
161,136 | 168,328 | 58,454 | 7,192 | 3,721 | |||||||||||||||
Consumer and other |
8,274 | 9,860 | 2,272 | 434 | 538 | |||||||||||||||
Total |
192,505 | 198,281 | 64,301 | 8,560 | 6,065 | |||||||||||||||
Accruing loans 90 days or more past due |
||||||||||||||||||||
Residential real estate |
506 | 1,965 | 4,103 | 840 | 554 | |||||||||||||||
Commercial |
3,051 | 1,311 | 2,897 | 1,216 | 638 | |||||||||||||||
Consumer and other |
974 | 2,261 | 1,613 | 629 | 153 | |||||||||||||||
Total |
4,531 | 5,537 | 8,613 | 2,685 | 1,345 | |||||||||||||||
Other real estate owned |
73,485 | 57,320 | 11,539 | 2,043 | 1,484 | |||||||||||||||
Total non-performing loans and
other real estate owned |
270,521 | 261,138 | 84,453 | 13,288 | 8,894 | |||||||||||||||
Allowance for loan and lease losses as a
percentage of non-performing assets |
51 | % | 55 | % | 91 | % | 409 | % | 554 | % | ||||||||||
Non-performing assets as a percentage
of total subsidiary assets |
3.91 | % | 4.13 | % | 1.46 | % | 0.27 | % | 0.19 | % | ||||||||||
Unrecorded interest income 1 |
$ | 10,987 | $ | 11,730 | $ | 4,434 | $ | 683 | $ | 462 |
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. |
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Non-Performing Assets, | Non- | Accruing | Other | |||||||||||||||||
by Loan Type | Accruing | Loans 90 | Real Estate | |||||||||||||||||
Balance | Balance | Loans | Days or More | Owned | ||||||||||||||||
(Dollars in thousands) | 12/31/10 | 12/31/09 | 12/31/10 | 12/31/10 | 12/31/10 | |||||||||||||||
Custom and owner
occupied construction |
$ | 2,575 | 3,281 | 1,908 | | 667 | ||||||||||||||
Pre-sold and spec construction |
16,071 | 29,580 | 10,577 | | 5,494 | |||||||||||||||
Land development |
83,989 | 88,488 | 55,938 | | 28,051 | |||||||||||||||
Consumer land or lots |
12,543 | 10,120 | 8,150 | 40 | 4,353 | |||||||||||||||
Unimproved land |
44,116 | 32,453 | 28,958 | | 15,158 | |||||||||||||||
Developed lots for operative
builders |
7,429 | 11,565 | 5,378 | | 2,051 | |||||||||||||||
Commercial lots |
3,110 | 909 | 2,933 | | 177 | |||||||||||||||
Other construction |
3,837 | | 3,837 | | | |||||||||||||||
Commercial real estate |
36,978 | 32,300 | 26,522 | 731 | 9,725 | |||||||||||||||
Commercial and industrial |
13,127 | 12,271 | 10,997 | 1,906 | 224 | |||||||||||||||
Agriculture loans |
5,253 | 283 | 4,723 | 125 | 405 | |||||||||||||||
1-4 family |
34,791 | 30,868 | 28,479 | 878 | 5,434 | |||||||||||||||
Home equity lines of credit |
4,805 | 6,234 | 3,371 | 788 | 646 | |||||||||||||||
Consumer |
446 | 1,042 | 150 | 24 | 272 | |||||||||||||||
Other |
1,451 | 1,744 | 584 | 39 | 828 | |||||||||||||||
Total |
$ | 270,521 | 261,138 | 192,505 | 4,531 | 73,485 | ||||||||||||||
Accruing 30 - 89 Days Delinquent | Non-Accrual & | |||||||||||||||||||
Loans and Non-Performing | Accruing | Accruing Loans | Other | |||||||||||||||||
Assets, by Bank | 30-89 Days | 90 Days or | Real Estate | |||||||||||||||||
Balance | Balance | Past Due | More Past Due | Owned | ||||||||||||||||
(Dollars in thousands) | 12/31/10 | 12/31/09 | 12/31/10 | 12/31/10 | 12/31/10 | |||||||||||||||
Glacier |
$ | 75,869 | 97,666 | 10,188 | 57,659 | 8,022 | ||||||||||||||
Mountain West |
83,872 | 109,187 | 9,830 | 65,170 | 8,872 | |||||||||||||||
First Security |
59,770 | 59,351 | 11,493 | 35,782 | 12,495 | |||||||||||||||
Western |
11,237 | 9,315 | 1,917 | 6,209 | 3,111 | |||||||||||||||
1st Bank |
16,686 | 21,117 | 4,349 | 3,468 | 8,869 | |||||||||||||||
Valley |
1,900 | 2,542 | 723 | 1,049 | 128 | |||||||||||||||
Big Sky |
21,739 | 31,711 | 3,143 | 10,068 | 8,528 | |||||||||||||||
First National |
9,901 | 9,290 | 694 | 9,188 | 19 | |||||||||||||||
Citizens |
8,000 | 5,340 | 1,216 | 4,936 | 1,848 | |||||||||||||||
First Bank-MT |
553 | 800 | 299 | 254 | | |||||||||||||||
San Juans |
6,549 | 2,310 | 1,645 | 3,253 | 1,651 | |||||||||||||||
GORE |
19,942 | | | | 19,942 | |||||||||||||||
Total |
$ | 316,018 | 348,629 | 45,497 | 197,036 | 73,485 | ||||||||||||||
Non-performing assets as a percentage of the total subsidiary assets at December 31, 2010 were
3.91 percent, down from 4.13 percent at December 31, 2009. The allowance for loan and lease losses
(ALLL or allowance) was 51 percent of non-performing assets at December 31, 2010, down from 55
percent for the prior year end. Most of the Companys non-performing assets are secured by real
estate and, based on the most current information available to management, including updated
appraisals or evaluations, the Company believes the value of the underlying real estate collateral
is adequate to minimize significant charge-offs or loss to the Company. Each bank subsidiary
evaluates the level of its non-performing assets, the values of the underlying real estate and
other collateral, and related trends in net charge-offs in determining the adequacy of the ALLL.
Through pro-active credit administration, the Banks work closely with borrowers to seek favorable
resolution to the extent possible, thereby attempting to minimize net charge-offs or losses to the
Company.
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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 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 non-accrual, 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.
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 90 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 loans). The Company measures
impairment on a loan-by-loan basis. 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 borrowers prior payment record, and the amount of the shortfall in
relation to the principal and interest due. At the time a loan is identified as impaired, it is
measured for impairment and thereafter reviewed and measured on at least a quarterly basis for
additional impairment.
The amount of the impairment is measured based on the present value of expected future cash flows
discounted at the loans 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 troubled debt restructuring 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 (new or updated) of the underlying property value. The Company reviews appraisals or
evaluations, giving consideration to the highest and best use of the collateral, with values
reduced by discounts to consider lack of marketability and estimated cost to sell. Appraisals or
evaluations (new or updated) are reviewed at least quarterly and more frequently based on current
market conditions, including deterioration in a borrowers 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 an impaired loans value may occur.
In deciding whether to obtain a new or updated appraisal or evaluation, the Company considers the
impact of the following factors and environmental events:
| passage of time; | ||
| improvements to, or lack of maintenance of, the collateral property; | ||
| stressed and volatile economic conditions, including market values; | ||
| changes in the performance, risk profile, size and complexity of the credit exposure; | ||
| limited or specific use collateral property; | ||
| high loan-to-value credit exposures; | ||
| changes in the adequacy of the collateral protections, including loan covenants and financially responsible guarantors; | ||
| competing properties in the market area; | ||
| changes in zoning and environmental contamination; | ||
| the nature of subsequent transactions (e.g., modification, restructuring, refinancing); and | ||
| the availability of alternative financing sources. |
The Company also takes into account (i) the Companys experience with whether the appraised values
of impaired collateral-dependent loans are actually realized, and (ii) the timing of cash flows
expected to be received from the underlying collateral to the extent such timing is significantly
different than anticipated in the most recent appraisal.
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The Company generally obtains new or updated appraisals or evaluations annually for collateral
underlying impaired loans. For
collateral-dependent loans for which the appraisal of the underlying collateral is more than twelve
months old, the Company updates collateral valuations through procedures that include obtaining
current inspections of the collateral property, broker price opinions, comprehensive market
analyses and current data for conditions and assumptions (e.g., discounts, comparable sales and
trends) underlying the appraisals valuation techniques. The Companys impairment/valuation
procedures take into account new and updated appraisals on similar properties in the same area in
order to capture current market valuation changes, unfavorable and favorable.
When the ultimate collectability of the total principal of an impaired loan is in doubt and
designated as non-accrual, all payments are applied to principal under the cost recovery method.
When the ultimate collectability of the total principal on an impaired loan is not in doubt,
contractual interest is generally credited to interest income when received under the cash basis
method. Impaired loans were $225.1 million and $218.7 million as of December 31, 2010 and 2009,
respectively. The ALLL includes valuation allowances of $16.9 million and $19.8 million specific
to impaired loans as of December 31, 2010 and 2009, respectively. Of the total impaired loans at
December 31, 2010, there were 45 commercial real estate and other commercial loans that accounted
for $120.0 million, or 53 percent, of the impaired loans. The 45 loans were collateralized by 125
percent of the loan value, the majority of which had appraisals (new or updated) in 2010, such
appraisals reviewed at least quarterly taking into account current market conditions. Of the total
impaired loans at December 31, 2010, there were 254 loans aggregating to $133.6 million, or 59
percent, whereby the borrowers had more than one impaired loan. The amount of impaired loans that
have had partial charge-offs during the year for which the Company continues to have concern about
the collectability of the remaining loan balance was $64.6 million. Of these loans, there were
charge-offs of $25.4 million during 2010.
A restructured loan is considered a troubled debt restructuring (TDR) if the creditor, for
economic or legal reasons related to the debtors financial difficulties, grants a concession to
the debtor that it would not otherwise consider. The Company made the following types of loan
modifications, some of which were considered 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. |
Each restructured debt is separately negotiated with the borrower and includes terms and conditions
that reflect the borrowers prospective ability to service the debt as modified. The Company
discourages the multiple loan strategy when restructuring loans regardless of whether or not the
notes are TDR loans. The Companys TDR loans are considered impaired loans of which the majority
are designated as nonaccrual. The Company does not have any commercial TDR loans as of December
31, 2010 that have repayment dates extended at or near the original maturity date for which the
Company has not classified as impaired. The Company had TDR loans of $68.7 million as of December
31, 2010, of which $42.0 million were on non-accrual status. The Company has TDR loans of $19.0
million that are in non-accrual status or that have had partial charge-offs during the year, the
borrowers of which continue to have $30.7 million in other loans that are on accrual status.
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 troubled debt restructurings, 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 non-performing construction loans involving residential structures, the percentage of
completion exceeds 95% at December 31, 2010. For construction loans involving commercial
structures, the percentage of completion ranges from projects not started to projects completed at
year end 2010. 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
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completion appraisals for consideration of potential increases
or decreases in the collaterals value. The Company also considers the
increased costs of monitoring progress to completion, and the related collection/holding period
costs should collateral ownership be transferred to the Company. With very limited exception, the
Company does not disburse additional funds on non-performing loans; instead, the Company has
proceeded to collection and foreclosure actions in order to reduce the Companys exposure to loss
on such loans.
Property acquired by foreclosure or deed-in-lieu of foreclosure is carried at the lower of fair
value at acquisition date or current estimated fair value, less selling costs. 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. If the fair value of the asset, less selling costs, is less than the cost of the property, a
loss is recognized in other expenses and the asset carrying value is reduced. Gain or loss on
disposition of real estate owned is recorded in non-interest income or non-interest expense,
respectively. The loan book value prior to the acquisition and transfer of the loan into other
real estate owned during 2010 was $99.8 million of which $27.5 million was residential real estate,
$67.3 million was commercial real estate, and $5.0 million was consumer loans. The loan collateral
acquired in foreclosure during 2010 was $72.6 million of which $19.1 million was residential real
estate, $49.0 million was commercial real estate, and $4.5 million was consumer loans. The
following table sets forth the changes in other real estate owned for the years ended December 31,
2010 and 2009:
Years ended December 31, | ||||||||
(Dollars in thousands) | 2010 | 2009 | ||||||
Balance at beginning of period |
$ | 57,320 | 11,539 | |||||
Additions |
72,572 | 71,967 | ||||||
Capital improvements |
273 | 2,403 | ||||||
Write-downs |
(10,429 | ) | (2,616 | ) | ||||
Sales |
(46,251 | ) | (25,973 | ) | ||||
Balance at end of period |
$ | 73,485 | 57,320 | |||||
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. Although there was an increase in write-downs in 2010
compared to 2009, the majority occurred during the third quarter of 2010 and slowed significantly
during the fourth quarter of 2010. The Company believes that the write-downs in 2010 are not
indicative of a trend in that several of such properties have characteristics unique to the
property, including special or limited use, and locations of such properties. The Company
determined that the write-downs were not indicative of a trend continuing beyond 2010 which would
likely affect the future operating results in light of the remaining holdings of real property and
each particular bank subsidiarys experience in its particular markets. However, there can be no
assurance that future significant write-downs will not occur.
With respect to the $6.7 million of loss realized during 2010 from dispositions of other real
estate owned, $3.1 million resulted from the sales of individual or a combination of properties
through auctions conducted by several of the bank subsidiaries. Of the other real estate owned
properties sold during the third quarter of 2010, whether sold individually or through auction,
several were sold at less than fair value, such strategic decisions taking into account the
potential for increases or decreases in the propertys value over time and related holding period
costs. Costs of the auctions, including property-specific marketing costs and service fees paid to
the third-party auction firms, are aggregated with other directly-related selling costs in
determining the loss realized from disposition of the other real estate owned.
The use of auctions during the third quarter of 2010 was undertaken by the Company as a step in
evaluating strategic alternatives and consideration of more aggressive efforts to market other real
estate owned outside of the Companys geographic operations to attract additional interest. In
addition to auctions, the Company utilizes real estate companies (local and national franchises) as
well as showcasing select properties through the websites of the bank subsidiaries. Strategies for
disposition of other real estate and other assets owned by each subsidiary are developed specific
to each property. The Company does not intend to use auctions for disposition of other real estate
owned in the future unless it is determined to be beneficial to the Company.
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 each bank subsidiarys loan and lease
portfolios. 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 managements judgments about all known relevant internal
and external environmental factors that affect loan losses, including the credit risk inherent in
the loan and lease portfolios,
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economic conditions nationally and in the local markets in which the
community bank subsidiaries operate, changes in collateral values, delinquencies, non-performing
assets and net charge-offs.
Although the Company and Banks continue to actively monitor economic trends, soft economic
conditions combined with potential declines in the values of real estate that collateralize most of
the Companys loan and lease portfolios may adversely affect the credit risk and potential for loss
to the Company.
The ALLL evaluation is well documented and approved by each bank subsidiarys Board of Directors
and reviewed by the Parents Board of Directors. In addition, the policy and procedures for
determining the balance of the ALLL are reviewed annually by each bank subsidiarys Board of
Directors, the Parents Board of Directors, the internal audit department, independent credit
reviewers and state and federal bank regulatory agencies.
At the end of each quarter, each of the community bank subsidiaries analyzes its loan and lease
portfolio and maintain an ALLL at a level that is appropriate and determined in accordance with
accounting principles generally accepted in the United States of America. The allowance consists
of a specific allocation component and a general allocation component. The specific allocation
component relates to loans that are determined to be impaired. A valuation allowance is
established when the fair value of a collateral-dependent loan or the present value of the loans
expected future cash flows (discounted at the loans effective interest rate) is lower than the
carrying value of the impaired loan. The general allocation component relates to probable credit
losses inherent in the balance of the portfolio based on prior loss experience, adjusted for
changes in trends and conditions of qualitative or environmental factors. Each of the Banks ALLL
is considered adequate to absorb losses from any class of its loan and lease portfolio.
Management of each bank subsidiary exercises significant judgment when evaluating the effect of
applicable qualitative or environmental factors on each bank subsidiarys historical loss
experience for loans not identified as impaired. Quantification of the impact upon each subsidiary
banks 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 banks unimpaired loan portfolio as of each evaluation date.
Bank management documents its conclusions and rationale for changes that occur in each applicable
factors weight, i.e., measurement and ensures that such changes are directionally consistent based
on the underlying current trends and conditions for the factor.
The Company is committed to a conservative management of the credit risk within the loan and lease
portfolios, including the early recognition of problem loans. The Companys 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 and lease portfolios, semi-annual review of loans by
industry, and periodic stress testing of the loans secured by real estate.
The Companys model of eleven independent wholly-owned community banks, each with its own loan
committee, chief credit officer and Board of Directors, provides substantial local oversight to the
lending and credit management function. Unlike a traditional, single-bank holding company, the
Companys decentralized business model affords multiple reviews of larger loans before credit is
extended, a significant benefit in mitigating and managing the Companys credit risk. The
geographic dispersion of the market areas in which the Company and the community bank subsidiaries
operate further mitigates the risk of credit loss. While this process is intended to limit credit
exposure, there can be no assurance that further problem credits will not arise and additional loan
losses incurred, particularly in periods of rapid economic downturns.
The primary responsibility for credit risk assessment and identification of problem loans rests
with the loan officer of the account. This continuous process, utilizing each of the Banks
internal credit risk rating process, is necessary to support managements evaluation of the ALLL
adequacy. An independent loan review function verifying credit risk ratings evaluates the loan
officer and managements evaluation of the loan portfolio credit quality. The loan review function
also assesses the evaluation process and provides an independent analysis of the adequacy of the
ALLL.
The Company considers the ALLL balance of $137 million adequate to cover inherent losses in the
loan and lease portfolios as of December 31, 2010. However, 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 and lease portfolios applying managements
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 increased
provisions for loan losses. See additional risk factors in Item 1A. Risk Factors.
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The following table summarizes the allocation of the ALLL:
December 31, 2010 | December 31, 2009 | December 31, 2008 | December 31, 2007 | December 31, 2006 | ||||||||||||||||||||||||||||||||||||
Allowance | Percent | Allowance | Percent | Allowance | Percent | Allowance | Percent | Allowance | Percent | |||||||||||||||||||||||||||||||
for Loan and | of Loans in | for Loan and | of Loans in | for Loan and | of Loans in | for Loan and | of Loans in | for Loan and | of Loans in | |||||||||||||||||||||||||||||||
(Dollars in thousands) | Lease Losses | Category | Lease Losses | Category | Lease Losses | Category | Lease Losses | Category | Lease Losses | Category | ||||||||||||||||||||||||||||||
Residential real estate |
$ | 20,957 | 16.9 | % | 13,496 | 18.3 | % | 7,233 | 19.2 | % | 4,755 | 19.2 | % | 5,421 | 23.7 | % | ||||||||||||||||||||||||
Commercial real estate |
76,147 | 47.9 | % | 66,791 | 46.6 | % | 35,305 | 47.4 | % | 23,010 | 45.1 | % | 16,741 | 36.5 | % | |||||||||||||||||||||||||
Other commercial |
19,932 | 17.4 | % | 39,558 | 17.8 | % | 21,590 | 15.8 | % | 17,453 | 17.8 | % | 18,361 | 21.7 | % | |||||||||||||||||||||||||
Home equity |
13,334 | 12.9 | % | 13,419 | 12.4 | % | 6,975 | 12.5 | % | 4,680 | 12.1 | % | 4,087 | 11.2 | % | |||||||||||||||||||||||||
Other consumer |
6,737 | 4.9 | % | 9,663 | 4.9 | % | 5,636 | 5.1 | % | 4,515 | 5.8 | % | 4,649 | 6.9 | % | |||||||||||||||||||||||||
Totals |
$ | 137,107 | 100.0 | % | 142,927 | 100.0 | % | 76,739 | 100.0 | % | 54,413 | 100.0 | % | 49,259 | 100.0 | % | ||||||||||||||||||||||||
The following tables summarize the ALLL experience at the dates indicated, including breakouts
by regulatory and bank subsidiary classification:
Years ended December 31, | ||||||||||||||||||||
(Dollars in thousands ) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
Balance at beginning of period |
$ | 142,927 | 76,739 | 54,413 | 49,259 | 38,655 | ||||||||||||||
Charge-offs |
||||||||||||||||||||
Residential real estate |
(16,575 | ) | (18,854 | ) | (3,233 | ) | (306 | ) | (14 | ) | ||||||||||
Commercial loans |
(69,595 | ) | (35,077 | ) | (4,957 | ) | (2,367 | ) | (1,187 | ) | ||||||||||
Consumer and other loans |
(7,780 | ) | (6,965 | ) | (1,649 | ) | (714 | ) | (448 | ) | ||||||||||
Total charge-offs |
(93,950 | ) | (60,896 | ) | (9,839 | ) | (3,387 | ) | (1,649 | ) | ||||||||||
Recoveries |
||||||||||||||||||||
Residential real estate |
749 | 423 | 23 | 208 | 341 | |||||||||||||||
Commercial loans |
2,203 | 1,636 | 716 | 656 | 331 | |||||||||||||||
Consumer and other loans |
485 | 407 | 321 | 358 | 298 | |||||||||||||||
Total recoveries |
3,437 | 2,466 | 1,060 | 1,222 | 970 | |||||||||||||||
Charge-offs, net of recoveries |
(90,513 | ) | (58,430 | ) | (8,779 | ) | (2,165 | ) | (679 | ) | ||||||||||
Acquisitions 1 |
| | 2,625 | 639 | 6,091 | |||||||||||||||
Provision for loan losses |
84,693 | 124,618 | 28,480 | 6,680 | 5,192 | |||||||||||||||
Balance at end of period |
$ | 137,107 | 142,927 | 76,739 | 54,413 | 49,259 | ||||||||||||||
Ratio of net charge-offs to average
loans outstanding during the period |
2.26 | % | 1.41 | % | 0.23 | % | 0.06 | % | 0.02 | % | ||||||||||
Allowance for loan and lease losses as a
percentage of total loan and leases |
3.58 | % | 3.46 | % | 1.86 | % | 1.51 | % | 1.53 | % |
1 | Acquisition of San Juans in 2008, North Side in 2007, CDC and Morgan in 2006. |
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Provision | ||||||||||||||||||||
Allowance for Loan | Provision | for Year | ALLL | |||||||||||||||||
and Lease Losses | for Year | Ended 12/31/10 | as a Percent | |||||||||||||||||
Balance | Balance | Ended | Over Net | of Loans | ||||||||||||||||
(Dollars in thousands) | 12/31/10 | 12/31/09 | 12/31/10 | Charge-Offs | 12/31/10 | |||||||||||||||
Glacier |
$ | 34,701 | 38,978 | 20,050 | 0.8 | 4.01 | % | |||||||||||||
Mountain West |
35,064 | 37,551 | 45,000 | 0.9 | 4.27 | % | ||||||||||||||
First Security |
19,046 | 18,242 | 8,100 | 1.1 | 3.33 | % | ||||||||||||||
Western |
7,606 | 8,762 | 950 | 0.5 | 2.49 | % | ||||||||||||||
1st Bank |
10,467 | 10,895 | 2,150 | 0.8 | 3.93 | % | ||||||||||||||
Valley |
4,651 | 4,367 | 500 | 2.3 | 2.54 | % | ||||||||||||||
Big Sky |
9,963 | 10,536 | 3,475 | 0.9 | 3.99 | % | ||||||||||||||
First National |
2,527 | 1,679 | 1,453 | 2.4 | 1.76 | % | ||||||||||||||
Citizens |
5,502 | 4,865 | 2,000 | 1.5 | 3.26 | % | ||||||||||||||
First Bank-MT |
3,020 | 2,904 | 265 | 1.8 | 2.76 | % | ||||||||||||||
San Juans |
4,560 | 4,148 | 750 | 2.2 | 3.18 | % | ||||||||||||||
Total |
$ | 137,107 | 142,927 | 84,693 | 0.9 | 3.58 | % | |||||||||||||
Net Charge-Offs, | ||||||||||||||||
for Year Ended, By Bank | ||||||||||||||||
Balance | Balance | Charge-Offs | Recoveries | |||||||||||||
(Dollars in thousands) | 12/31/10 | 12/31/09 | 12/31/10 | 12/31/10 | ||||||||||||
Glacier |
$ | 24,327 | 12,012 | 24,783 | 456 | |||||||||||
Mountain West |
47,487 | 28,931 | 48,221 | 734 | ||||||||||||
First Security |
7,296 | 3,745 | 8,509 | 1,213 | ||||||||||||
Western |
2,106 | 1,500 | 2,202 | 96 | ||||||||||||
1st Bank |
2,578 | 5,917 | 3,176 | 598 | ||||||||||||
Valley |
216 | 414 | 229 | 13 | ||||||||||||
Big Sky |
4,048 | 4,896 | 4,216 | 168 | ||||||||||||
First National |
605 | 4 | 681 | 76 | ||||||||||||
Citizens |
1,363 | 656 | 1,379 | 16 | ||||||||||||
First Bank-MT |
149 | 26 | 165 | 16 | ||||||||||||
San Juans |
338 | 329 | 389 | 51 | ||||||||||||
Total |
$ | 90,513 | 58,430 | 93,950 | 3,437 | |||||||||||
Net Charge-Offs, | ||||||||||||||||
for Year Ended, By Loan Type | ||||||||||||||||
Balance | Balance | Charge-Offs | Recoveries | |||||||||||||
(Dollars in thousands) | 12/31/10 | 12/31/09 | 12/31/10 | 12/31/10 | ||||||||||||
Residential construction |
$ | 7,147 | 13,455 | 7,432 | 285 | |||||||||||
Land, lot and other construction |
51,580 | 28,310 | 52,671 | 1,091 | ||||||||||||
Commercial real estate |
10,181 | 1,187 | 10,404 | 223 | ||||||||||||
Commercial and industrial |
5,612 | 3,610 | 6,490 | 878 | ||||||||||||
1-4 family |
9,897 | 7,242 | 10,414 | 517 | ||||||||||||
Home equity lines of credit |
4,496 | 2,357 | 4,535 | 39 | ||||||||||||
Consumer |
951 | 1,895 | 1,312 | 361 | ||||||||||||
Other |
649 | 374 | 692 | 43 | ||||||||||||
Total |
$ | 90,513 | 58,430 | 93,950 | 3,437 | |||||||||||
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The allowance determined by each of the eleven community bank subsidiaries is combined
together into a single allowance for the Company. As of December 31, 2010 and 2009, the Companys
allowance consisted of the following components:
December 31, | ||||||||
(Dollars in thousands) | 2010 | 2009 | ||||||
Specific allocation |
$ | 16,871 | 19,760 | |||||
General allocation |
120,236 | 123,167 | ||||||
Total allowance |
$ | 137,107 | 142,927 | |||||
Throughout 2010 and at December 31, 2010, the Company believes the allowance is commensurate with
the risk in the Companys loan and lease portfolio and is directionally consistent with the change
in the quality of the Companys loan and lease portfolio as determined at each bank subsidiary.
In total, the ALLL has decreased $5.8 million, or 4 percent, from a year ago. The ALLL of $137.1
million is 3.58 percent of total loans outstanding at December 31, 2010, up from 3.46 percent of
total loans at the prior year end. While the overall amount of the ALLL decreased, the increase in
the ALLL as a percent of loans is the result of a continuing overall upward increase in
environmental factors upon each bank subsidiarys historical loss experience. Despite the overall
continuing upward increase in environmental factors upon each bank subsidiarys historical loss
experience, the general allocation of the Companys allowance decrease by $2.9 million due to the
decrease of $304.7 million, or 7 percent, in total loans at December 31, 2010 compared to the prior
year end. For additional information regarding the trends and conditions impacting the
environmental factors, see Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations.
Presented below are select aggregated statistics that were also considered when determining the
adequacy of the Companys ALLL:
Positive Trends | |||
| The provision for loan losses in 2010 was $84.7 million, a decrease of $39.9 million from 2009. | ||
| Non-accrual construction loans (i.e., residential construction and land, lot and other construction) was $117.7 million, or 61 percent, of the $192.5 million of non-accrual loans at year end 2010, a decrease of $9.7 million from the prior year end. Non-accrual construction loans at year end 2009 accounted for 64 percent of the $198.3 million of non-accrual loans. | ||
| The allowance as a percent of non-performing loans was 70 percent at year ends 2010 and 2009. | ||
| Early stage delinquencies (accruing loans 30-89 days past due) decreased to $45.5 million at year end 2010 from $87.5 million at the prior year end. | ||
Negative Trends | |||
| The $37.3 million total of non-accrual loans in the agriculture, 1-4 family, home equity lines of credit, consumer, and other loans at year end 2010 increased by $7.9 million from year end 2009. | ||
| Charge-offs, net of recoveries, in 2010 was $90.5 million, an increase of $32.1 million from 2009. | ||
| Net charge-offs of construction loans was $58.7 million, or 65 percent, of the $90.5 million of net charge-offs in 2010 compared to net charge-offs of construction loans of $41.8 million, or 71 percent, of the $58.4 million of net charge-offs in 2009. | ||
| Impaired loans as a percent of total loans increased to 5.88 percent at year end 2010 as compared to 5.30 percent at year end 2009. | ||
| Non-performing loans as a percent of total loans increased to 5.15 percent at year end 2010 as compared to 4.93 percent at year end 2009. |
When applied to each bank subsidiarys historical loss experience, the 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. The occurrence of
confirming events in 2010 for previously recognized provision for loan losses resulted in loan
charge-offs, net of recoveries, exceeding the provision for loan losses by $5.8 million. During
2009, the provision for loan losses exceeded loan charge-offs, net of recoveries, by $66.2 million.
The eleven bank subsidiaries provide commercial services to individuals, small to medium size
businesses, community organizations and public entities from 105 locations, including 96 branches,
across Montana, Idaho, Wyoming, Colorado, Utah, and Washington. The Rocky Mountain areas in which
the bank subsidiaries operate 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 downturn in the
global, national, and local economies is not uniform across each of the bank subsidiaries.
26
Table of Contents
The soft economic conditions during much of 2009, though stabilized during 2010, included the
declining sales of existing real property (e.g., single family residential, multi-family,
commercial buildings and land), an increase in existing inventory of real property, increase in
real property delinquencies and foreclosures, and corresponding decrease in absorption rates, and
lower values of real property that collateralize most of the Companys loan and lease portfolios,
among other factors. While national unemployment increased steadily from 7.4 percent at the start
of 2009 to 10.0 percent at year end 2009 and dropping to 9.4 at December 31, 2010, the unemployment
rates for the states in which the community bank subsidiaries conduct operations were significantly
lower throughout 2009 and 2010 than the national unemployment percentages. Agricultural price
declines in livestock and grain in 2009 have significantly recovered in 2010. Concurrently, prices
for oil held strong, while prices for natural gas remain below the exceptionally high price levels
of 2008. The decline in the cost of living, as reflected in CPI measures, helped buffer the
general softening of the economy nationally, regionally and locally, and the impact of lower real
property values. The tourism industry and related lodging continues to be a source of strength for
those banks whose market areas have national parks and similar recreational areas in the market
areas served. Such changes affected the bank subsidiaries in distinctly different ways as each
bank has its own geographic area and local economy influences over both a short-term and long-term
horizon.
The specific allowance allocation of $16.9 million pertains to total impaired loans of $225.1
million. Included in the impaired loans is $159.9 million of loans which have no specific
allowance allocation since the fair value of collateral-dependent loans or the present value of the
loans expected future cash flows (discounted at the loans effective interest rate) is higher than
the carrying value of such impaired loans. In determining the need for a specific allowance
allocation on impaired loans, the effects of decreases during 2010 in the fair value of the
underlying collateral were considered.
In evaluating the need for a specific or general valuation allowance for impaired and unimpaired
loans, respectively, within the Companys construction loan portfolio, 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 new or updated appraisals or evaluations of the underlying collateral,
expected cash flows and the timing thereof, as well as the estimated costs to sell when such costs
are expected to reduce the cash flows available to repay or otherwise satisfy the construction
loan. Construction loans are 17% of the Companys total loan portfolio and account for 61% of the
Companys non-accrual loans at December 31, 2010. Collateral securing construction loans include
residential buildings (e.g., single/multi-family and condominiums), commercial buildings, and
associated land (multi-acre parcels and individual lots, with and without shorelines). Outstanding
balances are centered in Western Montana and Northern Idaho, as well as Boise, Ketchum and Sun
Valley, Idaho. None of the individual bank subsidiaries have a concentration of constructions
loans exceeding 5% of the Companys total loan portfolio.
As identified below, the following four bank subsidiaries had non-accrual construction loans that
aggregated 5 percent or more of the Companys $117.7 million of non-accrual construction loans at
December 31, 2010. Also identified below are the principal areas of the bank subsidiaries
operations in which the collateral properties of such non-accrual construction loans are located:
Mountain West
|
38 percent | Northern Idaho and Boise and Sun Valley, Idaho | ||
Glacier
|
31 percent | Western Montana | ||
First Security
|
14 percent | Western Montana | ||
Big Sky
|
7 percent | Western Montana |
Residential non-accrual construction loans are 11 percent of the total construction loans on
non-accrual status as of year end 2010. Unimproved land and land development loans collectively
account for the bulk of the non-accrual commercial construction loans at each of the four bank
subsidiaries. With locations and operations in the contiguous northern Rocky Mountain states of
Idaho and Montana, the geography and economies of each of the four bank subsidiaries are
predominantly tied to real estate development given the sprawling abundance of timbered valleys and
mountainous terrain with significant lakes, streams and watershed areas. Consistent with the
general economic downturn, the market for upscale primary, secondary and other housing as well as
the associated construction and building industries have stalled after years of significant growth.
As the housing market (rental and owner-occupied) and related industries continue to recover from
the downturn, the Company continues to reduce its exposure to loss in the construction loan and
other segments of the total loan portfolio.
For additional information regarding the ALLL, its relation to the provision for loan losses and
risk related to asset quality, see Note 4 to the Consolidated Financial Statements in Item 8.
Financial Statements and Supplementary Data.
27
Table of Contents
SOURCES OF FUNDS
General
Deposits obtained through the Banks have traditionally been the principal source of funds for use
in lending and other business purposes. The Banks have a number of different deposit programs
designed to attract both short-term and long-term deposits from the general public by providing a
wide selection of accounts and rates. These programs include non-interest bearing demand accounts,
interest-bearing checking, regular statement savings, money market deposit accounts, and fixed rate
certificates of deposit with maturities ranging from three months to five years, negotiated-rate
jumbo certificates, and individual retirement accounts. In addition, the Banks obtain wholesale
deposits through various programs including the Certificate of Deposit Account Registry System
(CDARS).
The Banks also obtain funds from repayment of loans and investment securities, advances from the
FHLB and other borrowings, repurchase agreements, and sale of loans and investment securities.
Loan repayments are a relatively stable source of funds, while interest bearing deposit inflows and
outflows are significantly influenced by general interest rate levels and market conditions.
Borrowings and advances may be used on a short-term basis to compensate for reductions in normal
sources of funds such as deposit inflows at less than projected levels. Borrowings also may be
used on a long-term basis to support expanded activities and to match maturities of longer-term
assets.
Deposits
Deposits are obtained primarily from individual and business residents of the Banks market area.
The Banks issue negotiated-rate certificate of deposits accounts and have paid a limited amount of
fees to brokers to obtain deposits. The following table illustrates the amounts outstanding at
December 31, 2010 for deposits of $100,000 and greater, according to the time remaining to
maturity. Included in certificates of deposit are brokered certificates of deposit and deposits
issued through the CDARS of $386,745,000. Included in Demand Deposits are brokered deposits of
$179,422,000.
Certificates | Demand | |||||||||||
(Dollars in thousands) | of Deposit | Deposits | Totals | |||||||||
Within three months |
$ | 427,436 | 1,812,587 | 2,240,023 | ||||||||
Three months to six months |
160,525 | | 160,525 | |||||||||
Seven months to twelve months |
173,215 | | 173,215 | |||||||||
Over twelve months |
150,678 | | 150,678 | |||||||||
Totals |
$ | 911,854 | 1,812,587 | 2,724,441 | ||||||||
For additional deposit information, see Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations and Note 7 to the Consolidated Financial Statements
in Item 8. Financial Statements and Supplementary Data.
Advances and Other Borrowings
As members of the FHLB, the Banks may borrow from such entity on the security of FHLB stock, which
the Banks are required to own as a member. The borrowings are collateralized by eligible
categories of loans and investment securities (principally, securities which are obligations of, or
guaranteed by, the United States and its agencies), provided certain standards related to
credit-worthiness have been met. Advances are made pursuant to several different credit programs,
each of which has its own interest rate and range of maturities. Depending on the program,
limitations on the amount of advances are based either on a fixed percentage of an institutions
total assets or on the FHLBs assessment of the institutions credit-worthiness. FHLB advances
have been used from time to time to meet seasonal and other withdrawals of deposits and to expand
lending by matching a portion of the estimated amortization and prepayments of retained fixed rate
mortgages.
The Banks also periodically borrow funds from the FRB and from the U.S. Treasury Tax and Loan
program. There were no FRB borrowings as of December 31, 2010 as a result of the cessation of the
Term Auction Facility program. Both programs require pledging of certain loans or investment
securities of the Banks and are generally short term obligations.
The Banks have borrowed money through repurchase agreements. This process involves the selling
of one or more of the securities in the Banks investment portfolios and by entering into an
agreement to repurchase that same security at an agreed upon later date. A rate of interest is
paid for the subject period of time. In addition, although the Banks have offered retail
repurchase agreements to its
retail customers, the Government Securities Act of 1986 imposed confirmation and other requirements
which generally made it impractical for financial institutions to offer such investments on a broad
basis. Through policies adopted by each of the Banks Board of Directors, the Banks enter into
repurchase agreements with local municipalities, and certain customers, and have adopted procedures
designed to ensure proper transfer of title and safekeeping of the underlying securities.
28
Table of Contents
The following chart illustrates the average balances and the maximum outstanding month-end balances
for FHLB advances, repurchase agreements and borrowings through the FRB:
At or for the Years ended December 31, | ||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
FHLB advances |
||||||||||||
Amount outstanding at end of period |
$ | 965,141 | 790,367 | 338,456 | ||||||||
Average balance |
$ | 691,969 | 473,038 | 566,933 | ||||||||
Maximum outstanding at any month-end |
$ | 977,155 | 790,367 | 822,107 | ||||||||
Weighted average interest rate |
1.38 | % | 1.68 | % | 2.71 | % | ||||||
Repurchase agreements |
||||||||||||
Amount outstanding at end of period |
$ | 249,403 | 212,506 | 188,363 | ||||||||
Average balance |
$ | 227,202 | 204,503 | 188,952 | ||||||||
Maximum outstanding at any month-end |
$ | 252,083 | 234,914 | 196,461 | ||||||||
Weighted average interest rate |
0.71 | % | 0.98 | % | 2.02 | % | ||||||
FRB discount window |
||||||||||||
Amount outstanding at end of period |
$ | | 225,000 | 914,000 | ||||||||
Average balance |
$ | 35,630 | 658,262 | 277,611 | ||||||||
Maximum outstanding at any month-end |
$ | 235,000 | 1,005,000 | 928,000 | ||||||||
Weighted average interest rate |
0.25 | % | 0.26 | % | 1.76 | % | ||||||
Total FHLB advances, repurchase agreements,
and FRB discount window |
||||||||||||
Amount outstanding at end of period |
$ | 1,214,544 | 1,227,873 | 1,440,819 | ||||||||
Average balance |
$ | 954,801 | 1,335,803 | 1,033,496 | ||||||||
Maximum outstanding at any month-end |
$ | 1,464,238 | 2,030,281 | 1,946,568 | ||||||||
Weighted average interest rate |
1.18 | % | 0.88 | % | 2.32 | % |
For additional information concerning the Companys borrowings and repurchase agreements, see Notes
8 and 9 to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary
Data.
Subordinated Debentures
In addition to funds obtained in the ordinary course of business, the Company formed Glacier Trust
II, Glacier Trust III, and Glacier Trust IV as financing subsidiaries and obtained Citizens Trust I
in connection with the acquisition of Citizens on April 1, 2005, San Juans Trust I in connection
with the acquisition of San Juans on December 1, 2008, and First Co Trust 01 and First Co Trust 03
in connection with the acquisition of First National on October 2, 2009. The trusts issued
preferred securities that entitle the shareholder to receive cumulative cash distributions from
payments thereon. The subordinated debentures outstanding as of December 31, 2010 are
$125,132,000, including fair value adjustments from acquisitions. For additional information
regarding the subordinated debentures, see Note 10 to the Consolidated Financial Statements Item
8. Financial Statements and Supplementary Data.
EMPLOYEES
As of December 31, 2010, the Company employed 1,674 persons, 1,517 of whom were full time, none of
whom were represented by a collective bargaining group. The Company provides its employees with a
comprehensive benefit program, including medical insurance, dental plan, life and accident
insurance, long-term disability coverage, sick leave, profit sharing plan, savings plan and
employee stock options. The Company considers its employee relations to be excellent. See Note 15
in the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data
for detailed information regarding employee benefit plans and eligibility.
29
Table of Contents
SUPERVISION AND REGULATION
Introduction
The following discussion provides an overview of certain elements of the extensive regulatory
framework applicable to the Company and the Banks. This regulatory framework is primarily designed
for the protection of depositors, federal deposit insurance funds and the banking system as a
whole, rather than specifically for the protection of shareholders. Due to the breadth and growth
of this regulatory framework, the costs of compliance continue to increase in order to monitor and
satisfy these requirements.
To the extent that this section describes statutory and regulatory provisions, it is qualified by
reference to those provisions. These statutes and regulations, as well as related policies, are
subject to change by Congress, state legislatures and federal and state regulators. Changes in
statutes, regulations or regulatory policies applicable to the Company, including the
interpretation or implementation thereof, could have a material effect on the Companys business or
operations. Recently, in light of the recent financial crisis, numerous proposals to modify or
expand banking regulation have surfaced and potentially have unintended consequences. Based on past
history, if any are approved, they will add to the complexity and cost of the Companys business.
Bank Holding Company Regulation
General. The Company is a bank holding company as defined in the Bank Holding Company Act
of 1956, as amended (BHCA), due to its ownership of the bank subsidiaries. Glacier, First
Security, Western, Valley, Big Sky, and First Bank-MT are Montana state-chartered banks and are
members of the Federal Reserve System; Mountain West and Citizens are Idaho state-chartered banks;
1st Bank is a Wyoming state-chartered bank and is a member of the Federal Reserve System; First
National is a nationally chartered bank and is a member of the Federal Reserve System; and San
Juans is a Colorado state-chartered bank. The deposits of the Banks are insured by the FDIC.
As a bank holding company, the Company is subject to regulation, supervision and examination by the
Federal Reserve. In general, the BHCA limits the business of bank holding companies to owning or
controlling banks and engaging in other activities closely related to banking. The Company must
also file reports with and provide additional information to the Federal Reserve. Under the
Financial Services Modernization Act of 1999, a bank holding company may apply to the Federal
Reserve to become a financial holding company, and thereby engage (directly or through a
subsidiary) in certain expanded activities deemed financial in nature, such as securities brokerage
and insurance underwriting.
Holding Company Bank Ownership. The BHCA requires every bank holding company to obtain the
prior approval of the Federal Reserve before 1) acquiring, directly or indirectly, ownership or
control of any voting shares of another bank or bank holding company if, after such acquisition, it
would own or control more than 5 percent of such shares; 2) acquiring all or substantially all of
the assets of another bank or bank holding company; or 3) merging or consolidating with another
bank holding company.
Holding Company Control of Nonbanks. With some exceptions, the BHCA also prohibits a bank
holding company from acquiring or retaining direct or indirect ownership or control of more than 5
percent of the voting shares of any company that is not a bank or bank holding company, or from
engaging directly or indirectly in activities other than those of banking, managing or controlling
banks or providing services for its subsidiaries. The principal exceptions to these prohibitions
involve certain non-bank activities that, by federal statute, agency regulation or order, have been
identified as activities closely related to the business of banking or of managing or controlling
banks.
Transactions with Affiliates. Bank subsidiaries of a bank holding company are subject to
restrictions imposed by the Federal Reserve Act on extensions of credit to the holding company or
its subsidiaries, on investments in securities, and on the use of securities as collateral for
loans to any borrower. These regulations and restrictions may limit the Companys ability to obtain
funds from the bank subsidiaries for its cash needs, including funds for payment of dividends,
interest and operational expenses.
Tying Arrangements. The Company is prohibited from engaging in certain tie-in arrangements
in connection with any extension of credit, sale or lease of property or furnishing of services.
For example, with certain exceptions, neither the Company nor the Banks 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 Banks; or 2) an agreement by the customer to refrain from obtaining
other services from a competitor.
Support of Bank Subsidiaries. Under Federal Reserve policy, the Company is expected to act
as a source of financial and managerial strength to its banks. This means that the Company is
required to commit, as necessary, resources to support the Banks. 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.
30
Table of Contents
State Law Restrictions. As a Montana corporation, the Company is subject to certain
limitations and restrictions under applicable Montana corporate law. For example, state law
restrictions in Montana include limitations and restrictions relating to indemnification of
directors, distributions to shareholders, transactions involving directors, officers or interested
shareholders, maintenance of books, records and minutes, and observance of certain corporate
formalities.
The Bank Subsidiaries
Glacier, First Security, Western, Valley, Big Sky, and First Bank-MT are subject to regulation and
supervision by the Montana Department of Administrations Banking and Financial Institutions
Division and the Federal Reserve as a result of their membership in the Federal Reserve System.
Mountain West and Citizens are subject to regulation and supervision by the Idaho Department of
Finance and by the FDIC. In addition, Mountain Wests Utah and Washington branches are primarily
regulated by the Utah Department of Financial Institutions and the Washington Department of
Financial Institutions, respectively.
1st Bank is subject to regulation and supervision by the Wyoming Division of Banking and the
Federal Reserve. First National is subject to regulation and supervision by the Federal Reserve and
also the Office of Comptroller of the Currency (OCC) as a nationally chartered bank, and to a
certain extent, by the Wyoming Division of Banking.
San Juans is subject to regulation by the Colorado Department of Regulatory Agencies-Division of
Banking and by the FDIC.
The federal laws that apply to the Banks regulate, among other things, the scope of their business,
their investments, their 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.
Community Reinvestment. The Community Reinvestment Act of 1977 requires that, in connection
with examinations of financial institutions within their jurisdiction, federal bank regulators must
evaluate the record of financial institutions in meeting the credit needs of their local
communities, including low and moderate-income neighborhoods, consistent with the safe and sound
operation of those banks. A banks community reinvestment record is also considered by the
applicable banking agencies in evaluating mergers, acquisitions, and applications to open a branch
or facility.
Insider Credit Transactions. Banks are also subject to certain restrictions on extensions
of credit to executive officers, directors, principal shareholders, and their related interests.
Extensions of credit 1) must be made on substantially the same terms, including interest rates and
collateral, and follow credit underwriting procedures that are at least as stringent, as those
prevailing at the time for comparable transactions with persons not covered above and who are not
employees; 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, the imposition of a cease and desist order, and other
regulatory sanctions.
Regulation of Management. Federal law 1) sets forth circumstances under which officers or
directors of a bank may be removed by the institutions federal supervisory agency; 2) places
restraints on lending by a bank to its executive officers, directors, principal shareholders, and
their related interests; and 3) prohibits management personnel of a bank from serving as a director
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. Federal law imposes upon banks certain non-capital safety
and soundness standards. These standards cover, among other things, internal controls, information
systems and internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits, such other operational and managerial
standards as the agency determines to be appropriate, and standards for asset quality, earnings and
stock valuation. An institution that fails to meet these standards must develop a plan acceptable
to its regulators, specifying the steps that the institution will take to meet the standards.
Failure to submit or implement such a plan may subject the institution to regulatory sanctions.
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Interstate Banking and Branching
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the Interstate Act)
relaxed prior interstate branching restrictions under federal law by permitting nationwide
interstate banking and branching under certain circumstances. Generally, bank holding companies may
purchase banks in any state and states may not prohibit these purchases. 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. As a result of the Dodd-Frank Act, prior restrictions on de novo branching by out of
state banks have been removed. The Dodd-Frank Act generally permits all banks to branch into other
states by opening a new branch or purchasing a branch from another financial institution, to the
extent that banks chartered under the state in which the new branch is located can do so. In the
past, the Interstate Act barred all financial institutions, except for thrifts, from branching into
other states unless they purchased or merged with a bank located in the other state.
Dividends
A principal source of the Companys cash is from dividends received from the Banks, which are
subject to government regulation and limitation. Regulatory authorities may prohibit banks and bank
holding companies from paying dividends in a manner that would constitute an unsafe or unsound
banking practice. In addition, a bank may not pay cash dividends if that payment could reduce the
amount of its capital below that necessary to meet minimum applicable regulatory capital
requirements. State law and, in the case of First National, national banking laws and related OCC
regulations, limit a banks ability to pay dividends that are greater than a certain amount without
approval of the applicable agency. Additionally, current guidance from the Federal Reserve
provides, among other things, that dividends per share on the Companys common stock generally
should not exceed earnings per share, measured over the previous four fiscal quarters.
Capital Adequacy
Regulatory Capital Guidelines. Federal bank regulatory agencies use capital adequacy
guidelines in the examination and regulation of bank holding companies and banks. The guidelines
are risk-based, meaning that they are designed to make capital requirements more sensitive to
differences in risk profiles among banks and bank holding companies.
Tier I and Tier II Capital. Under the guidelines, an institutions capital is divided into
two broad categories, Tier I capital and Tier II capital. Tier I capital generally consists of
common shareholders equity, surplus, undivided profits, and subordinated debentures. Tier II
capital generally consists of the allowance for loan and lease losses, hybrid capital instruments,
and subordinated debt. The sum of Tier I capital and Tier II capital represents an institutions
total capital. The guidelines require that at least 50 percent of an institutions total capital
consist of Tier I capital.
Risk-based Capital Ratios. The adequacy of an institutions capital is gauged primarily
with reference to the institutions risk-weighted assets. The guidelines assign risk weightings to
an institutions assets in an effort to quantify the relative risk of each asset and to determine
the minimum capital required to support that risk. An institutions risk-weighted assets are then
compared with its Tier I capital and total capital to arrive at a Tier I risk-based ratio and a
total risk-based ratio, respectively. The guidelines provide that an institution must have a
minimum Tier I risk-based ratio of 4 percent and a minimum total risk-based ratio of 8 percent.
Leverage Ratio. The guidelines also employ a leverage ratio, which is Tier I capital as a
percentage of average total assets, less intangibles. The principal objective of the leverage ratio
is to constrain the maximum degree to which a bank holding company may leverage its equity capital
base. The minimum leverage ratio is 4 percent.
Prompt Corrective Action. Under the guidelines, an institution is assigned to one of five
capital categories depending on its total risk-based capital ratio, Tier I risk-based capital
ratio, and leverage ratio, together with certain subjective factors. The categories range from
well capitalized to critically undercapitalized. Institutions that are undercapitalized or
lower are subject to certain mandatory supervisory corrective actions. At each successively lower
capital category, an insured bank is subject to increased restrictions on its operations. During
these challenging economic times, the federal banking regulators have actively enforced these
provisions.
Regulatory Oversight and Examination
The Federal Reserve conducts periodic inspections of bank holding companies, which are performed
both onsite and offsite. The supervisory objectives of the inspection program are to ascertain
whether the financial strength of the bank holding company is being maintained on an ongoing basis
and to determine the effects or consequences of transactions between a holding company or its
non-banking subsidiaries and its bank subsidiaries. For holding companies under $10 billion in
assets, the inspection type and frequency varies depending on asset size, complexity of the
organization, and the holding companys rating at its last inspection.
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Banks are subject to periodic examinations by their primary regulators. Bank examinations have
evolved from reliance on transaction testing in assessing a banks condition to a risk-focused
approach. These examinations are extensive and cover the entire breadth of operations of the bank.
Generally, safety and soundness examinations occur on an 18-month cycle for banks under $500
million in total assets that are well capitalized and without regulatory issues, and 12-months
otherwise. Examinations alternate between the federal and state bank regulatory agency or may occur
on a combined schedule. The frequency of consumer compliance and CRA examinations is linked to the
size of the institution and its compliance and CRA ratings at its most recent examinations.
However, the examination authority of the Federal Reserve and the FDIC allows them to examine
supervised banks as frequently as deemed necessary based on the condition of the bank or as a
result of certain triggering events.
Corporate Governance and Accounting
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 (the Act) addresses, among
other things, corporate governance, auditing and accounting, enhanced and timely disclosure of
corporate information, and penalties for non-compliance. Generally, the Act 1) requires chief
executive officers and chief financial officers to certify to the accuracy of periodic reports
filed with the Securities and Exchange Commission (the SEC); 2) imposes specific and enhanced
corporate disclosure requirements; 3) accelerates the time frame for reporting of insider
transactions and periodic disclosures by public companies; 4) requires companies to adopt and
disclose information about corporate governance practices, including whether or not they have
adopted a code of ethics for senior financial officers and whether the audit committee includes at
least one audit committee financial expert; and 5) requires the SEC, based on certain enumerated
factors, to regularly and systematically review corporate filings.
As a publicly reporting company, the Company is subject to the requirements of the Act and related
rules and regulations issued by the SEC and NASDAQ. After enactment, the Company updated its
policies and procedures to comply with the Acts requirements and has found that such compliance,
including compliance with Section 404 of the Act relating to management control over financial
reporting, has resulted in significant additional expense for the Company. The Company anticipates
that it will continue to incur such additional expense in its ongoing compliance.
Anti-Terrorism
USA Patriot Act of 2001. The Uniting and Strengthening America by Providing Appropriate
Tools Required to Intercept and Obstruct Terrorism Act of 2001, intended to combat terrorism, was
renewed with certain amendments in 2006 (the Patriot Act). Certain provisions of the Patriot Act
were made permanent and other sections were made subject to extended sunset provisions. The
Patriot Act, in relevant part, 1) prohibits banks from providing correspondent accounts directly to
foreign shell banks; 2) imposes due diligence requirements on banks opening or holding accounts for
foreign financial institutions or wealthy foreign individuals; 3) requires financial institutions
to establish an anti-money-laundering compliance program; and 4) eliminates civil liability for
persons who file suspicious activity reports.
Financial Services Modernization
Gramm-Leach-Bliley Act of 1999. The Gramm-Leach-Bliley Financial Services Modernization Act
of 1999 brought about significant changes to the laws affecting banks and bank holding companies.
Generally, the Act 1) repeals historical restrictions on preventing banks from affiliating with
securities firms; 2) provides a uniform framework for the activities of banks, savings institutions
and their holding companies; 3) broadens the activities that may be conducted by national banks and
banking subsidiaries of bank holding companies; 4) provides an enhanced framework for protecting
the privacy of consumer information and requires notification to consumers of bank privacy
policies; and 5) addresses a variety of other legal and regulatory issues affecting both day-to-day
operations and long-term activities of financial institutions. Bank holding companies that qualify
and elect to become financial holding companies can engage in a wider variety of financial
activities than permitted under previous law, particularly with respect to insurance and securities
underwriting activities.
The Emergency Economic Stabilization Act of 2008
Emergency Economic Stabilization Act of 2008. In response to market turmoil and financial
crises affecting the overall banking system and financial markets in the United States, the
Emergency Economic Stabilization Act of 2008 (the EESA) was enacted on October 3, 2008. EESA
provides the United States Treasury Department (the Treasury) with broad authority to implement
certain actions intended to help restore stability and liquidity to the U.S. financial markets.
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Troubled Asset Relief Program. Under the EESA, the Treasury has authority, among other
things, to purchase up to $700 billion in mortgage loans, mortgage-related securities and certain
other financial instruments, including debt and equity securities issued by financial institutions
pursuant to the Troubled Asset Relief Program (TARP). The purpose of TARP is to restore
confidence and stability to the U.S. banking system and to encourage financial institutions to
increase lending to customers and to each other. Pursuant to the EESA, the Treasury was initially
authorized to use $350 billion for TARP. Of this amount, the Treasury allocated $250 billion to the
TARP Capital Purchase Program, which funds were used to purchase preferred stock from qualifying
financial institutions. After receiving preliminary approval from Treasury to participate in the
program, the Company elected not to participate in light of its capital position and due to its
ability to raise capital successfully in private equity markets.
Temporary Liquidity Guarantee Program. Another program established pursuant to the EESA is
the Temporary Liquidity Guarantee Program (TLGP), which 1) removed the limit on FDIC deposit
insurance coverage for non-interest bearing transaction accounts through December 31, 2009, and 2)
provided FDIC backing for certain types of senior unsecured debt issued from October 14, 2008
through June 30, 2009. The end-date for issuing senior unsecured debt was later extended to October
31, 2009 and the FDIC also extended the Transaction Account Guarantee portion of the TLGP through
December 31, 2010. Financial institutions that did not opt out of unlimited coverage for
non-interest bearing accounts were initially charged an annualized 10 basis points on individual
account balances exceeding $250,000, and those issuing FDIC-backed senior unsecured debt were
initially charged an annualized 75 basis points on all such debt, although those rates were
subsequently increased.
Deposit Insurance
The bank subsidiaries deposits are insured under the Federal Deposit Insurance Act, up to the
maximum applicable limits and are subject to deposit insurance assessments designed to tie what
banks pay for deposit insurance more closely to the risks they pose. The banks have prepaid their
quarterly deposit insurance assessments for 2011 and 2012 pursuant to applicable FDIC regulations,
but the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank
Act) in July 2010 required the FDIC to amend its regulations to redefine the assessment base used
for calculating deposit insurance assessments. As a result, in February 2011, the FDIC approved
new rules to, among other things, change the assessment base from one based on domestic deposits
(as it has been since 1935) to one based on assets (average consolidated total assets minus average
tangible equity). Since the new assessment base is larger than the base used under prior
regulations, the rules also lower assessment rates, so that the total amount of revenue collected
by the FDIC from the industry is not significantly altered. The rule also revises the deposit
insurance assessment system for large financial institutions, defined as institutions with at least
$10 billion in assets. The rules revise the assessment rate schedule, effective April 1, 2011, and
adopt additional rate schedules that will go into effect when the Deposit Insurance Fund reserve
ratio reaches various milestones.
Insurance of Deposit Accounts. The EESA included a provision for a temporary increase from
$100,000 to $250,000 per depositor in deposit insurance effective October 3, 2008 through December
31, 2010. On May 20, 2009, the temporary increase was extended through December 31, 2013. The
Dodd-Frank Act permanently raises the current standard maximum deposit insurance amount to
$250,000. The FDIC insurance coverage limit applies per depositor, per insured depository
institution for each account ownership category. EESA also temporarily raised the limit on federal
deposit insurance coverage to an unlimited amount for non-interest or low-interest bearing demand
deposits. Pursuant to the Dodd-Frank Act, unlimited coverage for non-interest transaction accounts
will continue upon expiration of the TLGP until December 31, 2012.
Recent Legislation
Dodd-Frank Wall Street Reform and Consumer Protection Act. As a result of the recent
financial crises, on July 21, 2010 the Dodd-Frank Act was signed into law. The Dodd-Frank Act is
expected to have a broad impact on the financial services industry, including significant
regulatory and compliance changes and changes to corporate governance matters affecting public
companies. Many of the requirements called for in the Dodd-Frank Act will be implemented over time
and most will be subject to implementing regulations over the course of several years. Among other
things, the legislation 1) centralizes responsibility for consumer financial protection by creating
a new agency responsible for implementing, examining and enforcing compliance with federal consumer
financial laws; 2) applies the same leverage and risk-based capital requirements that apply to
insured depository institutions to bank holding companies; 3) requires the FDIC to seek to make its
capital requirements for banks countercyclical so that the amount of capital required to be
maintained increases in times of economic expansion and decreases in times of economic contraction;
4) changes the assessment base for federal deposit insurance from the amount of insured deposits to
consolidated assets less tangible capital; 5) requires the SEC to complete studies and develop
rules or approve stock exchange rules regarding various investor protection issues, including
shareholder access to the proxy process, and various matters pertaining to executive compensation
and compensation committee oversight; 6) makes permanent the $250,000 limit for federal deposit
insurance and provides unlimited federal deposit insurance until
December 31, 2012, for
non-interest bearing transaction accounts; 7) removes prior restrictions on interstate de novo
branching; and 8) 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. Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over
several years, making it difficult to anticipate the overall financial impact on the Company, the
bank subsidiaries and the
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financial services industry more generally. However, based on past experience with new legislation, it can
be anticipated that the Dodd-Frank Act, directly and indirectly, will impact the business of the
Company and the bank subsidiaries and increase compliance costs.
American Recovery and Reinvestment Act of 2009. On February 17, 2009 the American Recovery
and Reinvestment Act of 2009 (ARRA) was signed into law. ARRA is intended to help stimulate the
economy through a combination of tax cuts and spending provisions applicable to a broad range of
areas with an estimated cost of about $780 billion. The impact that ARRA may have on the US
economy, the Company and the Banks cannot be predicted with reasonable certainty.
Overdrafts. On November 17, 2009, the Board of Governors of the Federal Reserve System
promulgated the Electronic Fund Transfer rule with an effective date of January 19, 2010 and a
mandatory compliance date of July 1, 2010. The rule, which applies to all FDIC-regulated
institutions, prohibits financial institutions from assessing an overdraft fee for paying automated
teller machine (ATM) and one-time point-of-sale debit card transactions, unless the customer
affirmatively opts in to the overdraft service for those types of transactions. The opt-in
provision establishes requirements for clear disclosure of fees and terms of overdraft services for
ATM and one-time debit card transactions. Since a percentage of the Companys service charges on
deposits are in the form of overdraft fees on point-of-sale transactions, this could have an
adverse impact on the Companys non-interest income.
Proposed Legislation
Proposed legislation is introduced in almost every legislative session. Such legislation could
dramatically affect the regulation of the banking industry. The Company cannot predict if any such
legislation will be adopted or if it is adopted how it would affect the business of the Company or
the Banks. Past history has demonstrated that new legislation or changes to existing laws or
regulations usually results in a greater compliance burden and, therefore, generally increases the
cost of doing business.
Effects of Government Monetary Policy
The Companys earnings and growth are affected not only by general economic conditions, but also by
the fiscal and monetary policies of the federal government, particularly the Federal Reserve. The
Federal Reserve implements national monetary policy for such purposes as curbing inflation and
combating recession, but its open market operations in U.S. government securities, control of the
discount rate applicable to borrowings from the Federal Reserve, and establishment of reserve
requirements against certain deposits, influence the growth of bank loans, investments and
deposits, and also affect interest rates charged on loans or paid on deposits. The nature and
impact of future changes in monetary policies and their impact on the Company or the Banks cannot
be predicted with certainty.
TAXATION
Federal Taxation
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.
State Taxation
Under Montana, Idaho, Colorado and Utah law, financial institutions are subject to a corporation
tax, which incorporates or is substantially similar to applicable provisions of the Internal
Revenue Code. The corporation tax is imposed on federal taxable income, subject to certain
adjustments. State taxes are incurred at the rate of 6.75 percent in Montana, 7.6 percent in
Idaho, 5 percent in Utah and 4.63 percent in Colorado. Wyoming and Washington do not impose a
corporate income tax.
Income Tax Expense
Income tax expense for the years ended December 31, 2010 and 2009 was $7.3 million and $4.0
million, respectively. The Companys effective tax rate for the years ended December 31, 2010 and
2009 was 14.8 percent and 10.4 percent, respectively. The primary reason for the low effective
rate is the amount of tax-exempt investment income and federal tax credits. The tax-exempt income
was $23.4 million and $22.2 million for the years ended December 31, 2010 and 2009, respectively.
The federal tax credit benefits were $3.4 million and $1.2 million for the years ended December 31,
2010 and 2009, respectively. The Company continues its investments in select municipal securities
and various VIEs whereby the Company receives federal tax credits.
See Note 13 to the Consolidated Financial Statements in Item 8. Financial Statements and
Supplementary Data for additional information.
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Item 1A. Risk Factors
The Company and its eleven wholly-owned, independent community bank subsidiaries are exposed
to certain risks. The following is a discussion of the most significant risks and uncertainties
that may affect the Companys business, financial condition and future results.
The continued challenging economic environment could have a material adverse effect on the
Companys future results of operations or market price of stock.
The national economy, and the financial services sector in particular, are still facing significant
challenges. Substantially all of the Companys loans are to businesses and individuals in
Montana, Idaho, Wyoming, Utah, Colorado and Washington, markets facing many of the same challenges
as the national economy, including elevated unemployment and declines in commercial and residential
real estate. Although some economic indicators are improving both nationally and in the Companys
markets, unemployment remains high and there remains substantial uncertainty regarding when and how
strongly a sustained economic recovery will occur. The inability of borrowers to repay loans can
erode earnings by reducing earnings and by requiring the Company to add to its allowance for loan
and lease losses. While the Company cannot accurately predict how long these conditions may exist,
the economic downturn could continue to present risks for some time for the industry and Company.
A further deterioration in economic conditions in the nation as a whole or in the Companys markets
could result in the following consequences, any of which could have an adverse impact, which may be
material, on the Companys business, financial condition, results of operations and prospects, and
could also cause the market price of the Companys stock to decline:
§ | loan delinquencies may increase further; | ||
§ | problem assets and foreclosures may increase further; | ||
§ | collateral for loans made may decline further in value, in turn reducing customers borrowing power, reducing the value of assets and collateral associated with existing loans and increasing the potential severity of loss in the event of loan defaults; | ||
§ | demand for banking products and services may decline; and | ||
§ | low cost or non-interest bearing deposits may decrease. |
The allowance for loan and lease losses may not be adequate to cover actual loan losses, which
could adversely affect earnings.
The Company maintains an ALLL in an amount that it believes is adequate to provide for losses in
the loan portfolio. While the Company strives to carefully manage and monitor credit quality and
to identify loans that may become non-performing, at any time there are loans included in the
portfolio that will result in losses, but that have not been identified as non-performing or
potential problem loans. By closely monitoring credit quality, the Company attempts to identify
deteriorating loans before they become non-performing assets and adjust the ALLL accordingly.
However, because future events are uncertain, and if the economic downturn continues or
deteriorates further, there may be loans that deteriorate to a non-performing status in an
accelerated time frame. As a result, future additions to the ALLL may be necessary. Because the
loan portfolio contains a number of loans with relatively large balances, the deterioration of one
or a few of these loans may cause a significant increase in non-performing loans, requiring an
increase to the ALLL. Additionally, future significant additions to the ALLL may be required based
on changes in the mix of loans comprising the portfolio, changes in the financial condition of
borrowers, which may result from changes in economic conditions, or changes in the assumptions used
in determining the ALLL. Additionally, federal banking regulators, as an integral part of their
supervisory function, periodically review the Companys loan portfolio and the adequacy of the
ALLL. These regulatory agencies may require the Company to recognize further loan loss provisions
or charge-offs based upon their judgments, which may be different from the Companys judgments.
Any increase in the ALLL would have an adverse effect, which could be material, on the Companys
financial condition and results of operations.
The Company has a high concentration of loans secured by real estate, so any further deterioration
in the real estate markets could require material increases in ALLL and adversely affect the
Companys financial condition and results of operations.
The Company has a high degree of concentration in loans secured by real estate. A sluggish
recovery, or a continuation of the downturn in the economic conditions or real estate values, of
the Companys market areas 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 Companys ability to recover on these loans by selling or disposing of the
underlying real estate collateral is adversely impacted by declining real estate values, which
increases the likelihood that the Company will suffer losses on defaulted loans secured by real
estate beyond the amounts provided for in the ALLL. This, in turn, could require material
increases in the ALLL which would adversely affect the Companys financial condition and results of
operations, perhaps materially.
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A tightening of the credit markets may make it difficult to obtain adequate funding for loan
growth, which could adversely affect earnings.
A tightening of the credit markets and the inability to obtain or retain adequate funds for
continued loan growth at an acceptable cost may negatively affect the Companys asset growth and
liquidity position and, therefore, earnings capability. In addition to core deposit growth,
maturity of investment securities and loan payments, the Company also relies on alternative funding
sources through correspondent banking, and borrowing lines with the FRB and FHLB to fund loans. In
the event the current economic downturn continues, particularly in the housing market, these
resources could be negatively affected, both as to price and availability, which would limit and or
raise the cost of the funds available to the Company.
There can be no assurance the Company will be able to continue paying dividends on the common stock
at recent levels.
The ability to pay dividends on the Companys common stock depends on a variety of factors. The
Company paid dividends of $0.13 per share in each quarter of 2009 and 2010. There can be no
assurance that the Company will be able to continue paying quarterly dividends commensurate with
recent levels. In that regard, the Federal Reserve now is requiring the Company to provide prior
written notice and related information for staff review before declaring or paying dividends. In
addition, current guidance from the Federal Reserve provides, among other things, that dividends
per share generally should not exceed earnings per share. As a result, future dividends will
depend on sufficient earnings to support them. Furthermore, the Companys ability to pay dividends
depends on the amount of dividends paid to the Company by its subsidiaries, which is also subject
to government regulation, oversight and review. In addition, the ability of some of the bank
subsidiaries to pay dividends to the Company is subject to prior regulatory approval.
The Company may not be able to continue to grow organically or through acquisitions.
Historically, the Company has expanded through a combination of organic growth and acquisitions. If
market and regulatory conditions remain challenging, the Company may be unable to grow organically
or successfully complete potential future acquisitions. In particular, while the Company intends to
focus any near-term acquisition efforts on FDIC-assisted transactions within its existing market
areas, there can be no assurance that such opportunities will become available on terms that are
acceptable to the Company. Furthermore, there can be no assurance that the Company can successfully
complete such transactions, since they are subject to a formal bid process and regulatory review
and approval.
The FDIC has increased insurance premiums to rebuild and maintain the federal deposit insurance
fund and there may be additional future premium increases and special assessments.
In 2009, the FDIC imposed a special deposit insurance assessment of five basis points on all
insured institutions, and also required insured institutions to prepay estimated quarterly
risk-based assessments through 2012.
The Dodd-Frank Act established 1.35% as the minimum deposit insurance fund reserve ratio. The FDIC
has determined that the fund reserve ratio should be 2.0% and has adopted a plan under which it
will meet the statutory minimum fund reserve ratio of 1.35% by the statutory deadline of September
30, 2020. The Dodd-Frank Act requires the FDIC to offset the effect on institutions with assets
less than $10 billion of the increase in the statutory minimum fund reserve ratio to 1.35% from the
former statutory minimum of 1.15%. The FDIC has not announced how it will implement this offset or
how larger institutions will be affected by it.
Despite the FDICs actions to restore the deposit insurance fund, the fund will suffer additional
losses in the future due to failures of insured institutions. There can be no assurance that there
will not be additional significant deposit insurance premium increases, special assessments or
prepayments in order to restore the insurance funds reserve ratio. Any significant premium
increases or special assessments could have a material adverse effect on the Companys financial
condition and results of operations.
The Companys 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 Companys loan portfolio contains a significant number of commercial
and commercial real estate loans with relatively large balances, the deterioration of one or more
of these loans may cause a significant increase in non-performing loans. An increase in
non-performing loans could result in a loss of earnings from these loans, an increase in the
provision for loan losses, or an increase in loan charge-offs, which could have an adverse impact
on results of operations and financial condition.
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Non-performing assets have increased and could continue to increase, which could adversely
affect the Companys results of operations and financial condition.
Non-performing assets (which include foreclosed real estate) adversely affects the Companys net
income and financial condition in various ways. The Company does not record interest income on
non-accrual loans or other real estate owned, thereby adversely affecting its income. When the
Company takes collateral in foreclosures and similar proceedings, it is required to mark the
related asset to the then fair market value of the collateral, less estimated cost to sell, which
may result in a charge-off of the value of the asset and lead the Company to increase the provision
for loan losses. An increase in the level of non-performing assets also increases the Companys
risk profile and may impact the capital levels its regulators believe is appropriate in light of
such risks. Continued 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 Companys control, could adversely affect the Companys business, results of
operations and financial condition, perhaps materially. In addition to the carrying costs to
maintain other real estate owned, the resolution of non-performing assets increases the Companys
loan administration costs generally, and requires significant commitments of time from management
and the Companys directors, which reduces the time they have to focus on growing the Companys
business. There can be no assurance that the Company will not experience further increases in
non-performing assets in the future.
Decline in the fair value of the Companys investment portfolio could adversely affect earnings.
The fair value of the Companys investment securities could decline as a result of factors
including changes in market interest rates, credit quality and ratings, lack of market liquidity
and other economic conditions. Investment securities are impaired if the fair value of the
security is less than the carrying value. When a security is impaired, the Company determines
whether 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 an 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 Companys results of operations and financial condition.
Fluctuating interest rates can adversely affect profitability.
The Companys profitability is dependent to a large extent upon net interest income, which is the
difference (or spread) between the interest earned on loans, 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 Companys interest rate spread, and, in turn, profitability. The Company seeks to manage its
interest rate risk within well established guidelines. Generally, the Company seeks an asset and
liability structure that insulates net interest income from large deviations attributable to
changes in market rates. However, the Companys structures and practices to manage interest rate
risk may not be effective in a highly volatile rate environment.
If the goodwill recorded in connection with acquisitions becomes impaired, it could have an adverse
impact on earnings and capital.
Accounting standards require that the Company 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 acquirers balance sheet as
goodwill. In accordance with generally accepted accounting principles in the United States of
America, 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. Although
at the current time the Company has not incurred an impairment of goodwill, there can be no
assurance that future evaluations of goodwill will not result in findings of impairment and
write-downs, which could be material. An impairment of goodwill could have a material adverse
affect on the Companys business, financial condition and results of operations. Furthermore, an
impairment of goodwill could subject the Company to regulatory limitations, including the ability
to pay dividends on common stock.
Growth through future acquisitions could, in some circumstances, adversely affect profitability or
other performance measures.
The Company has in recent years acquired other financial institutions. The Company may in the
future engage in selected acquisitions of additional financial institutions, including transactions
that may receive assistance from the FDIC, although there can be no assurance that the Company will
be able to successfully complete any such transactions. 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, encountering greater than anticipated cost of integrating acquired businesses into
the Companys operations, and being unable to profitably deploy funds acquired in an acquisition.
The Company cannot provide any assurance as to the extent to which the Company can continue to grow
through acquisitions or the impact of such acquisitions on the Companys operating results or
financial condition.
38
Table of Contents
The Company anticipates that it might issue capital stock in connection with future acquisitions.
Acquisitions and related issuances of stock may have a dilutive effect on earnings per share and
the percentage ownership of current shareholders.
The Company may pursue additional capital in the future, which could dilute the holders of the
Companys outstanding common stock and may adversely affect the market price of common stock.
In the current economic environment, the Company believes it is prudent to consider alternatives
for raising capital when opportunities to raise capital at attractive prices present themselves, in
order to further strengthen the Companys capital and better position itself to take advantage of
opportunities that may arise in the future. Such alternatives may include issuance and sale of
common or preferred stock, trust preferred securities, or borrowings by the Company, with proceeds
contributed to the bank subsidiaries. Any such capital raising alternatives could dilute the
holders of the Companys outstanding common stock, and may adversely affect the market price of the
Companys common stock and performance measures such as earnings per share.
Business would be harmed if the Company lost the services of any of the senior management team.
The Company believes its success to date has been substantially dependent on its Chief Executive
Officer and other members of the executive management team, and on the Presidents of its bank
subsidiaries. The loss of any of these persons could have an adverse effect on the Companys
business and future growth prospects.
Competition in the Companys market areas may limit future success.
Commercial banking is a highly competitive business. The Company competes with other commercial
banks, savings and loan associations, credit unions, finance, insurance and other non-depository
companies operating in its market areas. The Company is subject to substantial competition for
loans and deposits from other financial institutions. Some of its competitors are not subject to
the same degree of regulation and restriction as the Company. Some of the Companys competitors
have greater financial resources than the Company. If the Company is unable to effectively compete
in its market areas, the Companys business, results of operations and prospects could be adversely
affected.
The Company operates in a highly regulated environment and changes of or increases in, or
supervisory enforcement of, banking or other laws and regulations or governmental fiscal or
monetary policies could adversely affect the Company.
The Company is subject to extensive regulation, supervision and examination by federal and state
banking authorities. In addition, as a publicly-traded company, the Company is subject to
regulation by the Securities and Exchange Commission. 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 Companys 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
Companys reputation, all of which could adversely affect the Companys business, financial
condition or results of operations.
In that regard, sweeping financial regulatory reform legislation was enacted in July 2010. Among
other provisions, the new legislation 1) creates a new Bureau of Consumer Financial Protection with
broad powers to regulate consumer financial products such as credit cards and mortgages, 2) creates
a Financial Stability Oversight Council comprised of the heads of other regulatory agencies, 3)
will lead to new capital requirements from federal banking agencies, 4) places new limits on
electronic debt card interchange fees, and 5) will require the Securities and Exchange Commission
and national stock exchanges to adopt significant new corporate governance and executive
compensation reforms. The new legislation and regulations are expected to increase the overall
costs of regulatory compliance.
Further, regulators have significant discretion and authority to prevent or remedy unsafe or
unsound practices or violations of laws or regulations by financial institutions and holding
companies in the performance of their supervisory and enforcement duties. Recently, these powers
have been utilized more frequently due to the serious national, regional and local economic
conditions the Company is facing. The exercise of regulatory authority may have a negative impact
on the Companys financial condition and results of operations. Additionally, the Companys
business is affected significantly by the fiscal and monetary policies of the U.S. federal
government and its agencies, including the Federal Reserve Board.
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, on the Company and on its bank subsidiaries. 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 Companys business, financial condition,
results of operations, and the trading price of the Companys common stock.
39
Table of Contents
The Company has various anti-takeover measures that could impede a takeover.
The Companys articles of incorporation include certain provisions that could make more difficult
the acquisition of the Company by means of a tender offer, a proxy contest, merger or otherwise.
These provisions include a requirement that any Business Combination (as defined in the articles
of incorporation) be approved by at least 80 percent of the voting power of the then-outstanding
shares, unless it is either approved by the Board of Directors 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 affect of lengthening the time required for a person 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 Companys shareholders of opportunities to realize a premium for their Glacier common stock,
even in circumstances where such action is favored by a majority of the Companys shareholders.
Item 1B. Unresolved Staff Comments
None
Item 2. Properties
At December 31, 2010, the Company owned 80 of its 105 offices. The remaining 25 offices are
leased and include 7 offices in Montana, 13 offices in Idaho, 2 offices in Wyoming, 1 office in
Colorado, 1 office in Utah, and 1 office in Washington. Including its headquarters, the aggregate
book value of Company-owned offices is $114 million. The following schedule provides property
information for the Companys bank subsidiaries as of December 31, 2010.
Properties | Properties | Net Book | ||||||||||
(Dollars in thousands) | Leased | Owned | Value | |||||||||
Glacier |
2 | 14 | $ | 22,478 | ||||||||
Mountain West |
15 | 13 | 16,012 | |||||||||
First Security |
2 | 11 | 13,140 | |||||||||
Western |
1 | 7 | 14,228 | |||||||||
1st Bank |
1 | 11 | 10,229 | |||||||||
Valley |
| 6 | 5,007 | |||||||||
Big Sky |
1 | 4 | 10,147 | |||||||||
First National |
1 | 3 | 6,459 | |||||||||
Citizens |
| 6 | 6,433 | |||||||||
First Bank-MT |
1 | 2 | 788 | |||||||||
San Juans |
1 | 2 | 4,177 | |||||||||
Parent |
| 1 | 4,883 | |||||||||
25 | 80 | $ | 113,981 | |||||||||
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.
For additional information concerning the Companys premises and equipment and lease obligations,
see Notes 5 and 20 to the Consolidated Financial Statements in Item 8. Financial Statements and
Supplementary Data.
Item 3. Legal Proceedings
The Company and its subsidiaries are parties to various claims, legal actions and complaints
in the ordinary course of their businesses. In the Companys 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 consolidated financial
position or results of
operations of the Company.
40
Table of Contents
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
The Companys stock trades on the NASDAQ Global Select Market under the symbol: GBCI. The
primary market makers during the year are listed below:
Barclays Capital Inc./Le
|
Citadel Derivatives Group LLC | Credit Suisse Securities USA | ||
D.A. Davidson & Co., Inc.
|
Deutsche Banc Alex Brown | Direct Edge ECN LLC | ||
EBX LLC
|
Getco Execution Services LLC | Goldman, Sachs & Co. | ||
Instinet, LLC
|
Keefe, Bruyette & Woods, Inc. | Knight Equity Markets, L.P. | ||
Liquidnet, Inc.
|
Lime Brokerage, LLC | Merrill Lynch, Pierce, Fenner | ||
Morgan Stanley & Co., Inc.
|
Octeg, LLC | RBC Capital Markets Corp. | ||
Tradebot Systems, Inc.
|
UBS Securities, LLC. | Wedbush Morgan Securities Inc |
The market range of high and low closing prices for the Companys common stock for the periods
indicated are shown below. As of December 31, 2010, there were approximately 1,904 shareholders of
record for the Companys common stock.
2010 | 2009 | |||||||||||||||
Quarter | High | Low | High | Low | ||||||||||||
First |
$ | 15.94 | $ | 13.75 | $ | 19.36 | $ | 12.15 | ||||||||
Second |
18.88 | 14.67 | 18.97 | 14.67 | ||||||||||||
Third |
16.73 | 13.75 | 16.80 | 12.92 | ||||||||||||
Fourth |
15.76 | 13.00 | 14.62 | 11.92 |
The Company paid cash dividends on its common stock of $0.52 per share for the years ended
December 31, 2010 and 2009.
On March 22, 2010, the Company completed the common stock offering of 10,291,465 shares generating
net proceeds, after underwriter discounts and offering expenses, of $145.5 million.
Unregistered Securities
There have been no securities of the Company sold within the last three years which were not
registered under the Securities Act.
Issuer Stock Purchases
The Company made no stock repurchases during 2010.
Equity Compensation Plan Information
The Company currently maintains the 2005 Employee Stock Incentive Plan which was approved by the
shareholders and provides for the issuance of stock-based compensation to officers and other
employees and directors. Although the 1994 Director Stock Option Plan and the 1995 Employee Stock
Option Plan expired in March 2009 and April 2005, respectively, there are issued options
outstanding under both plans that have not been exercised as of year-end.
41
Table of Contents
The following table sets forth information regarding outstanding options and shares reserved for
future issuance under the foregoing plans as of December 31, 2010:
Number of Shares Remaining | ||||||||||||
Available for Future | ||||||||||||
Number of Shares to be | Weighted-Average | Issuance Under Equity | ||||||||||
Issued Upon Exercise of | Exercise Price of | Compensation Plans | ||||||||||
Outstanding Options, | Outstanding Options, | (Excluding Shares | ||||||||||
Warrants and Rights | Warrants and Rights | Reflected in Column (a)) | ||||||||||
Plan Category | (a) | (b) | (c) | |||||||||
Equity compensation plans
approved by the shareholders |
2,241,310 | $ | 20.00 | 3,067,178 | ||||||||
Equity compensation plans not
approved by shareholders |
| $ | | |
Item 6. Selected Financial Data
The following financial data of the Company are derived from the Companys historical audited
financial statements and related notes. The information set forth below should be read in
conjunction with Managements Discussion and Analysis of Financial Condition and Results of
Operations and the Consolidated Financial Statements and related notes contained elsewhere in this
report.
42
Table of Contents
Summary of Operations and Selected Financial Data
Compounded Annual | ||||||||||||||||||||||||||||
Growth Rate | ||||||||||||||||||||||||||||
December 31, | 1-Year | 5-Year | ||||||||||||||||||||||||||
(Dollars in thousands, except per share data) | 2010 | 2009 | 2008 | 2007 | 2006 | 2010/2009 | 2010/2006 | |||||||||||||||||||||
Summary of financial condition |
||||||||||||||||||||||||||||
Total assets |
$ | 6,759,287 | 6,191,795 | 5,553,970 | 4,817,330 | 4,471,298 | 9.2 | % | 12.8 | % | ||||||||||||||||||
Investment securities, available-for-sale |
2,461,119 | 1,506,394 | 990,092 | 700,324 | 825,637 | 63.4 | % | 20.5 | % | |||||||||||||||||||
Loans receivable and loans held for sale, net |
3,688,395 | 3,987,318 | 4,053,454 | 3,557,122 | 3,165,524 | (7.5 | %) | 9.0 | % | |||||||||||||||||||
Allowance for loan and lease losses |
(137,107 | ) | (142,927 | ) | (76,739 | ) | (54,413 | ) | (49,259 | ) | (4.1 | %) | 28.8 | % | ||||||||||||||
Goodwill and intangibles |
157,016 | 160,196 | 159,765 | 154,264 | 144,466 | (2.0 | %) | 12.5 | % | |||||||||||||||||||
Deposits |
4,521,902 | 4,100,152 | 3,262,475 | 3,184,478 | 3,207,533 | 10.3 | % | 12.3 | % | |||||||||||||||||||
Federal Home Loan Bank advances |
965,141 | 790,367 | 338,456 | 538,949 | 307,522 | 22.1 | % | 19.1 | % | |||||||||||||||||||
Securities sold under agreements to
repurchase and other borrowed funds |
269,408 | 451,251 | 1,110,731 | 401,621 | 338,986 | (40.3 | %) | (3.2 | %) | |||||||||||||||||||
Stockholders equity |
838,204 | 685,890 | 676,940 | 528,576 | 456,143 | 22.2 | % | 20.3 | % | |||||||||||||||||||
Equity per common share1 |
11.66 | 11.13 | 11.04 | 9.85 | 8.72 | 4.8 | % | 11.0 | % | |||||||||||||||||||
Equity as a percentage of total assets |
12.40 | % | 11.08 | % | 12.19 | % | 10.97 | % | 10.20 | % | 11.9 | % | 6.7 | % |
Compounded Annual | ||||||||||||||||||||||||||||
Growth Rate | ||||||||||||||||||||||||||||
Years ended December 31, | 1-Year | 5-Year | ||||||||||||||||||||||||||
(Dollars in thousands, except per share data) | 2010 | 2009 | 2008 | 2007 | 2006 | 2010/2009 | 2010/2006 | |||||||||||||||||||||
Summary of operations |
||||||||||||||||||||||||||||
Interest income |
$ | 288,402 | 302,494 | 302,985 | 304,760 | 253,326 | (4.7 | %) | 8.7 | % | ||||||||||||||||||
Interest expense |
53,634 | 57,167 | 90,372 | 121,291 | 95,038 | (6.2 | %) | (2.2 | %) | |||||||||||||||||||
Net interest income |
234,768 | 245,327 | 212,613 | 183,469 | 158,288 | (4.3 | %) | 12.5 | % | |||||||||||||||||||
Provision for loan losses |
84,693 | 124,618 | 28,480 | 6,680 | 5,192 | (32.0 | %) | 69.7 | % | |||||||||||||||||||
Non-interest income |
87,546 | 86,474 | 61,034 | 64,818 | 51,842 | 1.2 | % | 14.4 | % | |||||||||||||||||||
Non-interest expense |
187,948 | 168,818 | 145,909 | 137,917 | 112,550 | 11.3 | % | 15.6 | % | |||||||||||||||||||
Earnings before income taxes |
49,673 | 38,365 | 99,258 | 103,690 | 92,388 | 29.5 | % | (8.6 | %) | |||||||||||||||||||
Income taxes |
7,343 | 3,991 | 33,601 | 35,087 | 31,257 | 84.0 | % | (21.9 | %) | |||||||||||||||||||
Net earnings |
42,330 | 34,374 | 65,657 | 68,603 | 61,131 | 23.1 | % | (4.2 | %) | |||||||||||||||||||
Basic earnings per common share1 |
0.61 | 0.56 | 1.20 | 1.29 | 1.23 | 8.9 | % | (11.4 | %) | |||||||||||||||||||
Diluted earnings per common share1 |
0.61 | 0.56 | 1.19 | 1.28 | 1.21 | 8.9 | % | (11.0 | %) | |||||||||||||||||||
Dividends declared per share1 |
0.52 | 0.52 | 0.52 | 0.50 | 0.45 | 0.0 | % | 5.4 | % |
At or for the years ended December 31, | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
Ratios |
||||||||||||||||||||
Net earnings as a percent of
average assets |
0.67 | % | 0.60 | % | 1.31 | % | 1.49 | % | 1.52 | % | ||||||||||
average stockholders equity |
5.18 | % | 4.97 | % | 11.63 | % | 13.82 | % | 16.00 | % | ||||||||||
Dividend payout ratio |
85.25 | % | 92.86 | % | 43.33 | % | 38.76 | % | 36.59 | % | ||||||||||
Average equity to average asset ratio |
12.96 | % | 12.16 | % | 11.23 | % | 10.78 | % | 9.52 | % | ||||||||||
Net interest margin on average earning
assets (tax equivalent) |
4.21 | % | 4.82 | % | 4.70 | % | 4.50 | % | 4.44 | % | ||||||||||
Efficiency ratio |
50.11 | % | 46.45 | % | 49.68 | % | 53.24 | % | 51.10 | % | ||||||||||
Allowance for loan and lease losses as a percent of loans |
3.58 | % | 3.46 | % | 1.86 | % | 1.51 | % | 1.53 | % | ||||||||||
Allowance for loan and lease losses as a
percent of nonperforming assets |
51 | % | 55 | % | 91 | % | 409 | % | 554 | % |
At or for the years ended December 31, | ||||||||||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
Other data |
||||||||||||||||||||
Loans originated and acquired |
$ | 1,935,311 | 2,430,967 | 2,456,749 | 2,576,260 | 2,389,341 | ||||||||||||||
Loans serviced for others |
173,446 | 176,231 | 181,351 | 177,173 | 177,518 | |||||||||||||||
Number of full time equivalent employees |
1,674 | 1,643 | 1,571 | 1,480 | 1,356 | |||||||||||||||
Number of offices |
105 | 106 | 101 | 97 | 93 | |||||||||||||||
Number of shareholders of record |
1,904 | 1,979 | 2,032 | 1,992 | 1,973 |
1 | Revised for stock splits and dividends. |
43
Table of Contents
Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Managements Discussion and Analysis of Financial Condition and Results of Operations
Year ended December 31, 2010 Compared to December 31, 2009
Year ended December 31, 2010 Compared to December 31, 2009
The following discussion is intended to provide a more comprehensive review of the Companys
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.
Highlights and Overview
Net earnings for 2010 were $42.3 million, which is an increase of $8.0 million, or 23 percent, over
the prior year. Diluted earnings per share of $0.61 is an increase of 9 percent from the $0.56
earned in 2009. Included in net earnings for 2010 are $1.2 million ($2.0 million pre-tax) in
one-time gains on the sale of a merchant card servicing portfolios. Included in net earnings for
2009 is a $3.5 million one-time bargain purchase gain from the acquisition of First National and a
$1.5 million ($2.5 million pre-tax) expense in a FDIC special assessment charge.
The primary reason for the increase in net earnings was a reduction in the provision for loan
losses of $39.9 million, which was partially offset by the increase in the other real estate owned
expense of $13.1 million. In addition, there was increased pressure on the net interest margin
which resulted in a decrease of $10.6 million in net interest income. The net interest margin as a
percentage of earning assets, on a tax-equivalent basis, was 4.21 percent, a decrease of 61 basis
points from the 4.82 percent for 2009.
The Companys loan portfolio decreased from the prior year as a result of slowing loan demand, net
charged-off loans, and repossession of foreclosed assets. Gross outstanding loans, including loans
held for sale, decreased by $305 million, or 7 percent, from the prior year end. The credit
quality of the loan portfolio stabilized at a historically high level of $271 million in
non-performing assets. The slight increase in non-performing assets of $9.4 million, or 4 percent,
from the prior year was primarily the result of an increase in the other real estate owned
category. The early stage delinquencies (accruing loans 30-89 days past due) have decreased from
$87.5 million in the prior year end to $45.5 million at the end of 2010.
Consistent with the prior year, the Company purchased investment securities throughout the year to
offset the decrease in the loan portfolio and to increase earnings. Investment securities,
including interest bearing deposits, FHLB and FRB stock, and federal funds sold, increased $898
million, or 56 percent, from the prior year end.
Deposit growth in 2010 has been beneficial for the Company and reduced the reliance upon other
borrowings. Non-interest bearing deposits increased $45 million, or 6 percent, during the year.
Interest bearing deposits increased by $376 million, or 11 percent, from prior year. FHLB advances
increased $175 million during the year, while FRB borrowings decreased $225 million. Repurchase
agreements and other borrowed funds increased $43 million from the prior year.
The Company had a successful equity offering in March 2010 which generated $146 million in net
proceeds and 10.291 million in common equity shares. Stockholders equity increased $152 million,
or 22 percent, during the year and the Company and each of the bank subsidiaries have remained
above the well capitalized levels required by regulators.
Looking forward, the Companys future performance will depend on many factors including economic
conditions in the markets the Company serves, interest rate changes, increasing competition for
deposits and loans, loan quality, and regulatory burden. The Companys 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.
44
Table of Contents
Financial Condition Analysis
Assets
The following table summarizes the asset balances as of December 31, 2010 and 2009, the amount of
change, and percentage change during 2010:
December 31, | ||||||||||||||||
(Dollars in thousands) | 2010 | 2009 | $ Change | % Change | ||||||||||||
Cash on hand and in banks |
$ | 71,465 | $ | 120,731 | $ | (49,266 | ) | -41 | % | |||||||
Investments, interest bearing deposits, |
||||||||||||||||
FHLB stock, FRB stock, and federal funds |
2,494,513 | 1,596,238 | 898,275 | 56 | % | |||||||||||
Loans and loans held for sale |
||||||||||||||||
Residential real estate |
709,090 | 797,626 | (88,536 | ) | -11 | % | ||||||||||
Commercial |
2,451,091 | 2,613,218 | (162,127 | ) | -6 | % | ||||||||||
Consumer and other |
665,321 | 719,401 | (54,080 | ) | -8 | % | ||||||||||
Loans receivable, gross |
3,825,502 | 4,130,245 | (304,743 | ) | -7 | % | ||||||||||
Allowance for loan and lease losses |
(137,107 | ) | (142,927 | ) | 5,820 | -4 | % | |||||||||
Loans receivable, net |
3,688,395 | 3,987,318 | (298,923 | ) | -7 | % | ||||||||||
Other assets |
504,914 | 487,508 | 17,406 | 4 | % | |||||||||||
Total assets |
$ | 6,759,287 | $ | 6,191,795 | $ | 567,492 | 9 | % | ||||||||
Total assets at December 31, 2010 were $6.759 billion, which is $567 million, or 9 percent
greater than total assets of $6.192 billion at December 31, 2009.
Investment securities, including interest bearing deposits, FHLB and FRB stock, and federal funds
sold, have increased $898 million, or 56 percent, since December 31, 2009. The Company continues
to purchase investment securities as loan originations slow, such purchases predominately
mortgage-backed securities issued by Federal Home Loan Mortgage Corporation (Freddie Mac) and
Federal National Mortgage Association (Fannie Mae) with short weighted-average-lives in the
targeted range of two to three years. While mitigating against extension-risk, such securities
have lower yields. These security purchases, however, allow the Company to create incremental
yield without taking long-term interest rate risk. The Company also continues to selectively
purchase tax-exempt investment securities. Investment securities represent 37 percent of total
assets at December 31, 2010 versus 26 percent of total assets at December 31, 2009.
At December 31, 2010, gross loans were $3.826 billion, a decrease of $305 million, or 7 percent,
compared to gross loans of $4.130 billion at December 31, 2009. The largest decrease in dollars
was in commercial loans which decreased $162 million, or 6 percent, from December 31, 2009. In
addition, residential real estate loans decreased $89 million, or 11 percent, from December 31,
2009. The decrease in each loan category is due to slower loan demand within the Companys market
areas. Excluding net charge-offs of $91 million, loans transferred to other real estate of $72
million, and an increase in loans held for sale of $10 million, loans decreased $152 million, or 4
percent from December 31, 2009.
The following table summarizes the major asset components as a percentage of total assets as of
December 31, 2010, 2009, and 2008:
December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Cash, cash equivalents and investment securities |
38.0 | % | 27.7 | % | 20.3 | % | ||||||
Residential real estate loans |
10.2 | % | 12.7 | % | 15.0 | % | ||||||
Commercial loans |
34.8 | % | 40.5 | % | 45.3 | % | ||||||
Consumer and other loans |
9.5 | % | 11.2 | % | 12.7 | % | ||||||
Other assets |
7.5 | % | 7.9 | % | 6.7 | % | ||||||
Total assets |
100.0 | % | 100.0 | % | 100.0 | % | ||||||
The mix of assets from 2008 through 2010 has shifted steadily from the loan portfolio to the
investment security portfolio, with the largest increase occurring during 2010 as the Company
continued to purchase investment securities as loan demand decreased.
45
Table of Contents
Liabilities
The following table summarizes the liability balances as of December 31, 2010 and 2009, the amount
of change, and percentage change during 2010:
December 31, | ||||||||||||||||
(Dollars in thousands) | 2010 | 2009 | $ Change | % Change | ||||||||||||
Non-interest bearing deposits |
$ | 855,829 | $ | 810,550 | $ | 45,279 | 6 | % | ||||||||
Interest bearing deposits |
3,666,073 | 3,289,602 | 376,471 | 11 | % | |||||||||||
FHLB advances |
965,141 | 790,367 | 174,774 | 22 | % | |||||||||||
FRB discount window |
| 225,000 | (225,000 | ) | -100 | % | ||||||||||
Securities
sold under agreements to repurchase and other borrowed funds |
269,408 | 226,251 | 43,157 | 19 | % | |||||||||||
Other liabilities |
39,500 | 39,147 | 353 | 1 | % | |||||||||||
Subordinated debentures |
125,132 | 124,988 | 144 | 0 | % | |||||||||||
Total liabilities |
$ | 5,921,083 | $ | 5,505,905 | $ | 415,178 | 8 | % | ||||||||
As of December 31, 2010, non-interest bearing deposits of $856 million increased $45 million, or 6
percent, since December 31, 2009. Interest bearing deposits of $3.666 billion at December 31, 2010
includes $203 million issued through the CDARS. Interest bearing deposits increased $376 million,
or 11 percent from December 31, 2009, of which $226 million was from wholesale deposits, including
CDARS. The increase in non-interest bearing and interest bearing deposits from the prior year end
was driven by a greater number of personal and business customers, as well as existing customers
retaining cash deposits because of the uncertainty in the current interest rate environment and for
liquidity purposes.
Increases in deposits have reduced the Companys reliance on the amount of borrowings used to fund
investment security growth over the prior year end. FHLB advances increased $175 million, or 22
percent, from December 31, 2009. There were no FRB borrowings through the Term Auction Facility
(TAF) program at December 31, 2010 due to the cessation of the TAF program by the Federal
Reserve. Repurchase agreements and other borrowed funds were $269 million at December 31, 2010, an
increase of $43 million, or 19 percent, from December 31, 2009.
The following table summarizes the major liability and equity components as a percentage of total
liabilities and equity as of December 31, 2010, 2009, and 2008:
December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Deposit accounts |
66.9 | % | 66.2 | % | 58.7 | % | ||||||
FHLB advances |
14.3 | % | 12.8 | % | 6.1 | % | ||||||
FRB discount window |
0.0 | % | 3.6 | % | 16.5 | % | ||||||
Other borrowed funds and repurchase agreements |
4.0 | % | 3.7 | % | 3.5 | % | ||||||
Subordinated debentures |
1.8 | % | 2.0 | % | 2.2 | % | ||||||
Other liabilities |
0.6 | % | 0.6 | % | 0.8 | % | ||||||
Stockholders equity |
12.4 | % | 11.1 | % | 12.2 | % | ||||||
Total liabilities and stockholders equity |
100.0 | % | 100.0 | % | 100.0 | % | ||||||
The mix of liabilities and stockholders equity has remained fairly stable from 2008 through 2010.
The deposit component increased slightly from the prior year with a larger increase versus 2008, as
the Banks continue to focus on growing and retaining deposits. The increase in deposits allowed
the Company to decrease its reliance on the combined FHLB advances, FRB, and other borrowed funds
and repurchase agreements. In 2010 those borrowings decreased a combined 1.8 percent from the
prior year and 7.8 percent from 2008. The increase in stockholders equity from prior year was a
result of the public offering of common stock in 2010.
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Table of Contents
Stockholders Equity
The following table summarizes the stockholders equity balances as of December 31, 2010 and 2009,
the amount of change, and percentage change during 2010:
December 31, | ||||||||||||||||
(Dollars in thousands, except per share data) | 2010 | 2009 | $ Change | % Change | ||||||||||||
Common equity |
$ | 837,676 | $ | 686,238 | $ | 151,438 | 22 | % | ||||||||
Accumulated other comprehensive income (loss) |
528 | (348 | ) | 876 | -252 | % | ||||||||||
Total stockholders equity |
838,204 | 685,890 | 152,314 | 22 | % | |||||||||||
Goodwill and core deposit intangible, net |
(157,016 | ) | (160,196 | ) | 3,180 | -2 | % | |||||||||
Tangible stockholders equity |
$ | 681,188 | $ | 525,694 | $ | 155,494 | 30 | % | ||||||||
Stockholders equity to total assets |
12.40 | % | 11.08 | % | ||||||||||||
Tangible stockholders equity to total tangible assets |
10.32 | % | 8.72 | % | ||||||||||||
Book value per common share |
$ | 11.66 | $ | 11.13 | $ | 0.53 | 5 | % | ||||||||
Tangible book value per common share |
$ | 9.47 | $ | 8.53 | $ | 0.94 | 11 | % | ||||||||
Market price per share at end of year |
$ | 15.11 | $ | 13.72 | $ | 1.39 | 10 | % |
Total stockholders equity and book value per share increased $152 million and $0.53 per share,
respectively, from December 31, 2009, the increase largely the result of the $146
million in net proceeds from the Companys March 2010 equity offering of 10.291 million shares.
Tangible stockholders equity has increased $155 million, or 30 percent, since December 31, 2009
with tangible stockholders equity to tangible assets at 10.32 percent and 8.72 percent as of
December 31, 2010 and December 31, 2009, respectively.
Results of Operations
The following table summarizes revenue for the years ended December 31, 2010 and 2009, including
the amount and percentage change during 2010:
Revenue Summary
Years ended December 31, | ||||||||||||||||
(Dollars in thousands) | 2010 | 2009 | $ Change | % Change | ||||||||||||
Net interest income |
||||||||||||||||
Interest income |
$ | 288,402 | $ | 302,494 | $ | (14,092 | ) | -5 | % | |||||||
Interest expense |
53,634 | 57,167 | (3,533 | ) | -6 | % | ||||||||||
Total net interest income |
234,768 | 245,327 | (10,559 | ) | -4 | % | ||||||||||
Non-interest income |
||||||||||||||||
Service charges, loan fees, and other fees |
47,946 | 45,871 | 2,075 | 5 | % | |||||||||||
Gain on sale of loans |
27,233 | 26,923 | 310 | 1 | % | |||||||||||
Gain on sale of investments |
4,822 | 5,995 | (1,173 | ) | -20 | % | ||||||||||
Other income |
7,545 | 7,685 | (140 | ) | -2 | % | ||||||||||
Total non-interest income |
87,546 | 86,474 | 1,072 | 1 | % | |||||||||||
$ | 322,314 | $ | 331,801 | $ | (9,487 | ) | -3 | % | ||||||||
Net interest margin (tax-equivalent) |
4.21 | % | 4.82 | % | ||||||||||||
Net Interest Income
Net interest income for the year decreased $10.6 million, or 4 percent, over 2009. Total interest
income decreased $14 million, or 5 percent, while total interest expense decreased $3.5 million, or
6 percent. The net interest margin as a percentage of earning assets, on a tax equivalent basis,
decreased 61 basis points from 4.82 percent for 2009 to 4.21 percent for 2010, such decrease
including a 6 basis points reduction from the reversal of interest on non-accrual loans. The
decrease in lower yield and lower volume of loans coupled with an increase in lower yielding
investment securities continues to put pressure on both interest income and net interest margin.
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Table of Contents
Non-interest Income
Non-interest income increased $1.0 million for the year over the same period in 2009. Fee income
for 2010 increased $2.1 million, or 5 percent, compared to the prior year primarily from an
increase in debit card income. Gain on sale of loans has remained at historical highs of $27.2
million for the year, which is an increase of $310 thousand, or 1 percent, over last year.
Included in current year other income is $2.0 million in one-time gains on merchant card servicing
portfolios and included in prior year other income is $3.5 million in a one-time bargain purchase
gain from the acquisition of First National. Excluding one-time gains, other income increased $1.3
million over the same period in 2009.
Non-interest Expense
The following table summarizes non-interest expense for the years ended December 31, 2010 and 2009,
including the amount and percentage change during 2010:
Years ended December 31, | ||||||||||||||||
(Dollars in thousands) | 2010 | 2009 | $ Change | % Change | ||||||||||||
Compensation, employee
benefits and related expense |
$ | 87,728 | $ | 84,965 | $ | 2,763 | 3 | % | ||||||||
Occupancy and equipment expense |
24,261 | 23,471 | 790 | 3 | % | |||||||||||
Advertising and promotions |
6,831 | 6,477 | 354 | 5 | % | |||||||||||
Outsourced data processing expense |
3,057 | 3,031 | 26 | 1 | % | |||||||||||
Core deposit intangibles amortization |
3,180 | 3,116 | 64 | 2 | % | |||||||||||
Other real estate owned expense |
22,193 | 9,092 | 13,101 | 144 | % | |||||||||||
Federal Deposit Insurance Corporation premium |
9,121 | 8,639 | 482 | 6 | % | |||||||||||
Other expenses |
31,577 | 30,027 | 1,550 | 5 | % | |||||||||||
Total non-interest expense |
$ | 187,948 | $ | 168,818 | $ | 19,130 | 11 | % | ||||||||
Non-interest expense for 2010 increased by $19.1 million, or 11 percent, from the same period last
year. Compensation and employee benefits increased $2.8 million, or 3 percent, from 2009 which
relates to the increase in full-time equivalent employees including the addition of First National
employees in October 2009. Occupancy and equipment expense increased $790 thousand, or 3 percent,
from 2009. Advertising and promotion expense increased by $354 thousand, or 5 percent, from 2009.
The primary category that saw much higher expense was the other real estate owned which increased
$13.1 million, or 144 percent, from the prior year. The other real estate owned expenses of $22.2
million for 2010 included $5.1 million of operating expenses, $10.4 million of fair value
write-downs, and $6.7 million of loss on sale of other real estate owned. FDIC premiums increased
$482 thousand, or 6 percent, from the prior year which included a second quarter special assessment
of $2.5 million. Other expense increased $1.6 million, or 5 percent, from the prior year.
Efficiency Ratio
In 2010, the Company revised its efficiency ratio calculation to be consistent with industry
reporting by SNL Financial and has also revised the efficiency ratio reported for all prior
periods. The efficiency ratio is now calculated as non-interest expense before other real estate
owned expenses, core deposit intangible amortization, and non-recurring expense items as a
percentage of fully taxable equivalent net interest income and non-interest income, excluding gains
and losses on sale of investment securities, other real estate owned income, and non-recurring
income items. The efficiency ratio for 2010 was 50 percent compared to 46 percent for 2009. The
increase in efficiency ratio resulted from continuing pressure on net interest income in the
current low interest rate environment.
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Table of Contents
Credit Quality Summary
The following table summarizes the Companys credit quality:
December 31, | ||||||||
(Dollars in thousands) | 2010 | 2009 | ||||||
Allowance for loan and lease losses at beginning of year |
$ | 142,927 | 76,739 | |||||
Provision for loan losses |
84,693 | 124,618 | ||||||
Charge-offs |
(93,950 | ) | (60,896 | ) | ||||
Recoveries |
3,437 | 2,466 | ||||||
Allowance for loan and lease losses at end of year |
137,107 | 142,927 | ||||||
Other real estate owned |
73,485 | 57,320 | ||||||
Accruing loans 90 days or more past due |
4,531 | 5,537 | ||||||
Non-accrual loans |
192,505 | 198,281 | ||||||
Total non-performing assets |
270,521 | 261,138 | ||||||
Allowance for loan and lease losses as a percentage
of non-performing assets |
51 | % | 55 | % | ||||
Non-performing assets as a percentage of total subsidiary assets |
3.91 | % | 4.13 | % | ||||
Allowance for loan and lease losses as a
percentage of total loans |
3.58 | % | 3.46 | % | ||||
Net charge-offs as a percentage of loans |
2.37 | % | 1.42 | % | ||||
Accruing loans 30-89 days or more past due |
$ | 45,497 | 87,491 |
At December 31, 2010, the ALLL was $137.1 million, a decrease of $5.8 million from the prior year
end. The allowance was 3.58 percent of total loans outstanding at December 31, 2010, such
percentage up from the 3.46 percent at December 31, 2009. The allowance was 51 percent of
non-performing assets at December 31, 2010, compared to 55 percent a year ago. Non-performing
assets as a percentage of total subsidiary assets at December 31, 2010 were at 3.91 percent, down
from 4.13 percent at prior year end. Early stage delinquencies (accruing loans 30-89 days past
due) of $45.5 million at December 31, 2010 improved from prior years $87.5 million. Loan
portfolio growth, composition, average loan size, credit quality considerations, and other
environmental factors will continue to determine the level of additional provision for loan loss
expense at each bank subsidiary.
Provision for Loan Losses
Accruing | ||||||||||||||||||||
Loans 30-89 | Non-Performing | |||||||||||||||||||
Provision | ALLL | Days Past Due | Assets to | |||||||||||||||||
for Loan | Net | as a Percent | as a Percent of | Total Subsidiary | ||||||||||||||||
(Dollars in thousands) | Losses | Charge-Offs | of Loans | Loans | Assets | |||||||||||||||
Q4 2010 |
$ | 27,375 | 24,525 | 3.58 | % | 1.19 | % | 3.91 | % | |||||||||||
Q3 2010 |
19,162 | 26,570 | 3.37 | % | 1.03 | % | 4.03 | % | ||||||||||||
Q2 2010 |
17,246 | 19,181 | 3.51 | % | 0.90 | % | 4.01 | % | ||||||||||||
Q1 2010 |
20,910 | 20,237 | 3.53 | % | 1.50 | % | 4.19 | % | ||||||||||||
Q4 2009 |
36,713 | 19,116 | 3.46 | % | 2.12 | % | 4.13 | % | ||||||||||||
Q3 2009 |
47,050 | 19,094 | 3.10 | % | 1.08 | % | 4.10 | % | ||||||||||||
Q2 2009 |
25,140 | 11,543 | 2.36 | % | 1.52 | % | 3.06 | % | ||||||||||||
Q1 2009 |
15,715 | 8,677 | 2.01 | % | 1.60 | % | 1.97 | % |
The provision for loan losses was $84.7 million for 2010, a decrease of $39.9 million, or 32
percent, from the same period in 2009. Net charged-off loans during the year ended December 31,
2010 was $90.5 million, an increase of $32.1 million from the same period in 2009.
49
Table of Contents
For additional information regarding the loan portfolio, credit quality, the ALLL and lending
practices, see lending activity in Item 1. Business.
Managements Discussion and Analysis of the Results of Operations
Year ended December 31, 2009 Compared to December 31, 2008
Year ended December 31, 2009 Compared to December 31, 2008
Revenue Summary
The following table summarizes revenue for the years ended December 31, 2009 and 2008, including
the amount and percentage change during 2009:
Years ended December 31, | ||||||||||||||||
(Dollars in thousands) | 2009 | 2008 | $ Change | % Change | ||||||||||||
Net interest income |
||||||||||||||||
Interest income |
$ | 302,494 | $ | 302,985 | $ | (491 | ) | 0 | % | |||||||
Interest expense |
57,167 | 90,372 | (33,205 | ) | -37 | % | ||||||||||
Total net interest income |
245,327 | 212,613 | 32,714 | 15 | % | |||||||||||
Non-interest income |
||||||||||||||||
Service charges, loan fees, and other fees |
45,871 | 47,506 | (1,635 | ) | -3 | % | ||||||||||
Gain on sale of loans |
26,923 | 14,849 | 12,074 | 81 | % | |||||||||||
Gain (loss) on investments |
5,995 | (7,345 | ) | 13,340 | -182 | % | ||||||||||
Other income |
7,685 | 6,024 | 1,661 | 28 | % | |||||||||||
Total non-interest income |
86,474 | 61,034 | 25,440 | 42 | % | |||||||||||
$ | 331,801 | $ | 273,647 | $ | 58,154 | 21 | % | |||||||||
Net interest margin (tax-equivalent) |
4.82 | % | 4.70 | % | ||||||||||||
Net Interest Income
Net interest income for 2009 increased $33 million, or 15 percent, over 2008. Total interest
income during 2009 decreased $491 thousand, or less than 1 percent, while total interest expense
decreased $33 million, or 37 percent. The decrease in total interest expense from the prior year
is primarily attributable to rate decreases in interest bearing deposits and lower cost borrowings.
The net interest margin as a percentage of earning assets, on a tax-equivalent basis for the year,
was 4.82 percent for the current year, an increase of 12 basis points from the 4.70 percent for
2008.
Non-interest Income
Total non-interest income for 2009 increased $25 million, or 42 percent over 2008. Fee income for
2009 decreased $1.6 million, or 3 percent, as compared to 2008. Gain on sale of loans increased
$12 million, or 81 percent, primarily the result of the increase in purchase and refinance
residential loans originated and sold in the secondary market. Gain on investments during 2009 of
$6.0 million is the net gain from sales of investment securities. Loss from investments during
2008 included a non-recurring $7.6 million other-than-temporary impairment charge on investments in
Freddie Mac preferred stock and Fannie Mae common stock. Other income of $7.7 million included a
$3.5 million one-time bargain purchase gain from the acquisition of First National in 2009. In
2008, other income of $6.0 million included a $1.7 million gain from the sale and relocation of
Mountain Wests office facility in Ketchum, Idaho.
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Table of Contents
Non-interest Expense
The following table summarizes non-interest expense for the years ended December 31, 2009 and 2008,
including the amount and percentage change during 2009:
Years ended December 31, | ||||||||||||||||
(Dollars in thousands) | 2009 | 2008 | $ Change | % Change | ||||||||||||
Compensation, employee
benefits and related expense |
$ | 84,965 | $ | 82,027 | $ | 2,938 | 4 | % | ||||||||
Occupancy and equipment expense |
23,471 | 21,674 | 1,797 | 8 | % | |||||||||||
Advertising and promotions |
6,477 | 6,989 | (512 | ) | -7 | % | ||||||||||
Outsourced data processing expense |
3,031 | 2,508 | 523 | 21 | % | |||||||||||
Core deposit intangibles amortization |
3,116 | 3,051 | 65 | 2 | % | |||||||||||
Other real estate owned expense |
9,092 | 1,176 | 7,916 | 673 | % | |||||||||||
Federal Deposit Insurance Corporation premium |
8,639 | 1,377 | 7,262 | 527 | % | |||||||||||
Other expenses |
30,027 | 27,107 | 2,920 | 11 | % | |||||||||||
Total non-interest expense |
$ | 168,818 | $ | 145,909 | $ | 22,909 | 16 | % | ||||||||
Non-interest expense increased by $23 million, or 16 percent, during 2009. Compensation and
employee benefit expense increased $2.9 million, or 4 percent, from 2008, due to the increased
number of employees from the acquisition of San Juans in December 2008 and First National in
October 2009. Occupancy and equipment expense increased $2 million, or 8 percent, over 2008
reflecting the cost of additional locations and facility upgrades in 2009. Advertising and
promotion expense decreased $512 thousand, or 7 percent, from 2008 reflecting the Banks continuing
focus on reducing operating expenses. Outsourced data processing expenses increased $523 thousand,
or 21 percent, from 2008 as a result of additional locations and general operating increases.
Other expenses increased $18 million, or 61 percent, from 2008. The increase in other expenses
includes $7.3 million in FDIC insurance premiums, $5.2 million loss from sales of other real estate
owned, $2.7 million expense associated with repossessed assets and $1.4 million in legal and
outside firm expense. Of the increase in FDIC insurance premiums, $2.5 million is attributable to
the second quarter asset-based special assessment.
Credit Quality Summary
The following table summarizes the Companys credit quality:
December 31, | ||||||||
(Dollars in thousands) | 2009 | 2008 | ||||||
Allowance for loan and lease losses at beginning of year |
$ | 76,739 | 54,413 | |||||
Provision for loan losses |
124,618 | 28,480 | ||||||
Acquisition |
| 2,625 | ||||||
Charge-offs |
(60,896 | ) | (9,839 | ) | ||||
Recoveries |
2,466 | 1,060 | ||||||
Allowance for loan and lease losses at end of year |
142,927 | 76,739 | ||||||
Other real estate owned |
57,320 | 11,539 | ||||||
Accruing loans 90 days or more past due |
5,537 | 8,613 | ||||||
Non-accrual loans |
198,281 | 64,301 | ||||||
Total non-performing assets |
261,138 | 84,453 | ||||||
Allowance for loan and lease losses as a percentage
of non-performing assets |
55 | % | 91 | % | ||||
Non-performing assets as a percentage of total subsidiary assets |
4.13 | % | 1.46 | % | ||||
Allowance for loan and lease losses as a
percentage of total loans |
3.46 | % | 1.86 | % | ||||
Net charge-offs as a percentage of loans |
1.42 | % | 0.21 | % | ||||
Accruing loans 30-89 days or more past due |
$ | 87,491 | 54,787 |
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Table of Contents
Provision for Loan Losses
The provision for loan losses expense was $125 million for 2009, an increase of $96 million, or 338
percent, from 2008. Net charged-off loans for the year were $58 million compared to $9 million for
the prior year. For the year, the provision for loan losses covered net charge-offs 2.1 times.
Additional Managements Discussion and Analysis
Commitments
In the normal course of business, there are various outstanding commitments to extend credit, such
as letters of credit and un-advanced loan commitments, which are not reflected in the accompanying
condensed consolidated financial statements. Management does not anticipate any material losses as
a result of these transactions. The Company has outstanding debt maturities, the largest of which
are FHLB advances. For the maturity schedule of advances and schedule of future minimum lease
payments see Notes 8 and 20, respectively, to the Consolidated Financial Statements in Item 8.
Financial Statements and Supplementary Data.
The following table represents the Companys contractual obligations as of December 31, 2010:
Payments Due by Period | ||||||||||||||||||||||||||||||||
Indeterminate | ||||||||||||||||||||||||||||||||
(Dollars in thousands) | Total | Maturity 1 | 2011 | 2012 | 2013 | 2014 | 2015 | Thereafter | ||||||||||||||||||||||||
Deposits |
$ | 4,521,902 | 3,045,233 | 1,180,365 | 170,836 | 74,408 | 17,787 | 33,068 | 205 | |||||||||||||||||||||||
FHLB advances |
965,141 | | 761,064 | 82,000 | | | 75,000 | 47,077 | ||||||||||||||||||||||||
Repurchase agreements |
249,403 | | 249,403 | | | | | | ||||||||||||||||||||||||
Subordinated debentures |
125,132 | | | | | | | 125,132 | ||||||||||||||||||||||||
Other borrowed funds |
18,009 | | 11,764 | | | | | 6,245 | ||||||||||||||||||||||||
Capital lease obligations |
2,912 | | 240 | 242 | 261 | 828 | 195 | 1,146 | ||||||||||||||||||||||||
Operating lease obligations |
18,858 | | 2,834 | 2,345 | 2,066 | 1,930 | 1,765 | 7,918 | ||||||||||||||||||||||||
$ | 5,901,357 | 3,045,233 | 2,205,670 | 255,423 | 76,735 | 20,545 | 110,028 | 187,723 | ||||||||||||||||||||||||
1 | Represents non-interest bearing deposits and NOW, savings, and money market accounts. |
Liquidity
Liquidity risk is the possibility that the Company will not be able to fund present and future
obligations as they come due because of an inability to liquidate assets or obtain adequate funding
at a reasonable cost. The objective of liquidity management is to maintain cash flows adequate to
meet current and future needs for credit demand, deposit withdrawals, maturing liabilities and
corporate operating expenses. Effective liquidity management entails three elements:
1. | Assessing on an ongoing basis, the current and expected future needs for funds, and ensuring that sufficient funds or access to funds exist to meet those needs at the appropriate time. | ||
2. | Providing for an adequate cushion of liquidity to meet unanticipated cash flow needs that may arise from potential adverse circumstances ranging from high probability/low severity events to low probability/high severity. | ||
3. | Balancing the benefits between providing for adequate liquidity to mitigate potential adverse events and the cost of that liquidity. |
52
Table of Contents
The Banks primary sources of funds are deposits, receipts of principal and interest payments
on loans and investment securities, proceeds from sale of loans and securities, short and long-term
borrowings. In addition, the Company maintains liquidity capacity through secured and unsecured
borrowing programs, brokered deposit relationships, and unencumbered securities. The following
table identifies certain liquidity sources and capacity available to the Company at December 31,
2010:
December 31, | ||||
(Dollars in thousands) | 2010 | |||
FHLB advances |
||||
Borrowing capacity |
$ | 1,102,986 | ||
Amount utilized |
(965,141 | ) | ||
Amount available |
$ | 137,845 | ||
FRB discount window |
||||
Borrowing capacity |
$ | 359,555 | ||
Amount utilized |
| |||
Amount available |
$ | 359,555 | ||
Unsecured lines of credit available |
$ | 161,760 | ||
Unencumbered securities |
||||
U.S. government and federal agency |
$ | 170 | ||
U.S. government sponsored enterprises |
5,188 | |||
State and local governments |
464,828 | |||
Collateralized debt obligations |
3,298 | |||
Residential mortgage-backed securities |
981,545 | |||
Total unencumbered securities |
$ | 1,455,029 | ||
The Company and each of the bank subsidiaries has a wide range of versatility in managing the
liquidity and asset/liability mix across each of the bank subsidiaries as well as the Company as a
whole. Asset liability committees (ALCO) are maintained at the Parent and bank subsidiary levels
with the ALCO committees meeting regularly to assess liquidity risk, among other matters. The
Company monitors liquidity and contingency funding alternatives through management reports of
liquid assets (e.g., investment securities), both unencumbered and pledged, as well as borrowing
capacity, both secured and unsecured.
Capital Resources
Maintaining capital strength continues to be a long-term objective. Abundant capital is necessary
to sustain growth, provide protection against unanticipated declines in asset values, and to
safeguard the funds of depositors. Capital also is a source of funds for loan demand and enables
the Company to effectively manage its assets and liabilities. Stockholders equity increased $152
million since prior year end, or 22 percent, primarily the result of a public offering of common
stock of $146 million in net proceeds.
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The Federal Reserve Board has adopted capital adequacy guidelines that are used to assess the
adequacy of capital in supervising a bank holding company. Each of the bank subsidiaries was
considered well capitalized by the respective regulator as of December 31, 2010 and 2009.
There are no conditions or events since year end that management believes have changed the
Companys or subsidiaries risk-based capital category. The following table illustrates the
Federal Reserve Boards capital adequacy guidelines and the Companys compliance with those
guidelines as of December 31, 2010.
Tier 1 (Core) | Total | Leverage | ||||||||||
(Dollars in thousands) | Capital | Capital | Capital | |||||||||
Total stockholders equity |
$ | 838,204 | 838,204 | 838,204 | ||||||||
Less: |
||||||||||||
Goodwill and intangibles |
(150,470 | ) | (150,470 | ) | (150,470 | ) | ||||||
Net unrealized gain on AFS debt securities |
(528 | ) | (528 | ) | (528 | ) | ||||||
Other adjustments |
(88 | ) | (88 | ) | (88 | ) | ||||||
Plus: |
||||||||||||
Allowance for loan and lease losses |
| 56,625 | | |||||||||
Subordinated debentures |
124,500 | 124,500 | 124,500 | |||||||||
Other adjustments |
| 2 | | |||||||||
Regulatory capital |
$ | 811,618 | 868,245 | 811,618 | ||||||||
Risk-weighted assets |
$ | 4,449,324 | 4,449,324 | |||||||||
Total adjusted average assets |
$ | 6,386,400 | ||||||||||
Capital as % of risk weighted assets |
18.24 | % | 19.51 | % | 12.71 | % | ||||||
Regulatory well capitalized requirement |
6.00 | % | 10.00 | % | ||||||||
Excess over well capitalized requirement |
12.24 | % | 9.51 | % | ||||||||
For additional information, see Note 11 to the Consolidated Financial Statements in Item 8.
Financial Statements and Supplementary Data. Dividend payments were $0.52 per share for 2010 and
2009. 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. Additionally, current guidance from the Federal Reserve provides,
among other things, that dividends per share on the Companys common stock generally should not
exceed earnings per share, measured over the previous four fiscal quarters.
In addition to the primary and safeguard liquidity sources available, the Company has the capacity
to issue 117,187,500 shares of common stock, of which 71,915,073 has been issued as of December 31,
2010. The Companys capacity to issue additional shares has been demonstrated with the most recent
stock issuances in 2010 and 2008, although no assurances can be made that future stock issuances
would be as successful. The Company also has the capacity to issue 1,000,000 shares of preferred
shares, of which currently none are issued.
Short-term borrowings
A critical component of the Companys liquidity and capital resources is access to short-term
borrowings to fund its operations. Short-term borrowings are accompanied by increased risks
managed by ALCO such as rate increases or unfavorable change in terms which would make it more
costly to obtain future short-term borrowings. The Companys short-term borrowing sources include
FHLB advances, FRB borrowings, federal funds purchased, brokered deposits, and wholesale repurchase
agreements. FHLB advances and certain other short-term borrowings may be extended as long-term
borrowings to decrease certain risks such as liquidity or interest rate risk; however, the
reduction in risks are weighed against the increased costs of funds.
Market Risk
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 Companys primary market risk exposure is interest rate risk. The ongoing monitoring
and management of this risk is an important component of the Companys asset/liability management
process which is governed by policies established by its Board of Directors that are reviewed and
approved annually. The Board of Directors delegates responsibility for carrying out the
asset/liability management policies to each bank subsidiary and Parent ALCO. In this capacity,
ALCO develops guidelines and strategies impacting the Companys asset/liability management related
activities based upon estimated market risk sensitivity, policy limits and overall market interest
rate levels and trends.
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Interest Rate Risk
The objective of interest rate risk management is to contain the risks associated with interest
rate fluctuations. The process involves identification and management of the sensitivity of net
interest income to changing interest rates. Managing interest rate risk is not an exact science.
The interval between repricing of interest rates of assets and liabilities changes from day to day
as the assets and liabilities change. For some assets and liabilities, contractual maturity and
the actual cash flows experienced are not the same. A good example is residential mortgages that
have long-term contractual maturities but may be repaid well in advance of the maturity when
current prevailing interest rates become lower than the contractual rate. Interest-bearing
deposits without a stated maturity could be withdrawn upon demand. However, the Banks experience
indicates that these funding pools have a much longer duration and are not as sensitive to interest
rate changes as other financial instruments. Prime based loans generally have rate changes when
the FRB changes short-term interest rates. However, depending on the magnitude of the rate change
and the relationship of the current rates to rate floors and rate ceilings that may be in place on
the loans, the loan rate may not change.
GAP analysis
The following table gives a description of our GAP position for various time periods. As of
December 31, 2010, the Company had a negative GAP position at six months and a negative GAP
position at twelve months. The cumulative GAP as a percentage of total assets for six months is a
negative 17.77 percent which compares to a negative 14.05 percent at December 31, 2009 and a
negative 14.07 percent at December 31, 2008. The table also shows the GAP earnings sensitivity, and
earnings sensitivity ratio, along with a brief description as to how they are calculated. The
methodology used to compile this GAP information is based on the Companys mix of assets and
liabilities and the historical experience accumulated regarding their rate sensitivity.
Projected Maturity or Repricing | ||||||||||||||||||||
0-6 | 6-12 | 1 - 5 | More than | |||||||||||||||||
(Dollars in thousands) | Months | Months | Years | 5 Years | Total | |||||||||||||||
Assets |
||||||||||||||||||||
Interest bearing deposits and |
||||||||||||||||||||
federal funds sold |
$ | 33,349 | | 45 | | 33,394 | ||||||||||||||
Investment securities |
22,522 | 20,566 | 105,209 | 558,291 | 706,588 | |||||||||||||||
Residential mortgage-backed securities |
408,652 | 339,403 | 895,724 | 46,323 | 1,690,102 | |||||||||||||||
FHLB stock and FRB stock |
| | 49,072 | 15,357 | 64,429 | |||||||||||||||
Variable rate loans |
1,110,473 | 244,946 | 928,247 | 165,469 | 2,449,135 | |||||||||||||||
Fixed rate loans |
329,353 | 201,062 | 587,452 | 182,287 | 1,300,154 | |||||||||||||||
Total interest bearing assets |
$ | 1,904,349 | 805,977 | 2,565,749 | 967,727 | 6,243,802 | ||||||||||||||
Liabilities |
||||||||||||||||||||
Interest bearing deposits |
2,011,827 | 357,097 | 292,166 | 1,004,983 | 3,666,073 | |||||||||||||||
FHLB advances |
741,064 | 20,000 | 157,000 | 47,077 | 965,141 | |||||||||||||||
Repurchase
agreements and other borrowed funds |
260,802 | 453 | 1,028 | 7,125 | 269,408 | |||||||||||||||
Subordinated debentures |
| | | 125,132 | 125,132 | |||||||||||||||
Total interest bearing liabilities |
$ | 3,013,693 | 377,550 | 450,194 | 1,184,317 | 5,025,754 | ||||||||||||||
Repricing gap |
$ | (1,109,344 | ) | 428,427 | 2,115,555 | (216,590 | ) | 1,218,048 | ||||||||||||
Cumulative repricing gap |
$ | (1,109,344 | ) | (680,917 | ) | 1,434,638 | 1,218,048 | |||||||||||||
Cumulative gap as a % of interest bearing assets |
-17.77 | % | -10.91 | % | 22.98 | % | 19.51 | % | ||||||||||||
Gap earnings sensitivity 1 |
(4,141 | ) | ||||||||||||||||||
Gap earnings sensitivity ratio 2 |
-9.78 | % |
1 | Gap Earnings Sensitivity is the estimated effect on earnings, after taxes of 39.19 percent, of a 1 percent increase or decrease in interest rates (1 percent of ($680,917 $266,851)) | |
2 | Gap Earnings Sensitivity Ratio is Gap Earnings Sensitivity divided by the 2010 net earnings of $42,330. A 1 percent increase in interest rates has this estimated percentage decrease on annual net earnings. |
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This table estimates the repricing and maturities of the contractual characteristics of the
assets and liabilities, based upon the Companys assessment of the repricing characteristics of the
various instruments. Interest-bearing checking and regular savings are included in the categories
that reflect the interest rate sensitivity of the individual programs and if the deposits are not
clearly rate sensitive, the deposits are included in the more than 5 years category. Money market
balances are included in the less than 6 months category. Residential mortgage-backed securities
are categorized based on the anticipated payments.
Net interest income simulation
The traditional one-dimensional view of GAP is not sufficient to show a banks ability to withstand
interest rate changes. Because of limitations in GAP modeling the ALCO of the Company uses a
detailed and dynamic simulation model to quantify the estimated exposure of net interest income
(NII) to sustained interest rate changes. While ALCO routinely monitors simulated NII
sensitivity over a rolling two-year horizon, it also utilizes additional tools to monitor potential
longer-term interest rate risk. The simulation model captures the impact of changing interest
rates on the interest income received and interest expense paid on all assets and liabilities
reflected on the Companys statement 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
horizon, assuming no balance sheet growth, given a 200 basis point (bp) upward and 100bp downward
shift in interest rates. A parallel and pro rata shift in rates over a 12-month period is assumed
as a benchmark. Other non-parallel rate movement scenarios are also modeled to determine the
potential impact on net interest income. The following reflects the Companys NII sensitivity
analysis as of December 31, 2010 and 2009 as compared to the 10 percent policy limit approved by
the Companys and Banks Board of Directors.
December 31, | ||||||||
(Dollars in thousands) | 2010 | 2009 | ||||||
+200 bp |
||||||||
Estimated sensitivity |
-4.5 | % | -3.0 | % | ||||
Estimated decrease in net interest income |
$ | (10,541 | ) | (7,433 | ) | |||
-100 bp |
||||||||
Estimated sensitivity |
-2.1 | % | 0.3 | % | ||||
Estimated (decrease) increase in net interest income |
$ | (4,930 | ) | 613 |
The preceding sensitivity analysis does not represent a forecast and should not be relied upon as
being indicative of expected operating results. These hypothetical estimates are based upon
numerous assumptions including: the nature and timing of interest rate levels including yield
curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans
and deposits, reinvestment/replacement of assets and liability cash flows, and others. While
assumptions are developed based upon current economic and local market conditions, the Company
cannot make any assurances as to the predictive nature of these assumptions including how customer
preferences or competitor influences might change. Also, as market conditions vary from those
assumed in the sensitivity analysis, actual results will also differ due to prepayment/refinancing
levels likely deviating from those assumed, the varying impact of interest rate change caps or
floors on adjustable rate assets, the potential effect of changing debt service levels on customers
with adjustable rate loans, depositor early withdrawals and product preference changes, and other
internal and external variables. Furthermore, the sensitivity analysis does not reflect actions
that ALCO might take in responding to or anticipating changes in interest rates.
Economic value of equity
In addition to the GAP and NII analysis, 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. The model incorporates growth and pricing assumptions to
develop a baseline EVE. The interest rates used in the model are then shocked for an immediate
increase 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 results percentage
change in the EVE is an indication of the longer term re-pricing risk and options embedded in the
balance sheet. The following includes the Companys EVE maximum sensitivity policy limits and EVE
analysis as of December 31, 2010:
Policy | Post | |||||||
Rate Shocks | Limits | Shock Ratio | ||||||
-100 bp |
15 | % | -0.6 | % | ||||
+100 bp |
15 | % | -5.0 | % | ||||
+200 bp |
25 | % | -11.5 | % | ||||
+300 bp |
35 | % | -18.9 | % |
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Effect of inflation and changing prices
Generally accepted accounting principles often require 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 and each bank
subsidiary are monetary in nature; therefore, interest rates generally have a more significant
impact on a companys performance than does the effect of inflation.
Critical Accounting Policies
The preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America 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, revenues and expenses. The Company
considers its accounting policy for the ALLL and determination of whether an investment security is
temporarily or other-than-temporarily impaired to be critical accounting policies.
Allowance for Loan and Lease Losses Accounting Policy and Analysis
The Banks charge-off policy is consistent with bank regulatory standards. Consumer loans
generally are charged off when the loan becomes over 120 days delinquent. Real estate acquired as
a result of foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned until
such time as it is sold. When such property is acquired, it is recorded at estimated fair value,
less estimated cost to sell. Any write-down at the time of recording real estate owned is charged
to the ALLL. Subsequent write-downs, if any, are charged to current expense.
Based upon managements analysis of the Companys loan and lease portfolio, the balance of the ALLL
is an estimate of probable credit losses known and inherent within each bank subsidiarys loan and
lease 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 managements judgments about all known
relevant internal and external environmental factors that affect loan losses. The balance of the
ALLL is highly dependent upon managements evaluations of borrowers current and prospective
performance, appraisals and other variables affecting the quality of the loan and lease portfolio.
Individually significant loans and major lending areas are reviewed periodically to determine
potential problems at an early date. Changes in managements estimates and assumptions are
reasonably possible and may have a material impact upon the Companys consolidated financial
statements, results of operations or capital.
The ALLL consists of a specific allocation component and a general allocation component. The
specific component relates to loans that are determined to be impaired. The Company measures
impairment on a loan-by-loan basis based on the present value of expected future cash flows
discounted at the loans effective interest rate, except when it is determined that repayment of
the loan is expected to be provided solely by the underlying collateral. 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 Companys impaired loans include TDR loans which are
individually assessed in the specific allocation component of the ALLL by portfolio class.
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The general allocation component relates to probable credit losses inherent in the balance of the
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 each of the Banks judgment and experience. The changes in trends and conditions of
certain items include the following:
| Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses; | ||
| Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments; | ||
| Changes in the nature and volume of the portfolio and in the terms of loans; | ||
| Changes in experience, ability, and depth of lending management and other relevant staff; | ||
| Changes in the volume and severity of past due and nonaccrual loans; | ||
| Changes in the quality of the Companys 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; | ||
| The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the Companys existing portfolio. |
Each of the banks ALLL evaluation is well documented and approved by each bank subsidiarys Board
of Directors and reviewed by the Parents Board of Directors. In addition, the policy and
procedures for determining the balance of the ALLL are reviewed annually by each bank subsidiarys
Board of Directors, the Parents Board of Directors, independent credit reviewers and state and
federal bank regulatory agencies.
Management of each bank subsidiary exercises significant judgment when evaluating the effect of
applicable qualitative or environmental factors on each bank subsidiarys historical loss
experience for loans not identified as impaired. Quantification of the impact upon each banks
allowance 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 each banks unimpaired loan and lease portfolio as of each
evaluation date. Bank management documents its conclusions and rationale for changes that occur in
each applicable factors weight, i.e., measurement and ensures that such changes are directionally
consistent based on the underlying current trends and conditions for the factor.
The ALLL is increased by charges to earnings and decreased by charge-offs (net of recoveries). For
additional information regarding the ALLL, its relation to the provision for loan losses and risk
related to asset quality, see Note 4 to the Consolidated Financial Statements in Item 8. Financial
Statements and Supplementary Data.
Other-Than-Temporary Impairment on Securities Accounting Policy and Analysis
The Company views the determination of whether an investment security is temporarily or
other-than-temporarily impaired as a critical accounting policy, as the estimate is susceptible to
significant change from period to period because it requires management to make significant
judgments, assumptions and estimates in the preparation of its consolidated financial statements.
The Company assesses individual securities in its investment securities portfolio for impairment at
least on a quarterly basis, and more frequently when economic or market conditions warrant. An
investment is impaired if the fair value of the security is less than its carrying value at the
financial statement date. If impairment is determined to be other-than-temporary, an impairment
loss is recognized by reducing the amortized cost for the credit loss portion of the impairment
with a corresponding charge to earnings for a like amount.
For fair value estimates provided by third party vendors, management also considered the models and
methodology for appropriate consideration of both observable and unobservable inputs, including
appropriately adjusted discount rates and credit spreads for securities with limited or inactive
markets, and whether the quoted prices reflect orderly transactions. For certain securities, the
Company obtained independent estimates of inputs, including cash flows, in supplement to third
party vendor provided information. The Company also reviewed financial statements of select
issuers, with follow up discussions with issuers management for clarification and verification of
information relevant to the Companys impairment analysis.
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In evaluating impaired securities for other-than-temporary impairment losses, management considers,
among other things, 1) the severity and duration of the impairment, 2) the credit ratings of the
security, 3) the overall deal structure, including the Companys position within the structure, the
overall and near term financial performance of the issuer and underlying collateral, delinquencies,
defaults, loss severities, recoveries, prepayments, cumulative loss projections, discounted cash
flows and fair value estimates.
In evaluating equity securities for other-than-temporary impairment losses, the Company assesses
impairment to be other-than-temporary when the Company lacks the intent and the ability to retain
the equity security for a period of time sufficient to allow for recovery in full of the cost basis
of the security. If the Company has decided to sell an impaired equity security and the Company
does not expect the fair value of the security to fully recover before the expected time of sale,
the security is deemed to have an other-than-temporary impairment in the period in which the
decision to sell is made. The Company recognizes an impairment loss when the impairment is deemed
other-than-temporary even if a decision to sell has not been made. For other-than-temporary losses
on equity securities, the Company recognizes the entire amount of the other-than-temporary
impairment in earnings.
In evaluating debt securities for other-than-temporary impairment losses, management assesses
whether the Company intends to sell the security or if it is more likely-than-not that the Company
will be required to sell the debt security. In so doing, management considers contractual
constraints, liquidity, capital, asset / liability management and securities portfolio objectives.
If impairment is determined to be other-than-temporary and the Company does not intend to sell a
debt security, and it is more likely-than-not the Company will not be required to sell the security
before recovery of its cost basis, it recognizes the credit component of an other-than-temporary
impairment of a debt security in earnings and the remaining portion (noncredit portion) in other
comprehensive income, net of tax. For held-to-maturity debt securities, the amount of an
other-than-temporary impairment recorded in other comprehensive income for the noncredit portion of
a previous other-than-temporary impairment is amortized prospectively 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.
Equity securities owned at December 31, 2010 primarily consisted of stock issued by the FHLB of
Seattle, FHLB of Topeka and the FRB, such shares are measured at cost for purposes in recognition
of the transferability restrictions imposed by the issuers. Other equity securities include
Federal Agriculture Mortgage Corporation and Bankers Bank of the West Bancorporation, Inc. The
fair value of other stock in an unrealized loss position was $7 thousand, with unrealized losses of
$4 thousand or 57 percent of fair value, at December 31, 2010.
With respect to FHLB stock, the Company evaluates such stock for other-than-temporary impairment.
Such evaluation takes into consideration (1) FHLB deficiency, if any, in meeting applicable
regulatory capital targets, including risk-based capital requirements, (2) the significance of any
decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the time
period for any such decline, (3) commitments by the FHLB to make payments required by law or
regulation and the level of such payments in relation to the operating performance of the FHLB, (4)
the impact of legislative and regulatory changes on the FHLB, and (5) the liquidity position of the
FHLB.
Based on the analysis of its impaired equity securities as of December 31, 2010, the Company
determined that none of such securities had other-than-temporary impairment.
The Company believes that macroeconomic conditions occurring in 2010 and in 2009 have unfavorably
impacted the fair value of certain debt securities in its investment portfolio. For debt
securities with limited or inactive markets, the impact of these macroeconomic conditions upon fair
value estimates includes higher risk-adjusted discount rates and downgrades in credit ratings
provided by nationally recognized credit rating agencies, (e.g., Moodys, S&P, Fitch, and DBRS).
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Debt securities sold during the 2010, included 119 securities of which 108 were sold at a realized
gain of $7.8 million and 11 were sold at a realized loss of $3.0 million. The increase in sales
activity reflects the Companys more active management of the portfolio. Such sales were executed
with the proceeds used to buy additional investment securities such that the investment portfolio
performs well across varying interest rate environments.
During the first half of 2009, the Company sold no investment securities as the Company continued
its then historical approach to managing the investment portfolio, i.e., to buy and hold
securities to maturity, although such securities may be sold given that all of the securities held
in the investment portfolio are designated as available-for-sale. During the second half of 2009,
the Company sold 59 securities of which 52 were sold at a realized gain of $7.1 million and 7 were
sold at a realized loss of $1.1 million.
Of the securities sold at a realized loss, none had previously been subject to an
other-than-temporary impairment charge, and none were subject to an expectation or requirement to
sell. With respect to its impaired debt securities at December 31, 2010, management determined
that it does not intend to sell and that there is no expected requirement to sell any of its
impaired debt securities.
As of December 31, 2010, there were 597 investments in an unrealized loss position of which 595
were debt securities and 2 were equity securities. With respect to the 595 debt securities, state
and local government securities have the largest unrealized loss. The fair value of the
residential mortgage-backed securities, which have underlying collateral consisting of U.S.
government sponsored enterprise guaranteed mortgages and non-guaranteed private label whole loan
mortgages, were $384.2 million at December 31, 2010 of which $325.1 million was purchased during
2010, the remainder of which had a fair market value of $59.2 million at December 31, 2009. For
the securities purchased in 2010, there has been an unrealized loss of $1.5 million since purchase.
Of the remaining residential mortgage-backed securities in a loss position, the unrealized loss
decreased from 4.51 percent of fair value at December 31, 2009 to .73 percent of fair value at
December 31, 2010. The fair value of Collateralized Debt Obligation (CDO) securities in an
unrealized loss position is $6.6 million, with unrealized losses of $4.583 million at December 31,
2010; the unrealized loss decreased from 162.7 percent of fair value at December 31, 2009 to 69.48
percent of fair value at December 31, 2010. The fair value of state and local government
securities in an unrealized loss position were $378.3 million at December 31, 2010 of which $240.3
million was purchased during 2010, the remainder of which had a fair market value of $138.0 million
at December 31, 2009. For the securities purchased in 2010, there has been an unrealized loss of
$11.7 million since purchase. Of the remaining state and local government securities in a loss
position, the unrealized loss increased from 1.35 percent of fair value at December 31, 2009 to
4.21 percent of fair value at December 31, 2010. With respect to severity, the following table
provides the number of securities and amount of unrealized loss in the various ranges of unrealized
loss as a percent of book value.
Number of | Number of | |||||||||||
Unrealized | Debt | Equity | ||||||||||
(Dollars in thousands) | Loss | Securities | Securities | |||||||||
Greater than 40.0% |
$ | 4,586 | 6 | 1 | ||||||||
30.1% to 40.0% |
| | | |||||||||
20.1% to 30.0% |
| | | |||||||||
15.1% to 20.0% |
415 | 2 | | |||||||||
10.1% to 15.0% |
2,182 | 20 | 1 | |||||||||
5.1% to 10.0% |
8,152 | 134 | | |||||||||
0.1% to 5.0% |
7,978 | 433 | | |||||||||
Total |
$ | 23,313 | 595 | 2 | ||||||||
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With respect to the duration of the impaired debt securities, the Company identified 32 which have
been continuously impaired for the twelve months ending December 31, 2010. The valuation history
of such securities in the prior year(s) was also reviewed to determine the number of months in
prior year(s) in which the identified securities was in an unrealized loss position. Of the 32
securities, 14 are state and local tax-exempt securities with an unrealized loss of $1.3 million,
the most notable of which had an unrealized loss of $325 thousand. Of the 32 securities, 6 are
identical CDO securities with an aggregate unrealized loss of $4.6 million, the most notable of
which had an unrealized loss of $1.1 million.
With respect to the CDO securities, each is in the form of a pooled trust preferred structure of
which the Company owns a portion of the Senior Notes tranche. All of the assets underlying the
pooled trust preferred structure are capital securities issued by trust subsidiaries of holding
companies of banks and thrifts. Since December 31, 2009, the Senior Notes have been rated A3 by
Moodys. The Senior Notes have also been rated as of December 31, 2010 by Fitch as BBB, such
rating effective September 21, 2010. Prior to such downgrade, Fitch had rated the Senior Notes as
A since December 31, 2009. As of December 31, 2010, 9 of the 26 trust subsidiaries were treated
by the Trustee as in default, either because of an actual default or elective deferral of interest
payments on their respective obligations. As of the end of the third and second quarters of 2010,
8 of the 26 trust subsidiaries were treated by the Trustee as in default on their respective
obligations underlying the CDO structure. As of the end of the first quarter of 2010 and the
fourth quarter of 2009, 6 of the 26 trust subsidiaries were treated as in default compared to 3 of
the 26 trust subsidiaries treated as in default on their respective obligations as of the end of
the first three quarters of 2009. In accordance with the prospectus for the CDO structure, the
priority of payments favors holders of the Senior Notes over holders of the Mezzanine Notes and
Income Notes. Though the maturity of the CDO structure is June 15, 2031, 25.28 percent of the
outstanding principle of the Senior Notes has been prepaid through December 31, 2010 compared to
15.22 percent at December 31, 2009. More specifically, at any time the Senior Notes are
outstanding, if either the Senior Principle or Senior Interest Coverage Tests (the Senior Coverage
Tests) are not satisfied as of a calculation date, then funds that would have otherwise been used
to make payments on the Mezzanine Notes or Income Notes shall instead be applied as principle
prepayments on the Senior Notes. For each of the four quarters of 2010 and the fourth quarter of
2009, the Senior Principle Coverage Test was below its threshold level, while the Senior Interest
Coverage Test exceeded its threshold level. The Senior Coverage Tests exceeded the threshold
levels for each of the first three quarters of 2009. In its assessment of the Senior Notes for
potential other-than-temporary impairment, the Company evaluated the underlying issuers and engaged
a third party vendor to stress test the performance of the underlying capital securities and
related obligors. Such stress testing has been performed as of the end of each of the four
quarters of 2010 and at each quarter end in 2009. In each instance of stress testing, the results
reflect no credit loss for the Senior Notes. In evaluating such results, the Company reviewed with
the third party vendor the stress test assumptions and concurred with the analyses in concluding
that the impairment at December 31, 2010 and at the end of each of the prior quarters of 2010 and
2009 was temporary, and not other-than-temporary.
Of the 32 securities temporarily impaired continuously for the twelve months ending December 31,
2010, 6 are non-guaranteed private label whole loan mortgages with an aggregate unrealized loss of
$1.2 million, the most notable of which had an unrealized loss of $476 thousand. Of the 6
non-guaranteed private label whole loan mortgages, 2 are collateralized by 30-year fixed rate
residential mortgages considered to be Prime and 4 are collateralized by 30-year fixed rate
residential mortgages considered to be ALT A. Moreover, none of the underlying mortgage
collateral is considered subprime.
The Companys engages a third-party to perform detailed analysis for other-than-temporary
impairment of such securities. Such analysis takes into consideration original and current data
for the tranche and CMO structure, the non-guaranteed classification of each CMO tranche, current
and deal inception credit ratings, credit support (protection) afforded the tranche through the
subordination of other tranches in the CMO structure, the nature of the collateral (e.g., Prime or
Alt-A) underlying each CMO tranche, and realized cash flows since purchase. When available, the
collateral loss estimates are compared against loss estimates obtained from the credit rating
agencies for the CMO structure and the resulting impact upon the tranche.
The analysis includes performance projections based upon cash flow assumptions designed to assess
risk by capturing key performance data and trends such as delinquencies, severity of defaults,
severity of collateral loss, and a range of prepayment speeds taking into account both voluntary
(CRR) and involuntary (CDR) payments and the seniority of the CMO tranche within the CMO deal.
The projected cash flows incorporate a range of macroeconomic trends, including for example,
interest rates, gross domestic product and employment, as well as home price
appreciation/depreciation (HPA) and geographic affordability (Geo Aff).
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HPA is a primary driver of credit performance in addition to loan characteristics. Negative HPA
refers to declining house price appreciation (i.e., depreciation in essence). HPA scenarios are
performed at loan-level capturing characteristics such as loan-to-value, credit scores (e.g.,
FICO), loan type, occupancy, purpose, and geography. Geo Aff is also a house price appreciation
scenario and such refers to house price affordability levels by geography (relative to income).
Prior to performing any HPA or Geo Aff-based analysis, significant fine-tuning adjustments are made
to factor in the current state of the housing market. Tuning adjustments include delinquency roll
rates, cure rates, voluntary prepayments, loan-to-values, and credit scores. Additionally, other
factors used in the analyses are updated for current market conditions and trends, including loss
severities and collateral loss estimates provided by the credit rating agencies for the CMO
structures.
Based on the analysis of its impaired debt securities as of December 31, 2010, the Company
determined that none of such securities had other-than-temporary impairment.
Goodwill Impairment
As required by FASB ASC Topic 350, Intangibles Goodwill and Other, the Company tests goodwill
and other intangible assets for impairment at the reporting unit level annually during the third
quarter. The reporting unit level at which goodwill exists is at ten of the eleven bank
subsidiaries. In addition, goodwill and other intangible assets of a subsidiary are tested for
impairment between annual tests if an event occurs or circumstances change that would
more-likely-than not reduce the fair value of a reporting units below its carrying amount.
Examples of events and circumstances that could trigger the need for interim impairment testing
include:
| A significant change in legal factors or in the business climate; | ||
| An adverse action or assessment by a regulator; | ||
| Unanticipated competition; | ||
| A loss of key personnel; | ||
| A more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of; and | ||
| The testing for recoverability of a significant asset group within a reporting unit. |
The goodwill impairment test is a two-step process which requires the Company to make assumptions
and judgments regarding fair value. In the first step for evaluating for possible impairment, the
Company compares the estimated fair value of its reporting units to the carrying value, which
includes goodwill. If the estimated fair value is less than the carrying value, the second step is
completed to compute the impairment amount 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 amount, if any.
For the first step in evaluating goodwill for possible impairment, the Company performs two
analyses. The first analysis estimates fair value based on market multiples of deal price to
equity, deal price to tangible equity, and deal price to last twelve months earnings. The deal
price multiples are obtained from an independent third party for acquisitions of financial
institutions completed within the prior twelve months preceding each testing date, such
acquisitions excluding financial institutions whose size and operations are not comparable to the
Company and its bank subsidiaries. As an additional analysis, the Company also tests for goodwill
impairment based on the Companys market capitalization adjusted for control value. In evaluating
the range of appropriate control values, the control values have ranged from twenty percent to
thirty-five percent, such values taking into account recent trends in market capitalization in
advance of the date at which the Company is testing for potential goodwill impairment. Based on
annual and any interim testing results, the Company has determined that the fair value of each
reporting unit exceeded its carrying value, such that the Companys goodwill was not considered
impaired during 2010. However, further adverse changes in the economic environment, operations of
the reporting units, or other factors could result in a decline in the fair value of the reporting
units which could result in goodwill impairment.
Fair Value Measurements
FASB ASC Topic 820, Fair Value Measurements and Disclosures, requires the Company to disclose
information relating to fair value. 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. The Topic establishes 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 standard describes three levels of inputs that may be used to measure fair value:
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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 |
On a recurring basis, the Company measures investment securities at fair value. The fair value of
such investments is estimated by obtaining quoted market prices for identical assets, where
available. If such prices are not available, fair value is based on independent asset pricing
services and models, the inputs of which are market-based or independently sourced market
parameters, including, but not limited to, yield curves, interest rates, volatilities, prepayments,
defaults, cumulative loss projections, and cash flows. For those securities where greater reliance
on unobservable inputs occurs, such securities are classified as Level 3 within the hierarchy.
In performing due diligence reviews of the independent asset pricing services and models for
investment securities, the Company reviewed the vendors inputs for fair value estimates and the
recommended assignments of levels within the fair value hierarchy. The Companys review included
the extent to which markets for investment securities were determined to have limited or no
activity, or were judged to be active markets. The Company reviewed the extent to which observable
and unobservable inputs were 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 placed less
reliance on quotes that were judged to not reflect orderly transactions, or were non-binding
indications. The Company made independent inquires of other knowledgeable parties in testing the
reliability of the inputs, including consideration for illiquidity, credit risk, and cash flow
estimates. In assessing credit risk, the Company reviewed payment performance, collateral
adequacy, credit rating histories, and issuers financial statements with follow-up discussion with
issuers. For those markets determined to be inactive, the valuation techniques used were models
for which management verified that discount rates were appropriately adjusted to reflect
illiquidity and credit risk. The Company independently obtained cash flow estimates that were
stressed at levels that exceeded those used by independent third party pricing vendors. Based on
the Companys due diligence review, investment securities are placed in the appropriate hierarchy
levels with adjustment to vendors recommendations made as necessary. Most notably, the Company
determined that its CDO securities, i.e., trust preferred securities, were illiquid due to inactive
markets (i.e., due to the absence of trade volume during 2009 and 2010), the fair values of which
had significant reliance on unobservable inputs, and therefore were classified as Level 3 within
the hierarchy.
On a non-recurring basis, the Company measures other real estate owned and collateral-dependent
impaired loans, net of ALLL, at fair value. Other real estate owned is carried at the lower of
fair value at acquisition date or current estimated fair value, less estimated cost to sell.
Estimated fair value of other real estate owned is based on appraisals or evaluations. Other real
estate owned is classified within Level 3 of the fair value hierarchy. Collateral-dependent
impaired loans, net of ALLL, are loans for which it is probable that the Company will not collect
all principal and interest due according to contractual terms and are considered impaired in
accordance with FASB ASC Topic 310, Receivables. The estimated fair value of collateral-dependent
impaired loans is based on the appraised 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 reviews appraisals for other real estate owned and collateral-dependent loans, giving
consideration to the highest and best use of the collateral. The Company considers the appraisal
or evaluation as the starting point for determining fair value and the Company also considers other
factors and events in the environment that may affect the fair value. The appraised values are
reduced by discounts to consider lack of marketability and estimated cost to sell.
In addition to measuring certain financial assets and liabilities on a recurring or non-recurring
basis, the Company discloses estimated fair value on financial assets and liabilities. The
following is a description of the methods used to estimate the fair value of all other financial
instruments recognized at amounts other than fair value:
Loans receivable, net of ALLL: fair value is estimated by discounting the future cash flows using
the rates at which similar notes would be originated for the same remaining maturities. The market
rates used are based on current rates the Banks would impose for similar loans and reflect a market
participant assumption about risks associated with non-performance, illiquidity, and the structure
and term of the loans along with local economic and market conditions.
Term deposits: fair value is estimated by discounting the future cash flows using rates of similar
deposits with similar maturities. The market rates used were obtained from a knowledgeable
independent third party and reviewed by the Company. The rates were the average of current rates
offered by local competitors of the Banks. The estimated fair value of demand, NOW, savings, and
money market deposits is the book value since rates are regularly adjusted to market rates.
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Non-callable FHLB advances: fair value is estimated by discounting the future cash flows using
rates of similar advances with similar maturities. These rates were obtained from current rates
offered by FHLB. The estimated fair value of callable FHLB advances was obtained from FHLB and the
model was reviewed by the Company through discussions with FHLB.
FRB borrowings: fair value is estimated based on borrowing rates currently available to the Company
for FRB borrowings with similar terms and maturities. The current outstanding borrowings are short
term and current rates offered by FRB equal the rates on the outstanding borrowings, resulting in
the estimated fair value being the same as the book value.
Term repurchase agreements: fair value is estimated based on current repurchase rates currently
available to the Company for repurchases agreements with similar terms and maturities. The market
rates used are based on current rates the Banks would incur for similar borrowings. The estimated
fair value for overnight repurchase agreements and other borrowings is book value.
Subordinated debentures: fair value is estimated by discounting the estimated future cash flows
using current estimated market rates. The market rates used were averages of currently traded
trust preferred securities with similar characteristics to the Companys issuances and obtained
from an independent third party.
For additional information on fair value measurements, see Note 19 to the Consolidated Financial
Statements in Item 8. Financial Statements and Supplementary Data.
Impact of Recently Issued Accounting Standards
New authoritative accounting guidance that has either been issued during 2010 or is effective
during 2010 or 2011 and may possibly have a material impact on the Company includes amendments to:
FASB ASC Topic 310, Receivables, FASB ASC Topic 350, Intangibles Goodwill and Other, FASB ASC
Topic 805, Business Combinations, FASB ASC Topic 810, Consolidation, FASB ASC Topic 820, Fair Value
Measurements and Disclosures and FASB ASC Topic 860, Transfers and Servicing. For additional
information on the topics and the impact on the Company see Note 23 to the Consolidated Financial
Statements in Item 8. Financial Statements and Supplementary Data.
Item 7A. | Quantitative and Qualitative Disclosures about Market Risk |
Information regarding Quantitative and Qualitative Disclosures about Market Risk is set
forth under Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations.
Item 8. | Financial Statements and Supplementary Data |
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Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors and Stockholders
Glacier Bancorp, Inc.
Kalispell, Montana
Glacier Bancorp, Inc.
Kalispell, Montana
We have audited the accompanying consolidated statements of financial condition of Glacier Bancorp,
Inc. as of December 31, 2010 and 2009, and the related consolidated statements of operations,
stockholders equity and comprehensive income and cash flows for each of the years in the
three-year period ended December 31, 2010. The Companys management is responsible for these
financial statements. Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement. Our
audits included examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by
management and evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Glacier Bancorp, Inc. as December 31, 2010 and 2009,
and the results of its operations and its cash flows for each of the years in the three-year period
ended December 31, 2010, in conformity with accounting principles generally accepted in the Unites
States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Glacier Bancorp, Inc.s internal control over financial reporting as of
December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated
February 28, 2011, expressed an unqualified opinion on the effectiveness of the Companys internal
control over financial reporting.
/s/ BKD, llp
Denver, Colorado
February 28, 2011
February 28, 2011
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Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors and Stockholders
Glacier Bancorp, Inc.
Kalispell, Montana
Glacier Bancorp, Inc.
Kalispell, Montana
We have audited Glacier Bancorp, Inc.s internal control over financial reporting as of December
31, 2010, based on criteria established in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys 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 Report of Management. Our responsibility is to express an opinion on the Companys
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys 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 generally accepted accounting principles in the United
States of America. Because managements assessment and our audit were conducted to meet the
reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act
(FDICIA), our examination of Glacier Bancorp, Inc.s internal control over financial reporting
included controls over the preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America and with the instructions to the
Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C). A companys 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 companys assets
that could have a material effect on the financial statements.
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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.
In our opinion, Glacier Bancorp, Inc. maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2010, based on criteria established in Internal
Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated financial statements of Glacier Bancorp, Inc. and our
report dated February 28, 2011, expressed an unqualified opinion thereon.
/s/ BKD, llp
Denver, Colorado
February 28, 2011
February 28, 2011
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Glacier Bancorp, Inc.
Consolidated Statements of Financial Condition
Consolidated Statements of Financial Condition
December 31, | ||||||||
(Dollars in thousands, except per share data) | 2010 | 2009 | ||||||
Assets |
||||||||
Cash on hand and in banks |
$ | 71,465 | 120,731 | |||||
Federal funds sold |
| 87,155 | ||||||
Interest bearing cash deposits |
33,394 | 2,689 | ||||||
Cash and cash equivalents |
104,859 | 210,575 | ||||||
Investment securities, available-for-sale |
2,461,119 | 1,506,394 | ||||||
Loans held for sale |
76,213 | 66,330 | ||||||
Loans receivable |
3,749,289 | 4,063,915 | ||||||
Allowance for loan and lease losses |
(137,107 | ) | (142,927 | ) | ||||
Loans receivable, net |
3,612,182 | 3,920,988 | ||||||
Premises and equipment, net |
152,492 | 140,921 | ||||||
Other real estate owned |
73,485 | 57,320 | ||||||
Accrued interest receivable |
30,246 | 29,729 | ||||||
Deferred tax asset |
40,284 | 41,082 | ||||||
Core deposit intangible, net |
10,757 | 13,937 | ||||||
Goodwill |
146,259 | 146,259 | ||||||
Other assets |
51,391 | 58,260 | ||||||
Total assets |
$ | 6,759,287 | 6,191,795 | |||||
Liabilities |
||||||||
Non-interest bearing deposits |
$ | 855,829 | 810,550 | |||||
Interest bearing deposits |
3,666,073 | 3,289,602 | ||||||
Federal Home Loan Bank advances |
965,141 | 790,367 | ||||||
Securities sold under agreements to repurchase |
249,403 | 212,506 | ||||||
Federal Reserve Bank discount window |
| 225,000 | ||||||
Other borrowed funds |
20,005 | 13,745 | ||||||
Accrued interest payable |
7,245 | 7,928 | ||||||
Subordinated debentures |
125,132 | 124,988 | ||||||
Other liabilities |
32,255 | 31,219 | ||||||
Total liabilities |
5,921,083 | 5,505,905 | ||||||
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 |
719 | 616 | ||||||
Paid-in capital |
643,894 | 497,493 | ||||||
Retained earnings substantially restricted |
193,063 | 188,129 | ||||||
Accumulated other comprehensive income (loss) |
528 | (348 | ) | |||||
Total stockholders equity |
838,204 | 685,890 | ||||||
Total liabilities and stockholders equity |
$ | 6,759,287 | 6,191,795 | |||||
Number of common stock shares issued and outstanding |
71,915,073 | 61,619,803 | ||||||
See accompanying notes to consolidated financial statements. |
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Glacier Bancorp, Inc.
Consolidated Statements of Operations
Consolidated Statements of Operations
Years ended December 31 | ||||||||||||
(Dollars in thousands, except per share data) | 2010 | 2009 | 2008 | |||||||||
Interest Income |
||||||||||||
Residential real estate loans |
$ | 45,401 | 54,498 | 51,166 | ||||||||
Commercial loans |
143,861 | 151,580 | 165,119 | |||||||||
Consumer and other loans |
42,130 | 44,844 | 47,725 | |||||||||
Investment securities |
57,010 | 51,572 | 38,975 | |||||||||
Total interest income |
288,402 | 302,494 | 302,985 | |||||||||
Interest Expense |
||||||||||||
Deposits |
35,598 | 38,429 | 55,012 | |||||||||
Federal Home Loan Bank advances |
9,523 | 7,952 | 15,355 | |||||||||
Securities sold under agreements to repurchase |
1,607 | 2,007 | 3,823 | |||||||||
Subordinated debentures |
6,622 | 6,818 | 7,430 | |||||||||
Other borrowed funds |
284 | 1,961 | 8,752 | |||||||||
Total interest expense |
53,634 | 57,167 | 90,372 | |||||||||
Net Interest Income |
234,768 | 245,327 | 212,613 | |||||||||
Provision for loan losses |
84,693 | 124,618 | 28,480 | |||||||||
Net interest income after provision for loan losses |
150,075 | 120,709 | 184,133 | |||||||||
Non-Interest Income |
||||||||||||
Service charges and other fees |
43,040 | 40,465 | 41,550 | |||||||||
Miscellaneous loan fees and charges |
4,906 | 5,406 | 5,956 | |||||||||
Gain on sale of loans |
27,233 | 26,923 | 14,849 | |||||||||
Gain (loss) on investments |
4,822 | 5,995 | (7,345 | ) | ||||||||
Other income |
7,545 | 7,685 | 6,024 | |||||||||
Total non-interest income |
87,546 | 86,474 | 61,034 | |||||||||
Non-Interest Expense |
||||||||||||
Compensation, employee benefits and related expense |
87,728 | 84,965 | 82,027 | |||||||||
Occupancy and equipment expense |
24,261 | 23,471 | 21,674 | |||||||||
Advertising and promotions |
6,831 | 6,477 | 6,989 | |||||||||
Outsourced data processing expense |
3,057 | 3,031 | 2,508 | |||||||||
Core deposit intangibles amortization |
3,180 | 3,116 | 3,051 | |||||||||
Other real estate owned expense |
22,193 | 9,092 | 1,176 | |||||||||
Federal Deposit Insurance Corporation premiums |
9,121 | 8,639 | 1,377 | |||||||||
Other expense |
31,577 | 30,027 | 27,107 | |||||||||
Total non-interest expense |
187,948 | 168,818 | 145,909 | |||||||||
Earnings Before Income Taxes |
49,673 | 38,365 | 99,258 | |||||||||
Federal and state income tax expense |
7,343 | 3,991 | 33,601 | |||||||||
Net Earnings |
$ | 42,330 | 34,374 | 65,657 | ||||||||
Basic earnings per share |
$ | 0.61 | 0.56 | 1.20 | ||||||||
Diluted earnings per share |
$ | 0.61 | 0.56 | 1.19 |
See accompanying notes to consolidated financial statements.
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Glacier Bancorp, Inc.
Consolidated Statements of Stockholders Equity
and Comprehensive Income
Years ended December 31, 2010, 2009 and 2008
Consolidated Statements of Stockholders Equity
and Comprehensive Income
Years ended December 31, 2010, 2009 and 2008
Retained | Accumulated | Total | ||||||||||||||||||||||
Earnings | Other Comp- | Stock- | ||||||||||||||||||||||
Common Stock | Paid-in | Substantially | rehensive | holders' | ||||||||||||||||||||
(Dollars in thousands, except per share data) | Shares | Amount | Capital | Restricted | Income (Loss) | Equity | ||||||||||||||||||
Balance at December 31, 2007 |
53,646,480 | $ | 536 | 374,728 | 150,195 | 3,117 | 528,576 | |||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||
Net earnings |
| | | 65,657 | | 65,657 | ||||||||||||||||||
Unrealized gain on securities, net of
reclassification adjustment and taxes |
| | | | (4,360 | ) | (4,360 | ) | ||||||||||||||||
Total comprehensive income |
61,297 | |||||||||||||||||||||||
Cash dividends declared ($0.52 per share) |
| | | (29,079 | ) | | (29,079 | ) | ||||||||||||||||
Stock options exercised |
719,858 | 7 | 9,789 | | | 9,796 | ||||||||||||||||||
Stock issued in connection with acquisition |
639,935 | 7 | 9,280 | | | 9,287 | ||||||||||||||||||
Public offering of stock issued |
6,325,000 | 63 | 93,890 | | | 93,953 | ||||||||||||||||||
Cumulative effect of a change in accounting principle |
| | | (997 | ) | | (997 | ) | ||||||||||||||||
Stock based compensation and tax benefit |
| | 4,107 | | | 4,107 | ||||||||||||||||||
Balance at December 31, 2008 |
61,331,273 | $ | 613 | 491,794 | 185,776 | (1,243 | ) | 676,940 | ||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||
Net earnings |
| | | 34,374 | | 34,374 | ||||||||||||||||||
Unrealized gain on securities, net of
reclassification adjustment and taxes |
| | | | 895 | 895 | ||||||||||||||||||
Total comprehensive income |
35,269 | |||||||||||||||||||||||
Cash dividends declared ($0.52 per share) |
| | | (32,021 | ) | | (32,021 | ) | ||||||||||||||||
Stock options exercised |
188,535 | 2 | 2,552 | | | 2,554 | ||||||||||||||||||
Stock issued in connection with acquisition |
99,995 | 1 | 1,419 | | | 1,420 | ||||||||||||||||||
Stock based compensation and tax benefit |
| | 1,728 | | | 1,728 | ||||||||||||||||||
Balance at December 31, 2009 |
61,619,803 | $ | 616 | 497,493 | 188,129 | (348 | ) | 685,890 | ||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||
Net earnings |
| | | 42,330 | | 42,330 | ||||||||||||||||||
Unrealized gain on securities, net of
reclassification adjustment and taxes |
| | | | 876 | 876 | ||||||||||||||||||
Total comprehensive income |
43,206 | |||||||||||||||||||||||
Cash dividends declared ($0.52 per share) |
| | | (37,396 | ) | | (37,396 | ) | ||||||||||||||||
Stock options exercised |
3,805 | | 58 | | | 58 | ||||||||||||||||||
Public offering of stock issued |
10,291,465 | 103 | 145,493 | | | 145,596 | ||||||||||||||||||
Stock based compensation and tax benefit |
| | 850 | | | 850 | ||||||||||||||||||
Balance at December 31, 2010 |
71,915,073 | $ | 719 | 643,894 | 193,063 | 528 | 838,204 | |||||||||||||||||
See accompanying notes to consolidated financial statements.
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Glacier Bancorp, Inc.
Consolidated Statements of Cash Flows
Consolidated Statements of Cash Flows
Years ended December 31 | ||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
Operating Activities |
||||||||||||
Net earnings |
$ | 42,330 | 34,374 | 65,657 | ||||||||
Adjustments
to reconcile net earnings to net cash provided by (used in) operating activities: |
||||||||||||
Mortgage loans held for sale originated or acquired |
(1,086,089 | ) | (1,239,862 | ) | (675,280 | ) | ||||||
Proceeds from sales of mortgage loans held for sale |
1,129,592 | 1,255,432 | 675,276 | |||||||||
Provision for loan losses |
84,693 | 124,618 | 28,480 | |||||||||
Depreciation of premises and equipment |
10,808 | 10,450 | 9,814 | |||||||||
Amortization of core deposit intangible |
3,180 | 3,116 | 3,051 | |||||||||
(Gain) loss on investments |
(4,822 | ) | (5,995 | ) | 7,345 | |||||||
Gain on sale of loans |
(27,233 | ) | (26,923 | ) | (14,849 | ) | ||||||
Loss on other real estate owned and writedown |
15,937 | 5,676 | 149 | |||||||||
Bargain purchase gain |
| (3,482 | ) | | ||||||||
Amortization of investment securities premiums and discounts, net |
17,782 | (73 | ) | 1,400 | ||||||||
Federal Home Loan Bank stock dividends |
(23 | ) | (16 | ) | | |||||||
Deferred tax expense (benefit) |
138 | (29,755 | ) | (11,032 | ) | |||||||
Stock compensation expense, net of tax benefits |
932 | 1,863 | 1,686 | |||||||||
Excess deficiencies (benefits) related to the exercise of stock options |
4 | (75 | ) | (1,325 | ) | |||||||
Net (increase) decrease in accrued interest receivable |
(517 | ) | 1,312 | (2,135 | ) | |||||||
Net decrease in accrued interest payable |
(683 | ) | (2,241 | ) | (3,656 | ) | ||||||
Net decrease (increase) in other assets |
6,878 | (29,895 | ) | 2,117 | ||||||||
Net increase (decrease) in other liabilities |
1,036 | (1,787 | ) | 517 | ||||||||
Net cash provided by operating activities |
193,943 | 96,737 | 87,215 | |||||||||
Investing Activities |
||||||||||||
Proceeds
from sales, maturities and prepayments of investments available-for-sale |
700,182 | 310,809 | 280,051 | |||||||||
Purchases of investments available-for-sale |
(1,664,573 | ) | (768,045 | ) | (584,058 | ) | ||||||
Principal collected on commercial and consumer loans |
771,255 | 1,002,856 | 1,088,871 | |||||||||
Commercial and consumer loans originated or acquired |
(709,317 | ) | (1,006,751 | ) | (1,420,609 | ) | ||||||
Principal collections on real estate loans |
213,572 | 237,883 | 305,353 | |||||||||
Real estate loans originated or acquired |
(139,905 | ) | (184,354 | ) | (357,951 | ) | ||||||
Proceeds from sale of other real estate owned |
30,529 | 14,763 | 4,294 | |||||||||
Net purchase of Federal Home Loan Bank and Federal Reserve Bank stock |
(1,829 | ) | (701 | ) | (640 | ) | ||||||
Net cash received (paid) for acquisition of banks |
| 41,716 | (7,133 | ) | ||||||||
Net addition of premises and equipment and other real estate owned |
(22,652 | ) | (11,859 | ) | (15,336 | ) | ||||||
Net cash used in investment activities |
(822,738 | ) | (363,683 | ) | (707,158 | ) | ||||||
Financing Activities |
||||||||||||
Net increase (decrease) in deposits |
421,750 | 601,062 | (40,936 | ) | ||||||||
Net increase (decrease) in Federal Home Loan Bank advances |
174,774 | 451,910 | (209,829 | ) | ||||||||
Net increase in securities sold under repurchase agreements |
36,897 | 8,251 | 10,322 | |||||||||
Net (decrease) increase in Federal Reserve Bank discount window |
(225,000 | ) | (689,000 | ) | 914,000 | |||||||
Net increase (decrease) in other borrowed funds |
6,404 | (565 | ) | (221,963 | ) | |||||||
Cash dividends paid |
(37,396 | ) | (32,021 | ) | (29,079 | ) | ||||||
Excess (deficiencies) benefits related to the exercise of stock options |
(4 | ) | 75 | 1,325 | ||||||||
Proceeds from exercise of stock options and other stock issued |
145,654 | 2,554 | 103,749 | |||||||||
Net cash provided by financing activities |
523,079 | 342,266 | 527,589 | |||||||||
Net (decrease) increase in cash and cash equivalents |
(105,716 | ) | 75,320 | (92,354 | ) | |||||||
Cash and cash equivalents at beginning of period |
210,575 | 135,255 | 227,609 | |||||||||
Cash and cash equivalents at end of period |
$ | 104,859 | 210,575 | 135,255 | ||||||||
Supplemental Disclosure of Cash Flow Information |
||||||||||||
Cash paid during the period for interest |
$ | 54,318 | 59,408 | 94,028 | ||||||||
Cash paid during the period for income taxes |
9,371 | 36,778 | 43,114 | |||||||||
Sale and refinancing of other real estate owned |
10,215 | 8,150 | 2,909 | |||||||||
Other real estate acquired in settlement of loans |
72,572 | 71,967 | 16,661 |
The following schedule summarizes the Companys acquisitions in 2009 and 2008:
First National | Bank of the | |||||||
Bank & Trust | San Juans | |||||||
Date acquired | Oct. 2, 2009 | Dec. 1, 2008 | ||||||
Fair Value of assets acquired |
$ | 272,280 | $ | 157,648 | ||||
Cash paid for the capital stock |
621 | 7,133 | ||||||
Capital stock issued |
9,995 | 9,287 | ||||||
Liabilities assumed |
266,758 | 139,016 |
See accompanying notes to consolidated financial statements.
71
Table of Contents
1. Summary of Significant Accounting Policies
(a) General
Glacier Bancorp, Inc. (the Company), headquartered in Kalispell, Montana, is a Montana
corporation incorporated in 2004 as a successor corporation to the Delaware corporation
incorporated in 1990. The Company is a regional multi-bank holding company that provides a full
range of banking services to individual and corporate customers in Montana, Idaho, Wyoming,
Colorado, Utah and Washington through its bank subsidiaries (collectively referred to hereafter as
the Banks). The bank subsidiaries are subject to competition from other financial service
providers. The bank subsidiaries are also subject to the regulations of certain government
agencies and undergo periodic examinations by those regulatory authorities.
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America 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 revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change include the
determination of the allowance for loan and lease losses (ALLL or allowance) and the valuations
related to investments, business combinations and real estate acquired in connection with
foreclosures or in satisfaction of loans. In connection with the determination of the ALLL and
other real estate valuation estimates, management obtains independent appraisals for significant
items. Estimates relating to investments are obtained from independent parties. Estimates
relating to business combinations are determined based on internal calculations using significant
independent party inputs and independent party valuations.
(b) Principles of Consolidation
As of December 31, 2010, the Company is the parent holding company (Parent) for eleven
independent wholly-owned community bank subsidiaries: Glacier Bank (Glacier), First Security Bank
of Missoula (First Security), Western Security Bank (Western), Big Sky Western Bank (Big
Sky), Valley Bank of Helena (Valley), and First Bank of Montana (First Bank-MT), all located
in Montana, Mountain West Bank (Mountain West) and Citizens Community Bank (Citizens) located
in Idaho, 1st Bank (1st Bank) and First National Bank & Trust (First
National) located in Wyoming, and Bank of the San Juans (San Juans) located in Colorado. All
significant inter-company transactions have been eliminated in consolidation.
In April 2010, the Company formed a wholly-owned subsidiary, GBCI Other Real Estate (GORE), to
isolate certain bank foreclosed properties for legal protection and administrative purposes.
During the year, foreclosed properties were sold to GORE from bank subsidiaries at fair market
value and properties remaining are currently held for sale.
In addition, the Company owns seven trust subsidiaries, Glacier Capital Trust II (Glacier Trust
II), Glacier Capital Trust III (Glacier Trust III), Glacier Capital Trust IV (Glacier Trust
IV), Citizens (ID) Statutory Trust I (Citizens Trust I), Bank of the San Juans Bancorporation
Trust I (San Juans Trust I), First Company Statutory Trust 2001 (First Co Trust 01) and First
Company Statutory Trust 2003 (First Co Trust 03) for the purpose of issuing trust preferred
securities and, in accordance with Financial Accounting Standards Board (FASB) Accounting
Standards Codification (ASC) Topic 810, Consolidation, the trust subsidiaries are not
consolidated into the Companys financial statements.
On October 2, 2009, First Company and its subsidiary, First National, was acquired by the Company.
First National became an independent wholly-owned community bank subsidiary of the Company and the
financial condition and results of operations are included from the acquisition date.
On February 1, 2009, First National Bank of Morgan (Morgan) merged into 1st Bank
resulting in operations being conducted under the 1st Bank charter. Prior period
activity of Morgan has been combined and included in 1st Banks historical results. The
merger was accounted for as a combination of two wholly-owned subsidiaries without acquisition
accounting and prior period activity of the merged banks has been combined and included in the
acquiring bank subsidiaries historical results.
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Table of Contents
1. Summary of Significant Accounting Policies . . . continued
(c) Variable Interest Entities
FASB ASC Topic 810, Consolidation, states that a variable interest entity (VIE) exists when
either the entitys total equity at risk is not sufficient to permit the entity to finance its
activities without additional subordinated financial support or the equity investors as a group
lack any of the following three characteristics: the power through voting rights or similar rights
to direct the activities of an entity that most significantly impact the entitys economic
performance, the obligation to absorb the expected losses of the entity, the right to receive the
expected residual returns of the entity. A variable interest is a contractual ownership or other
interest that changes with changes in the fair value of the VIEs net assets exclusive of variable
interests. Under the guidance, the Company is deemed to be the primary beneficiary and required to
consolidate a VIE if it has a variable interest in the VIE that provides it with a controlling
financial interest. The determination of whether a controlling financial interest exists is based
on whether a single party has both the power to direct the VIEs significant activities and has an
obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could
potentially be significant to the VIE. The guidance requires continual reconsideration of
conclusions reached regarding which variable interest holder is a VIEs primary beneficiary.
The Company has equity investments in Certified Development Entities (CDE) which have received
allocations of new markets tax credits (NMTC). The Company also has equity investments in
low-income housing tax credit (LIHTC) partnerships. The CDEs and the LIHTC partnerships are
VIEs. The underlying activities of the VIEs are community development projects designed primarily
to promote community welfare, such as economic rehabilitation and development of low-income areas
by providing housing, services, or jobs for residents. The maximum exposure to loss in the VIEs is
the amount of equity invested or 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) and LIHTC
partnership investments and determined that the Company is the primary beneficiary of such VIEs and
has consolidated the VIEs into the bank subsidiary which holds the direct investment in the VIE.
For the CDE (NMTC) investments, the creditors and other beneficial interest holders therein have no
recourse to the general credit of the bank subsidiaries. As of December 31, 2010, the Company had
investments in VIEs of $39,936,000 and $2,941,000 for the CDE (NMTC) and LIHTC partnerships,
respectively. The total assets consolidated into the bank subsidiaries approximated the
investments in the VIEs.
(d) Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, cash held as demand deposits at various banks and
regulatory agencies, interest bearing deposits, federal funds sold and liquid investments with
original maturities of three months or less.
(e) Investment Securities
Debt securities for which the Company has the positive intent and ability to hold to maturity are
classified as held-to-maturity and are stated at amortized cost. Debt and equity securities held
primarily for the purpose of selling in the near term are classified as trading securities and are
reported at fair market value, with unrealized gains and losses included in income. Debt and
equity securities not classified as held-to-maturity or trading are classified as
available-for-sale and are reported at fair value with unrealized gains and losses, net of income
taxes, shown as a separate component of stockholders equity. As of December 31, 2010 and 2009,
the Company only has available-for-sale securities.
Premiums and discounts on investment securities are amortized or accreted into income using a
method that approximates the level-yield interest method. The cost of any investment, if sold,
is determined by specific identification. If impairment of securities 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.
The Company holds stock in the Federal Home Loan Bank (FHLB) and the Federal Reserve Bank
(FRB). FHLB stock and FRB stock is restricted because such stock may only be sold to the FHLB or
FRB at its par value. Due to restrictive terms, and the lack of a readily determinable market
value, FHLB and FRB stocks are carried at cost.
For additional information relating to investment securities, see Note 3.
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Table of Contents
1. Summary of Significant Accounting Policies . . . continued
(f) Loans Held for Sale
Mortgage and commercial loans originated and intended for sale in the secondary market are carried
at the lower of cost or estimated fair value in the aggregate. Net unrealized losses are
recognized by charges to non-interest income. A sale is recognized when the Company surrenders
control of the loan and consideration, other than beneficial interests in the loan, is received in
exchange. A gain is recognized in non-interest income to the extent the selling price exceeds the
carrying value.
(g) 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. Interest income is reported on the interest method and
includes discount accretion and premium amortization on acquired loans and net loan fees on
originated loans which are amortized over the expected life of loans using a method that
approximates the effective interest method. The Companys loan portfolio segments include real
estate, commercial, and consumer loans. The Companys portfolio classes, a further disaggregation
of segments, include residential real estate loans (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 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 non-accrual, interest accruals are resumed on such loans only when they are brought fully
current with respect to interest and principal and when, in the judgment of management, the loans
are estimated to be fully collectible as to both principal and interest.
The Company 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 troubled debt restructurings, 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. |
The Company considers its 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 90 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 (TDR) loans).
A restructured loan is considered a TDR if the creditor, for economic or legal reasons related to
the debtors financial difficulties, grants a concession to the debtor that it would not otherwise
consider. The Companys troubled debt restructuring loans are included in the impaired loans
amount of which the majority are designated as nonaccrual. The Company made the following types of
loan modifications, some of which were considered 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. |
For additional information relating to loans, see Note 4.
74
Table of Contents
1. Summary of Significant Accounting Policies . . . continued
(h) Allowance for Loan and Lease Losses
Based upon managements analysis of the Companys loan and lease portfolio, the balance of the ALLL
is an estimate of probable credit losses known and inherent within each bank subsidiarys loan and
lease 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 managements judgments about all known
relevant internal and external environmental factors that affect loan losses. The balance of the
ALLL is highly dependent upon managements evaluations of borrowers current and prospective
performance, appraisals and other variables affecting the quality of the loan and lease portfolio.
Individually significant loans and major lending areas are reviewed periodically to determine
potential problems at an early date. Changes in managements estimates and assumptions are
reasonably possible and may have a material impact upon the Companys consolidated financial
statements, results of operations or capital.
The ALLL consists of a specific allocation component and a general allocation component. The
specific component relates to loans that are determined to be impaired. The Company measures
impairment on a loan-by-loan basis based on the present value of expected future cash flows
discounted at the loans effective interest rate, except when it is determined that repayment of
the loan is expected to be provided solely by the underlying collateral. 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 Companys impaired loans include TDR loans which are
individually assessed in the specific allocation component of the ALLL by portfolio class.
The general allocation component relates to probable credit losses inherent in the balance of the
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 each of the banks judgment and experience. The changes in trends and conditions of
certain items include the following:
| Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses; | ||
| Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments; | ||
| Changes in the nature and volume of the portfolio and in the terms of loans; | ||
| Changes in experience, ability, and depth of lending management and other relevant staff; | ||
| Changes in the volume and severity of past due and nonaccrual loans; | ||
| Changes in the quality of the Companys 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; | ||
| The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the Companys existing portfolio. |
The ALLL is increased by provisions for loan losses which are charged to expense. The portions of
loan balances determined by management to be uncollectible are charged off as a reduction of the
ALLL. Recoveries of amounts previously charged off are credited as an increase to the ALLL. The
Companys 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 until
such time as it is sold.
75
Table of Contents
1. Summary of Significant Accounting Policies . . . continued
(i) Temporary versus Other-Than-Temporary Impairment
The Company views the determination of whether an investment security is temporarily or
other-than-temporarily impaired as a critical accounting policy, as the estimate is susceptible to
significant change from period to period because it requires management to make significant
judgments, assumptions and estimates in the preparation of its consolidated financial statements.
The Company assesses individual securities in its investment securities portfolio for impairment at
least on a quarterly basis, and more frequently when economic or market conditions warrant. An
investment is impaired if the fair value of the security is less than its carrying value at the
financial statement date. If impairment is determined to be other-than-temporary, an impairment
loss is recognized by reducing the amortized cost for the credit loss portion of the impairment
with a corresponding charge to earnings for a like amount.
In evaluating impaired securities for other-than-temporary impairment losses, management considers,
1) the severity and duration of the impairment, 2) the credit ratings of the security, 3) the
overall deal structure, including the Companys 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. The Company also considers its intent and ability to retain the investment
security for a period of time sufficient to allow for anticipated recovery in fair value. In so
doing, the Company considers 1) contractual constraints, liquidity and capital needs of the
Company, and 2) managements approach to managing the investment portfolio including intent, if
any, to dispose of impaired investment securities in periods subsequent to the impairment analysis
date.
For additional information relating to whether an investment security is temporarily or
other-than-temporarily impaired, see Note 3.
(j) Premises and Equipment
Premises and equipment are accounted for at cost less depreciation. Depreciation is computed on a
straight-line method over the estimated useful lives or the term of the related lease. The
estimated useful life for office buildings is 15 - 40 years and the estimated useful life for
furniture, fixtures, and equipment is 3 - 10 years. Interest is capitalized for any significant
building projects. For additional information relating to premises and equipment, see Note 5.
(k) Other Real Estate Owned
Property acquired by foreclosure or deed-in-lieu of foreclosure is carried at the lower of fair
value at acquisition date or current estimated fair value, less selling costs. 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. Costs, excluding interest, relating to the improvement of property are capitalized, whereas
those relating to holding the property are charged to expense. If the fair value of the asset,
less selling costs, is less than the cost of the property, a loss is recognized in other expenses
and the assets carrying value is reduced. Gain or loss on disposition of other real estate owned
is recorded in non-interest income or non-interest expense.
(l) Business Combinations and Intangible Assets
Acquisitions are accounted for as prescribed by FASB ASC Topic 805, Business Combinations.
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 are amortized using an accelerated method based on
an estimated runoff of the related deposits, not exceeding 10 years. The useful life of the core
deposit intangible is reevaluated on an annual basis, with any changes in estimated useful life
accounted for prospectively over the revised remaining life. For additional information relating to
core deposit intangibles, see Note 6.
As required on an annual basis, the Company tests goodwill and other intangible assets for
impairment at the subsidiary level annually during the third quarter. In addition, goodwill and
other intangible assets of a subsidiary are 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. For additional information relating to goodwill, see Note 6.
76
Table of Contents
1. Summary of Significant Accounting Policies . . . continued
(m) Income Taxes
Deferred tax assets and liabilities are recognized for estimated future 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 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 50 percent. The
recognition threshold considers the facts, circumstances, and information available at the
reporting date and is subject to the Companys 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 13.
(n) Advertising and Promotion
Advertising and promotion costs are recognized in the period incurred.
(o) Stock-based Compensation
Compensation cost related to the share-based payment transactions is recognized in the financial
statements over the requisite service period, which is the vesting period. Compensation cost is
measured using the fair value of an award on the grant date by using the Black Scholes
option-pricing model. For additional information relating to stock-based compensation, see Note
16.
(p) 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 to reduce the carrying value of the asset to fair value. At
December 31, 2010 and 2009, no assets were considered impaired.
(q) Earnings Per Share
Basic earnings per common share is computed by dividing net earnings by the weighted average number
of shares of common stock outstanding during the period presented. Diluted earnings per share is
computed by including the net increase in shares as if dilutive outstanding stock options were
exercised, using the treasury stock method. For additional information relating earnings per
share, see Note 14.
(r) 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 20.
(s) Comprehensive Income
Comprehensive income includes net income, as well as other changes in stockholders equity that
result from transactions and economic events other than those with stockholders. The Companys
only element of other comprehensive income is unrealized gains and losses, net of tax expense
(benefit), on available-for-sale securities.
(t) Transfers between Fair Value Hierarchy Levels
Transfers in and out of Level 1 (quoted market prices), Level 2 (other significant observable
inputs) and Level 3 (significant unobservable inputs) are recognized on the actual transfer date.
(u) Reclassifications
Certain reclassifications have been made to the 2009 and 2008 financial statements to conform to
the 2010 presentation.
77
Table of Contents
2. Cash on Hand and in Banks
At December 31, 2010 and 2009, cash and cash equivalents primarily consisted of federal funds
sold, cash on hand, and cash items in process. The bank subsidiaries are required to maintain an
average reserve balance with either the Federal Reserve or in the form of cash on hand. The
required reserve balance at December 31, 2010 was $10,630,000.
The financial institutions holding the Companys cash accounts are participating in the Federal
Deposit Insurance Corporations (FDIC) Transaction Account Guarantee Program. Under that
program, through December 31, 2010, all noninterest-bearing transaction accounts are fully
guaranteed by the FDIC for the entire amount in the account.
3. Investment Securities, Available-for-Sale
A comparison of the amortized cost and estimated fair value of the Companys investment
securities designated as available-for-sale is presented below.
Year ended December 31, 2010 | ||||||||||||||||||||
Weighted | Amortized | Gross Unrealized | Fair | |||||||||||||||||
(Dollars in thousands) | Yield | Cost | Gains | Losses | Value | |||||||||||||||
U.S. government and federal agency |
||||||||||||||||||||
Maturing within one year |
1.62 | % | $ | 207 | 4 | | 211 | |||||||||||||
U.S. government sponsored enterprises |
||||||||||||||||||||
Maturing within one year |
0.00 | % | | | | | ||||||||||||||
Maturing after one year through five years |
2.38 | % | 40,715 | 715 | | 41,430 | ||||||||||||||
Maturing after five years through ten years |
1.94 | % | 84 | | | 84 | ||||||||||||||
Maturing after ten years |
0.73 | % | 4 | | | 4 | ||||||||||||||
2.38 | % | 40,803 | 715 | | 41,518 | |||||||||||||||
State and local governments |
||||||||||||||||||||
Maturing within one year |
4.06 | % | 1,096 | 11 | (1 | ) | 1,106 | |||||||||||||
Maturing after one year through five years |
3.70 | % | 8,341 | 214 | (10 | ) | 8,545 | |||||||||||||
Maturing after five years through ten years |
3.73 | % | 18,675 | 379 | (56 | ) | 18,998 | |||||||||||||
Maturing after ten years |
4.91 | % | 639,364 | 5,281 | (15,873 | ) | 628,772 | |||||||||||||
4.86 | % | 667,476 | 5,885 | (15,940 | ) | 657,421 | ||||||||||||||
Collateralized debt obligations |
||||||||||||||||||||
Maturing after ten years |
8.03 | % | 11,178 | | (4,583 | ) | 6,595 | |||||||||||||
Residential mortgage-backed securities |
2.23 | % | 1,675,319 | 17,569 | (2,786 | ) | 1,690,102 | |||||||||||||
Total marketable securities |
3.00 | % | 2,394,983 | 24,173 | (23,309 | ) | 2,395,847 | |||||||||||||
Other investments |
||||||||||||||||||||
FHLB and FRB stock, at cost |
1.43 | % | 64,429 | | | 64,429 | ||||||||||||||
Other stock |
0.05 | % | 606 | 9 | (4 | ) | 611 | |||||||||||||
Certificates of deposit |
1.45 | % | 232 | | | 232 | ||||||||||||||
Total investment securities |
2.95 | % | $ | 2,460,250 | 24,182 | (23,313 | ) | 2,461,119 | ||||||||||||
78
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3. Investment Securities, Available-for-Sale . . . continued
Year ended December 31, 2009 | ||||||||||||||||||||
Weighted | Amortized | Gross Unrealized | Fair | |||||||||||||||||
(Dollars in thousands) | Yield | Cost | Gains | Losses | Value | |||||||||||||||
U.S. government and federal agency |
||||||||||||||||||||
Maturing within one year |
1.62 | % | $ | 210 | | (1 | ) | 209 | ||||||||||||
U.S. government sponsored enterprises |
||||||||||||||||||||
Maturing within one year |
0.00 | % | | | | | ||||||||||||||
Maturing after one year through five years |
3.21 | % | 74 | | | 74 | ||||||||||||||
Maturing after five years through ten years |
1.64 | % | 40 | | | 40 | ||||||||||||||
Maturing after ten years |
2.05 | % | 63 | | | 63 | ||||||||||||||
2.43 | % | 177 | | | 177 | |||||||||||||||
State and local governments |
||||||||||||||||||||
Maturing within one year |
2.48 | % | 2,040 | 6 | | 2,046 | ||||||||||||||
Maturing after one year through five years |
3.30 | % | 9,326 | 208 | (12 | ) | 9,522 | |||||||||||||
Maturing after five years through ten years |
3.84 | % | 27,125 | 786 | (168 | ) | 27,743 | |||||||||||||
Maturing after ten years |
4.92 | % | 434,165 | 10,140 | (2,640 | ) | 441,665 | |||||||||||||
4.82 | % | 472,656 | 11,140 | (2,820 | ) | 480,976 | ||||||||||||||
Collateralized debt obligations |
||||||||||||||||||||
Maturing after ten years |
2.48 | % | 14,688 | | (7,899 | ) | 6,789 | |||||||||||||
Residential mortgage-backed securities |
3.42 | % | 956,033 | 15,167 | (16,158 | ) | 955,042 | |||||||||||||
Total marketable securities |
3.89 | % | 1,443,764 | 26,307 | (26,878 | ) | 1,443,193 | |||||||||||||
Other investments |
||||||||||||||||||||
FHLB and FRB stock, at cost |
1.30 | % | 62,577 | | | 62,577 | ||||||||||||||
Other stock |
0.05 | % | 624 | | | 624 | ||||||||||||||
Total investment securities |
3.78 | % | $ | 1,506,965 | 26,307 | (26,878 | ) | 1,506,394 | ||||||||||||
The amortized cost of securities at December 31, 2008 was as follows:
December 31, | ||||
(Dollars in thousands) | 2008 | |||
U.S. government and federal agency |
$ | 213 | ||
U.S. government sponsored enterprises |
314 | |||
State and local governments |
419,018 | |||
Collateralized debt obligations |
15,226 | |||
Residential mortgage-backed securities |
495,961 | |||
FHLB and FRB stock |
60,945 | |||
Other stock |
465 | |||
$ | 992,142 | |||
Included in the residential mortgage-backed securities is $68,051,000 and $115,899,000 as of
December 31, 2010 and December 31, 2009, respectively, of non-guaranteed private whole loan
mortgage-backed securities of which none of the underlying collateral is considered subprime.
Maturities of securities do not reflect repricing opportunities present in adjustable rate
securities, nor do they reflect expected shorter maturities based upon early prepayment of
principal. Weighted yields are based on the constant yield method taking into account premium
amortization and discount accretion. Weighted yields on tax-exempt investment securities exclude
the tax effect.
79
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3. Investment Securities, Available-for-Sale...continued
Interest income from investment securities consists of the following:
Years ended December 31, | ||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
Taxable interest |
$ | 33,659 | 29,376 | 25,074 | ||||||||
Tax-exempt interest |
23,351 | 22,196 | 13,901 | |||||||||
Total interest income |
$ | 57,010 | 51,572 | 38,975 | ||||||||
The cost of any investment sold is determined by specific identification. Gain and loss on sale of
investments consists of the following:
Years ended December 31, | ||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
Gross proceeds |
$ | 142,925 | 85,224 | 97,002 | ||||||||
Less amortized cost |
(138,103 | ) | (79,229 | ) | (104,347 | ) | ||||||
Net gain (loss) on investments |
$ | 4,822 | 5,995 | (7,345 | ) | |||||||
Gross gain on sale of investments |
$ | 7,779 | 7,113 | 248 | ||||||||
Gross loss on sale of investments |
(2,957 | ) | (1,118 | ) | (7,593 | ) | ||||||
Net gain (loss) on investments |
$ | 4,822 | 5,995 | (7,345 | ) | |||||||
Included in the 2008 loss on investments is a $7,593,000 other-than-temporary impairment charge
with respect to its investments in Federal Home Loan Mortgage Corporation (Freddie Mac) preferred
stock and Federal National Mortgage Association (Fannie Mae) common stock. The Fannie Mae and
Freddie Mac stock was written down to a $0 value; however, the shares were still owned by the
Company at December 31, 2010.
At December 31, 2010 and 2009, the Company had investment securities with carrying values of
$879,330,000 and $1,114,749,000, respectively, pledged as collateral for FHLB advances, FRB
discount window borrowings, securities sold under agreements to repurchase, U.S. Treasury Tax and
Loan borrowings and deposits of several local government units.
The investments in the FHLB stock are required investments related to the Companys 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 12 FHLBs are
jointly and severally liable for repayment of each others debt.
Investments with an unrealized loss position at December 31, 2010:
Less than 12 months | 12 Months or More | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
(Dollars in thousands) | Value | Loss | Value | Loss | Value | Loss | ||||||||||||||||||
State and local governments |
$ | 365,164 | (14,680 | ) | 13,122 | (1,260 | ) | 378,286 | (15,940 | ) | ||||||||||||||
Collateralized debt obligations |
| | 6,595 | (4,583 | ) | 6,595 | (4,583 | ) | ||||||||||||||||
Residential mortgage-backed securities |
364,925 | (1,585 | ) | 19,304 | (1,201 | ) | 384,229 | (2,786 | ) | |||||||||||||||
Other investments other stock |
| | 7 | (4 | ) | 7 | (4 | ) | ||||||||||||||||
Total temporarily impaired securities |
$ | 730,089 | (16,265 | ) | 39,028 | (7,048 | ) | 769,117 | (23,313 | ) | ||||||||||||||
80
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3. Investment Securities, Available-for-Sale...continued
Investments with an unrealized loss position at December 31, 2009:
Less than 12 months | 12 Months or More | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
(Dollars in thousands) | Value | Loss | Value | Loss | Value | Loss | ||||||||||||||||||
U.S. government and federal agency |
$ | 208 | (1 | ) | | | 208 | (1 | ) | |||||||||||||||
State and local governments |
74,045 | (1,835 | ) | 18,094 | (985 | ) | 92,139 | (2,820 | ) | |||||||||||||||
Collateralized debt obligations |
6,789 | (7,899 | ) | | | 6,789 | (7,899 | ) | ||||||||||||||||
Residential mortgage-backed securities |
466,196 | (3,861 | ) | 39,780 | (12,297 | ) | 505,976 | (16,158 | ) | |||||||||||||||
Total temporarily impaired securities |
$ | 547,238 | (13,596 | ) | 57,874 | (13,282 | ) | 605,112 | (26,878 | ) | ||||||||||||||
The Company assesses individual securities in its investment securities portfolio for impairment at
least on a quarterly basis, and more frequently when economic or market conditions warrant. An
investment is impaired if the fair value of the security is less than its carrying value at the
financial statement date. If impairment is determined to be other-than-temporary, an impairment
loss is recognized by reducing the amortized cost for the credit loss portion of the impairment
with a corresponding charge to earnings of a like amount.
For fair value estimates provided by third party vendors, management also considered the models and
methodology for appropriate consideration of both observable and unobservable inputs, including
appropriately adjusted discount rates and credit spreads for securities with limited or inactive
markets, and whether the quoted prices reflect orderly transactions. For certain securities, the
Company obtained independent estimates of inputs, including cash flows, in supplement to third
party vendor provided information. The Company also reviewed financial statements of select
issuers, with follow up discussions with issuers management for clarification and verification of
information relevant to the Companys impairment analysis.
In evaluating securities for other-than-temporary impairment losses, management assesses whether
the Company intends to sell or if it is more likely-than-not that it will be required to sell
impaired securities. In so doing, management considers contractual constraints, liquidity,
capital, asset/liability management and securities portfolio objectives. With respect to its
impaired securities at December 31, 2010, management determined that it does not intend to
sell and that there is no expected requirement to sell any of its impaired securities.
Based on an analysis of its impaired securities as of December 31, 2010, the Company determined
that none of such securities had other-than-temporary impairment.
81
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4. Loans Receivable, Net
The following is a summary of the recorded investment in loans and ALLL for the years ended
December 31, 2010 and 2009 on a portfolio class basis:
December 31, 2010 | ||||||||||||||||||||||||
Residential | Commercial | Other | Home | Other | ||||||||||||||||||||
(Dollars in thousands) | Total | Real Estate | Real Estate | Commercial | Equity | Consumer | ||||||||||||||||||
Loans receivable |
||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 225,052 | 29,480 | 165,784 | 21,358 | 6,138 | 2,292 | |||||||||||||||||
Collectively evaluated for impairment |
3,524,237 | 603,397 | 1,630,719 | 633,230 | 476,999 | 179,892 | ||||||||||||||||||
Total loans receivable |
$ | 3,749,289 | 632,877 | 1,796,503 | 654,588 | 483,137 | 182,184 | |||||||||||||||||
Allowance for loan and lease losses |
||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 16,871 | 2,793 | 10,184 | 2,649 | 504 | 741 | |||||||||||||||||
Collectively evaluated for impairment |
120,236 | 18,164 | 65,963 | 17,283 | 12,830 | 5,996 | ||||||||||||||||||
Total ALLL |
$ | 137,107 | 20,957 | 76,147 | 19,932 | 13,334 | 6,737 | |||||||||||||||||
December 31, 2009 | ||||||||||||||||||||||||
Residential | Commercial | Other | Home | Other | ||||||||||||||||||||
(Dollars in thousands) | Total | Real Estate | Real Estate | Commercial | Equity | Consumer | ||||||||||||||||||
Loans receivable |
$ | 4,063,915 | 743,147 | 1,894,690 | 724,579 | 501,866 | 199,633 | |||||||||||||||||
Allowance for loan and lease losses |
$ | 142,927 | 13,496 | 66,791 | 39,558 | 13,419 | 9,663 |
Substantially all of the Companys loan receivables are with customers within the Companys
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
Companys market areas. The bank subsidiaries are subject to regulatory limits for the amount of
loans to any individual borrower and all bank subsidiaries are in compliance as of December 31,
2010. No borrower had outstanding loans or commitments exceeding 10 percent of the Companys
consolidated stockholders equity as of December 31, 2010.
Net deferred fees, premiums, and discounts are included in the loan receivable balances of
$6,001,000 and $10,460,000 at December 31, 2010 and 2009 respectively. At December 31,
2010, the Company had $2,449,135,000 in variable rate loans and $1,300,154,000 in fixed rate loans.
The weighted average interest rate on loans was 5.79 percent and 6.06 percent at December 31, 2010
and 2009, respectively. At December 31, 2010, 2009 and 2008, loans sold and serviced for others
were $173,446,000, $176,231,000, and $181,351,000, respectively. At December 31, 2010, the Company
had loans of $1,955,824,000 pledged as collateral for FHLB advances, FRB and U.S. Treasury Tax and
Loan borrowings. There were no significant purchases or sales of loans held-to-maturity during
2009 or 2010.
82
Table of Contents
4. Loans Receivable, Net . . . continued
The following is a summary of activity in the ALLL for the years ended December 31, 2010, 2009 and
2008:
Years ended December 31, | ||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
Balance at beginning of period |
$ | 142,927 | 76,739 | 54,413 | ||||||||
Acquisitions |
| | 2,625 | |||||||||
Net charge-offs |
(90,513 | ) | (58,430 | ) | (8,779 | ) | ||||||
Provision for loan losses |
84,693 | 124,618 | 28,480 | |||||||||
Balance at end of period |
$ | 137,107 | 142,927 | 76,739 | ||||||||
The following is a summary of the impaired loans by portfolio class of loans for the year
ended December 31, 2010:
December 31, 2010 | ||||||||||||||||||||||||
Residential | Commercial | Other | Home | Other | ||||||||||||||||||||
(Dollars in thousands) | Total | Real Estate | Real Estate | Commercial | Equity | Consumer | ||||||||||||||||||
Loans with a specific valuation allowance |
||||||||||||||||||||||||
Recorded balance |
$ | 65,170 | 12,473 | 44,338 | 5,898 | 732 | 1,729 | |||||||||||||||||
Unpaid principal balance |
73,195 | 12,970 | 50,614 | 6,934 | 945 | 1,732 | ||||||||||||||||||
Valuation allowance |
16,871 | 2,793 | 10,184 | 2,649 | 504 | 741 | ||||||||||||||||||
Average impaired loans |
71,192 | 10,599 | 51,627 | 5,773 | 1,514 | 1,679 | ||||||||||||||||||
Loans without a specific valuation allowance |
||||||||||||||||||||||||
Recorded balance |
$ | 159,882 | 17,007 | 121,446 | 15,460 | 5,406 | 563 | |||||||||||||||||
Unpaid principal balance |
186,280 | 20,399 | 142,141 | 16,909 | 6,204 | 627 | ||||||||||||||||||
Average impaired loans |
152,364 | 18,402 | 109,136 | 17,412 | 5,696 | 1,718 | ||||||||||||||||||
Totals |
||||||||||||||||||||||||
Recorded balance |
$ | 225,052 | 29,480 | 165,784 | 21,358 | 6,138 | 2,292 | |||||||||||||||||
Unpaid principal balance |
259,475 | 33,369 | 192,755 | 23,843 | 7,149 | 2,359 | ||||||||||||||||||
Valuation allowance |
16,871 | 2,793 | 10,184 | 2,649 | 504 | 741 | ||||||||||||||||||
Average impaired loans |
223,556 | 29,001 | 160,763 | 23,185 | 7,210 | 3,397 |
The following is a loan portfolio aging analysis as of December 31, 2010:
December 31, 2010 | ||||||||||||||||||||||||
Residential | Commercial | Other | Home | Other | ||||||||||||||||||||
(Dollars in thousands) | Total | Real Estate | Real Estate | Commercial | Equity | Consumer | ||||||||||||||||||
Accruing loans 30-59 days or more past due |
$ | 36,545 | 13,450 | 11,399 | 6,262 | 3,031 | 2,403 | |||||||||||||||||
Accruing loans 60-89 days or more past due |
8,952 | 1,494 | 4,424 | 1,053 | 1,642 | 339 | ||||||||||||||||||
Accruing loans 90 days or more past due |
4,531 | 506 | 731 | 2,320 | 910 | 64 | ||||||||||||||||||
Non-accrual loans |
192,505 | 23,095 | 142,334 | 18,802 | 5,431 | 2,843 | ||||||||||||||||||
Total past due and non-accrual loans |
242,533 | 38,545 | 158,888 | 28,437 | 11,014 | 5,649 | ||||||||||||||||||
Current loans receivable |
3,506,756 | 594,332 | 1,637,615 | 626,151 | 472,123 | 176,535 | ||||||||||||||||||
Total loans receivable |
$ | 3,749,289 | 632,877 | 1,796,503 | 654,588 | 483,137 | 182,184 | |||||||||||||||||
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Table of Contents
4. Loans Receivable, Net . . . continued
The following is a summary of the non-performing loans for the years ended December 31, 2010
and 2009:
December 31, | ||||||||
(Dollars in thousands) | 2010 | 2009 | ||||||
Impaired loans, without a valuation allowance |
$ | 159,882 | 141,613 | |||||
Impaired loans, with a valuation allowance |
65,170 | 77,129 | ||||||
Impaired loans, gross |
225,052 | 218,742 | ||||||
Valuation allowance |
(16,871 | ) | (19,760 | ) | ||||
Impaired loans, net |
$ | 208,181 | 198,982 | |||||
Average recorded investment in impaired loans |
$ | 223,556 | 145,230 | |||||
Non-accrual loans |
192,505 | 198,281 | ||||||
Accruing loans 90 days or more past due |
4,531 | 5,537 |
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 $10,987,000, $11,730,000, and
$4,434,000 for the years ended December 31, 2010, 2009, and 2008. Interest income recognized on
impaired loans for the years ended December 31, 2010, 2009, and 2008 was not significant.
As of December 31, 2010, the Company had TDR loans of $68,737,000 of which $41,953,000 was on
non-accrual status. There was $242,000 of additional outstanding commitments on the TDR loans
outstanding at December 31, 2010. The amount of charge-offs on TDR loans during 2010 was
$5,657,000.
The Company has entered into transactions with its executive officers, directors, significant
shareholders, and their affiliates. The aggregate amount of loans outstanding to such related
parties at December 31, 2010 and 2009 was $86,070,000 and $87,037,000, respectively. During 2010,
new loans to such related parties were $17,490,000 and repayments were $18,457,000. In
managements opinion, such loans were made in the ordinary course of business and were made on
substantially the same terms as those prevailing at the time for comparable transaction with other
persons.
The 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 Companys 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:
December 31, | ||||||||
(Dollars in thousands) | 2010 | 2009 | ||||||
Loans and loans in process |
$ | 347,055 | 457,754 | |||||
Unused consumer lines of credit |
279,668 | 286,621 | ||||||
Letters of credit |
25,250 | 28,691 | ||||||
$ | 651,973 | 773,066 | ||||||
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Table of Contents
5. Premises and Equipment, Net
Premises and equipment, net of accumulated depreciation, consist of the following at:
December 31, | ||||||||
(Dollars in thousands) | 2010 | 2009 | ||||||
Land |
$ | 24,933 | 23,315 | |||||
Office buildings and construction in progress |
134,486 | 119,420 | ||||||
Furniture, fixtures and equipment |
60,496 | 58,013 | ||||||
Leasehold improvements |
8,836 | 8,969 | ||||||
Accumulated depreciation |
(76,259 | ) | (68,796 | ) | ||||
$ | 152,492 | 140,921 | ||||||
Depreciation expense for the years ended December 31, 2010, 2009, and 2008 was $10,808,000,
$10,450,000, and $9,814,000, respectively. Interest expense capitalized for various construction
projects for the years ended December 31, 2010, 2009 and 2008 was $65,000, $33,000 and $71,000,
respectively.
6. Goodwill and Other Intangible Assets
The following table sets forth information regarding the Companys core deposit intangibles:
At or for the | ||||||||||||
Years ended December 31, | ||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
Gross carrying value |
$ | 31,847 | 31,847 | 27,807 | ||||||||
Accumulated amortization |
(21,090 | ) | (17,910 | ) | (14,794 | ) | ||||||
Net carrying value |
$ | 10,757 | 13,937 | 13,013 | ||||||||
Aggregate amortization expense |
$ | 3,180 | 3,116 | 3,051 | ||||||||
Weighted-average amortization period
(Period in years) |
9.1 | |||||||||||
Estimated amortization expense |
||||||||||||
For the year ended December 31, 2011 |
$ | 2,473 | ||||||||||
For the year ended December 31, 2012 |
2,111 | |||||||||||
For the year ended December 31, 2013 |
1,860 | |||||||||||
For the year ended December 31, 2014 |
1,611 | |||||||||||
For the year ended December 31, 2015 |
1,368 |
The following is a summary of activity in goodwill:
Years ended December 31, | ||||||||
(Dollars in thousands) | 2010 | 2009 | ||||||
Balance at beginning of period |
$ | 146,259 | 146,752 | |||||
Acquisition of San Juans |
| (493 | ) | |||||
Balance at end of period |
$ | 146,259 | 146,259 | |||||
85
Table of Contents
7. Deposits
Deposits consist of the following at:
December 31, | ||||||||||||||||
(Dollars in thousands) | 2010 | 2009 | ||||||||||||||
Demand accounts |
$ | 855,829 | 18.9 | % | 810,550 | 19.8 | % | |||||||||
NOW accounts |
771,961 | 17.1 | % | 743,936 | 18.1 | % | ||||||||||
Savings accounts |
361,124 | 8.0 | % | 324,235 | 7.9 | % | ||||||||||
Money market deposit accounts |
876,948 | 19.4 | % | 813,159 | 19.8 | % | ||||||||||
Certificate accounts |
1,079,138 | 23.9 | % | 1,057,513 | 25.8 | % | ||||||||||
Wholesale deposits |
576,902 | 12.7 | % | 350,759 | 8.6 | % | ||||||||||
Total interest bearing deposits |
3,666,073 | 81.1 | % | 3,289,602 | 80.2 | % | ||||||||||
Total deposits |
$ | 4,521,902 | 100.0 | % | 4,100,152 | 100.0 | % | |||||||||
Deposits with a balance of $100,000 and greater |
||||||||||||||||
Certificates of deposit |
$ | 911,854 | 729,146 | |||||||||||||
Demand deposits |
1,812,587 | 1,586,604 | ||||||||||||||
Total balances of $100,000 and greater |
$ | 2,724,441 | 2,315,750 | |||||||||||||
The scheduled maturities of certificates of deposit are as follows and include $397,530,000 of
wholesale deposits:
December 31, | ||||||||
(Dollars in thousands) | 2010 | 2009 | ||||||
Maturing within one year |
$ | 1,180,365 | 1,091,380 | |||||
Maturing after one year through two years |
170,836 | 141,277 | ||||||
Maturing after two years through three years |
74,408 | 47,284 | ||||||
Maturing after three years through four years |
17,787 | 11,063 | ||||||
Maturing after four years through five years |
33,068 | 16,592 | ||||||
Thereafter |
205 | 288 | ||||||
Total |
$ | 1,476,669 | 1,307,884 | |||||
Interest expense on deposits is summarized as follows:
Years ended December 31, | ||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
NOW accounts |
$ | 2,545 | 2,275 | 3,014 | ||||||||
Savings accounts |
725 | 947 | 1,865 | |||||||||
Money market deposit accounts |
6,975 | 8,436 | 17,234 | |||||||||
Certificate accounts |
21,016 | 24,719 | 32,899 | |||||||||
Wholesale deposits |
4,337 | 2,052 | | |||||||||
$ | 35,598 | 38,429 | 55,012 | |||||||||
The Company reclassified $4,298,000 and $2,894,000 of overdraft demand deposits to loans as of
December 31, 2010 and 2009, respectively. The Company has entered into deposit transactions with
its executive officers, directors, significant shareholders, and their affiliates. The aggregate
amount of deposits with such related parties at December 31, 2010, and 2009 was $53,388,000 and
$53,082,000, respectively.
86
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8. Borrowings
Advances from the FHLB are all fixed rate and consist of the following:
December 31, | ||||||||||||||||
(Dollars in thousands) | 2010 | 2009 | ||||||||||||||
Weighted | Weighted | |||||||||||||||
Amount | Rate | Amount | Rate | |||||||||||||
Maturing within one year |
$ | 761,064 | 0.32 | % | 586,057 | 0.25 | % | |||||||||
Maturing one year through two years |
82,000 | 4.19 | % | 207 | 4.41 | % | ||||||||||
Maturing two years through three years |
| 0.00 | % | 82,000 | 4.19 | % | ||||||||||
Maturing three years through four years |
| 0.00 | % | | 0.00 | % | ||||||||||
Maturing four years through five years |
75,000 | 3.48 | % | | 0.00 | % | ||||||||||
Thereafter |
47,077 | 3.09 | % | 122,103 | 3.33 | % | ||||||||||
Total |
$ | 965,141 | 1.03 | % | 790,367 | 1.14 | % | |||||||||
In addition to specifically pledged loans and investment securities, the FHLB advances are
collateralized by FHLB stock owned by the Company and a blanket assignment of the unpledged
qualifying loans and investments. The total amount of advances available as of December 31, 2010
was $137,845,000.
With respect to $202,000,000 of advances at December 31, 2010, the FHLB holds put options that will
be exercised on the quarterly measurement date, after the initial call date, if 3-month LIBOR is 8
percent or greater. The FHLB put options as of December 31, 2010 are summarized as
follows:
Interest | Earliest | |||||||||||
(Dollars in thousands) | Amount | Rate | Call | |||||||||
Maturing during years ending December 31, |
||||||||||||
2012 |
$ | 82,000 | 3.49% - 4.83 | % | 2011 | |||||||
2015 |
75,000 | 3.16% - 3.64 | % | 2011 | ||||||||
2016 |
45,000 | 2.93% - 3.05 | % | 2011 | ||||||||
$ | 202,000 | |||||||||||
The Company had short-term borrowings through the FRB of $0 and $225,000,000 as of December 31,
2010 and 2009, respectively. The borrowings are collateralized by loans and investments with an
available balance of $359,555,000 as of December 31, 2010.
The Companys remaining borrowings consist of U.S. Treasury Tax and Loan borrowings, capital lease
obligations, liens on other real estate owned, deferred gains from sales of small business
administration loans, and other debt obligations through consolidation of certain VIEs. The
Company had $161,760,000 in unsecured lines of credit with various institutions which are typically
renewed on an annual basis.
87
Table of Contents
9. Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase consist of the following at December 31, 2010:
Amortized | Fair | |||||||||||||||
Weighted | Cost of | Value of | ||||||||||||||
Repurchase | Average | Underlying | Underlying | |||||||||||||
(Dollars in thousands) | Amount | Fixed Rate | Assets | Assets | ||||||||||||
Overnight |
$ | 247,749 | 0.62 | % | $ | 247,712 | 255,271 | |||||||||
Term up to 30 days |
418 | 2.00 | % | 870 | 902 | |||||||||||
Term over 90 days |
1,236 | 1.75 | % | 2,570 | 2,665 | |||||||||||
$ | 249,403 | 0.63 | % | $ | 251,152 | 258,838 | ||||||||||
Securities sold under agreements to repurchase consist of the following at December 31, 2009:
Amortized | Fair | |||||||||||||||
Weighted | Cost of | Value of | ||||||||||||||
Repurchase | Average | Underlying | Underlying | |||||||||||||
(Dollars in thousands) | Amount | Fixed Rate | Assets | Assets | ||||||||||||
Overnight |
$ | 210,132 | 0.92 | % | $ | 210,449 | 206,450 | |||||||||
Term up to 30 days |
410 | 2.75 | % | 476 | 487 | |||||||||||
Term over 90 days |
1,964 | 2.34 | % | 2,284 | 2,339 | |||||||||||
$ | 212,506 | 0.94 | % | $ | 213,209 | 209,276 | ||||||||||
The securities, consisting of U.S. government sponsored enterprises issued or guaranteed
residential mortgage-backed securities, subject to agreements to repurchase are for the same
securities originally sold, and are held in a custody account by a third party.
88
Table of Contents
10. Subordinated Debentures
Trust preferred securities were issued by the Companys seven trust subsidiaries, the common
stock of which is wholly-owned by the Company, in conjunction with the Company issuing subordinated
debentures to the trust subsidiaries. The terms of the subordinated debentures are the same as the
terms of the trust preferred securities. The Company guaranteed the payment of distributions and
payments for redemption or liquidation of the trust preferred securities to the extent of funds
held by the trust subsidiaries. The obligations of the Company under the subordinated debentures
together with the guarantee and other back-up obligations, in the aggregate, constitute a full and
unconditional guarantee by the Company of the obligations of all trusts under the trust preferred
securities.
The trust preferred securities are subject to mandatory redemption upon repayment of the
subordinated debentures at their stated maturity date or the earlier redemption in an amount equal
to their liquidation amount plus accumulated and unpaid distributions to the date of redemption.
Interest distributions are payable quarterly. The Company may defer the payment of interest at any
time from time to time for a period not exceeding 20 consecutive quarters provided that the
deferral period does not extend past the stated maturity. During any such deferral period,
distributions on the trust preferred securities will also be deferred and the Companys ability to
pay dividends on its common shares will be restricted.
Subject to approval by the FRB, the trust preferred securities may be redeemed at par prior to
maturity at the Companys option on or after the redemption date. 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.
The terms of the subordinated debentures, arranged by maturity date, are reflected in the table
below. The amounts include fair value adjustments from acquisitions.
Rate at | ||||||||||||||||||||||||
December 31, | Fixed/ | Variable Rate | Maturity | Redemption | ||||||||||||||||||||
(Dollars in thousands) | Balance | 2010 | Variable | Structure 1 | Date | Date | ||||||||||||||||||
First Co Trust 01 |
$ | 2,829 | 3.587 | % | Variable | 3 mo LIBOR plus 3.30% | 07/31/31 | 07/31/11 | ||||||||||||||||
First Co Trust 03 |
2,092 | 3.553 | % | Variable | 3 mo LIBOR plus 3.25% | 03/26/33 | 03/26/08 | |||||||||||||||||
Glacier Capital Trust II |
46,393 | 3.039 | % | Variable | 3 mo LIBOR plus 2.75% | 04/07/34 | 04/07/09 | |||||||||||||||||
Citizens Capital Trust I |
5,155 | 2.952 | % | Variable | 3 mo LIBOR plus 2.65% | 06/17/34 | 06/17/09 | |||||||||||||||||
Glacier Capital Trust III |
36,083 | 6.078 | % | Fixed | 3 mo LIBOR plus 1.29% | 04/07/36 | 04/07/11 | |||||||||||||||||
Glacier Capital Trust IV |
30,928 | 7.235 | % | Fixed | 3 mo LIBOR plus 1.57% | 09/15/36 | 09/15/11 | |||||||||||||||||
San Juan Trust I |
1,652 | 6.681 | % | Fixed | 3 mo LIBOR plus 1.82% | 03/01/37 | 03/01/12 | |||||||||||||||||
$ | 125,132 | |||||||||||||||||||||||
1 | For fixed rate debentures, this will be the rate structure upon conversion to variable rate at redemption date. |
89
Table of Contents
11. Regulatory Capital
The FRB has adopted capital adequacy guidelines pursuant to which it assesses the adequacy of
capital in supervising a bank holding company. The following table illustrates the FRBs adequacy
guidelines and the Companys and bank subsidiaries compliance with those guidelines as of December
31, 2010.
Minimum Capital | Well Capitalized | |||||||||||||||||||||||
Actual | Requirement | Requirement | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
Tier 1 capital (to risk
weighted assets) |
||||||||||||||||||||||||
Consolidated |
811,618 | 18.24 | % | 177,973 | 4.00 | % | 266,959 | 6.00 | % | |||||||||||||||
Glacier |
162,190 | 16.61 | % | 39,060 | 4.00 | % | 58,590 | 6.00 | % | |||||||||||||||
Mountain West |
154,575 | 18.81 | % | 32,879 | 4.00 | % | 49,318 | 6.00 | % | |||||||||||||||
First Security |
104,291 | 15.35 | % | 27,174 | 4.00 | % | 40,761 | 6.00 | % | |||||||||||||||
Western |
63,735 | 15.30 | % | 16,658 | 4.00 | % | 24,987 | 6.00 | % | |||||||||||||||
1st Bank |
61,497 | 17.60 | % | 13,976 | 4.00 | % | 20,964 | 6.00 | % | |||||||||||||||
Valley |
30,048 | 13.82 | % | 8,695 | 4.00 | % | 13,042 | 6.00 | % | |||||||||||||||
Big Sky |
62,570 | 21.95 | % | 11,402 | 4.00 | % | 17,103 | 6.00 | % | |||||||||||||||
First National |
38,476 | 18.74 | % | 8,212 | 4.00 | % | 12,318 | 6.00 | % | |||||||||||||||
Citizens |
24,235 | 11.85 | % | 8,179 | 4.00 | % | 12,268 | 6.00 | % | |||||||||||||||
First Bank-MT |
19,497 | 13.93 | % | 5,599 | 4.00 | % | 8,399 | 6.00 | % | |||||||||||||||
San Juans |
18,681 | 11.76 | % | 6,356 | 4.00 | % | 9,533 | 6.00 | % | |||||||||||||||
Total capital (to risk
weighted assets) |
||||||||||||||||||||||||
Consolidated |
868,245 | 19.51 | % | 355,946 | 8.00 | % | 444,932 | 10.00 | % | |||||||||||||||
Glacier |
174,674 | 17.89 | % | 78,119 | 8.00 | % | 97,649 | 10.00 | % | |||||||||||||||
Mountain West |
165,156 | 20.09 | % | 65,757 | 8.00 | % | 82,197 | 10.00 | % | |||||||||||||||
First Security |
112,913 | 16.62 | % | 54,348 | 8.00 | % | 67,935 | 10.00 | % | |||||||||||||||
Western |
68,971 | 16.56 | % | 33,317 | 8.00 | % | 41,646 | 10.00 | % | |||||||||||||||
1st Bank |
65,940 | 18.87 | % | 27,952 | 8.00 | % | 34,940 | 10.00 | % | |||||||||||||||
Valley |
32,789 | 15.08 | % | 17,389 | 8.00 | % | 21,737 | 10.00 | % | |||||||||||||||
Big Sky |
66,212 | 23.23 | % | 22,804 | 8.00 | % | 28,505 | 10.00 | % | |||||||||||||||
First National |
41,015 | 19.98 | % | 16,424 | 8.00 | % | 20,530 | 10.00 | % | |||||||||||||||
Citizens |
26,827 | 13.12 | % | 16,357 | 8.00 | % | 20,447 | 10.00 | % | |||||||||||||||
First Bank-MT |
21,263 | 15.19 | % | 11,198 | 8.00 | % | 13,998 | 10.00 | % | |||||||||||||||
San Juans |
20,699 | 13.03 | % | 12,711 | 8.00 | % | 15,889 | 10.00 | % | |||||||||||||||
Leverage capital (to
average assets) |
||||||||||||||||||||||||
Consolidated |
811,618 | 12.71 | % | 255,456 | 4.00 | % | N/A | N/A | ||||||||||||||||
Glacier |
162,190 | 11.98 | % | 54,149 | 4.00 | % | 67,686 | 5.00 | % | |||||||||||||||
Mountain West |
154,575 | 13.29 | % | 46,511 | 4.00 | % | 58,139 | 5.00 | % | |||||||||||||||
First Security |
104,291 | 10.82 | % | 38,538 | 4.00 | % | 48,173 | 5.00 | % | |||||||||||||||
Western |
63,735 | 9.21 | % | 27,678 | 4.00 | % | 34,598 | 5.00 | % | |||||||||||||||
1st Bank |
61,497 | 9.42 | % | 26,101 | 4.00 | % | 32,626 | 5.00 | % | |||||||||||||||
Valley |
30,048 | 8.05 | % | 14,939 | 4.00 | % | 18,673 | 5.00 | % | |||||||||||||||
Big Sky |
62,570 | 17.43 | % | 14,357 | 4.00 | % | 17,946 | 5.00 | % | |||||||||||||||
First National |
38,476 | 11.77 | % | 13,077 | 4.00 | % | 16,347 | 5.00 | % | |||||||||||||||
Citizens |
24,235 | 8.86 | % | 10,940 | 4.00 | % | 13,675 | 5.00 | % | |||||||||||||||
First Bank-MT |
19,497 | 9.18 | % | 8,492 | 4.00 | % | 10,615 | 5.00 | % | |||||||||||||||
San Juans |
18,681 | 8.83 | % | 8,466 | 4.00 | % | 10,582 | 5.00 | % |
90
Table of Contents
11. Regulatory Capital. . . continued
The following table illustrates the FRBs adequacy guidelines and the Companys and bank
subsidiaries compliance with those guidelines as of December 31, 2009:
Minimum capital | Well capitalized | |||||||||||||||||||||||
Actual | requirement | requirement | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
Tier 1 capital (to risk
weighted assets) |
||||||||||||||||||||||||
Consolidated |
656,880 | 14.02 | % | 187,439 | 4.00 | % | 281,158 | 6.00 | % | |||||||||||||||
Glacier |
128,765 | 12.33 | % | 41,781 | 4.00 | % | 62,672 | 6.00 | % | |||||||||||||||
Mountain West |
129,649 | 13.39 | % | 38,728 | 4.00 | % | 58,092 | 6.00 | % | |||||||||||||||
First Security |
99,762 | 14.91 | % | 26,756 | 4.00 | % | 40,135 | 6.00 | % | |||||||||||||||
Western |
61,594 | 14.67 | % | 16,794 | 4.00 | % | 25,191 | 6.00 | % | |||||||||||||||
1st Bank |
58,119 | 14.99 | % | 15,504 | 4.00 | % | 23,256 | 6.00 | % | |||||||||||||||
Valley |
28,495 | 13.11 | % | 8,694 | 4.00 | % | 13,041 | 6.00 | % | |||||||||||||||
Big Sky |
49,766 | 16.06 | % | 12,393 | 4.00 | % | 18,589 | 6.00 | % | |||||||||||||||
First National |
29,517 | 15.98 | % | 7,390 | 4.00 | % | 11,084 | 6.00 | % | |||||||||||||||
Citizens |
22,201 | 11.32 | % | 7,844 | 4.00 | % | 11,766 | 6.00 | % | |||||||||||||||
First Bank-MT |
18,437 | 12.73 | % | 5,794 | 4.00 | % | 8,691 | 6.00 | % | |||||||||||||||
San Juans |
17,942 | 11.11 | % | 6,462 | 4.00 | % | 9,693 | 6.00 | % | |||||||||||||||
Total capital (to risk
weighted assets) |
||||||||||||||||||||||||
Consolidated |
716,498 | 15.29 | % | 374,877 | 8.00 | % | 468,597 | 10.00 | % | |||||||||||||||
Glacier |
142,142 | 13.61 | % | 83,562 | 8.00 | % | 104,453 | 10.00 | % | |||||||||||||||
Mountain West |
142,066 | 14.67 | % | 77,456 | 8.00 | % | 96,820 | 10.00 | % | |||||||||||||||
First Security |
108,246 | 16.18 | % | 53,513 | 8.00 | % | 66,891 | 10.00 | % | |||||||||||||||
Western |
66,886 | 15.93 | % | 33,588 | 8.00 | % | 41,985 | 10.00 | % | |||||||||||||||
1st Bank |
63,039 | 16.26 | % | 31,009 | 8.00 | % | 38,761 | 10.00 | % | |||||||||||||||
Valley |
31,232 | 14.37 | % | 17,388 | 8.00 | % | 21,734 | 10.00 | % | |||||||||||||||
Big Sky |
53,721 | 17.34 | % | 24,786 | 8.00 | % | 30,982 | 10.00 | % | |||||||||||||||
First National |
31,196 | 16.89 | % | 14,779 | 8.00 | % | 18,474 | 10.00 | % | |||||||||||||||
Citizens |
24,682 | 12.59 | % | 15,688 | 8.00 | % | 19,610 | 10.00 | % | |||||||||||||||
First Bank-MT |
20,261 | 13.99 | % | 11,588 | 8.00 | % | 14,485 | 10.00 | % | |||||||||||||||
San Juans |
19,988 | 12.37 | % | 12,924 | 8.00 | % | 16,155 | 10.00 | % | |||||||||||||||
Leverage capital (to
average assets) |
||||||||||||||||||||||||
Consolidated |
656,880 | 11.20 | % | 234,518 | 4.00 | % | N/A | N/A | ||||||||||||||||
Glacier |
128,765 | 10.09 | % | 51,043 | 4.00 | % | 63,803 | 5.00 | % | |||||||||||||||
Mountain West |
129,649 | 10.98 | % | 47,217 | 4.00 | % | 59,021 | 5.00 | % | |||||||||||||||
First Security |
99,762 | 11.32 | % | 35,237 | 4.00 | % | 44,046 | 5.00 | % | |||||||||||||||
Western |
61,594 | 10.19 | % | 24,185 | 4.00 | % | 30,231 | 5.00 | % | |||||||||||||||
1st Bank |
58,119 | 9.74 | % | 23,865 | 4.00 | % | 29,832 | 5.00 | % | |||||||||||||||
Valley |
28,495 | 8.57 | % | 13,297 | 4.00 | % | 16,621 | 5.00 | % | |||||||||||||||
Big Sky |
49,766 | 13.67 | % | 14,561 | 4.00 | % | 18,201 | 5.00 | % | |||||||||||||||
First National |
29,517 | 10.38 | % | 11,376 | 4.00 | % | 14,220 | 5.00 | % | |||||||||||||||
Citizens |
22,201 | 9.62 | % | 9,227 | 4.00 | % | 11,534 | 5.00 | % | |||||||||||||||
First Bank-MT |
18,437 | 9.19 | % | 8,020 | 4.00 | % | 10,026 | 5.00 | % | |||||||||||||||
San Juans |
17,942 | 10.33 | % | 6,948 | 4.00 | % | 8,685 | 5.00 | % |
91
Table of Contents
11. Regulatory Capital. . . continued
The Federal Deposit Insurance Corporation Improvement Act generally restricts a depository
institution from making any capital distribution (including payment of a dividend) or paying any
management fee to its bank holding company if the institution would thereafter be capitalized at
less than 8 percent total capital (to risk weighted assets), 4 percent tier 1 capital (to risk
weighted assets), or a 4 percent tier 1 capital (to average assets).
At December 31, 2010 and 2009, each of the bank subsidiaries capital measures exceed the well
capitalized threshold, which requires total capital (to risk weighted assets) of at least 10
percent, tier 1 capital (to risk weighted assets) of at least 6 percent, and a leverage capital (to
average assets) of at least 5 percent. Failure to meet minimum capital requirements can initiate
certain mandatory and possible additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Companys and bank subsidiaries financial condition.
There are no conditions or events since year end that management believes have changed the
Companys or subsidiaries risk-based capital category. In addition to the minimum regulatory
capital requirements, certain bank subsidiaries have added regulatory capital requirements of which
they are in compliance as of December 31, 2010.
Current guidance from the Federal Reserve provides, among other things, that dividends per share on
the Companys common stock generally should not exceed earnings per share, measured over the
previous four fiscal quarters. The bank subsidiaries are subject to certain restrictions on the
amount of dividends that they may declare without prior regulatory approval. At December 31, 2010,
$49,554,000 of retained earnings at the bank subsidiary level is available to the Parent without
regulatory approval.
12. Comprehensive Income
The Companys only component of comprehensive income other than net earnings is the unrealized
gains and losses, net of tax, on available-for-sale securities.
Years ended December 31, | ||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
Net earnings |
$ | 42,330 | 34,374 | 65,657 | ||||||||
Unrealized holding gains (losses) arising during the period |
6,263 | 7,474 | (14,540 | ) | ||||||||
Tax (expense) benefit |
(2,455 | ) | (2,933 | ) | 5,699 | |||||||
Net after tax |
3,808 | 4,541 | (8,841 | ) | ||||||||
Reclassification adjustment for (gains) losses
included in net earnings |
(4,822 | ) | (5,995 | ) | 7,345 | |||||||
Tax expense (benefit) |
1,890 | 2,349 | (2,864 | ) | ||||||||
Net after tax |
(2,932 | ) | (3,646 | ) | 4,481 | |||||||
Net unrealized gain (loss) on securities |
876 | 895 | (4,360 | ) | ||||||||
Total comprehensive income |
$ | 43,206 | 35,269 | 61,297 | ||||||||
92
Table of Contents
13. Federal and State Income Taxes
The following is a summary of consolidated income tax expense for:
Years ended December 31, | ||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
Current |
||||||||||||
Federal |
$ | 3,724 | 26,557 | 37,373 | ||||||||
State |
3,481 | 7,189 | 8,271 | |||||||||
Total current tax expense |
7,205 | 33,746 | 45,644 | |||||||||
Deferred |
||||||||||||
Federal |
115 | (24,656 | ) | (9,979 | ) | |||||||
State |
23 | (5,099 | ) | (2,064 | ) | |||||||
Total deferred tax expense (benefit) |
138 | (29,755 | ) | (12,043 | ) | |||||||
Total income tax expense |
$ | 7,343 | 3,991 | 33,601 | ||||||||
Combined federal and state income tax expense differs from that computed at the federal statutory
corporate tax rate as follows for:
Years ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Federal statutory rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
State taxes, net of federal income tax benefit |
4.6 | % | 3.8 | % | 4.1 | % | ||||||
Tax-exempt interest income |
-17.3 | % | -21.0 | % | -4.9 | % | ||||||
Tax credits |
-7.3 | % | -3.3 | % | -0.1 | % | ||||||
Bargain purchase gain |
0.0 | % | -3.2 | % | 0.0 | % | ||||||
Other, net |
-0.2 | % | -0.9 | % | -0.2 | % | ||||||
14.8 | % | 10.4 | % | 33.9 | % | |||||||
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13. Federal and State Income Taxes . . . continued
The tax effect of temporary differences which give rise to a significant portion of deferred
tax assets and deferred tax liabilities are as follows:
December 31, | ||||||||
(Dollars in thousands) | 2010 | 2009 | ||||||
Deferred tax assets |
||||||||
Allowance for loan and lease losses |
$ | 53,795 | 56,067 | |||||
Non-accrual interest |
4,528 | 4,524 | ||||||
Stock based compensation |
3,888 | 3,612 | ||||||
Impairment of equity securities (FHLMC & FNMA) |
2,976 | 2,976 | ||||||
Deferred compensation |
2,953 | 2,877 | ||||||
Employee benefits |
2,345 | 2,046 | ||||||
Available-for-sale securities |
| 224 | ||||||
Other |
3,801 | 1,539 | ||||||
Total gross deferred tax assets |
74,286 | 73,865 | ||||||
Deferred tax liabilities |
||||||||
FHLB stock dividends |
(10,236 | ) | (10,234 | ) | ||||
Intangibles |
(8,952 | ) | (8,352 | ) | ||||
Depreciation of premises and equipment |
(6,687 | ) | (7,704 | ) | ||||
Deferred loan costs |
(4,761 | ) | (4,338 | ) | ||||
Available-for-sale securities |
(341 | ) | | |||||
Other |
(3,025 | ) | (2,155 | ) | ||||
Total gross deferred tax liabilities |
(34,002 | ) | (32,783 | ) | ||||
Net deferred tax asset |
$ | 40,284 | 41,082 | |||||
The Company and its bank subsidiaries join together in the filing of consolidated income tax
returns in the following jurisdictions: federal, Montana, Idaho, Colorado and Utah. Although 1st
Bank and First National have operations in Wyoming and Mountain West has operations in 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, 2010:
Years ended December 31, | ||
Federal
|
2007, 2008 and 2009 | |
Montana
|
2007, 2008 and 2009 | |
Idaho
|
2007, 2008 and 2009 | |
Colorado
|
2006, 2007, 2008 and 2009 | |
Utah
|
2007, 2008 and 2009 |
During 2010 and 2009, the Company made investments in CDEs which received NMTC allocations.
Administered by the Community Development Financial Institutions Fund of the U.S. Department of the
Treasury, the NMTC program is aimed at stimulating economic and community development and job
creation in low-income communities. The federal income tax credits received are claimed over a
seven-year credit allowance period. The Company also has made investments in LIHTCs which are
indirect federal subsidies used to finance the development of affordable rental housing for
low-income households. The federal income tax credits received are claimed over a ten-year credit
allowance period. The Company invests in Qualified Zone Academy and Qualified School Construction
bonds whereby the Company receives quarterly federal income tax credits in lieu of taxable interest
income until the bonds mature. The federal income tax credits on these bonds are subject to
federal and state income tax.
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13. Federal and State Income Taxes . . . continued
Following is a list of expected federal income tax credits to be received in the years
indicated.
New | Low-Income | Investment | ||||||||||||||
Market | Housing | Securities | ||||||||||||||
(Dollars in thousands) | Tax Credits | Tax Credits | Tax Credits | Total | ||||||||||||
2011 |
2,000 | 1,176 | 953 | 4,129 | ||||||||||||
2012 |
2,306 | 1,270 | 939 | 4,515 | ||||||||||||
2013 |
2,400 | 1,270 | 921 | 4,591 | ||||||||||||
2014 |
2,400 | 1,270 | 899 | 4,569 | ||||||||||||
2015 |
2,400 | 1,174 | 875 | 4,449 | ||||||||||||
Thereafter |
564 | 5,379 | 5,263 | 11,206 | ||||||||||||
$ | 12,070 | 11,539 | 9,850 | 33,459 | ||||||||||||
The Company had no unrecognized tax benefit as of December 31, 2010 and 2009. A reconciliation of
the beginning and ending amount of unrecognized tax benefits is as follows:
Years ended December 31, | ||||||||
(Dollars in thousands) | 2010 | 2009 | ||||||
Balance at beginning of period |
$ | | 152 | |||||
Reduction of unrecognized tax benefits for expired periods |
| (152 | ) | |||||
Balance at end of period |
$ | | | |||||
The Company recognizes interest related to unrecognized income tax benefits in interest expense and
penalties are recognized in other expense. During the years ended December 31, 2010 and 2009, the
Company did not recognize any interest expense or penalties with respect to income tax liabilities.
The Company had no accrued liabilities for the payment of interest or penalties at December 31,
2010 and 2009.
The Company has assessed the need for a valuation allowance and determined that a valuation
allowance is not necessary at December 31, 2010 and 2009. The Company believes that it is
more-likely-than-not that the Companys deferred tax assets will be realizable by offsetting
taxable income in carryback years, and 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
tax credit carryforwards expiring unused, and no future net operating losses (for tax purposes) are
expected.
Retained earnings at December 31, 2010 includes $3,600,000 for which no provision for federal
income tax has been made. This amount represents the base year reserve for bad debts, which is
essentially an allocation of earnings to pre-1988 bad debt deductions for federal income tax
purposes only. This amount is treated as a permanent difference and deferred taxes are not
recognized unless it appears that this bad debt reserve will be reduced and thereby result in
taxable income in the foreseeable future. The Company is not currently contemplating any changes
in its business or operations which would result in a recapture of this reserve for bad debts for
federal tax income purposes.
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14. Earnings Per Share
The following schedule contains the data used in the calculation of basic and diluted earnings
per share:
Years ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Net earnings available to common
stockholders, basic and diluted |
$ | 42,330,000 | 34,374,000 | 65,657,000 | ||||||||
Average outstanding shares basic |
69,657,980 | 61,529,944 | 54,851,145 | |||||||||
Add: dilutive stock options |
2,365 | 1,696 | 152,669 | |||||||||
Average outstanding shares diluted |
69,660,345 | 61,531,640 | 55,003,814 | |||||||||
Basic earnings per share |
$ | 0.61 | 0.56 | 1.20 | ||||||||
Diluted earnings per share |
$ | 0.61 | 0.56 | 1.19 | ||||||||
There were 2,295,000, 2,717,000, and 1,421,000 options excluded from the diluted average
outstanding share calculation for December 31, 2010, 2009, and 2008, respectively, due to the
option exercise price exceeding the market price of the Companys common stock.
15. Employee Benefit Plans
The Company has a 401(k) and profit sharing plan. To be considered eligible for the plan, an
employee must be 21 years of age and have been employed for a full calendar quarter. Employees can
participate in the plan the first day of the quarter once theyve met the eligibility requirements.
Participants are at all times fully vested in all contributions. The Company amended the plan
during 2009, retaining the same safe harbor contribution and modifying the 401(k) match to be
discretionary.
The profit sharing plan contributions consists of two components; 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 Companys profitability. To be considered
eligible for the employer discretionary contribution, 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. The total profit sharing plan expense for the years ended December 31, 2010, 2009,
and 2008 was $2,223,000, $2,149,000 and $3,034,000 respectively.
The 401(k) plan allows eligible employees to contribute up to 60 percent of their eligible annual
compensation up to the limit set annually by the Internal Revenue Service (IRS). Currently, the
Company matches an amount equal to 50 percent of the first 6 percent of an employees contribution.
The Companys contribution to the 401(k) for the years ended December 31, 2010, 2009 and 2008 was
$1,570,000, $1,538,000, and $1,445,000, respectively.
The Company has a non-funded deferred compensation plan for directors and senior officers. The
plan provides for the deferral of cash payments of up to 50 percent of a participants salary, and
for 100 percent of bonuses and directors fees, at the election of the participant. The total
amount deferred was $358,000, $408,000, and $461,000, for the years ending December 31, 2010, 2009,
and 2008, respectively. The participant receives an earnings credit at a rate equal to 50 percent
of the Companys return on equity. The total earnings for the years ended 2010, 2009, and 2008 for
this plan were $116,000, $124,000 and $261,000, respectively. In connection with several
acquisitions, the Company assumed the obligations of deferred compensation plans for certain key
employees. As of December 31, 2010, the liability related to the obligations was $1,334,000 and
was included in other liabilities. The amount expensed related to the obligations during 2010 and
2009 was insignificant.
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15. Employee Benefit Plans...continued
The Company has a Supplemental Executive Retirement Plan (SERP) which is intended to
supplement payments due to participants upon retirement under the Companys other qualified plans.
The Company credits the participants account on annual basis for an amount equal to employer
contributions that would have otherwise been allocated to the participants 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 Companys required contribution to the SERP for the years ended December 31, 2010,
2009 and 2008 was $10,000, $20,000, and $31,000, respectively. The participant receives an earnings
credit at a rate equal to 50 percent of the Companys return on equity. The total earnings for the
years ended 2010, 2009, and 2008 for this plan were $22,000, $24,000, and $50,000, respectively.
The Company has elected to self-insure certain costs related to employee health and dental benefit
programs. Costs resulting from noninsured losses are expensed as incurred. The Company has
purchased insurance that limits its exposure on an aggregate and individual claims basis for the
employee health benefit programs.
The Company has entered into employment contracts with 14 senior officers that provide benefits
under certain conditions following a change in control of the Company.
16. Stock Option Plans
The Company has stock-based compensation plans outstanding. The Directors 1994 Stock Option
Plan was approved to provide for the grant of stock options to outside Directors of the Company.
The Directors 1994 Stock Option Plan expired in March of 2009 and has granted but unexpired stock
options outstanding. The Employees 1995 Stock Option Plan was approved to provide the grant of
stock options to certain full-time employees of the Company. The Employees 1995 Stock Option Plan
expired in April 2005 and has granted but unexpired stock options outstanding. The 2005 Stock
Incentive Plan provides awards to certain full-time employees and directors of the Company. The
2005 Stock Incentive Plan permits the granting of stock options, share appreciation rights,
restricted shares, restricted share units, and unrestricted shares, deferred share units, and
performance awards. Upon exercise of the stock options, the shares are obtained from the
authorized and unissued stock.
The 1994, 1995, and 2005 plans also contain provisions authorizing the grant of limited stock
rights, which permit the optionee, upon a change in control of the Company, to surrender his or her
stock options for cancellation and receive cash or common stock equal to the difference between the
exercise price and the fair market value of the shares on the date of the grant. The option price
at which the Companys common stock may be purchased upon exercise of stock options granted under
the plans must be at least equal to the per share market value of such stock at the date the option
is granted. All stock option shares are adjusted for stock splits and stock dividends. The term
of the stock options may not exceed five years from the date the options are granted.
Compensation cost is based on the fair value of the stock options at the grant date. Additionally,
the compensation cost for the portion of awards outstanding for which the requisite service has not
been rendered that are outstanding as of the required effective date are recognized as the
requisite service is rendered on or after the required effective date. For the year ended December
31, 2010, the compensation cost for the stock option plans was $912,000, with a corresponding
income tax benefit of $359,000, resulting in a net earnings and cash flow from operations reduction
of $553,000, or a decrease of $0.01 per share for both basic and diluted earnings per share.
Additionally, in the Consolidated Statement of Cash Flows, the excess tax deficiency from stock
options increased the net cash provided from operating activities and decreased the net cash
provided by financing activities by $4,000 for the twelve months ended December 31, 2010. Total
unrecognized compensation cost, net of income tax benefit, related to non-vested awards which are
expected to be recognized over the next weighted period of 0.3 years was $94,000 as of December 31,
2010. The total fair value of shares vested for the year ended December 31, 2010 and 2009 was
$1,762,000 and $3,334,000, respectively.
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16. Stock Option Plans . . . continued
The per share weighted-average fair value of stock options on the date of grant was based on
the Black Scholes option-pricing model. The Company uses historical data to estimate option
exercise and termination within the valuation model. Employee and director awards, which have
dissimilar historical exercise behavior, are considered separately for valuation purposes. The
risk-free interest rate for periods within the contractual life of the stock option is based on the
U.S. Treasury yield in effect at the time of the grant. The stock option awards generally vest upon
six months or two years of service for directors and employees, respectively, and generally expire
in five years. Expected volatilities are based on historical volatility and other factors. The
following lists the various assumptions and fair value of the grants awarded during the year.
Options Granted During | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Fair value of stock options Black Scholes |
$ | 4.63 | $ | 4.26 | $ | 3.56 | ||||||
Expected volatility |
44 | % | 44 | % | 29 | % | ||||||
Dividend yield |
2.74 | % | 2.74 | % | 2.30 | % | ||||||
Risk-free interest rate |
1.40 | % | 1.40 | % | 2.49 | % | ||||||
Expected life |
3.47 | 3.47 | 3.46 |
At December 31, 2010, total shares available for stock option grants to employees and directors are
3,067,178. Changes in shares granted for stock options for the year ended December 31, 2010 are
summarized as follows:
Weighted | ||||||||
Average | ||||||||
Options | Exercise Price | |||||||
Outstanding at December 31, 2009 |
2,695,645 | $ | 19.52 | |||||
Canceled |
(453,530 | ) | 17.15 | |||||
Granted |
3,000 | 16.73 | ||||||
Exercised |
(3,805 | ) | 15.37 | |||||
Outstanding at December 31, 2010 |
2,241,310 | 20.00 | ||||||
Excercisable at December 31, 2010 |
1,883,970 | 20.88 | ||||||
The range of exercise prices on options outstanding and exercisable at December 31, 2010 is as
follows:
Options Exercisable | ||||||||||||||||||||
Weighted | Weighted | Weighted | ||||||||||||||||||
Options | Average | Average | Options | Average | ||||||||||||||||
Price Range | Outstanding | Exercise Price | Life of Options | Exercisable | Exercise Price | |||||||||||||||
$13.91 - $20.63 |
938,985 | $ | 16.97 | 2.5 years | 581,645 | $ | 17.94 | |||||||||||||
$20.96 - $24.73 |
1,302,325 | 22.19 | 0.6 years | 1,302,325 | 22.19 | |||||||||||||||
2,241,310 | 20.00 | 1.3 years | 1,883,970 | 20.88 | ||||||||||||||||
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17. Parent Holding Company Information (Condensed)
The following condensed financial information is the unconsolidated (Parent only) information
for the Company:
Statements of Financial Condition
December 31, | ||||||||
(Dollars in thousands) | 2010 | 2009 | ||||||
Assets |
||||||||
Cash on hand and in banks |
$ | 1,419 | 565 | |||||
Interest bearing cash deposits |
27,694 | 17,764 | ||||||
Cash and cash equivalents |
29,113 | 18,329 | ||||||
Investment securities, available-for-sale |
13,098 | 1,111 | ||||||
Other assets |
18,107 | 16,296 | ||||||
Investment in subsidiaries |
918,557 | 797,180 | ||||||
Total assets |
$ | 978,875 | 832,916 | |||||
Liabilities and Stockholders Equity |
||||||||
Dividends payable |
$ | 9,349 | 8,011 | |||||
Subordinated debentures |
125,132 | 124,988 | ||||||
Other liabilities |
5,811 | 14,027 | ||||||
Total liabilities |
140,292 | 147,026 | ||||||
Common stock |
719 | 616 | ||||||
Paid-in capital |
643,894 | 497,493 | ||||||
Retained earnings |
193,442 | 188,129 | ||||||
Accumulated other comprehensive income (loss) |
528 | (348 | ) | |||||
Total stockholders equity |
838,583 | 685,890 | ||||||
$ | 978,875 | 832,916 | ||||||
Statement of Operations
Years ended December 31, | ||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
Revenues |
||||||||||||
Dividends from subsidiaries |
$ | 31,350 | 24,300 | 20,500 | ||||||||
Other income |
3,730 | 2,775 | 747 | |||||||||
Intercompany charges for services |
13,977 | 13,108 | 12,656 | |||||||||
Total revenues |
49,057 | 40,183 | 33,903 | |||||||||
Expenses |
||||||||||||
Compensation, employee benefits and related expense |
8,287 | 7,793 | 7,769 | |||||||||
Other operating expenses |
12,990 | 12,845 | 13,044 | |||||||||
Total expenses |
21,277 | 20,638 | 20,813 | |||||||||
Earnings before income tax benefit and equity in
undistributed earnings of subsidiaries |
27,780 | 19,545 | 13,090 | |||||||||
Income tax benefit |
1,374 | 1,942 | 1,952 | |||||||||
Income before equity in undistributed earnings of subsidiaries |
29,154 | 21,487 | 15,042 | |||||||||
Subsidiary earnings in excess of dividends distributed |
13,558 | 12,887 | 50,615 | |||||||||
Net Earnings |
$ | 42,712 | 34,374 | 65,657 | ||||||||
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17. Parent Holding Company Information (Condensed)...continued
Statements of Cash Flows
Years ended December 31, | ||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
Operating Activities |
||||||||||||
Net earnings |
$ | 42,712 | 34,374 | 65,657 | ||||||||
Adjustments to reconcile net earnings to net cash
provided by operating activities: |
||||||||||||
Subsidiary earnings in excess of dividends distributed |
(13,558 | ) | (12,887 | ) | (50,615 | ) | ||||||
Gain on sale of investments |
(3,013 | ) | (2,147 | ) | | |||||||
Excess deficiencies (benefits) related to the exercise of stock option |
4 | (75 | ) | (1,325 | ) | |||||||
Net (decrease) increase in other assets and other liabilities |
(708 | ) | 1,356 | 3,411 | ||||||||
Net cash provided by operating activities |
25,437 | 20,621 | 17,128 | |||||||||
Investing Activities |
||||||||||||
Proceeds from sales, maturities and prepayments of
securities available-for-sale |
3,671 | 2,267 | 1,270 | |||||||||
Purchases of investment securities available-for-sale |
(13,126 | ) | (285 | ) | | |||||||
Equity contribution to subsidiaries |
(105,841 | ) | (68,753 | ) | (15,455 | ) | ||||||
Net addition of premises and equipment |
(2,754 | ) | (4,451 | ) | (2,741 | ) | ||||||
Net cash used by investing activities |
(118,050 | ) | (71,222 | ) | (16,926 | ) | ||||||
Financing Activities |
||||||||||||
Net (decrease) increase in other borrowed funds |
(4,857 | ) | 65 | | ||||||||
Cash dividends paid |
(37,396 | ) | (32,021 | ) | (29,079 | ) | ||||||
Excess (deficiencies) benefits related to the exercise of stock options |
(4 | ) | 75 | 1,325 | ||||||||
Proceeds from exercise of stock options and other stock issued |
145,654 | 2,554 | 103,749 | |||||||||
Net cash provided by (used in) financing activities |
103,397 | (29,327 | ) | 75,995 | ||||||||
Net increase (decrease) in cash and cash equivalents |
10,784 | (79,928 | ) | 76,197 | ||||||||
Cash and cash equivalents at beginning of year |
18,329 | 98,257 | 22,060 | |||||||||
Cash and cash equivalents at end of year |
$ | 29,113 | 18,329 | 98,257 | ||||||||
18. Unaudited Quarterly Financial Data
Summarized unaudited quarterly financial data is as follows:
Quarters ended, 2010 | ||||||||||||||||
(Dollars in thousands, except per share data) | March 31 | June 30 | September 30 | December 31 | ||||||||||||
Interest income |
$ | 73,398 | 73,818 | 72,103 | 69,083 | |||||||||||
Interest expense |
13,884 | 13,749 | 13,581 | 12,420 | ||||||||||||
Net interest income |
59,514 | 60,069 | 58,522 | 56,663 | ||||||||||||
Gain on sale of investments |
314 | 242 | 2,041 | 2,225 | ||||||||||||
Provision for loan losses |
20,910 | 17,246 | 19,162 | 27,375 | ||||||||||||
Earnings before income taxes |
12,826 | 16,005 | 11,330 | 9,512 | ||||||||||||
Net earnings |
10,070 | 13,222 | 9,445 | 9,593 | ||||||||||||
Basic earnings per share |
0.16 | 0.19 | 0.13 | 0.13 | ||||||||||||
Diluted earnings per share |
0.16 | 0.19 | 0.13 | 0.13 | ||||||||||||
Dividends declared per share |
0.13 | 0.13 | 0.13 | 0.13 | ||||||||||||
Market range high-low close |
$ | 15.94-$13.75 | $ | 18.88-$14.67 | $ | 16.73-$13.75 | $ | 15.76-$13.00 |
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18. Unaudited Quarterly Financial Data...continued
Quarters ended, 2009 | ||||||||||||||||
(Dollars in thousands, except per share data) | March 31 | June 30 | September 30 | December 31 | ||||||||||||
Interest income |
$ | 75,532 | 74,420 | 74,430 | 78,112 | |||||||||||
Interest expense |
15,154 | 13,939 | 13,801 | 14,273 | ||||||||||||
Net interest income |
60,378 | 60,481 | 60,629 | 63,839 | ||||||||||||
Gain on sale of investments |
0 | | 2,667 | 3,328 | ||||||||||||
Provision for loan losses |
15,715 | 25,140 | 47,050 | 36,713 | ||||||||||||
Earnings (loss) before income taxes |
22,414 | 13,696 | (6,617 | ) | 8,872 | |||||||||||
Net earnings (loss) |
15,779 | 10,652 | (1,531 | ) | 9,474 | |||||||||||
Basic earnings (loss) per share |
0.26 | 0.17 | (0.02 | ) | 0.15 | |||||||||||
Diluted earnings (loss) per share |
0.26 | 0.17 | (0.02 | ) | 0.15 | |||||||||||
Dividends declared per share |
0.13 | 0.13 | 0.13 | 0.13 | ||||||||||||
Market range high-low close |
$ | 19.36-$12.15 | $ | 18.97-$14.67 | $ | 16.80-$12.92 | $ | 14.62-$11.92 |
19. Fair Value of Financial Instruments
FASB ASC Topic 820, Fair Value Measurements and Disclosures, requires the Company to disclose
information relating to fair value. 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. The Topic establishes 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 Topic describes three levels of inputs that may be used to measure fair value:
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 |
The following is a description of the inputs and valuation methodologies used for financial assets
measured at fair value on a recurring basis. There have been no significant changes in the
valuation techniques during the period ended December 31, 2010.
Investment securities: fair value for available-for-sale securities is estimated by obtaining
quoted market prices for identical assets, where available. If such prices are not available, fair
value is based on independent asset pricing services and models, the inputs of which are
market-based or independently sourced market parameters, including but not limited to, yield
curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections, and cash
flows. For those securities where greater reliance on unobservable inputs occurs, such securities
are classified as Level 3 within the hierarchy.
The following schedules disclose the major class of assets measured at fair value on a recurring
basis for the years ended December 31, 2010 and 2009:
Assets/ | Quoted Prices | Significant | ||||||||||||||
Liabilities | in Active Markets | Other | Significant | |||||||||||||
Measured at | for Identical | Observable | Unobservable | |||||||||||||
Fair Value | Assets | Inputs | Inputs | |||||||||||||
(Dollars in thousands) | 12/31/10 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Financial assets |
||||||||||||||||
U.S. government and federal agency |
$ | 211 | | 211 | | |||||||||||
U.S. government sponsored enterprises |
41,518 | | 41,518 | | ||||||||||||
State and local governments |
657,421 | | 657,421 | | ||||||||||||
Collateralized debt obligations |
6,595 | | | 6,595 | ||||||||||||
Residential mortgage-backed securities |
1,690,102 | | 1,689,946 | 156 | ||||||||||||
Total financial assets |
$ | 2,395,847 | | 2,389,096 | 6,751 | |||||||||||
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19. Fair Value of Financial Instruments...continued
Assets/ | Quoted Prices | Significant | ||||||||||||||
Liabilities | in Active Markets | Other | Significant | |||||||||||||
Measured at | for Identical | Observable | Unobservable | |||||||||||||
Fair Value | Assets | Inputs | Inputs | |||||||||||||
(Dollars in thousands) | 12/31/09 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Financial assets |
||||||||||||||||
U.S. government and federal agency |
$ | 209 | | 209 | | |||||||||||
U.S. government sponsored enterprises |
177 | | 177 | | ||||||||||||
State and local governments |
480,976 | | 478,888 | 2,088 | ||||||||||||
Collateralized debt obligations |
6,789 | | | 6,789 | ||||||||||||
Residential mortgage-backed securities |
955,042 | | 953,931 | 1,111 | ||||||||||||
Total financial assets |
$ | 1,443,193 | | 1,433,205 | 9,988 | |||||||||||
The following schedules reconcile the beginning and ending balances for assets measured at fair
value on a recurring basis using significant unobservable inputs (Level 3) during the years ended
December 31, 2010 and 2009.
Significant Unobservable Inputs (Level 3) | ||||||||||||||||
Collateralized | Residential | |||||||||||||||
State and Local | Debt | Mortgage-backed | ||||||||||||||
(Dollars in thousands) | Total | Government | Obligations | Securities | ||||||||||||
Balance as of December 31, 2009 |
$ | 9,988 | 2,088 | 6,789 | 1,111 | |||||||||||
Total unrealized gains included
in other comprehensive income |
3,381 | | 3,276 | 105 | ||||||||||||
Amortization, accretion and principal payments |
(1,510 | ) | | (1,510 | ) | | ||||||||||
Sales, maturities and calls |
(3,020 | ) | | (1,960 | ) | (1,060 | ) | |||||||||
Transfers out of Level 3 |
(2,088 | ) | (2,088 | ) | | | ||||||||||
Balance as of December 31, 2010 |
$ | 6,751 | | 6,595 | 156 | |||||||||||
Significant Unobservable Inputs (Level 3) | ||||||||||||||||
Collateralized | Residential | |||||||||||||||
State and Local | Debt | Mortgage-backed | ||||||||||||||
(Dollars in thousands) | Total | Government | Obligations | Securities | ||||||||||||
Balance as of December 31, 2008 |
$ | 23,421 | 284 | 15,540 | 7,597 | |||||||||||
Total unrealized losses included in
other comprehensive income |
(8,212 | ) | | (8,212 | ) | | ||||||||||
Amortization, accretion and principal payments |
(539 | ) | | (539 | ) | | ||||||||||
Purchases |
3,199 | 2,088 | | 1,111 | ||||||||||||
Transfers out of Level 3 |
(7,881 | ) | (284 | ) | (7,597 | ) | ||||||||||
Balance as of December 31, 2009 |
$ | 9,988 | 2,088 | 6,789 | 1,111 | |||||||||||
The change in unrealized gains (losses) related to available-for-sale securities is reported in
accumulated other comprehensive income (loss). A state and local government security was
transferred out of Level 3 and into Level 2 during the first quarter 2010 as a result of obtaining
third party pricing which is expected to be obtained in future quarters, whereas third party
pricing was unavailable prior to the first quarter of 2010 for such security and there was a
greater reliance on unobservable inputs for fair value purposes.
102
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19. Fair Value of Financial Instruments...continued
The following is a description of the inputs and valuation methodologies used for assets
recorded at fair value on a non-recurring basis. There have been no significant changes in the
valuation techniques during the year ended December 31, 2010.
Other real estate owned: other real estate owned is carried at the lower of fair value at
acquisition date or estimated fair value, less estimated cost to sell. Estimated fair value of
other real estate owned is based on appraisals or evaluations. Other real estate owned is
classified within Level 3 of the fair value hierarchy.
Collateral-dependent impaired loans, net of ALLL: loans included in the Companys financials for
which it is probable that the Company will not collect all principal and interest due according to
contractual terms are considered impaired in accordance with FASB ASC Topic 310, Receivables.
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.
In determining fair values of other real estate owned and the collateral-dependent impaired loan,
the Company considers the appraisal or evaluation as the starting point for determining fair value
and the Company also considers other factors and events in the environment that may affect the fair
value.
The following schedule discloses the major classes of assets with a recorded change during the year
in the consolidated financial statements resulting from re-measuring the assets at fair value on a
non-recurring basis for the years ending December 31, 2010 and 2009.
Assets/ | Quoted Prices | Significant | ||||||||||||||
Liabilities | in Active Markets | Other | Significant | |||||||||||||
Measured at | for Identical | Observable | Unobservable | |||||||||||||
Fair Value | Assets | Inputs | Inputs | |||||||||||||
(Dollars in thousands) | 12/31/10 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Financial assets |
||||||||||||||||
Other real estate owned |
$ | 17,492 | | | 17,492 | |||||||||||
Collateral-dependent impaired loans,
net of allowance for loan and lease losses |
47,283 | | | 47,283 | ||||||||||||
Total financial assets |
$ | 64,775 | | | 64,775 | |||||||||||
Assets/ | Quoted Prices | Significant | ||||||||||||||
Liabilities | in Active Markets | Other | Significant | |||||||||||||
Measured at | for Identical | Observable | Unobservable | |||||||||||||
Fair Value | Assets | Inputs | Inputs | |||||||||||||
(Dollars in thousands) | 12/31/09 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Financial assets |
||||||||||||||||
Other real estate owned |
$ | 21,524 | | | 21,524 | |||||||||||
Collateral-dependent impaired loans,
net of allowance for loan and lease losses |
57,041 | | | 57,041 | ||||||||||||
Total financial assets |
$ | 78,565 | | | 78,565 | |||||||||||
103
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19. Fair Value of Financial Instruments...continued
The following is a description of the methods used to estimate the fair value of all other
financial instruments recognized at amounts other than fair value.
Financial Assets
The estimated fair value of cash, federal funds sold, interest bearing cash deposits, and accrued
interest receivable is the book value of such financial assets.
The estimated fair value of FHLB and FRB stock is book value due to the restrictions that such
stock may only be sold to another member institution or the FHLB or FRB at par value.
Loans held for sale: fair value is estimated at book value due to the insignificant time between
origination date and sale date.
Loans receivable, net of ALLL: fair value for loans, net of ALLL, is estimated by discounting the
future cash flows using the rates at which similar notes would be written for the same remaining
maturities.
Financial Liabilities
The estimated fair value of accrued interest payable is the book value of such financial
liabilities.
Deposits: fair value of term deposits is estimated by discounting the future cash flows using rates
of similar deposits with similar maturities. The estimated fair value of demand, NOW, savings, and
money market deposits is the book value since rates are regularly adjusted to market rates.
Advances from FHLB: fair value of advances is estimated based on borrowing rates currently
available to the Company for advances with similar terms and maturities.
FRB borrowings: fair value of borrowings through the FRB is estimated based on borrowing rates
currently available to the Company through FRB discount window programs with similar terms and
maturities.
Repurchase agreements and other borrowed funds: fair value of term repurchase agreements and other
term borrowings is estimated based on current repurchase rates and borrowing rates currently
available to the Company for repurchases and borrowings with similar terms and maturities. The
estimated fair value for overnight repurchase agreements and other borrowings is book value.
Subordinated debentures: fair value of the subordinated debt is estimated by discounting the
estimated future cash flows using current estimated market rates for subordinated debt issuances
with similar characteristics.
Off-balance sheet financial instruments: commitments to extend credit and letters of credit
represent the principal categories of off-balance sheet financial instruments. Rates for these
commitments are set at time of loan closing, such that no adjustment is necessary to reflect these
commitments at market value. The Company has immaterial off-balance sheet financial instruments.
104
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19. Fair Value of Financial Instruments...continued
The following presents the carrying amounts and estimated fair values as of December 31, 2010
and 2009:
December 31, 2010 | December 31, 2009 | |||||||||||||||
(Dollars in thousands) | Amount | Fair Value | Amount | Fair Value | ||||||||||||
Financial assets |
||||||||||||||||
Cash and cash equivalents |
$ | 104,859 | 104,859 | 210,575 | 210,575 | |||||||||||
Investment Securities |
2,461,119 | 2,461,119 | 1,506,394 | 1,506,394 | ||||||||||||
Loans held for sale |
76,213 | 76,213 | 66,330 | 66,330 | ||||||||||||
Loans receivable, net of allowance for loan and lease losses |
3,612,182 | 3,631,716 | 3,920,988 | 3,922,838 | ||||||||||||
Accrued interest receivable |
30,246 | 30,246 | 29,729 | 29,729 | ||||||||||||
Total financial assets |
$ | 6,284,619 | 6,304,153 | 5,734,016 | 5,735,866 | |||||||||||
Financial liabilities |
||||||||||||||||
Deposits |
$ | 4,521,902 | 4,533,974 | 4,100,152 | 4,111,909 | |||||||||||
FHLB advances |
965,141 | 974,853 | 790,367 | 798,509 | ||||||||||||
FRB discount window |
| | 225,000 | 225,000 | ||||||||||||
Repurchase agreements and other borrowed funds |
269,408 | 269,414 | 226,251 | 226,271 | ||||||||||||
Subordinated debentures |
125,132 | 70,404 | 124,988 | 80,473 | ||||||||||||
Accrued interest payable |
7,245 | 7,245 | 7,928 | 7,928 | ||||||||||||
Total financial liabilities |
$ | 5,888,828 | 5,855,890 | 5,474,686 | 5,450,090 | |||||||||||
20. Contingencies and Commitments
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, 2010, 2009, and 2008 was
$3,566,000, $3,306,000, and $2,561,000, respectively. Amortization of building capital lease
assets is included in depreciation. One of the Companys subsidiaries has entered into lease
transactions with two of its directors and the related party rent expense for the years ended
December 31, 2010, 2009, and 2008 was $902,000, $703,000, and $476,000. 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, 2010 are as follows:
Capital | Operating | |||||||||||
(Dollars in thousands) | Leases | Leases | Total | |||||||||
Years ending December 31, |
||||||||||||
2011 |
$ | 240 | 2,834 | 3,074 | ||||||||
2012 |
242 | 2,345 | 2,587 | |||||||||
2013 |
261 | 2,066 | 2,327 | |||||||||
2014 |
828 | 1,930 | 2,758 | |||||||||
2015 |
195 | 1,765 | 1,960 | |||||||||
Thereafter |
1,146 | 7,918 | 9,064 | |||||||||
Total minimum lease payments |
2,912 | 18,858 | 21,770 | |||||||||
Less: Amount representing interest |
916 | |||||||||||
Present value of minimum lease payments |
1,996 | |||||||||||
Less: Current portion of
obligations under capital leases |
89 | |||||||||||
Long-term portion of
obligations under capital leases |
$ | 1,907 | ||||||||||
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 Companys consolidated financial position, results of operations or liquidity.
105
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21. Acquisitions
On October 2, 2009, the Company acquired First Company and its bank subsidiary, First
National, with total assets of $272,280,000, loans of $160,538,000 and deposits of $236,529,000.
The purchase price included core deposit intangible of $4,040,000. The acquisition resulted in a
$3,482,000 one-time bargain purchase gain recorded in other income, such gain was based on the
estimated fair value of the assets acquired and liabilities assumed.
Adjustment of the allocated acquisition price may be related to fair value estimates for which all
information has not been obtained on 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.
22. Operating Segment Information
FASB ASC Topic 280, Segment Reporting, requires that a public business enterprise report
financial and descriptive information about its reportable operating segments. Operating segments
are defined as components of an enterprise about which separate financial information is available
that is evaluated regularly by the chief operating decision makers in deciding how to allocate
resources and in assessing performance. The Company defines operating segments and evaluates
segment performance internally based on individual bank charters, with the exception of GORE. If
required, VIEs are consolidated into the operating segment which invested in the entities.
On February 1, 2009, Morgan merged into 1st Bank resulting in operations being conducted
under the 1st Bank charter. On April 30, 2008, Glacier Bank of Whitefish
merged into Glacier with operations conducted under the Glacier charter. Prior period activity of
the merged banks has been combined and included in the acquiring bank subsidiaries historical
results.
The accounting policies of the individual operating segments are the same as those of the Company
described in Note 1. Transactions between operating segments are conducted at fair value,
resulting in profits that are eliminated for reporting consolidated results of operations.
Intersegment revenues primarily represents interest income on intercompany borrowings, management
fees, and data processing fees received by individual banks or the Parent. Intersegment revenues,
expenses and assets are eliminated in order to report results in accordance with accounting
principles generally accepted in the United States of America. Expenses for centrally provided
services are allocated based on the estimated usage of those services.
106
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22. Operating Segment Information . . . continued
The following schedules provide selected financial data for the Companys operating segments:
At or for the Year ended December 31, 2010 | ||||||||||||||||||||||||||||||||
Mountain | First | 1st | First | |||||||||||||||||||||||||||||
(Dollars in thousands) | Glacier | West | Security | Western | Bank | Valley | Big Sky | National | ||||||||||||||||||||||||
Net interest income |
$ | 50,260 | 47,786 | 35,676 | 20,519 | 22,796 | 13,611 | 14,168 | 10,315 | |||||||||||||||||||||||
Provision for loan losses |
(20,050 | ) | (45,000 | ) | (8,100 | ) | (950 | ) | (2,150 | ) | (500 | ) | (3,475 | ) | (1,453 | ) | ||||||||||||||||
Net interest income after
provision for loan and lease losses |
30,210 | 2,786 | 27,576 | 19,569 | 20,646 | 13,111 | 10,693 | 8,862 | ||||||||||||||||||||||||
Non-interest income |
15,272 | 26,148 | 7,799 | 9,857 | 4,934 | 6,913 | 3,427 | 3,072 | ||||||||||||||||||||||||
Core deposit intangibles amortization |
(192 | ) | (172 | ) | (425 | ) | (519 | ) | (591 | ) | (42 | ) | (23 | ) | (577 | ) | ||||||||||||||||
Other non-interest expense |
(29,113 | ) | (51,203 | ) | (21,842 | ) | (17,257 | ) | (17,197 | ) | (9,252 | ) | (10,411 | ) | (8,752 | ) | ||||||||||||||||
Earnings before income taxes |
16,177 | (22,441 | ) | 13,108 | 11,650 | 7,792 | 10,730 | 3,686 | 2,605 | |||||||||||||||||||||||
Income tax (expense) benefit |
(2,989 | ) | 10,262 | (2,798 | ) | (3,112 | ) | (2,080 | ) | (3,272 | ) | (945 | ) | (498 | ) | |||||||||||||||||
Net earnings (loss) |
$ | 13,188 | (12,179 | ) | 10,310 | 8,538 | 5,712 | 7,458 | 2,741 | 2,107 | ||||||||||||||||||||||
Assets |
$ | 1,374,067 | 1,164,903 | 1,004,835 | 766,367 | 717,120 | 394,220 | 362,416 | 351,624 | |||||||||||||||||||||||
Loans, net of ALLL |
822,476 | 752,964 | 548,258 | 288,005 | 254,047 | 174,354 | 236,373 | 139,300 | ||||||||||||||||||||||||
Goodwill |
8,900 | 23,159 | 18,582 | 22,311 | 41,718 | 1,770 | 1,752 | | ||||||||||||||||||||||||
Deposits |
740,391 | 770,058 | 713,098 | 577,147 | 468,966 | 276,567 | 199,599 | 258,454 | ||||||||||||||||||||||||
Stockholders equity |
172,224 | 178,765 | 122,807 | 86,606 | 107,234 | 31,784 | 64,656 | 40,322 |
First Bank- | San | |||||||||||||||||||||||||||
Citizens | MT | Juans | GORE | Parent | Eliminations | Consolidated | ||||||||||||||||||||||
Net interest income |
$ | 10,591 | 7,457 | 7,562 | | (5,973 | ) | | 234,768 | |||||||||||||||||||
Provision for loan losses |
(2,000 | ) | (265 | ) | (750 | ) | | | | (84,693 | ) | |||||||||||||||||
Net interest income after
provision for loan and lease losses |
8,591 | 7,192 | 6,812 | | (5,973 | ) | | 150,075 | ||||||||||||||||||||
Non-interest income |
5,003 | 1,144 | 1,727 | 258 | 61,924 | (59,932 | ) | 87,546 | ||||||||||||||||||||
Core deposit intangibles amortization |
(93 | ) | (312 | ) | (234 | ) | | | | (3,180 | ) | |||||||||||||||||
Other non-interest expense |
(8,631 | ) | (3,163 | ) | (5,419 | ) | (2,315 | ) | (14,613 | ) | 14,400 | (184,768 | ) | |||||||||||||||
Earnings before income taxes |
4,870 | 4,861 | 2,886 | (2,057 | ) | 41,338 | (45,532 | ) | 49,673 | |||||||||||||||||||
Income tax (expense) benefit |
(1,700 | ) | (1,590 | ) | (1,045 | ) | 806 | 1,374 | 244 | (7,343 | ) | |||||||||||||||||
Net earnings (loss) |
$ | 3,170 | 3,271 | 1,841 | (1,251 | ) | 42,712 | (45,288 | ) | 42,330 | ||||||||||||||||||
Assets |
$ | 289,507 | 239,667 | 230,345 | 20,610 | 978,875 | (1,135,269 | ) | 6,759,287 | |||||||||||||||||||
Loans, net of ALLL |
154,914 | 106,290 | 139,014 | | | (3,813 | ) | 3,612,182 | ||||||||||||||||||||
Goodwill |
9,553 | 12,556 | 5,958 | | | | 146,259 | |||||||||||||||||||||
Deposits |
207,473 | 165,816 | 184,217 | | | (39,884 | ) | 4,521,902 | ||||||||||||||||||||
Stockholders equity |
34,215 | 33,151 | 25,595 | 21,199 | 838,583 | (918,937 | ) | 838,204 |
107
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22. Operating Segment Information . . . continued
At or for the Year ended December 31, 2009 | ||||||||||||||||||||||||||||
Mountain | First | 1st | ||||||||||||||||||||||||||
(Dollars in thousands) | Glacier | West | Security | Western | Bank | Valley | Big Sky | |||||||||||||||||||||
Net interest income |
$ | 57,139 | 53,302 | 35,788 | 21,233 | 24,057 | 14,051 | 15,700 | ||||||||||||||||||||
Provision for loan losses |
(32,000 | ) | (50,500 | ) | (10,450 | ) | (3,200 | ) | (10,800 | ) | (1,200 | ) | (9,200 | ) | ||||||||||||||
Net interest income after
provision for loan and lease losses |
25,139 | 2,802 | 25,338 | 18,033 | 13,257 | 12,851 | 6,500 | |||||||||||||||||||||
Non-interest income |
15,387 | 27,882 | 8,103 | 8,631 | 4,628 | 5,717 | 3,564 | |||||||||||||||||||||
Core deposit intangibles amortization |
(330 | ) | (184 | ) | (468 | ) | (571 | ) | (652 | ) | (42 | ) | (23 | ) | ||||||||||||||
Other non-interest expense |
(27,325 | ) | (51,525 | ) | (18,897 | ) | (16,342 | ) | (14,943 | ) | (9,229 | ) | (8,441 | ) | ||||||||||||||
Earnings before income taxes |
12,871 | (21,025 | ) | 14,076 | 9,751 | 2,290 | 9,297 | 1,600 | ||||||||||||||||||||
Income tax (expense) benefit |
(2,803 | ) | 9,764 | (3,372 | ) | (2,813 | ) | (309 | ) | (2,740 | ) | (121 | ) | |||||||||||||||
Net earnings (loss) |
$ | 10,068 | (11,261 | ) | 10,704 | 6,938 | 1,981 | 6,557 | 1,479 | |||||||||||||||||||
Assets |
$ | 1,325,039 | 1,172,331 | 890,672 | 624,077 | 650,072 | 351,228 | 368,571 | ||||||||||||||||||||
Loans, net of ALLL |
895,489 | 892,804 | 547,050 | 304,291 | 283,138 | 178,745 | 258,817 | |||||||||||||||||||||
Goodwill |
8,900 | 23,159 | 18,582 | 22,311 | 41,718 | 1,770 | 1,752 | |||||||||||||||||||||
Deposits |
726,403 | 793,006 | 588,858 | 504,619 | 421,271 | 211,935 | 184,278 | |||||||||||||||||||||
Stockholders equity |
139,799 | 146,720 | 120,044 | 85,259 | 101,789 | 30,585 | 51,614 |
First | First Bank- | San | ||||||||||||||||||||||||||
National | Citizens | MT | Juans | Parent | Eliminations | Consolidated | ||||||||||||||||||||||
Net interest income |
$ | 3,964 | 10,437 | 7,900 | 8,021 | (6,265 | ) | | 245,327 | |||||||||||||||||||
Provision for loan losses |
(1,683 | ) | (2,800 | ) | (985 | ) | (1,800 | ) | | | (124,618 | ) | ||||||||||||||||
Net interest income after
provision for loan and lease losses |
2,281 | 7,637 | 6,915 | 6,221 | (6,265 | ) | | 120,709 | ||||||||||||||||||||
Non-interest income |
4,187 | 4,235 | 929 | 1,329 | 52,466 | (50,584 | ) | 86,474 | ||||||||||||||||||||
Core deposit intangibles amortization |
(144 | ) | (111 | ) | (358 | ) | (233 | ) | | | (3,116 | ) | ||||||||||||||||
Other non-interest expense |
(2,011 | ) | (7,992 | ) | (3,189 | ) | (5,435 | ) | (13,769 | ) | 13,396 | (165,702 | ) | |||||||||||||||
Earnings before income taxes |
4,313 | 3,769 | 4,297 | 1,882 | 32,432 | (37,188 | ) | 38,365 | ||||||||||||||||||||
Income tax (expense) benefit |
(230 | ) | (1,332 | ) | (1,426 | ) | (551 | ) | 1,942 | | (3,991 | ) | ||||||||||||||||
Net earnings (loss) |
$ | 4,083 | 2,437 | 2,871 | 1,331 | 34,374 | (37,188 | ) | 34,374 | |||||||||||||||||||
Assets |
$ | 295,953 | 241,807 | 217,379 | 184,528 | 832,916 | (962,778 | ) | 6,191,795 | |||||||||||||||||||
Loans, net of ALLL |
150,155 | 151,731 | 114,113 | 144,655 | | | 3,920,988 | |||||||||||||||||||||
Goodwill |
| 9,553 | 12,556 | 5,958 | | | 146,259 | |||||||||||||||||||||
Deposits |
247,256 | 159,763 | 143,552 | 148,474 | | (29,263 | ) | 4,100,152 | ||||||||||||||||||||
Stockholders equity |
31,364 | 31,969 | 32,627 | 25,410 | 685,890 | (797,180 | ) | 685,890 |
108
Table of Contents
22. Operating Segment Information . . . continued
At or for the Year ended December 31, 2008 | ||||||||||||||||||||||||||||
Mountain | First | 1st | ||||||||||||||||||||||||||
(Dollars in thousands) | Glacier | West | Security | Western | Bank | Valley | Big Sky | |||||||||||||||||||||
Net interest income |
$ | 52,900 | 45,614 | 34,212 | 20,713 | 22,695 | 12,719 | 15,595 | ||||||||||||||||||||
Provision for loan losses |
(8,825 | ) | (11,150 | ) | (1,750 | ) | (540 | ) | (2,012 | ) | (810 | ) | (2,200 | ) | ||||||||||||||
Net interest income after
provision for loan and lease losses |
44,075 | 34,464 | 32,462 | 20,173 | 20,683 | 11,909 | 13,395 | |||||||||||||||||||||
Non-interest income |
13,926 | 20,353 | 6,987 | 3,306 | 4,728 | 4,673 | 3,608 | |||||||||||||||||||||
Core deposit intangibles amortization |
(392 | ) | (196 | ) | (511 | ) | (623 | ) | (712 | ) | (42 | ) | (23 | ) | ||||||||||||||
Other non-interest expense |
(27,074 | ) | (41,922 | ) | (17,128 | ) | (16,151 | ) | (14,143 | ) | (8,770 | ) | (7,390 | ) | ||||||||||||||
Earnings before income taxes |
30,535 | 12,699 | 21,810 | 6,705 | 10,556 | 7,770 | 9,590 | |||||||||||||||||||||
Income tax (expense) benefit |
(10,910 | ) | (3,628 | ) | (7,282 | ) | (1,818 | ) | (3,631 | ) | (2,251 | ) | (3,587 | ) | ||||||||||||||
Net earnings (loss) |
$ | 19,625 | 9,071 | 14,528 | 4,887 | 6,925 | 5,519 | 6,003 | ||||||||||||||||||||
Assets |
$ | 1,250,774 | 1,226,869 | 954,218 | 609,868 | 566,869 | 298,392 | 332,325 | ||||||||||||||||||||
Loans, net of ALLL |
960,684 | 924,611 | 560,172 | 346,356 | 319,438 | 193,000 | 285,834 | |||||||||||||||||||||
Goodwill |
8,900 | 23,159 | 18,582 | 22,311 | 41,718 | 1,770 | 1,752 | |||||||||||||||||||||
Deposits |
609,473 | 680,404 | 545,199 | 357,729 | 418,231 | 185,505 | 179,834 | |||||||||||||||||||||
Stockholders equity |
129,890 | 124,881 | 116,856 | 83,843 | 95,200 | 31,483 | 40,384 |
First Bank- | San | |||||||||||||||||||||||
Citizens | MT | Juans | Parent | Eliminations | Consolidated | |||||||||||||||||||
Net interest income |
$ | 7,676 | 6,676 | 575 | (6,762 | ) | | 212,613 | ||||||||||||||||
Provision for loan losses |
(750 | ) | (390 | ) | (53 | ) | | | (28,480 | ) | ||||||||||||||
Net interest income after
provision for loan and lease losses |
6,926 | 6,286 | 522 | (6,762 | ) | | 184,133 | |||||||||||||||||
Non-interest income |
2,855 | 768 | 85 | 83,891 | (84,146 | ) | 61,034 | |||||||||||||||||
Core deposit intangibles amortization |
(128 | ) | (405 | ) | (19 | ) | | | (3,051 | ) | ||||||||||||||
Other non-interest expense |
(6,407 | ) | (3,083 | ) | (397 | ) | (13,424 | ) | 13,031 | (142,858 | ) | |||||||||||||
Earnings before income taxes |
3,246 | 3,566 | 191 | 63,705 | (71,115 | ) | 99,258 | |||||||||||||||||
Income tax (expense) benefit |
(1,092 | ) | (1,279 | ) | (75 | ) | 1,952 | | (33,601 | ) | ||||||||||||||
Net earnings (loss) |
$ | 2,154 | 2,287 | 116 | 65,657 | (71,115 | ) | 65,657 | ||||||||||||||||
Assets |
$ | 217,697 | 154,645 | 165,784 | 814,883 | (1,038,354 | ) | 5,553,970 | ||||||||||||||||
Loans, net of ALLL |
152,092 | 114,177 | 142,114 | | | 3,998,478 | ||||||||||||||||||
Goodwill |
9,553 | 12,556 | 6,451 | | | 146,752 | ||||||||||||||||||
Deposits |
135,970 | 113,531 | 143,056 | | (106,457 | ) | 3,262,475 | |||||||||||||||||
Stockholders equity |
29,110 | 29,329 | 21,207 | 676,940 | (702,183 | ) | 676,940 |
23. Impact of Recent Authoritative Accounting Guidance
The Accounting Standards Codification is FASBs officially recognized source of authoritative
U.S. generally accepted accounting principles (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 SEC registrants. All other accounting literature is considered
non-authoritative.
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23. Impact of Recent Authoritative Accounting Guidance...continued
In December 2010, FASB issued an amendment to FASB ASC Topic 805, Business Combinations. The
amendments in this Update specify that if a public entity presents comparative financial
statements, the entity should disclose revenue and earnings of the combined entity as though the
business combination(s) that occurred during the current year had occurred as of the beginning of
the comparable prior annual reporting period only. The amendments also expand the supplemental pro
forma disclosures to include a description of the nature and amount of material, nonrecurring pro
forma adjustments directly attributable to the business combination included in the reported pro
forma revenue and earnings. The amendments are effective prospectively for business combinations
for which the acquisition date is on or after the beginning of the first annual reporting period
beginning on or after December 15, 2010. The Company is currently evaluating the impact of the
adoption of this amendment, but does not expect it to have a material effect on the Companys
financial position or results of operations.
In December 2010, FASB issued an amendment to FASB ASC Topic 350, Intangibles Goodwill and
Other. The amendments in this Update affect all entities that have recognized goodwill and have
one or more reporting units whose carrying amount for purposes of performing Step 1 of the goodwill
impairment test is zero or negative. The amendments in this Update modify Step 1 so that for those
reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is
more likely than not that a goodwill impairment exists. In determining whether it is more likely
than not that a goodwill impairment exists, an entity should consider whether there are any adverse
qualitative factors indicating that an impairment may exist. The amendments are effective for
fiscal years, and interim periods within those years, beginning after December 15, 2010. The
Company is currently evaluating the impact of the adoption of this amendment, but does not expect
it to have a material effect on the Companys financial position or results of operations.
In July 2010, FASB issued an amendment to FASB ASC Subtopic 310-30, Disclosures about the Credit
Quality of Financing. As a result of the amendments in this Update, the Company will provide
additional information to assist financial users in assessing the Companys credit risk exposures
and evaluating the adequacy of the Companys allowance for loan loss. For public entities, the
disclosures as of the end of a reporting period are effective for interim and annual reporting
periods ending on or after December 15, 2010. The disclosures about activity that
occurs during a reporting period are effective for interim and annual reporting periods beginning
on or after December 15, 2010. In January 2011, the effective date of the disclosures about
troubled debt restructurings were temporarily delayed to allow FASB time to determine what
constitutes a troubled debt restructuring. The Company has evaluated the impact of the adoption of
this amendment and determined there was not a material effect on the Companys financial position
or results of operations.
In April 2010, FASB issued an amendment to FASB ASC Subtopic 310-30, Receivables Loans and Debt
Securities Acquired with Deteriorated Credit Quality. As a result of the amendments in this
Update, modifications of loans that are accounted for within a pool under Subtopic 310-30 do not
result in the removal of those loans from the pool even if the modification of those loans would
otherwise be considered a troubled debt restructuring. An entity will continue to be required to
consider whether the pool of assets in which the loan is included is impaired if expected cash
flows for the pool change. The amendments in this Update are effective for modifications of loans
accounted for within pools under Subtopic 310-30 occurring in the first interim or annual period
ending on or after July 15, 2010. The Company has evaluated the impact of the adoption of this
amendment and determined there was not a material effect on the Companys financial position or
results of operations.
In January 2010, FASB issued an amendment to FASB ASC Topic 820, Fair Value Measurements and
Disclosures, that provides for more robust disclosures about 1) the different classes of assets and
liabilities measured at fair value, 2) the valuation techniques and inputs used, 3) the activity in
Level 3 fair value measurements, and 4) the transfers between Levels 1, 2, and 3. The new
disclosures are effective for interim and annual reporting periods beginning after December 15,
2009, except for the disclosures about the activity in Level 3 fair value measurements. Those
disclosures are effective for fiscal years beginning after December 15, 2010. The Company has
evaluated the impact of the adoption of this amendment and determined there was not a material
effect on the Companys financial position or results of operations.
In June 2009, FASB issued an amendment to FASB ASC Topic 810, Consolidation. The objective of
this standard is to amend certain requirements to improve financial reporting by enterprises
involved with variable interest entities and to provide more relevant and reliable information to
users of financial statements. This standard is effective as of the beginning of each reporting
entitys first annual reporting period that begins after November 15, 2009, for interim periods
within that first annual reporting period, and for interim and annual reporting periods thereafter.
The Company has evaluated the impact of the adoption of this amendment and determined there was
not a material effect on the Companys financial position or results of operations.
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23. Impact of Recent Authoritative Accounting Guidance...continued
In June 2009, FASB issued an amendment to FASB ASC Topic 860, Transfers and Servicing. The
objective of this standard is to improve the relevance, representational faithfulness, and
comparability of the information that a reporting entity provides in its financial reports about a
transfer of financial assets; the effects of a transfer on its financial position, financial
performance, and cash flows; and a transferors continuing involvement in transferred financial
assets. This standard is effective as of the beginning of each reporting entitys first annual
reporting period that begins after November 15, 2009, for interim periods within that first annual
reporting period, and for interim and annual reporting periods thereafter. The Company has
evaluated the impact of the adoption of this amendment and determined there was not a material
effect on the Companys financial position or results of operations.
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 Companys management, including the Chief
Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the
disclosure controls and procedures. Based on that evaluation, the CEO and CFO have concluded that
as of the end of the period covered by this report, the disclosure controls and procedures are
effective to provide reasonable assurance that information required to be disclosed by the Company
in reports that are filed or submitted under the Securities Exchange Act of 1934 are recorded,
processed, summarized and timely reported as provided in the SECs rules and forms. As a result of
this evaluation, there were no significant changes in the internal control over financial reporting
during the three months ended December 31, 2010 that have materially affected, or are reasonable
likely to materially affect, the internal control over financial reporting.
Managements 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 U.S. generally accepted accounting
principles. The Companys internal control system was designed to provide reasonable assurance to
the Companys management and Board of Directors regarding the preparation and fair presentation of
published financial statements in accordance with U.S. generally accepted accounting principles.
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,
2010. This assessment was based on criteria for effective internal control over financial
reporting described in Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this assessment, management asserts
that the Company and subsidiaries maintained effective internal control over financial reporting as
it relates to its financial statements presented in conformity with accounting principles generally
accepted in the Unites States of America.
BKD LLP, the independent registered public accounting firm that audited the financial statements
for the year ended December 31, 2010, has issued an attestation report on the Companys internal
control over financial reporting. Such attestation report expresses an unqualified opinion on the
effectiveness of the Companys internal control over financial reporting as of December 31, 2010.
Item 9B. Other Information
None
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PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information regarding Directors and Executive Officers is set forth under the headings
Election of Directors and Management Executive Officers who are not Directors of the
Companys 2011 Annual Meeting Proxy Statement (Proxy Statement) and is incorporated herein by
reference.
Information regarding Compliance with Section 16(a) of the Exchange Act is set forth under the
section Compliance with Section 16(a) Filing Requirements of the Companys Proxy Statement and is
incorporated herein by reference.
Information regarding the Companys audit committee financial expert is set forth under the heading
Meetings and Committees of the Board of Directors Committee Membership in the Companys Proxy
Statement and is incorporated by reference.
Consistent with the requirements of the Sarbanes-Oxley Act, the Company has a Code of Ethics
applicable to senior financial officers including the principal executive officer. The Code of
Ethics can be accessed electronically by visiting the Companys website at www.glacierbancorp.com.
The Code of Ethics is also listed as Exhibit 14 to this report, and is incorporated by reference to
the Companys 2003 annual report Form 10-K.
Item 11. Executive Compensation
Information regarding Executive Compensation is set forth under the headings Compensation
of Directors and Executive Compensation of the Companys Proxy Statement and is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Information regarding Security Ownership of Certain Beneficial Owners and Management is set
forth under the headings Security Ownership of Certain Beneficial Owners and Management of the
Companys Proxy Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information regarding Certain Relationships and Related Transactions, and Director
Independence is set forth under the heading Transactions with Management and Corporate
Governance Director Independence of the Companys 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 Companys Proxy
Statement and is incorporated herein by reference.
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PART IV
Item 15. Exhibits and Financial Statement Schedules
List of Financial Statements and Financial Statement Schedules
(a) | The following documents are filed as a part of this report: |
(1) | Financial Statements and | ||
(2) | Financial Statement schedules required to be filed by Item 8 of this report. | ||
(3) | The following exhibits are required by Item 601 of Regulation S-K and are included as part of this Form 10-K: |
Exhibit No. | Exhibit | |
3(a)
|
Amended and Restated Articles of Incorporation 1 | |
3(b)
|
Amended and Restated Bylaws 1 | |
10(a) *
|
Amended and Restated 1995 Employee Stock Option Plan and related agreements 2 | |
10(b) *
|
Amended and Restated 1994 Director Stock Option Plan and related agreements 2 | |
10(c) *
|
Amended and Restated Deferred Compensation Plan effective January 1, 2008 3 | |
10(d) *
|
Amended and Restated Supplemental Executive Retirement Agreement effective January 1, 2008 3 | |
10(e) *
|
2005 Stock Incentive Plan and related agreements 4 | |
10(f) *
|
Employment Agreement dated January 1, 2011 between the Company and Michael J. Blodnick 5 | |
10(g) *
|
Employment Agreement dated January 1, 2011 between the Company and Ron J. Copher 5 | |
10(h) *
|
Employment Agreement dated January 1, 2011 between the Company and Don Chery 5 | |
14
|
Code of Ethics 6 | |
21
|
Subsidiaries of the Company (See item 1, Subsidiaries) | |
23
|
Consent of BKD LLP | |
31.1
|
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 |
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32 |
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 | |
101
|
The following financial information from Glacier Bancorp, Incs Annual Report on Form 10-K for the year ended December 31, 2010 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, tagged as blocks of text. |
1 | Incorporated by reference to Exhibits 3.i. and 3.ii included in the Companys Quarterly Report on form 10-Q for the quarter ended June 30, 2008. | |
2 | Incorporated by reference to Exhibits 99.1 99.4 of the Companys S-8 Registration Statement (No. 333-105995). | |
3 | Incorporated by reference to Exhibits 10(c) and 10(d) of the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2008. | |
4 | Incorporated by reference to Exhibits 99.1 through 99.3 of the Companys S-8 Registration Statement (No. 333-125024). | |
5 | Incorporated by reference to Exhibits 10.1 through 10.3 included in the Companys Form 8-K filed by the Company on January 4, 2011. | |
6 | Incorporated by reference to Exhibit 14, included in the Companys Form 10-K for the year ended December 31, 2003. | |
* | Compensatory Plan or Arrangement |
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.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized on February 28, 2011.
GLACIER BANCORP, INC. | ||||||
By: | /s/ Michael J. Blodnick | |||||
Michael J. Blodnick | ||||||
President and CEO |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below on February 28, 2011, by the following persons on behalf of the registrant in the capacities
indicated.
/s/ Michael J. Blodnick
|
President, CEO, and Director | |
(Principal Executive Officer) | ||
/s/ Ron J. Copher
|
Senior Vice President and CFO | |
(Principal Financial Accounting Officer) | ||
Board of Directors |
||
/s/ Everit A. Sliter
|
Chairman | |
/s/ Sherry L. Cladouhos
|
Director | |
/s/ James M. English
|
Director | |
/s/ Allen J. Fetscher
|
Director | |
/s/ Dallas I. Herron
|
Director | |
/s/ Craig A. Langel
|
Director | |
/s/ L. Peter Larson
|
Director | |
/s/ Douglas J. McBride
|
Director | |
/s/ John W. Murdoch
|
Director | |
114