GLACIER BANCORP, INC. - Quarter Report: 2010 September (Form 10-Q)
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2010
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 0-18911
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
Not Applicable
(Former name, former address, and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
Indicate by checkmark 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.
Large Accelerated Filer þ | Accelerated Filer o | Non-Accelerated Filer o (Do not check if a smaller reporting company) | Smaller reporting Company o |
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o
No þ
The number of shares of Registrants common stock outstanding on October 21, 2010 was 71,915,073.
No preferred shares are issued or outstanding.
GLACIER BANCORP, INC.
Quarterly Report on Form 10-Q
Quarterly Report on Form 10-Q
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EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT | ||||||||
EX-101 DEFINITION LINKBASE DOCUMENT |
Table of Contents
Glacier Bancorp, Inc.
Unaudited Condensed Consolidated Statements of Financial Condition
September 30, | December 31, | September 30, | ||||||||||
(Dollars in thousands, except per share data) | 2010 | 2009 | 2009 | |||||||||
Assets |
||||||||||||
Cash on hand and in banks |
$ | 83,684 | 120,731 | 93,728 | ||||||||
Federal funds sold |
29,675 | 87,155 | 47,025 | |||||||||
Interest bearing cash deposits |
2,155 | 2,689 | 2,570 | |||||||||
Cash and cash equivalents |
115,514 | 210,575 | 143,323 | |||||||||
Investment securities, available-for-sale |
1,825,159 | 1,506,394 | 1,212,947 | |||||||||
Loans held for sale |
114,926 | 66,330 | 54,475 | |||||||||
Loans receivable, gross |
3,869,034 | 4,063,915 | 3,991,775 | |||||||||
Allowance for loan and lease losses |
(134,257 | ) | (142,927 | ) | (125,330 | ) | ||||||
Loans receivable, net |
3,849,703 | 3,987,318 | 3,920,920 | |||||||||
Premises and equipment, net |
143,645 | 140,921 | 136,617 | |||||||||
Other real estate owned |
63,440 | 57,320 | 54,537 | |||||||||
Accrued interest receivable |
30,863 | 29,729 | 29,489 | |||||||||
Deferred tax asset |
29,968 | 41,082 | 22,681 | |||||||||
Core deposit intangible, net |
11,515 | 13,937 | 10,719 | |||||||||
Goodwill |
146,259 | 146,259 | 146,259 | |||||||||
Other assets |
56,593 | 58,260 | 30,808 | |||||||||
Total assets |
$ | 6,272,659 | 6,191,795 | 5,708,300 | ||||||||
Liabilities |
||||||||||||
Non-interest bearing deposits |
$ | 887,637 | 810,550 | 801,261 | ||||||||
Interest bearing deposits |
3,530,204 | 3,289,602 | 2,809,756 | |||||||||
Federal Home Loan Bank advances |
579,184 | 790,367 | 640,735 | |||||||||
Securities sold under agreements to repurchase |
237,609 | 212,506 | 210,519 | |||||||||
Federal Reserve Bank discount window |
| 225,000 | 370,000 | |||||||||
Other borrowed funds |
17,386 | 13,745 | 15,064 | |||||||||
Accrued interest payable |
7,750 | 7,928 | 8,015 | |||||||||
Subordinated debentures |
125,096 | 124,988 | 120,167 | |||||||||
Other liabilities |
34,139 | 31,219 | 34,681 | |||||||||
Total liabilities |
5,419,005 | 5,505,905 | 5,010,198 | |||||||||
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 | 615 | |||||||||
Paid-in capital |
643,674 | 497,493 | 495,663 | |||||||||
Retained earnings substantially restricted |
192,819 | 188,129 | 186,678 | |||||||||
Accumulated other comprehensive income (loss) |
16,442 | (348 | ) | 15,146 | ||||||||
Total stockholders equity |
853,654 | 685,890 | 698,102 | |||||||||
Total liabilities and stockholders equity |
$ | 6,272,659 | 6,191,795 | 5,708,300 | ||||||||
Number of shares outstanding |
71,915,073 | 61,619,803 | 61,519,808 | |||||||||
Book value per share |
$ | 11.87 | 11.13 | 11.35 |
See accompanying notes to unaudited condensed consolidated financial statements.
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Glacier Bancorp, Inc.
Unaudited Condensed Consolidated Statements of Operations
Three Months ended September 30, | Nine Months ended September 30, | |||||||||||||||
(Dollars in thousands, except per share data) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Interest Income |
||||||||||||||||
Residential real estate loans |
$ | 11,367 | 13,330 | 34,621 | 41,542 | |||||||||||
Commercial loans |
35,734 | 36,739 | 109,409 | 112,302 | ||||||||||||
Consumer and other loans |
10,599 | 11,150 | 31,959 | 33,631 | ||||||||||||
Investment securities |
14,403 | 13,211 | 43,330 | 36,907 | ||||||||||||
Total interest income |
72,103 | 74,430 | 219,319 | 224,382 | ||||||||||||
Interest Expense |
||||||||||||||||
Deposits |
9,142 | 9,232 | 27,695 | 28,799 | ||||||||||||
Federal Home Loan Bank advances |
2,318 | 2,087 | 7,083 | 5,758 | ||||||||||||
Securities sold under agreements to repurchase |
412 | 447 | 1,227 | 1,450 | ||||||||||||
Subordinated debentures |
1,683 | 1,641 | 4,967 | 5,224 | ||||||||||||
Other borrowed funds |
26 | 394 | 242 | 1,663 | ||||||||||||
Total interest expense |
13,581 | 13,801 | 41,214 | 42,894 | ||||||||||||
Net Interest Income |
58,522 | 60,629 | 178,105 | 181,488 | ||||||||||||
Provision for loan losses |
19,162 | 47,050 | 57,318 | 87,905 | ||||||||||||
Net interest income after provision for loan
losses |
39,360 | 13,579 | 120,787 | 93,583 | ||||||||||||
Non-Interest Income |
||||||||||||||||
Service charges and other fees |
11,956 | 10,604 | 32,117 | 29,838 | ||||||||||||
Miscellaneous loan fees and charges |
1,266 | 1,499 | 3,651 | 3,821 | ||||||||||||
Gain on sale of loans |
7,367 | 5,613 | 17,391 | 20,834 | ||||||||||||
Gain on sale of investments |
2,041 | 2,667 | 2,597 | 2,667 | ||||||||||||
Other income |
1,355 | 1,317 | 5,830 | 3,235 | ||||||||||||
Total non-interest income |
23,985 | 21,700 | 61,586 | 60,395 | ||||||||||||
Non-Interest Expense |
||||||||||||||||
Compensation, employee benefits and related
expense |
22,235 | 20,935 | 65,243 | 63,589 | ||||||||||||
Occupancy and equipment expense |
6,034 | 5,835 | 17,970 | 17,341 | ||||||||||||
Advertising and promotions |
1,912 | 1,596 | 5,148 | 5,042 | ||||||||||||
Outsourced data processing expense |
750 | 830 | 2,205 | 2,181 | ||||||||||||
Core deposit intangibles amortization |
801 | 758 | 2,422 | 2,294 | ||||||||||||
Other real estate owned expense |
9,655 | 2,881 | 19,346 | 5,722 | ||||||||||||
Federal Deposit Insurance Corporation premiums |
2,633 | 1,699 | 6,998 | 6,700 | ||||||||||||
Other expense |
7,995 | 7,362 | 22,880 | 21,616 | ||||||||||||
Total non-interest expense |
52,015 | 41,896 | 142,212 | 124,485 | ||||||||||||
Earnings (Loss) Before Income Taxes |
11,330 | (6,617 | ) | 40,161 | 29,493 | |||||||||||
Federal and state income tax expense (benefit) |
1,885 | (5,086 | ) | 7,424 | 4,593 | |||||||||||
Net Earnings (Loss) |
$ | 9,445 | (1,531 | ) | 32,737 | 24,900 | ||||||||||
Basic earnings (loss) per share |
$ | 0.13 | (0.03 | ) | 0.48 | 0.40 | ||||||||||
Diluted earnings (loss) per share |
$ | 0.13 | (0.03 | ) | 0.48 | 0.40 | ||||||||||
Dividends declared per share |
$ | 0.13 | 0.13 | 0.39 | 0.39 | |||||||||||
Return on average assets (annualized) |
0.60 | % | -0.11 | % | 0.70 | % | 0.60 | % | ||||||||
Return on average equity (annualized) |
4.37 | % | -0.88 | % | 5.43 | % | 4.81 | % | ||||||||
Average outstanding shares basic |
71,915,073 | 61,519,808 | 68,897,348 | 61,499,662 | ||||||||||||
Average outstanding shares diluted |
71,915,073 | 61,519,808 | 68,899,228 | 61,502,073 |
See accompanying notes to unaudited condensed consolidated financial statements.
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Glacier Bancorp, Inc.
Unaudited Condensed Consolidated Statements of Stockholders Equity
and Comprehensive Income
Year ended December 31, 2009 and Nine Months ended September 30, 2010
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 | (Loss) Income | Equity | ||||||||||||||||||
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 |
| | | 32,737 | | 32,737 | ||||||||||||||||||
Unrealized gain on securities, net of
reclassification adjustment and taxes |
| | | | 16,790 | 16,790 | ||||||||||||||||||
Total comprehensive income |
49,527 | |||||||||||||||||||||||
Cash dividends declared ($0.39 per share) |
| | | (28,047 | ) | | (28,047 | ) | ||||||||||||||||
Public offering of stock issued |
10,291,465 | 103 | 145,493 | | | 145,596 | ||||||||||||||||||
Stock options exercised |
3,805 | | 58 | | | 58 | ||||||||||||||||||
Stock based compensation and tax benefit |
| | 630 | | | 630 | ||||||||||||||||||
Balance at September 30, 2010 |
71,915,073 | $ | 719 | 643,674 | 192,819 | 16,442 | 853,654 | |||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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Glacier Bancorp, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
Nine Months ended September 30 | ||||||||
(Dollars in thousands) | 2010 | 2009 | ||||||
Operating Activities |
||||||||
Net cash provided by operating activities |
$ | 98,834 | 100,501 | |||||
Investing Activities |
||||||||
Proceeds from sales, maturities and prepayments of
investments available-for-sale |
438,937 | 194,297 | ||||||
Purchases of investments available-for-sale |
(734,807 | ) | (386,502 | ) | ||||
Principal collected on commercial and consumer loans |
520,136 | 768,123 | ||||||
Commercial and consumer loans originated or acquired |
(503,926 | ) | (807,260 | ) | ||||
Principal collections on real estate loans |
140,141 | 161,483 | ||||||
Real estate loans originated or acquired |
(106,288 | ) | (133,997 | ) | ||||
Net purchase of FHLB and FRB stock |
(1,819 | ) | (701 | ) | ||||
Proceeds from sale of other real estate owned |
36,713 | 9,833 | ||||||
Net addition of premises and equipment and other real estate
owned |
(10,943 | ) | (11,957 | ) | ||||
Net cash used in investment activities |
(221,856 | ) | (206,681 | ) | ||||
Financing Activities |
||||||||
Net increase in deposits |
317,689 | 348,456 | ||||||
Net (decrease) increase in FHLB advances |
(211,183 | ) | 302,279 | |||||
Net increase in securities sold under repurchase agreements |
25,103 | 22,156 | ||||||
Net decrease in Federal Reserve Bank discount window |
(225,000 | ) | (544,000 | ) | ||||
Net increase in other borrowed funds |
3,749 | 6,726 | ||||||
Cash dividends paid |
(28,047 | ) | (23,998 | ) | ||||
Excess (deficiencies) benefits related to the exercise of
stock options |
(4 | ) | 75 | |||||
Proceeds from exercise of stock options and other stock issued |
145,654 | 2,554 | ||||||
Net cash provided by financing activities |
27,961 | 114,248 | ||||||
Net (decrease) increase in cash and cash equivalents |
(95,061 | ) | 8,068 | |||||
Cash and cash equivalents at beginning of period |
210,575 | 135,255 | ||||||
Cash and cash equivalents at end of period |
$ | 115,514 | 143,323 | |||||
Supplemental Disclosure of Cash Flow Information |
||||||||
Cash paid during the period for interest |
$ | 41,392 | 44,630 | |||||
Cash paid during the period for income taxes |
9,371 | 28,392 | ||||||
Sale and refinancing of other real estate owned |
9,637 | 5,802 | ||||||
Other real estate acquired in settlement of loans |
67,343 | 61,581 |
See accompanying notes to unaudited condensed consolidated financial statements.
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Notes to Unaudited Condensed Consolidated Financial Statements
1) | Basis of Presentation | |
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of Glacier Bancorp Inc.s (the Company) financial condition as of September 30, 2010 and 2009, stockholders equity and comprehensive income for the nine months ended September 30, 2010, the results of operations for the three and nine month periods ended September 30, 2010 and 2009, and cash flows for the nine months ended September 30, 2010 and 2009. The condensed consolidated statement of financial condition and statement of stockholders equity and comprehensive income of the Company as of December 31, 2009 have been derived from the audited consolidated statements of the Company as of that date. | ||
The accompanying condensed consolidated financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Companys Annual Report on Form 10-K/A for the year ended December 31, 2009. Operating results for the three and nine months ended September 30, 2010 are not necessarily indicative of the results anticipated for the year ending December 31, 2010. Certain reclassifications have been made to the 2009 financial statements to conform to the 2010 presentation. | ||
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. | ||
2) | Organizational Structure | |
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. | ||
As of September 30, 2010, the Company is the parent holding company 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. |
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In April 2010, the Company formed a independent wholly-owned subsidiary, GBCI Other Real Estate (GORE) to isolate bank foreclosed properties for legal protection and administrative purposes. During the second and third quarters, foreclosed properties were sold to the new entity from bank subsidiaries at fair market value and such properties 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, the Company completed the acquisition of First Company and its subsidiary First National. 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. | ||
FASB ASC Topic 810, Consolidation, provides guidance as to when a company should consolidate the assets, liabilities, and activities of a variable interest entity (VIE) in its financial statements, and when a company should disclose information about its relationship with a VIE. A VIE is a legal structure used to conduct activities or hold assets, and a VIE must be consolidated by a company if it is the primary beneficiary that absorbs the majority of the entitys expected losses, receives a majority of the entitys expected residual returns, or both. | ||
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 and others and where the Company is the primary beneficiary of a VIE, the VIE has been consolidated into the bank subsidiary which holds the direct investment in the VIE. Currently, only CDE (NMTC) investments are consolidated into the Companys financial statements. For the CDE (NMTC) investments, the creditors and other beneficial interest holders have no recourse to the general credit of the bank subsidiaries. As of September 30, 2010, the Company had investments in VIEs of $39,848,000 and $2,991,000 for the CDE (NMTC) and LIHTC partnerships, respectively. The consolidated VIEs as well as the unconsolidated VIEs are regularly monitored by the Company to determine if any reconsideration events have occurred that could cause its primary beneficiary status to change. |
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See Note 11 Operating Segment Information for selected financial data including net earnings and total assets for the parent company and each of the subsidiaries. Although the consolidated total assets of the Company were $6.3 billion at September 30, 2010, nine of the eleven community banks had total assets of less than $1 billion. The smallest community bank subsidiary had $184 million in total assets, while the largest community bank subsidiary had $1.3 billion in total assets at September 30, 2010. | ||
The following abbreviated organizational chart illustrates the various relationships as of September 30, 2010: |
![(GRAPHIC)](https://www.sec.gov/Archives/edgar/data/0000868671/000095012310102434/v56652v5665200.gif)
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3) | Investment Securities, Available-for-Sale |
A comparison of the amortized cost and estimated fair value of the Companys investment securities, available-for-sale and other investments is as follows: |
As of September 30, 2010 | ||||||||||||||||||||
Estimated | ||||||||||||||||||||
Weighted | Amortized | Gross Unrealized | Fair | |||||||||||||||||
(Dollars in thousands) | Yield | Cost | Gains | Losses | Value | |||||||||||||||
U.S. Government and federal agency |
||||||||||||||||||||
Maturing after one year through five years |
1.62 | % | $ | 207 | 6 | | 213 | |||||||||||||
Government sponsored enterprises |
||||||||||||||||||||
Maturing after one year through five years |
2.43 | % | 39,249 | 990 | | 40,239 | ||||||||||||||
Maturing after five years through ten years |
1.96 | % | 86 | | | 86 | ||||||||||||||
Maturing after ten years |
0.73 | % | 5 | | | 5 | ||||||||||||||
2.43 | % | 39,340 | 990 | | 40,330 | |||||||||||||||
State and local governments and other issues |
||||||||||||||||||||
Maturing within one year |
3.66 | % | 943 | 17 | | 960 | ||||||||||||||
Maturing after one year through five years |
3.96 | % | 8,569 | 232 | (6 | ) | 8,795 | |||||||||||||
Maturing after five years through ten years |
3.98 | % | 23,465 | 871 | (3 | ) | 24,333 | |||||||||||||
Maturing after ten years |
4.74 | % | 506,070 | 22,074 | (471 | ) | 527,673 | |||||||||||||
4.69 | % | 539,047 | 23,194 | (480 | ) | 561,761 | ||||||||||||||
Collateralized debt obligations |
||||||||||||||||||||
Maturing after ten years |
8.03 | % | 12,360 | | (5,068 | ) | 7,292 | |||||||||||||
Residential mortgage-backed securities |
2.12 | % | 1,142,145 | 14,854 | (6,455 | ) | 1,150,544 | |||||||||||||
Total marketable securities |
2.97 | % | 1,733,099 | 39,044 | (12,003 | ) | 1,760,140 | |||||||||||||
Other investments |
||||||||||||||||||||
FHLB and FRB stock, at cost |
1.43 | % | 64,414 | | | 64,414 | ||||||||||||||
Other stock |
0.05 | % | 607 | 4 | (6 | ) | 605 | |||||||||||||
Total investment securities |
2.91 | % | $ | 1,798,120 | 39,048 | (12,009 | ) | 1,825,159 | ||||||||||||
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As of December 31, 2009 | ||||||||||||||||||||
Estimated | ||||||||||||||||||||
Weighted | Amortized | Gross Unrealized | Fair | |||||||||||||||||
(Dollars in thousands) | Yield | Cost | Gains | Losses | Value | |||||||||||||||
U.S. Government and federal agency |
||||||||||||||||||||
Maturing after one year through five years |
1.62 | % | $ | 210 | | (1 | ) | 209 | ||||||||||||
Government sponsored enterprises |
||||||||||||||||||||
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 and other issues |
||||||||||||||||||||
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 |
4.80 | % | 434,165 | 10,140 | (2,640 | ) | 441,665 | |||||||||||||
4.71 | % | 472,656 | 11,140 | (2,820 | ) | 480,976 | ||||||||||||||
Collateralized debt obligations |
||||||||||||||||||||
Maturing after ten years |
8.40 | % | 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 | ||||||||||||
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 on tax-exempt investment securities exclude the tax effect. |
Interest income from investment securities consists of the following: |
For the Three Months | For the Nine Months | |||||||||||||||
ended September 30, | ended September 30, | |||||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Taxable interest |
$ | 8,431 | 7,588 | 25,920 | 20,215 | |||||||||||
Tax-exempt interest |
5,972 | 5,623 | 17,410 | 16,692 | ||||||||||||
Total interest income |
$ | 14,403 | 13,211 | 43,330 | 36,907 | |||||||||||
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The cost of any investment sold is determined by specific identification. Gain and loss on sale of investments consists of the following: |
For the Three Months | For the Nine Months | |||||||||||||||
ended September 30, | ended September 30, | |||||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Gross proceeds |
$ | 62,779 | 37,450 | 95,102 | 37,450 | |||||||||||
Less amortized cost |
(60,738 | ) | (34,783 | ) | (92,505 | ) | (34,783 | ) | ||||||||
Net gain on sale of investments |
$ | 2,041 | 2,667 | 2,597 | 2,667 | |||||||||||
Gross gain on sale of investments |
$ | 2,041 | 2,871 | 3,390 | 2,871 | |||||||||||
Gross loss on sale of investments |
| (204 | ) | (793 | ) | (204 | ) | |||||||||
Net gain on sale of investments |
$ | 2,041 | 2,667 | 2,597 | 2,667 | |||||||||||
At September 30, 2010 and 2009, the Company had investment securities with carrying values of approximately $726,630,000 and $691,651,000, respectively, pledged as collateral for Federal Home Loan Bank (FHLB) advances, Federal Reserve Bank (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 September 30, 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 and other issues |
$ | 14,516 | 150 | 15,276 | 330 | 29,792 | 480 | |||||||||||||||||
Collateralized debt obligations |
| | 7,292 | 5,068 | 7,292 | 5,068 | ||||||||||||||||||
Residential mortgage-backed securities |
340,077 | 2,131 | 32,790 | 4,324 | 372,867 | 6,455 | ||||||||||||||||||
Other investments other stock |
5 | 6 | | | 5 | 6 | ||||||||||||||||||
Total temporarily impaired securities |
$ | 354,598 | 2,287 | 55,358 | 9,722 | 409,956 | 12,009 | |||||||||||||||||
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 and other issues |
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 | |||||||||||||||||
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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 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 debt 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 debt securities. In so doing, management considers contractual constraints, liquidity, capital, asset / liability management and securities portfolio objectives. With respect to its impaired debt securities at September 30, 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. |
Based on an analysis of its impaired securities as of September 30, 2010, the Company determined that none of such securities had other-than-temporary impairment. |
4) | Loans Receivable, Net and Loans Held for Sale |
The following table summarizes the Companys loan and lease portfolio: |
September 30, 2010 | December 31, 2009 | September 30, 2009 | ||||||||||||||||||||||
(Dollars in thousands) | Amount | Percent | Amount | Percent | Amount | Percent | ||||||||||||||||||
Real estate loans |
||||||||||||||||||||||||
Residential |
$ | 675,107 | 17.5 | % | $ | 746,050 | 18.7 | % | $ | 736,595 | 18.8 | % | ||||||||||||
Held for sale |
114,926 | 3.0 | % | 66,330 | 1.7 | % | 54,475 | 1.4 | % | |||||||||||||||
Total |
790,033 | 20.5 | % | 812,380 | 20.4 | % | 791,070 | 20.2 | % | |||||||||||||||
Commercial loans |
||||||||||||||||||||||||
Real estate |
1,848,976 | 48.0 | % | 1,900,438 | 47.7 | % | 1,934,200 | 49.3 | % | |||||||||||||||
Other commercial |
670,391 | 17.5 | % | 724,966 | 18.2 | % | 627,083 | 16.0 | % | |||||||||||||||
Total |
2,519,367 | 65.5 | % | 2,625,404 | 65.9 | % | 2,561,283 | 65.3 | % | |||||||||||||||
Consumer and other loans |
||||||||||||||||||||||||
Consumer |
180,367 | 4.7 | % | 201,001 | 5.0 | % | 195,742 | 5.0 | % | |||||||||||||||
Home equity |
501,235 | 13.0 | % | 501,920 | 12.6 | % | 504,343 | 12.9 | % | |||||||||||||||
Total |
681,602 | 17.7 | % | 702,921 | 17.6 | % | 700,085 | 17.9 | % | |||||||||||||||
Net deferred loan fees
premiums and discounts |
(7,042 | ) | -0.2 | % | (10,460 | ) | -0.3 | % | (6,188 | ) | -0.2 | % | ||||||||||||
Loans receivable, gross |
3,983,960 | 103.5 | % | 4,130,245 | 103.6 | % | 4,046,250 | 103.2 | % | |||||||||||||||
Allowance for loan and
lease losses |
(134,257 | ) | -3.5 | % | (142,927 | ) | -3.6 | % | (125,330 | ) | -3.2 | % | ||||||||||||
Loans receivable, net |
$ | 3,849,703 | 100.0 | % | $ | 3,987,318 | 100.0 | % | $ | 3,920,920 | 100.0 | % | ||||||||||||
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The following table sets forth information regarding the Companys non-performing assets at the dates indicated: |
September 30, | December 31, | September 30, | ||||||||||
(Dollars in thousands) | 2010 | 2009 | 2009 | |||||||||
Real estate and other assets owned |
$ | 63,440 | 57,320 | 54,537 | ||||||||
Accruing loans 90 days or more overdue |
5,335 | 5,537 | 2,891 | |||||||||
Non-accrual loans |
192,695 | 198,281 | 185,577 | |||||||||
Total non-performing assets |
$ | 261,470 | 261,138 | 243,005 | ||||||||
Non-performing assets as a percentage
of total subsidiary assets |
4.03 | % | 4.13 | % | 4.10 | % |
The following table summarizes impaired loans at the dates indicated: |
September 30, | December 31, | September 30, | ||||||||||
(Dollars in thousands) | 2010 | 2009 | 2009 | |||||||||
Impaired loans, without a valuation allowance |
$ | 144,498 | 141,613 | 111,877 | ||||||||
Impaired loans, with a valuation allowance |
87,927 | 77,129 | 95,177 | |||||||||
Impaired loans, gross |
232,425 | 218,742 | 207,054 | |||||||||
Valuation allowance included in ALLL |
(18,622 | ) | (19,760 | ) | (23,056 | ) | ||||||
Impaired loans, net |
$ | 213,803 | 198,982 | 183,998 | ||||||||
The loans without a specific impairment resulting in no valuation allowance are attributable to the loans fair value, less estimated cost to sell, exceeding the loans carrying value. |
The following table illustrates the loan and lease loss experience: |
September 30, | December 31, | September 30, | ||||||||||
(Dollars in thousands) | 2010 | 2009 | 2009 | |||||||||
Balance at the beginning of the year |
$ | 142,927 | 76,739 | 76,739 | ||||||||
Charge-offs |
(68,868 | ) | (60,896 | ) | (40,991 | ) | ||||||
Recoveries |
2,880 | 2,466 | 1,677 | |||||||||
Provision |
57,318 | 124,618 | 87,905 | |||||||||
Balance at the end of the period |
$ | 134,257 | 142,927 | 125,330 | ||||||||
Net charge-offs as a percentage of total loans |
1.66 | % | 1.42 | % | 0.97 | % |
In June 2009, FASB issued an amendment to FASB ASC Topic 860, Accounting for Transfers and Servicing of Financial Assets, and is effective for transfers occurring after the beginning of the first annual reporting period that begins after November 15, 2009. The Company adopted this amendment for all new transfers, primarily consisting of transfers of loans, occurring on or subsequent to January 1, 2010. The Company generally sells its long-term mortgage loans originated, retaining servicing only when required by certain lenders. The sale of loans in the secondary mortgage market reduces the Companys risk of holding residential fixed rate loans in the loan portfolio. Mortgage loans sold with no servicing rights retained for the nine months ended September 30, 2010 and 2009 were $674,989,000 and $982,207,000, respectively. The amount of loans sold and serviced for others at September 30, 2010 and 2009 was approximately $180,700,000 and $178,533,000, respectively. |
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In accordance with this amendment, transfers of SBA loans are recognized as sales when the warranty period expires, which is typically 90 days. The Company has been active in originating commercial SBA loans, some of which are sold to investors. As of September 30, 2010, the Company had $6,280,000 of SBA loans sold for which there was a deferred gain of $641,000 due to unexpired warranty periods. |
The Company occasionally purchases and sells other loan participations, the majority of which are large commercial loans. For participation transactions after the adoption of the amendment, the bank subsidiaries typically originate and sell the loan participations, at fair value, on a proportionate ownership basis, with no recourse conditions. |
5) Goodwill and Other Intangible Assets
The following table sets forth information regarding the Companys core deposit intangible and mortgage servicing rights as of September 30, 2010: |
Core | Mortgage | |||||||||||
Deposit | Servicing | |||||||||||
(Dollars in thousands) | Intangible | Rights1 | Total | |||||||||
Gross carrying value |
$ | 31,847 | ||||||||||
Accumulated amortization |
(20,332 | ) | ||||||||||
Net carrying value |
$ | 11,515 | 933 | 12,448 | ||||||||
Weighted-average amortization period
(Period in years) |
9.1 | 9.3 | 9.1 | |||||||||
Aggregate amortization expense |
||||||||||||
For the three months ended September 30, 2010 |
$ | 801 | 51 | 852 | ||||||||
For the nine months ended September 30, 2010 |
2,422 | 132 | 2,554 | |||||||||
Estimated amortization expense |
||||||||||||
For the year ended December 31, 2010 |
$ | 2,603 | 166 | 2,769 | ||||||||
For the year ended December 31, 2011 |
1,895 | 67 | 1,962 | |||||||||
For the year ended December 31, 2012 |
1,534 | 65 | 1,599 | |||||||||
For the year ended December 31, 2013 |
1,283 | 63 | 1,346 | |||||||||
For the year ended December 31, 2014 |
1,034 | 61 | 1,095 |
1 | The mortgage servicing rights are included in other assets and gross carrying value and accumulated amortization are not readily available. |
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Table of Contents
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. |
6) Deposits
The following table illustrates the amounts outstanding for deposits $100,000 and greater at September 30, 2010 according to the time remaining to maturity. Included in Certificates of Deposit are brokered certificates of deposit and deposits issued through the Certificate of Deposit Account Registry System of $347,732,000. Included in Demand Deposits are brokered deposits of $164,224,000. |
Certificates | Demand | |||||||||||
(Dollars in thousands) | of Deposit | Deposits | Totals | |||||||||
Within three months |
$ | 382,925 | 1,762,898 | 2,145,823 | ||||||||
Three months to six months |
161,662 | | 161,662 | |||||||||
Seven months to twelve months |
173,545 | | 173,545 | |||||||||
Over twelve months |
156,334 | | 156,334 | |||||||||
Totals |
$ | 874,466 | 1,762,898 | 2,637,364 | ||||||||
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7) | Borrowings | |
The following chart illustrates the average balances and the maximum outstanding month-end balances for FHLB advances, repurchase agreements and borrowings through the FRB: |
As of and | As of and | As of and | ||||||||||
for the Nine | for the | for the Nine | ||||||||||
Months ended | Year ended | Months ended | ||||||||||
(Dollars in thousands) | September 30, 2010 | December 31, 2009 | September 30, 2009 | |||||||||
FHLB advances |
||||||||||||
Amount outstanding at end of period |
$ | 579,184 | 790,367 | 640,735 | ||||||||
Average balance |
$ | 657,698 | 473,038 | 413,446 | ||||||||
Maximum outstanding at any month-end |
$ | 807,644 | 790,367 | 640,735 | ||||||||
Weighted average interest rate |
1.44 | % | 1.68 | % | 1.86 | % | ||||||
Repurchase agreements |
||||||||||||
Amount outstanding at end of period |
$ | 237,609 | 212,506 | 210,519 | ||||||||
Average balance |
$ | 224,690 | 204,503 | 196,562 | ||||||||
Maximum outstanding at any month-end |
$ | 252,083 | 234,914 | 210,519 | ||||||||
Weighted average interest rate |
0.73 | % | 0.98 | % | 0.99 | % | ||||||
Federal Reserve Bank discount window |
||||||||||||
Amount outstanding at end of period |
$ | | 225,000 | 370,000 | ||||||||
Average balance |
$ | 47,637 | 658,262 | 776,592 | ||||||||
Maximum outstanding at any month-end |
$ | 235,000 | 1,005,000 | 1,005,000 | ||||||||
Weighted average interest rate |
0.25 | % | 0.26 | % | 0.27 | % | ||||||
Total FHLB advances, repurchase agreements,
and Federal Reserve Bank discount window |
||||||||||||
Amount outstanding at end of period |
$ | 816,793 | 1,227,873 | 1,221,254 | ||||||||
Average balance |
$ | 930,025 | 1,335,803 | 1,386,600 | ||||||||
Maximum outstanding at any month-end |
$ | 1,294,727 | 2,030,281 | 1,856,254 | ||||||||
Weighted average interest rate |
1.21 | % | 0.87 | % | 0.84 | % |
8) | 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. |
17
Table of Contents
The following schedule contains the data used in the calculation of basic and diluted earnings per share: |
For the Three Months | For the Nine Months | |||||||||||||||
ended September 30, | ended September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net earnings (loss) available to common
stockholders, basic and diluted |
$ | 9,445,000 | (1,531,000 | ) | 32,737,000 | 24,900,000 | ||||||||||
Average outstanding shares basic |
71,915,073 | 61,519,808 | 68,897,348 | 61,499,662 | ||||||||||||
Add: dilutive stock options |
| | 1,880 | 2,411 | ||||||||||||
Average outstanding shares diluted |
71,915,073 | 61,519,808 | 68,899,228 | 61,502,073 | ||||||||||||
Basic earnings (loss) per share |
$ | 0.13 | (0.03 | ) | 0.48 | 0.40 | ||||||||||
Diluted earnings (loss) per share |
$ | 0.13 | (0.03 | ) | 0.48 | 0.40 | ||||||||||
There were approximately 2,309,410 and 2,723,109 average shares excluded from the diluted average outstanding share calculation for the nine months ended September 30, 2010 and 2009, respectively, due to the option exercise price exceeding the market price. |
9) | Comprehensive Income | |
The Companys only component of comprehensive income other than net earnings is the unrealized gains and losses on available-for-sale securities. |
For the Three Months | For the Nine Months | |||||||||||||||
ended September 30, | ended September 30, | |||||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Net earnings (loss) |
$ | 9,445 | (1,531 | ) | 32,737 | 24,900 | ||||||||||
Unrealized holding gain arising during the period |
14,620 | 31,492 | 30,208 | 29,626 | ||||||||||||
Tax expense |
(5,730 | ) | (12,342 | ) | (11,839 | ) | (11,615 | ) | ||||||||
Net after tax |
8,890 | 19,150 | 18,369 | 18,011 | ||||||||||||
Reclassification adjustment for gains
included in net earnings |
(2,041 | ) | (2,667 | ) | (2,597 | ) | (2,667 | ) | ||||||||
Tax expense |
800 | 1,045 | 1,018 | 1,045 | ||||||||||||
Net after tax |
(1,241 | ) | (1,622 | ) | (1,579 | ) | (1,622 | ) | ||||||||
Net unrealized gain on securities |
7,649 | 17,528 | 16,790 | 16,389 | ||||||||||||
Total comprehensive income |
$ | 17,094 | 15,997 | 49,527 | 41,289 | |||||||||||
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Table of Contents
10) | Federal and State Income Taxes | |
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 September 30, 2010: |
Years ended December 31, | ||
Federal |
2007, 2008 and 2009 | |
Montana |
2003, 2004, 2005, 2007, 2008 and 2009 | |
Idaho |
2003, 2004, 2005, 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. | ||
Following is a list of expected federal income tax credits to be received in the years indicated. |
New | Low-Income | Investment | ||||||||||||||
Years ended | Markets | Housing | Securities | |||||||||||||
(Dollars in thousands) | Tax Credits | Tax Credits | Tax Credits | Total | ||||||||||||
2010 |
$ | 2,000 | 337 | 916 | 3,253 | |||||||||||
2011 |
2,000 | 785 | 970 | 3,755 | ||||||||||||
2012 |
2,306 | 785 | 970 | 4,061 | ||||||||||||
2013 |
2,400 | 785 | 970 | 4,155 | ||||||||||||
2014 |
2,400 | 785 | 970 | 4,155 | ||||||||||||
Thereafter |
2,964 | 3,551 | 8,349 | 14,864 | ||||||||||||
$ | 14,070 | 7,028 | 13,145 | 34,243 | ||||||||||||
The Company determined its unrecognized tax benefit to be $0 and $113,000 as of September 30, 2010 and 2009, respectively. The Company recognizes interest related to unrecognized income tax benefits in interest expense and penalties are recognized in other expense. During the nine months ended September 30, 2010 and 2009, the Company did not recognize interest expense or penalties with respect to income tax liabilities. The Company had approximately $0 and $20,000 accrued for the payment of interest at September 30, 2010 and 2009, respectively. The Company had no accrued liabilities for the payment of penalties at September 30, 2010 and 2009. |
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Table of Contents
11) | 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. If required, VIEs are consolidated into the operating segment which invested in the entities. | ||
The accounting policies of the individual operating segments are the same as those of the Company. 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 company. 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. | ||
The following schedules provide selected financial data for the Companys operating segments: |
Three months ended and as of September 30, 2010 | ||||||||||||||||||||||||||||||||
Mountain | First | First | ||||||||||||||||||||||||||||||
(Dollars in thousands) | Glacier | West | Security | 1st Bank | Western | Big Sky | Valley | National | ||||||||||||||||||||||||
External revenues |
$ | 18,988 | 21,498 | 13,871 | 8,134 | 9,075 | 4,983 | 5,715 | 3,824 | |||||||||||||||||||||||
Intersegment revenues |
218 | 197 | 41 | 81 | 130 | | 165 | 21 | ||||||||||||||||||||||||
Expenses |
(15,326 | ) | (25,208 | ) | (11,549 | ) | (6,782 | ) | (7,212 | ) | (4,444 | ) | (3,951 | ) | (3,214 | ) | ||||||||||||||||
Net Earnings (Loss) |
$ | 3,880 | (3,513 | ) | 2,363 | 1,433 | 1,993 | 539 | 1,929 | 631 | ||||||||||||||||||||||
Total Assets |
$ | 1,332,594 | 1,177,317 | 948,692 | 655,334 | 682,635 | 365,254 | 341,219 | 305,353 | |||||||||||||||||||||||
First Bank | San | Total | ||||||||||||||||||||||||||||||
Citizens | of MT | Juans | GORE | Parent | Eliminations | Consolidated | ||||||||||||||||||||||||||
External revenues |
$ | 4,426 | 2,553 | 2,730 | 156 | 135 | | 96,088 | ||||||||||||||||||||||||
Intersegment revenues |
106 | 96 | 125 | | 14,442 | (15,622 | ) | | ||||||||||||||||||||||||
Expenses |
(3,795 | ) | (1,725 | ) | (2,323 | ) | (754 | ) | (4,712 | ) | 4,352 | (86,643 | ) | |||||||||||||||||||
Net Earnings (Loss) |
$ | 737 | 924 | 532 | (598 | ) | 9,865 | (11,270 | ) | 9,445 | ||||||||||||||||||||||
Total Assets |
$ | 271,309 | 183,672 | 212,152 | 19,757 | 997,670 | (1,220,299 | ) | 6,272,659 | |||||||||||||||||||||||
20
Table of Contents
Three months ended and as of September 30, 2009 | ||||||||||||||||||||||||||||
Mountain | First | |||||||||||||||||||||||||||
(Dollars in thousands) | Glacier | West | Security | 1st Bank | Western | Big Sky | Valley | |||||||||||||||||||||
External revenues |
$ | 20,546 | 23,641 | 14,188 | 8,310 | 8,782 | 5,233 | 5,433 | ||||||||||||||||||||
Intersegment revenues |
47 | 6 | 76 | 110 | 65 | | 11 | |||||||||||||||||||||
Expenses |
(17,995 | ) | (34,135 | ) | (12,019 | ) | (7,556 | ) | (7,170 | ) | (5,907 | ) | (3,865 | ) | ||||||||||||||
Net Earnings (Loss) |
$ | 2,598 | (10,488 | ) | 2,245 | 864 | 1,677 | (674 | ) | 1,579 | ||||||||||||||||||
Total Assets |
$ | 1,289,115 | 1,246,907 | 901,579 | 597,536 | 590,689 | 362,396 | 306,937 | ||||||||||||||||||||
First Bank | San | Total | ||||||||||||||||||||||||||
Citizens | of MT | Juans | Parent | Eliminations | Consolidated | |||||||||||||||||||||||
External revenues |
$ | 4,452 | 2,643 | 2,849 | 53 | | 96,130 | |||||||||||||||||||||
Intersegment revenues |
| 3 | | 2,926 | (3,244 | ) | | |||||||||||||||||||||
Expenses |
(3,822 | ) | (1,894 | ) | (2,473 | ) | (4,510 | ) | 3,685 | (97,661 | ) | |||||||||||||||||
Net Earnings (Loss) |
$ | 630 | 752 | 376 | (1,531 | ) | 441 | (1,531 | ) | |||||||||||||||||||
Total Assets |
$ | 244,238 | 204,224 | 179,799 | 827,473 | (1,042,593 | ) | 5,708,300 | ||||||||||||||||||||
Nine Months ended and as of September 30, 2010 | ||||||||||||||||||||||||||||||||
Mountain | First | First | ||||||||||||||||||||||||||||||
(Dollars in thousands) | Glacier | West | Security | 1st Bank | Western | Big Sky | Valley | National | ||||||||||||||||||||||||
External revenues |
$ | 56,692 | 62,631 | 39,524 | 23,863 | 26,014 | 14,918 | 16,605 | 11,523 | |||||||||||||||||||||||
Intersegment revenues |
314 | 235 | 79 | 202 | 385 | 1 | 241 | 43 | ||||||||||||||||||||||||
Expenses |
(49,468 | ) | (65,451 | ) | (31,766 | ) | (20,202 | ) | (20,215 | ) | (13,345 | ) | (11,503 | ) | (10,070 | ) | ||||||||||||||||
Net Earnings (Loss) |
$ | 7,538 | (2,585 | ) | 7,837 | 3,863 | 6,184 | 1,574 | 5,343 | 1,496 | ||||||||||||||||||||||
Total Assets |
$ | 1,332,594 | 1,177,317 | 948,692 | 655,334 | 682,635 | 365,254 | 341,219 | 305,353 | |||||||||||||||||||||||
First Bank | San | Total | ||||||||||||||||||||||||||||||
Citizens | of MT | Juans | GORE | Parent | Eliminations | Consolidated | ||||||||||||||||||||||||||
External revenues |
$ | 13,182 | 7,445 | 8,055 | 199 | 254 | | 280,905 | ||||||||||||||||||||||||
Intersegment revenues |
134 | 178 | 149 | | 46,963 | (48,924 | ) | | ||||||||||||||||||||||||
Expenses |
(11,207 | ) | (5,121 | ) | (6,919 | ) | (1,022 | ) | (14,060 | ) | 12,181 | (248,168 | ) | |||||||||||||||||||
Net Earnings (Loss) |
$ | 2,109 | 2,502 | 1,285 | (823 | ) | 33,157 | (36,743 | ) | 32,737 | ||||||||||||||||||||||
Total Assets |
$ | 271,309 | 183,672 | 212,152 | 19,757 | 997,670 | (1,220,299 | ) | 6,272,659 | |||||||||||||||||||||||
Nine Months ended and as of September 30, 2009 | ||||||||||||||||||||||||||||
Mountain | First | |||||||||||||||||||||||||||
(Dollars in thousands) | Glacier | West | Security | 1st Bank | Western | Big Sky | Valley | |||||||||||||||||||||
External revenues |
$ | 61,568 | 68,880 | 40,832 | 25,091 | 26,776 | 16,401 | 16,907 | ||||||||||||||||||||
Intersegment revenues |
140 | 7 | 631 | 236 | 436 | | 96 | |||||||||||||||||||||
Expenses |
(51,761 | ) | (77,178 | ) | (32,410 | ) | (24,496 | ) | (21,981 | ) | (15,191 | ) | (12,142 | ) | ||||||||||||||
Net Earnings (Loss) |
$ | 9,947 | (8,291 | ) | 9,053 | 831 | 5,231 | 1,210 | 4,861 | |||||||||||||||||||
Total Assets |
$ | 1,289,115 | 1,246,907 | 901,579 | 597,536 | 590,689 | 362,396 | 306,937 | ||||||||||||||||||||
First Bank | San | Total | ||||||||||||||||||||||||||
Citizens | of MT | Juans | Parent | Eliminations | Consolidated | |||||||||||||||||||||||
External revenues |
$ | 12,557 | 7,576 | 8,020 | 169 | | 284,777 | |||||||||||||||||||||
Intersegment revenues |
2 | 3 | | 38,168 | (39,719 | ) | | |||||||||||||||||||||
Expenses |
(10,732 | ) | (5,505 | ) | (6,779 | ) | (13,437 | ) | 11,735 | (259,877 | ) | |||||||||||||||||
Net Earnings (Loss) |
$ | 1,827 | 2,074 | 1,241 | 24,900 | (27,984 | ) | 24,900 | ||||||||||||||||||||
Total Assets |
$ | 244,238 | 204,224 | 179,799 | 827,473 | (1,042,593 | ) | 5,708,300 | ||||||||||||||||||||
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12) | 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 standard 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 September 30, 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 schedule discloses the major class of assets measured at fair value on a recurring basis for the period ended September 30, 2010: |
Assets/ | Quoted Prices | Significant | ||||||||||||||
Liabilities | in Active Markets | Other | Significant | |||||||||||||
Measured at | for Identical | Observable | Unobservable | |||||||||||||
Fair Value | Assets | Inputs | Inputs | |||||||||||||
(Dollars in thousands) | 9/30/10 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Financial assets |
||||||||||||||||
U.S. Government and federal agency |
$ | 213 | | 213 | | |||||||||||
Government sponsored enterprises |
40,330 | | 40,330 | | ||||||||||||
State and local governments and other issues |
561,761 | | 561,761 | | ||||||||||||
Collateralized debt obligations |
7,292 | | | 7,292 | ||||||||||||
Residential mortgage-backed securities |
1,150,544 | | 1,149,468 | 1,076 | ||||||||||||
Total financial assets |
$ | 1,760,140 | | 1,751,772 | 8,368 | |||||||||||
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The following schedule discloses the major class of assets measured at fair value on a
recurring basis for the period ended September 30, 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) | 9/30/09 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Financial assets |
||||||||||||||||
U.S. Government and federal agency |
$ | 209 | | 209 | | |||||||||||
Government sponsored enterprises |
278 | | 278 | | ||||||||||||
State and local governments and other issues |
451,115 | | 450,851 | 264 | ||||||||||||
Collateralized debt obligations |
6,600 | | | 6,600 | ||||||||||||
Residential mortgage-backed securities |
692,625 | | 615,466 | 77,159 | ||||||||||||
Total financial assets |
$ | 1,150,827 | | 1,066,804 | 84,023 | |||||||||||
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
nine month periods ended September 30, 2010 and 2009.
Significant Unobservable Inputs (Level 3) | ||||||||||||||||
State and Local | Collateralized | Residential | ||||||||||||||
Government and | Debt | Mortgage-backed | ||||||||||||||
(Dollars in thousands) | Total | Other Issues | Obligations | Securities | ||||||||||||
Balance as of December 31, 2009 |
$ | 9,988 | 2,088 | 6,789 | 1,111 | |||||||||||
Total unrealized gains (losses) included
in other comprehensive income |
2,755 | | 2,790 | (35 | ) | |||||||||||
Amortization, accretion and principal
payments |
(327 | ) | | (327 | ) | | ||||||||||
Sales, maturities and calls |
(1,960 | ) | | (1,960 | ) | | ||||||||||
Transfers out of Level 3 |
(2,088 | ) | (2,088 | ) | | | ||||||||||
Balance as of September 30, 2010 |
$ | 8,368 | | 7,292 | 1,076 | |||||||||||
Significant Unobservable Inputs (Level 3) | ||||||||||||||||
State and Local | Collateralized | Residential | ||||||||||||||
Government and | Debt | Mortgage-backed | ||||||||||||||
(Dollars in thousands) | Total | Other Issues | Obligations | Securities | ||||||||||||
Balance as of December 31, 2008 |
$ | 23,421 | 284 | 15,540 | 7,597 | |||||||||||
Total unrealized gains included in
other comprehensive income |
7,864 | | (8,780 | ) | 16,644 | |||||||||||
Amortization, accretion and principal payments |
(1,142 | ) | (20 | ) | (160 | ) | (962 | ) | ||||||||
Purchases |
60,515 | | | 60,515 | ||||||||||||
Transfers out of Level 3 |
(6,635 | ) | | | (6,635 | ) | ||||||||||
Balance as of September 30, 2009 |
$ | 84,023 | 264 | 6,600 | 77,159 | |||||||||||
The change in unrealized gains related to available-for-sale securities is reported in
the 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 also expected to be obtained in future quarters,
whereas third party pricing was unavailable prior to first quarter 2010 for such security and
there was a greater reliance on unobservable inputs for fair value.
23
Table of Contents
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 period ended September 30, 2010.
Other real estate owned: real estate and other assets owned are carried at the lower of fair
value at acquisition date or current estimated fair value, less estimated cost to sell.
Estimated fair value of real estate and other assets owned is based on appraisals. Real
estate and other assets owned are 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.
The following schedule discloses the major class of assets with a recorded change in the
financial statements resulting from re-measuring the assets at fair value on a non-recurring
basis for the nine month period ending September 30, 2010 and 2009. The disclosure includes
only individual financial assets that had a change in the balance during the period ended
September 30, 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) | 9/30/10 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Financial assets |
||||||||||||||||
Other real estate owned |
$ | 18,673 | | | 18,673 | |||||||||||
Collateral-dependent impaired loans,
net of allowance for loan and lease
losses |
67,382 | | | 67,382 | ||||||||||||
Total financial assets |
$ | 86,055 | | | 86,055 | |||||||||||
Assets/ | Quoted Prices | Significant | ||||||||||||||
Liabilities | in Active Markets | Other | Significant | |||||||||||||
Measured at | for Identical | Observable | Unobservable | |||||||||||||
Fair Value | Assets | Inputs | Inputs | |||||||||||||
(Dollars in thousands) | 9/30/09 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Financial assets |
||||||||||||||||
Other real estate owned |
$ | 2,038 | | | 2,038 | |||||||||||
Collateral-dependent impaired loans,
net of allowance for loan and lease
losses |
68,184 | | | 68,184 | ||||||||||||
Total financial assets |
$ | 70,222 | | | 70,222 | |||||||||||
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.
24
Table of Contents
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 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.
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.
The following presents the carrying amounts and estimated fair values as of September 30,
2010 and 2009:
September 30, 2010 | September 30, 2009 | |||||||||||||||
(Dollars in thousands) | Amount | Fair Value | Amount | Fair Value | ||||||||||||
Financial assets |
||||||||||||||||
Cash and cash equivalents |
$ | 115,514 | 115,514 | 143,323 | 143,323 | |||||||||||
Investment securities |
1,760,745 | 1,760,745 | 1,151,291 | 1,151,291 | ||||||||||||
FHLB and FRB stock |
64,414 | 64,414 | 61,656 | 61,656 | ||||||||||||
Loans receivable, net of allowance for loan
and lease losses |
3,849,703 | 3,856,353 | 3,920,920 | 3,919,067 | ||||||||||||
Accrued interest receivable |
30,863 | 30,863 | 29,489 | 29,489 | ||||||||||||
Total financial assets |
$ | 5,821,239 | 5,827,889 | 5,306,679 | 5,304,826 | |||||||||||
Financial liabilities |
||||||||||||||||
Deposits |
$ | 4,417,841 | 4,429,962 | 3,611,017 | 3,621,869 | |||||||||||
Federal Home Loan Bank advances |
579,184 | 594,593 | 640,735 | 645,829 | ||||||||||||
Federal Reserve Bank discount window |
| | 370,000 | 370,000 | ||||||||||||
Repurchase agreements and other borrowed funds |
254,995 | 255,004 | 225,583 | 225,603 | ||||||||||||
Subordinated debentures |
125,096 | 64,933 | 120,167 | 69,935 | ||||||||||||
Accrued interest payable |
7,750 | 7,750 | 8,015 | 8,015 | ||||||||||||
Total financial liabilities |
$ | 5,384,866 | 5,352,242 | 4,975,517 | 4,941,251 | |||||||||||
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Table of Contents
ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
This Form 10-Q 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 Form 10-Q:
| 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 the Company has 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 the Companys common stock and the ability to raise additional capital in the future; | ||
| competition from other financial services companies in the Companys 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 Form 10-Q. 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.
26
Table of Contents
Results of Operations The three months ended September 30, 2010
Compared to June 30, 2010 and September 30, 2009
Compared to June 30, 2010 and September 30, 2009
Performance Summary
The Company reported net earnings of $9.4 million for the third quarter of 2010, an increase of
$10.9 million, or 717 percent, from the $1.5 million net loss reported for the third quarter of
2009. The diluted earnings per share of $0.13 for the quarter represented a 533 percent increase
from the diluted loss per share of $0.03 for the same quarter of 2009. This quarters earnings per
share includes $0.02 per share from the gain on sale of investments, net of tax. Annualized return
on average assets and return on average equity for the third quarter were 0.60 percent and 4.37
percent, respectively, which compares with prior year returns for the third quarter of (0.11)
percent and (0.88) percent, respectively.
Revenue Summary
Three Months ended | ||||||||||||
September 30, | June 30, | September 30, | ||||||||||
(Unaudited - Dollars in thousands) | 2010 | 2010 | 2009 | |||||||||
Net interest income |
||||||||||||
Interest income |
$ | 72,103 | 73,818 | 74,430 | ||||||||
Interest expense |
13,581 | 13,749 | 13,801 | |||||||||
Total net interest income |
58,522 | 60,069 | 60,629 | |||||||||
Non-interest income |
||||||||||||
Service charges, loan fees, and other fees |
13,222 | 11,900 | 12,103 | |||||||||
Gain on sale of loans |
7,367 | 6,133 | 5,613 | |||||||||
Gain on sale of investments |
2,041 | 242 | 2,667 | |||||||||
Other income |
1,355 | 3,143 | 1,317 | |||||||||
Total non-interest income |
23,985 | 21,418 | 21,700 | |||||||||
$ | 82,507 | 81,487 | 82,329 | |||||||||
Net interest margin (tax-equivalent) |
4.19 | % | 4.35 | % | 4.80 | % | ||||||
$ Change from | $ Change from | % Change from | % Change from | |||||||||||||
June 30, | September 30, | June 30, | September 30, | |||||||||||||
(Unaudited - Dollars in thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Net interest income |
||||||||||||||||
Interest income |
$ | (1,715 | ) | (2,327 | ) | -2 | % | -3 | % | |||||||
Interest expense |
(168 | ) | (220 | ) | -1 | % | -2 | % | ||||||||
Total net interest income |
(1,547 | ) | (2,107 | ) | -3 | % | -3 | % | ||||||||
Non-interest income |
||||||||||||||||
Service charges, loan fees, and other fees |
1,322 | 1,119 | 11 | % | 9 | % | ||||||||||
Gain on sale of loans |
1,234 | 1,754 | 20 | % | 31 | % | ||||||||||
Gain on sale of investments |
1,799 | (626 | ) | 743 | % | -23 | % | |||||||||
Other income |
(1,788 | ) | 38 | -57 | % | 3 | % | |||||||||
Total non-interest income |
2,567 | 2,285 | 12 | % | 11 | % | ||||||||||
$ | 1,020 | 178 | 1 | % | 0 | % | ||||||||||
27
Table of Contents
Net Interest Income
Net interest income decreased $1.5 million from the prior quarter and decreased $2.1 million over
prior years third quarter. The current quarter net interest margin as a percentage of earning
assets, on a tax-equivalent basis, was 4.19 percent which is 16 basis points lower than the 4.35
percent for the prior quarter and included a 7 basis points reduction from the reversal of interest
on non-accrual loans. The net interest margin for the current quarter is 61 basis points lower
than the 4.80 percent result for the third quarter of 2009. The decrease in interest income is due
to a lower yield and volume of loans coupled with an increase in lower yielding investment
securities. The decrease in interest expense is primarily attributable to the rate decreases on
interest bearing deposits and lower cost borrowings.
Non-interest Income
Non-interest income for the quarter totaled $24.0 million, an increase of $2.6 million over the
prior quarter and $2.3 million over the same quarter as last year. Fee income of $13.2 million
increased $1.3 million, or 11 percent, during the quarter and $1.1 million, or 9 percent over prior
years quarter, such increases resulting from significant growth in debit card income. Gain on
sale of loans increased $1.2 million, or 20 percent, over the prior quarter due to a reduction in
mortgage interest rates during the second quarter which continued in the third quarter and led to
greater loan origination volume. Gain on sale of loans increased $1.8 million, or 31 percent, over
the same period last year, primarily the result of significant purchase and refinance activity this
period compared to the third quarter 2009. Net gain on sale of investments was $2.0 million for
the current quarter 2010 compared to $242 thousand for the previous quarter and $2.7 million for
the prior years quarter. Such sales were executed with the proceeds used to purchase securities
that enable the investment portfolio to perform well across varying interest rates. Other income
of $1.4 million for the current quarter is a decrease of $1.8 million from the prior quarter, such
decrease relates to the second quarter sale of Mountain Wests merchant card servicing portfolio.
28
Table of Contents
Non-interest Expense
Three Months ended | ||||||||||||
September 30, | June 30, | September 30, | ||||||||||
(Unaudited - Dollars in thousands) | 2010 | 2010 | 2009 | |||||||||
Compensation, employee benefits and related expense |
$ | 22,235 | 21,652 | 20,935 | ||||||||
Occupancy and equipment expense |
6,034 | 5,988 | 5,835 | |||||||||
Advertising and promotions |
1,912 | 1,644 | 1,596 | |||||||||
Outsourced data processing expense |
750 | 761 | 830 | |||||||||
Core deposit intangibles amortization |
801 | 801 | 758 | |||||||||
Other real estate owned expense |
9,655 | 7,373 | 2,881 | |||||||||
Federal Deposit Insurance Corporation premiums |
2,633 | 2,165 | 1,699 | |||||||||
Other expenses |
7,995 | 7,852 | 7,362 | |||||||||
Total non-interest expense |
$ | 52,015 | 48,236 | 41,896 | ||||||||
$ Change from | $ Change from | % Change from | % Change from | |||||||||||||
June 30, | September 30, | June 30, | September 30, | |||||||||||||
(Unaudited - Dollars in thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Compensation, employee benefits and related expense |
$ | 583 | 1,300 | 3 | % | 6 | % | |||||||||
Occupancy and equipment expense |
46 | 199 | 1 | % | 3 | % | ||||||||||
Advertising and promotions |
268 | 316 | 16 | % | 20 | % | ||||||||||
Outsourced data processing expense |
(11 | ) | (80 | ) | -1 | % | -10 | % | ||||||||
Core deposit intangibles amortization |
| 43 | 0 | % | 6 | % | ||||||||||
Other real estate owned expense |
2,282 | 6,774 | 31 | % | 235 | % | ||||||||||
Federal Deposit Insurance Corporation premiums |
468 | 934 | 22 | % | 55 | % | ||||||||||
Other expenses |
143 | 633 | 2 | % | 9 | % | ||||||||||
Total non-interest expense |
$ | 3,779 | 10,119 | 8 | % | 24 | % | |||||||||
Non-interest expense of $52.0 million for the quarter increased by $3.8 million, or 8 percent,
from the prior quarter and increased $10.1 million, or 24 percent, from the prior year third
quarter. Compensation and employee benefits of $22.2 million increased $583 thousand, or 3
percent, from the previous quarter, partly the result of higher commission expense paid on mortgage
originations, and $1.3 million, or 6 percent, from the prior year third quarter which is primarily
due to the addition of First National employees in October 2009. The number of full-time
equivalent employees increased slightly from 1,654 to 1,658 during the quarter, and increased from
1,577 since the end of the 2009 third quarter.
Occupancy and equipment expense increased $46 thousand, or 1 percent, from the prior quarter and
increased $199 thousand, or 3 percent, from the prior year third quarter. Advertising and
promotion expense increased $268 thousand, or 16 percent, from prior quarter and increased $316
thousand, or 20 percent, from the third quarter of 2009. The majority of such increases were
driven by aggressive advertising relating to the disposal of other real estate owned. Other real
estate owned expenses increased $2.3 million, or 31 percent, from prior quarter and increased $6.8
million, or 235 percent, from the prior year third quarter. The current quarter other real estate
owned expense of $9.7 million included $1.2 million of operating expenses, $6.4 million of fair
value write-downs, and $2.1 million of loss on sale of other real estate owned. The other real
estate owned expenses have increased as the Company continues to aggressively dispose of problem
assets and other real estate owned. FDIC premiums increased $468 thousand, or 22 percent, from
prior quarter and increased $934 thousand, or 55 percent, from the prior year third quarter. Other
expenses increased $143 thousand, or 2 percent, from the prior quarter and increased $633 thousand,
or 9 percent, from the prior year third quarter which was primarily due to an increase in debt card
expenses reflecting the increase in debit card activity and number of debit cards.
29
Table of Contents
In the current quarter, the Company revised the 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 the quarter was 50 percent compared to 47 percent for the
prior year third quarter. The increase resulted from continuing pressure on net interest income in
the current low interest rate environment coupled with small increases in operating expenses.
Provision for Loan Losses
The current quarter provision for loan loss expense was $19.2 million, an increase of $1.9 million
from the prior quarter and a decrease of $27.9 million from the same quarter in 2009. Net
charged-off loans for the current quarter were $26.6 million compared to $19.2 million for the
prior quarter and $19.1 million for the same quarter in 2009.
The determination of the allowance for loan and lease losses (ALLL or allowance) and the
related provision for loan losses is a critical accounting estimate that involves managements
judgments about current environmental factors which affect loan losses, such factors including
economic conditions, changes in collateral values, net charge-offs, and other factors discussed in
Additional Managements Discussion and Analysis Allowance for Loan and Lease Losses.
Results of Operations The nine months ended September 30, 2010
Compared to the nine months ended September 30, 2009
Compared to the nine months ended September 30, 2009
Performance Summary
Net earnings for the nine months ended September 30, 2010 were $32.7 million, which is an increase
of $7.8 million or 31 percent, over the prior year. Diluted earnings per share of $0.48 is an
increase of 20 percent over $0.40 earned in 2009.
Revenue Summary
Nine Months ended | ||||||||||||||||
September 30, | September 30, | |||||||||||||||
(Unaudited - Dollars in thousands) | 2010 | 2009 | $ Change | % Change | ||||||||||||
Net interest income |
||||||||||||||||
Interest income |
$ | 219,319 | $ | 224,382 | $ | (5,063 | ) | -2 | % | |||||||
Interest expense |
41,214 | 42,894 | (1,680 | ) | -4 | % | ||||||||||
Total net interest income |
178,105 | 181,488 | (3,383 | ) | -2 | % | ||||||||||
Non-interest income |
||||||||||||||||
Service charges, loan fees, and other fees |
35,768 | 33,659 | 2,109 | 6 | % | |||||||||||
Gain on sale of loans |
17,391 | 20,834 | (3,443 | ) | -17 | % | ||||||||||
Gain on sale of investments |
2,597 | 2,667 | (70 | ) | -3 | % | ||||||||||
Other income |
5,830 | 3,235 | 2,595 | 80 | % | |||||||||||
Total non-interest income |
61,586 | 60,395 | 1,191 | 2 | % | |||||||||||
$ | 239,691 | $ | 241,883 | $ | (2,192 | ) | -1 | % | ||||||||
Net interest margin (tax-equivalent) |
4.32 | % | 4.87 | % | ||||||||||||
30
Table of Contents
Net Interest Income
Net interest income for the nine month period decreased $3.4 million, or 2 percent, over the same
period in 2009. Total interest income decreased $5.1 million, or 2 percent, while total interest
expense decreased $1.7 million, or 4 percent. The net interest margin as a percentage of earning
assets, on a tax-equivalent basis, decreased 55 basis points from 4.87 percent for 2009 to 4.32
percent for 2010 and included a 6 basis points reduction from the reversal of interest on
non-accrual loans.
Non-interest Income
Non-interest income increased for the nine month period of 2010 by $1.2 million over the same
period in 2009. Fee income for the first nine months of 2010 has increased $2.1 million, or 6
percent, compared to the prior year primarily from an increase in debit card income. Gain on sale
of loans decreased $3.4 million, or 17 percent, over the first nine months of last year, primarily
the result of significant refinance activity in the first half of 2009. Other income increased
$2.6 million over the same period in 2009, of which $1.8 million relates to the second quarter 2010
sale of Mountain Wests merchant card servicing portfolio.
Non-interest Expense
Nine Months ended | ||||||||||||||||
September 30, | September 30, | |||||||||||||||
(Unaudited - Dollars in thousands) | 2010 | 2009 | $ Change | % Change | ||||||||||||
Compensation, employee benefits and related
expense |
$ | 65,243 | $ | 63,589 | $ | 1,654 | 3 | % | ||||||||
Occupancy and equipment expense |
17,970 | 17,341 | 629 | 4 | % | |||||||||||
Advertising and promotions |
5,148 | 5,042 | 106 | 2 | % | |||||||||||
Outsourced data processing expense |
2,205 | 2,181 | 24 | 1 | % | |||||||||||
Core deposit intangibles amortization |
2,422 | 2,294 | 128 | 6 | % | |||||||||||
Other real estate owned expense |
19,346 | 5,722 | 13,624 | 238 | % | |||||||||||
Federal Deposit Insurance Corporation premiums |
6,998 | 6,700 | 298 | 4 | % | |||||||||||
Other expenses |
22,880 | 21,616 | 1,264 | 6 | % | |||||||||||
Total non-interest expense |
$ | 142,212 | $ | 124,485 | $ | 17,727 | 14 | % | ||||||||
Non-interest expense for the first nine months of 2010 increased by $17.7 million, or 14
percent, from the same period last year, of which 11 percent related to other real estate owned
expense. The other real estate owned expenses of $19.3 million for the first nine months of 2010
included $3.3 million of operating expenses, $9.7 million of fair value write-downs, and $6.3
million of loss on sale of other real estate owned. FDIC premiums increased $298 thousand, or 4
percent, from the prior year which included a second quarter special assessment of $2.5 million.
Compensation and employee benefits increased $1.7 million, or 3 percent, from 2009. Occupancy and
equipment expense increased $629 thousand, or 4 percent, from 2009. Advertising and promotion
expense increased by $106 thousand, or 2 percent, from 2009. Other real estate owned expense
increased $13.6 million, or 238 percent, from the prior year first nine months. Other expense
increased $1.3 million, or 6 percent, from the prior year.
The efficiency ratio for the first nine months of 2010 was 50 percent compared to 46 percent for
the prior years first nine months. The increase in efficiency ratio resulted from continuing
pressure on net interest income in the current low interest rate environment coupled with small
increases in operating expenses.
Provision for Loan Losses
The provision for loan loss expense was $57.3 million for the first nine months of 2010, a decrease
of $30.6 million, or 35 percent, from the same period in 2009. Net charged-off loans during the
nine months ended September 30, 2010 was $66.0 million, an increase of $26.7 million from the same
period in 2009.
31
Table of Contents
Financial Condition Analysis
Assets
$ Change from | $ Change from | |||||||||||||||||||
September 30, | December 31, | September 30, | December 31, | September 30, | ||||||||||||||||
(Unaudited - Dollars in thousands) | 2010 | 2009 | 2009 | 2009 | 2009 | |||||||||||||||
Cash on hand and in banks |
$ | 83,684 | 120,731 | 93,728 | (37,047 | ) | (10,044 | ) | ||||||||||||
Investments, interest bearing deposits,
FHLB stock, FRB stock, and fed funds |
1,856,989 | 1,596,238 | 1,262,542 | 260,751 | 594,447 | |||||||||||||||
Loans |
||||||||||||||||||||
Residential real estate |
787,335 | 797,626 | 787,911 | (10,291 | ) | (576 | ) | |||||||||||||
Commercial |
2,515,767 | 2,613,218 | 2,558,270 | (97,451 | ) | (42,503 | ) | |||||||||||||
Consumer and other |
680,858 | 719,401 | 700,069 | (38,543 | ) | (19,211 | ) | |||||||||||||
Loans receivable, gross |
3,983,960 | 4,130,245 | 4,046,250 | (146,285 | ) | (62,290 | ) | |||||||||||||
Allowance for loan and lease losses |
(134,257 | ) | (142,927 | ) | (125,330 | ) | 8,670 | (8,927 | ) | |||||||||||
Loans receivable, net |
3,849,703 | 3,987,318 | 3,920,920 | (137,615 | ) | (71,217 | ) | |||||||||||||
Other assets |
482,283 | 487,508 | 431,110 | (5,225 | ) | 51,173 | ||||||||||||||
Total assets |
$ | 6,272,659 | 6,191,795 | 5,708,300 | 80,864 | 564,359 | ||||||||||||||
Total assets at September 30, 2010 were $6.273 billion, which is $81 million, or 1 percent
greater than total assets of $6.192 billion at December 31, 2009. Total assets increased $564
million, or 10 percent, from September 30, 2009, of which $272 million, including $161 million in
loans, related to the acquisition of First National in October 2009.
Investment securities, including interest bearing deposits, FHLB and FRB stock, and federal funds
sold, have increased $261 million, or 16 percent, from December 31, 2009 and increased $594
million, or 47 percent, from September 30, 2009. The Company continues to purchase investment
securities as loan originations slow, such purchases predominately mortgage-backed securities
issued by Freddie Mac and Fannie Mae with low yields and short-weighted average lives. The Company
also continues to selectively purchase tax-exempt investment securities. Investment securities
represent 30 percent of total assets at September 30, 2010 versus 22 percent of total assets at
September 30, 2009.
At September 30, 2010, gross loans were $3.984 billion, a decrease of $146 million over gross loans
of $4.130 billion at December 31, 2009. The largest category decrease was in commercial loans
which decreased $97 million, or 4 percent. The decrease in each loan category is due to the
slowing loan demand within the Companys market areas resulting from the current economic downturn.
Excluding net charge-offs of $66 million, loans transferred to other real estate of $67 million,
and an increase in loans held for sale of $49 million, loans decreased $62 million, or 2 percent
annualized, from December 31, 2009.
32
Table of Contents
Liabilities
$ Change from | $ Change from | |||||||||||||||||||
September 30, | December 31, | September 30, | December 31, | September 30, | ||||||||||||||||
(Unaudited - Dollars in thousands) | 2010 | 2009 | 2009 | 2009 | 2009 | |||||||||||||||
Non-interest bearing deposits |
$ | 887,637 | 810,550 | 801,261 | 77,087 | 86,376 | ||||||||||||||
Interest bearing deposits |
3,530,204 | 3,289,602 | 2,809,756 | 240,602 | 720,448 | |||||||||||||||
Federal Home Loan Bank advances |
579,184 | 790,367 | 640,735 | (211,183 | ) | (61,551 | ) | |||||||||||||
Federal Reserve Bank discount window |
| 225,000 | 370,000 | (225,000 | ) | (370,000 | ) | |||||||||||||
Securities sold under agreements to
repurchase and other borrowed funds |
254,995 | 226,251 | 225,583 | 28,744 | 29,412 | |||||||||||||||
Other liabilities |
41,889 | 39,147 | 42,696 | 2,742 | (807 | ) | ||||||||||||||
Subordinated debentures |
125,096 | 124,988 | 120,167 | 108 | 4,929 | |||||||||||||||
Total liabilities |
$ | 5,419,005 | 5,505,905 | 5,010,198 | (86,900 | ) | 408,807 | |||||||||||||
As of September 30, 2010, non-interest bearing deposits of $888 million increased $77 million,
or 13 percent annualized, since December 31, 2009 and increased $86 million, or 11 percent, since
September 30, 2009. Interest bearing deposits of $3.530 billion at September 30, 2010 include $187
million issued through the Certificate of Deposit Account Registry System (CDARS). Interest
bearing deposits increased $241 million, or 10 percent annualized, from December 31, 2009 and $720
million, or 26 percent from September 30, 2009. The increase in interest bearing deposits from
December 31, 2009 and September 30, 2009 includes $175 million and $292 million, respectively, from
wholesale deposits, including CDARS. The increase in non-interest bearing deposits and interest
bearing deposits from September 30, 2009 includes $39 million and $197 million, respectively, from
the First National acquisition. The increase in both interest bearing and non-interest bearing
deposits 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 both interest and non-interest bearing deposits have allowed the Company to reduce
overall borrowings. Federal Home Loan Bank advances decreased $211 million, or 27 percent, from
December 31, 2009 and decreased $62 million, or 10 percent, from September 30, 2009. There were no
Federal Reserve Bank borrowings through the Term Auction Facility program (TAF) at September 30,
2010 due to cessation of the TAF program by the Federal Reserve. TAF borrowings totaled $225
million at December 31, 2009 and $345 million at September 30, 2009. Repurchase agreements and
other borrowed funds were $255 million at September 30, 2010, an increase of $29 million from
December 31, 2009 and September 30, 2009.
33
Table of Contents
Stockholders Equity
$ Change from | $ Change from | |||||||||||||||||||
September 30, | December 31, | September 30, | December 31, | September 30, | ||||||||||||||||
Unaudited - Dollars in thousands, except per share data) | 2010 | 2009 | 2009 | 2009 | 2009 | |||||||||||||||
Common equity |
$ | 837,212 | 686,238 | 682,956 | 150,974 | 154,256 | ||||||||||||||
Accumulated other comprehensive income (loss) |
16,442 | (348 | ) | 15,146 | 16,790 | 1,296 | ||||||||||||||
Total stockholders equity |
853,654 | 685,890 | 698,102 | 167,764 | 155,552 | |||||||||||||||
Goodwill and core deposit intangible, net |
(157,774 | ) | (160,196 | ) | (156,978 | ) | 2,422 | (796 | ) | |||||||||||
Tangible stockholders equity |
$ | 695,880 | 525,694 | 541,124 | 170,186 | 154,756 | ||||||||||||||
Stockholders equity to total assets |
13.61 | % | 11.08 | % | 12.23 | % | ||||||||||||||
Tangible stockholders equity to total tangible assets |
11.38 | % | 8.72 | % | 9.75 | % | ||||||||||||||
Book value per common share |
$ | 11.87 | 11.13 | 11.35 | 0.74 | 0.52 | ||||||||||||||
Tangible book value per common share |
$ | 9.68 | 8.53 | 8.80 | 1.15 | 0.88 | ||||||||||||||
Market price per share at end of year |
$ | 14.59 | 13.72 | 14.94 | 0.87 | (0.35 | ) |
Total stockholders equity and book value per share increased $168 million and $0.74 per share
and $156 million and $0.52 per share, from December 31, 2010 and September 30, 2009, respectively,
such increases are largely the result of the $146 million in net proceeds from the Companys March
equity offering of 10.291 million shares. Tangible stockholders equity has increased $170
million, or 32 percent, and $155 million, or 29 percent, since December 31, 2009 and September 30,
2009, respectively, with tangible stockholders equity to tangible assets at 11.38 percent, 8.72
percent, and 9.75 percent as of September 30, 2010, December 31, 2010, and
September 30, 2009, respectively. Accumulated other comprehensive income (loss), representing net
unrealized gains or losses (net of tax) on investment securities, increased $16.8 million since
December 31, 2009 and $1.3 million from September 30, 2009.
On September 29, 2010, the Board of Directors declared a cash dividend of $0.13 per share, payable
October 21, 2010 to shareholders of record on October 12, 2010. Future cash dividends
will depend on a variety of factors, including net income, capital, asset quality and general
economic conditions.
Additional Managements Discussion and Analysis
Loan Portfolio
The following tables summarize selected information by bank and regulatory classification on the
Companys loan portfolio:
Loans Receivable, Gross by Bank | % Change | % Change | ||||||||||||||||||
Balance | Balance | Balance | from | from | ||||||||||||||||
(Dollars in thousands) | 9/30/10 | 12/31/09 | 9/30/09 | 12/31/09 | 9/30/09 | |||||||||||||||
Glacier |
$ | 891,508 | 942,254 | 950,000 | -5 | % | -6 | % | ||||||||||||
Mountain West |
884,648 | 957,451 | 971,240 | -8 | % | -9 | % | |||||||||||||
First Security |
575,980 | 566,713 | 574,371 | 2 | % | 0 | % | |||||||||||||
1st Bank |
275,650 | 296,913 | 299,095 | -7 | % | -8 | % | |||||||||||||
Western |
322,452 | 323,375 | 332,709 | 0 | % | -3 | % | |||||||||||||
Big Sky |
259,474 | 270,970 | 283,110 | -4 | % | -8 | % | |||||||||||||
Valley |
194,705 | 187,283 | 188,221 | 4 | % | 3 | % | |||||||||||||
First National |
151,134 | 153,058 | | -1 | % | n/m | ||||||||||||||
Citizens |
173,941 | 166,049 | 172,769 | 5 | % | 1 | % | |||||||||||||
First Bank-MT |
114,665 | 117,017 | 123,846 | -2 | % | -7 | % | |||||||||||||
San Juans |
143,616 | 149,162 | 150,889 | -4 | % | -5 | % | |||||||||||||
Eliminations |
(3,813 | ) | | | n/m | n/m | ||||||||||||||
Total |
$ | 3,983,960 | 4,130,245 | 4,046,250 | -4 | % | -2 | % | ||||||||||||
34
Table of Contents
Land, Lot and Other Construction Loans by Bank | % Change | % Change | ||||||||||||||||||
Balance | Balance | Balance | from | from | ||||||||||||||||
(Dollars in thousands) | 9/30/10 | 12/31/09 | 9/30/09 | 12/31/09 | 9/30/09 | |||||||||||||||
Glacier |
$ | 150,167 | 165,734 | 164,448 | -9 | % | -9 | % | ||||||||||||
Mountain West |
173,543 | 217,078 | 238,268 | -20 | % | -27 | % | |||||||||||||
First Security |
74,168 | 71,404 | 73,432 | 4 | % | 1 | % | |||||||||||||
1st Bank |
29,520 | 36,888 | 39,218 | -20 | % | -25 | % | |||||||||||||
Western |
30,552 | 32,045 | 37,887 | -5 | % | -19 | % | |||||||||||||
Big Sky |
56,440 | 71,365 | 73,944 | -21 | % | -24 | % | |||||||||||||
Valley |
13,423 | 14,704 | 15,450 | -9 | % | -13 | % | |||||||||||||
First National |
12,630 | 10,247 | | 23 | % | n/m | ||||||||||||||
Citizens |
12,622 | 13,263 | 21,816 | -5 | % | -42 | % | |||||||||||||
First Bank-MT |
799 | 1,010 | 5,804 | -21 | % | -86 | % | |||||||||||||
San Juans |
31,389 | 39,621 | 36,202 | -21 | % | -13 | % | |||||||||||||
Total |
$ | 585,253 | 673,359 | 706,469 | -13 | % | -17 | % | ||||||||||||
Land, Lot and Other Construction Loans by Bank, by Type at 9/30/10 | ||||||||||||||||||||||||
Consumer | Developed | Commercial | ||||||||||||||||||||||
Land | Land or | Unimproved | Lots for | Developed | Other | |||||||||||||||||||
(Dollars in thousands) | Development | Lot | Land | Operative Builders | Lot | Construction | ||||||||||||||||||
Glacier |
$ | 60,405 | 28,784 | 28,513 | 8,873 | 23,592 | | |||||||||||||||||
Mountain West |
45,079 | 63,388 | 17,680 | 23,407 | 8,855 | 15,134 | ||||||||||||||||||
First Security |
27,795 | 6,994 | 20,125 | 4,512 | 499 | 14,243 | ||||||||||||||||||
1st Bank |
7,968 | 10,565 | 3,782 | 218 | 2,305 | 4,682 | ||||||||||||||||||
Western |
15,190 | 5,938 | 4,858 | 587 | 1,863 | 2,116 | ||||||||||||||||||
Big Sky |
20,402 | 17,622 | 9,290 | 729 | 2,377 | 6,020 | ||||||||||||||||||
Valley |
2,259 | 5,485 | 1,308 | 106 | 3,288 | 977 | ||||||||||||||||||
First National |
2,074 | 3,992 | 1,426 | 477 | 2,139 | 2,522 | ||||||||||||||||||
Citizens |
2,790 | 2,292 | 2,957 | 50 | 657 | 3,876 | ||||||||||||||||||
First Bank-MT |
| 50 | 749 | | | | ||||||||||||||||||
San Juans |
3,384 | 16,821 | 2,253 | | 7,862 | 1,069 | ||||||||||||||||||
Total |
$ | 187,346 | 161,931 | 92,941 | 38,959 | 53,437 | 50,639 | |||||||||||||||||
Custom & | ||||||||||||||||||||||||||||
Residential Construction Loans by Bank, by Type | % Change | % Change | Owner | Pre-Sold | ||||||||||||||||||||||||
Balance | Balance | Balance | from | from | Occupied | & Spec | ||||||||||||||||||||||
(Dollars in thousands) | 9/30/10 | 12/31/09 | 9/30/09 | 12/31/09 | 9/30/09 | 9/30/10 | 9/30/10 | |||||||||||||||||||||
Glacier |
$ | 42,975 | 57,183 | 72,828 | -25 | % | -41 | % | $ | 9,037 | 33,938 | |||||||||||||||||
Mountain West |
22,829 | 57,437 | 63,572 | -60 | % | -64 | % | 7,461 | 15,368 | |||||||||||||||||||
First Security |
12,375 | 19,664 | 15,981 | -37 | % | -23 | % | 4,628 | 7,747 | |||||||||||||||||||
1st Bank |
10,037 | 17,633 | 18,783 | -43 | % | -47 | % | 6,589 | 3,448 | |||||||||||||||||||
Western |
1,294 | 2,245 | 3,709 | -42 | % | -65 | % | 871 | 423 | |||||||||||||||||||
Big Sky |
13,724 | 20,679 | 27,803 | -34 | % | -51 | % | 256 | 13,468 | |||||||||||||||||||
Valley |
5,550 | 5,170 | 5,380 | 7 | % | 3 | % | 4,455 | 1,095 | |||||||||||||||||||
First National |
2,105 | 2,612 | | -19 | % | n/m | 1,626 | 479 | ||||||||||||||||||||
Citizens |
11,175 | 13,211 | 16,705 | -15 | % | -33 | % | 5,166 | 6,009 | |||||||||||||||||||
First Bank-MT |
135 | 234 | 179 | -42 | % | -25 | % | 135 | | |||||||||||||||||||
San Juans |
8,421 | 13,811 | 13,549 | -39 | % | -38 | % | 8,026 | 395 | |||||||||||||||||||
Total |
$ | 130,620 | 209,879 | 238,489 | -38 | % | -45 | % | $ | 48,250 | 82,370 | |||||||||||||||||
35
Table of Contents
Single Family Residential Loans by Bank, by Type | % Change | % Change | 1st | Junior | ||||||||||||||||||||||||
Balance | Balance | Balance | from | from | Lien | Lien | ||||||||||||||||||||||
(Dollars in thousands) | 9/30/10 | 12/31/09 | 9/30/09 | 12/31/09 | 9/30/09 | 9/30/10 | 9/30/10 | |||||||||||||||||||||
Glacier |
$ | 193,110 | 204,789 | 205,203 | -6 | % | -6 | % | $ | 170,746 | 22,364 | |||||||||||||||||
Mountain West |
297,676 | 278,158 | 275,936 | 7 | % | 8 | % | 258,331 | 39,345 | |||||||||||||||||||
First Security |
93,629 | 82,141 | 82,349 | 14 | % | 14 | % | 79,130 | 14,499 | |||||||||||||||||||
1st Bank |
59,102 | 65,555 | 63,893 | -10 | % | -7 | % | 54,069 | 5,033 | |||||||||||||||||||
Western |
56,914 | 50,502 | 45,764 | 13 | % | 24 | % | 54,701 | 2,213 | |||||||||||||||||||
Big Sky |
34,895 | 33,308 | 33,840 | 5 | % | 3 | % | 31,327 | 3,568 | |||||||||||||||||||
Valley |
66,344 | 66,644 | 65,261 | 0 | % | 2 | % | 55,241 | 11,103 | |||||||||||||||||||
First National |
15,169 | 19,239 | | -21 | % | n/m | 11,794 | 3,375 | ||||||||||||||||||||
Citizens |
25,940 | 20,937 | 21,659 | 24 | % | 20 | % | 23,958 | 1,982 | |||||||||||||||||||
First Bank-MT |
9,314 | 10,003 | 10,592 | -7 | % | -12 | % | 8,138 | 1,176 | |||||||||||||||||||
San Juans |
29,164 | 22,811 | 22,790 | 28 | % | 28 | % | 27,571 | 1,593 | |||||||||||||||||||
Total |
$ | 881,257 | 854,087 | 827,287 | 3 | % | 7 | % | $ | 775,006 | 106,251 | |||||||||||||||||
Commercial Real Estate Loans by Bank, by Type | % Change | % Change | Owner | Non-Owner | ||||||||||||||||||||||||
Balance | Balance | Balance | from | from | Occupied | Occupied | ||||||||||||||||||||||
(Dollars in thousands) | 9/30/10 | 12/31/09 | 9/30/09 | 12/31/09 | 9/30/09 | 9/30/10 | 9/30/10 | |||||||||||||||||||||
Glacier |
$ | 228,090 | 232,552 | 235,576 | -2 | % | -3 | % | $ | 113,859 | 114,231 | |||||||||||||||||
Mountain West |
221,761 | 230,383 | 212,865 | -4 | % | 4 | % | 145,032 | 76,729 | |||||||||||||||||||
First Security |
225,806 | 224,425 | 223,756 | 1 | % | 1 | % | 152,480 | 73,326 | |||||||||||||||||||
1st Bank |
61,460 | 64,008 | 66,924 | -4 | % | -8 | % | 43,559 | 17,901 | |||||||||||||||||||
Western |
104,052 | 107,173 | 104,450 | -3 | % | 0 | % | 54,236 | 49,816 | |||||||||||||||||||
Big Sky |
90,337 | 82,303 | 83,489 | 10 | % | 8 | % | 54,758 | 35,579 | |||||||||||||||||||
Valley |
51,985 | 48,144 | 48,202 | 8 | % | 8 | % | 33,866 | 18,119 | |||||||||||||||||||
First National |
28,336 | 26,703 | | 6 | % | n/m | 22,406 | 5,930 | ||||||||||||||||||||
Citizens |
60,070 | 55,660 | 53,424 | 8 | % | 12 | % | 44,161 | 15,909 | |||||||||||||||||||
First Bank-MT |
17,095 | 18,827 | 13,772 | -9 | % | 24 | % | 11,070 | 6,025 | |||||||||||||||||||
San Juans |
49,530 | 47,838 | 54,525 | 4 | % | -9 | % | 28,820 | 20,710 | |||||||||||||||||||
Total |
$ | 1,138,522 | 1,138,016 | 1,096,983 | 0 | % | 4 | % | $ | 704,247 | 434,275 | |||||||||||||||||
Consumer Loans by Bank, by Type | % Change | % Change | Home Equity | Other | ||||||||||||||||||||||||
Balance | Balance | Balance | from | from | Line of Credit | Consumer | ||||||||||||||||||||||
(Dollars in thousands) | 9/30/10 | 12/31/09 | 9/30/09 | 12/31/09 | 9/30/09 | 9/30/10 | 9/30/10 | |||||||||||||||||||||
Glacier |
$ | 155,150 | 162,723 | 161,416 | -5 | % | -4 | % | $ | 139,773 | 15,377 | |||||||||||||||||
Mountain West |
71,818 | 71,702 | 72,696 | 0 | % | -1 | % | 62,729 | 9,089 | |||||||||||||||||||
First Security |
74,765 | 78,345 | 80,444 | -5 | % | -7 | % | 48,793 | 25,972 | |||||||||||||||||||
1st Bank |
41,937 | 46,455 | 46,686 | -10 | % | -10 | % | 16,654 | 25,283 | |||||||||||||||||||
Western |
46,772 | 48,946 | 49,912 | -4 | % | -6 | % | 33,309 | 13,463 | |||||||||||||||||||
Big Sky |
27,462 | 28,903 | 28,906 | -5 | % | -5 | % | 24,584 | 2,878 | |||||||||||||||||||
Valley |
25,204 | 24,625 | 25,753 | 2 | % | -2 | % | 15,771 | 9,433 | |||||||||||||||||||
First National |
26,416 | 27,320 | | -3 | % | n/m | 16,292 | 10,124 | ||||||||||||||||||||
Citizens |
30,566 | 29,253 | 28,276 | 4 | % | 8 | % | 24,174 | 6,392 | |||||||||||||||||||
First Bank-MT |
7,937 | 7,650 | 7,699 | 4 | % | 3 | % | 3,803 | 4,134 | |||||||||||||||||||
San Juans |
13,900 | 14,189 | 13,935 | -2 | % | 0 | % | 12,605 | 1,295 | |||||||||||||||||||
Total |
$ | 521,927 | 540,111 | 515,723 | -3 | % | 1 | % | $ | 398,487 | 123,440 | |||||||||||||||||
n/m | not measurable |
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Table of Contents
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 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, including the credit risk inherent in the loan and
lease portfolios, 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 parent companys 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 parent companys Board of Directors, the internal audit department, independent
credit reviewer 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 component and a general component. The specific component relates to loans that are
determined to be impaired. A valuation allowance is established when 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 lower than the carrying value of the impaired
loan and lease. The general 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 segment 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 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 the 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 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.
37
Table of Contents
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 $134.3 million adequate to cover inherent losses in the
loan and lease portfolios as of September 30, 2010. However, no assurance can be given that the
Company will not, in any particular period, sustain losses that are significant relative to the
amount reserved, 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
enhanced provisions for loan losses. See additional risk factors in Part II, ITEM 1A. Risk
Factors.
The following table summarizes the allocation of the ALLL:
September 30, 2010 | December 31, 2009 | September 30, 2009 | ||||||||||||||||||||||
Allowance | Percent | Allowance | Percent | Allowance | Percent | |||||||||||||||||||
for Loan and | of Loans in | for Loan and | of Loans in | for Loan and | of Loans in | |||||||||||||||||||
(Unaudited - Dollars in thousands) | Lease Losses | Category | Lease Losses | Category | Lease Losses | Category | ||||||||||||||||||
Residential real estate |
$ | 11,872 | 19.8 | % | 13,496 | 19.6 | % | 11,959 | 19.5 | % | ||||||||||||||
Commercial real estate |
61,092 | 46.3 | % | 66,791 | 45.9 | % | 59,471 | 47.7 | % | |||||||||||||||
Other commercial |
39,768 | 16.8 | % | 39,558 | 17.5 | % | 33,406 | 15.5 | % | |||||||||||||||
Consumer and other loans |
21,525 | 17.1 | % | 23,082 | 17.0 | % | 20,494 | 17.3 | % | |||||||||||||||
Totals |
$ | 134,257 | 100.0 | % | 142,927 | 100.0 | % | 125,330 | 100.0 | % | ||||||||||||||
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Table of Contents
The following tables summarize the ALLL experience at the dates indicated, including breakouts
by regulatory and bank subsidiary classification:
Nine Months ended | Year ended | Nine Months ended | ||||||||||
September 30, | December 31, | September 30, | ||||||||||
(Unaudited Dollars in thousands) | 2010 | 2009 | 2009 | |||||||||
Balance at beginning of period |
$ | 142,927 | 76,739 | 76,739 | ||||||||
Charge-offs |
||||||||||||
Residential real estate |
(12,287 | ) | (18,854 | ) | (10,031 | ) | ||||||
Commercial loans |
(51,274 | ) | (35,077 | ) | (26,408 | ) | ||||||
Consumer and other loans |
(5,307 | ) | (6,965 | ) | (4,552 | ) | ||||||
Total charge-offs |
(68,868 | ) | (60,896 | ) | (40,991 | ) | ||||||
Recoveries |
||||||||||||
Residential real estate |
695 | 423 | 372 | |||||||||
Commercial loans |
1,841 | 1,636 | 1,011 | |||||||||
Consumer and other loans |
344 | 407 | 294 | |||||||||
Total recoveries |
2,880 | 2,466 | 1,677 | |||||||||
Charge-offs, net of recoveries |
(65,988 | ) | (58,430 | ) | (39,314 | ) | ||||||
Provision for loan losses |
57,318 | 124,618 | 87,905 | |||||||||
Balance at end of period |
$ | 134,257 | 142,927 | 125,330 | ||||||||
Allowance for loan and lease losses as a
percentage of total loan and leases |
3.37 | % | 3.46 | % | 3.10 | % | ||||||
Net charge-offs as a percentage of total loans |
1.66 | % | 1.42 | % | 0.97 | % |
Provision for | ||||||||||||||||||||||||
Provision for | the Year-to-Date | ALLL | ||||||||||||||||||||||
Allowance for Loan and Lease Losses | Year-to-Date | Ended 9/30/10 | as a Percent | |||||||||||||||||||||
Balance | Balance | Balance | Ended | Over Net | of Loans | |||||||||||||||||||
(Dollars in thousands) | 9/30/10 | 12/31/09 | 9/30/09 | 9/30/10 | Charge-Offs | 9/30/10 | ||||||||||||||||||
Glacier |
$ | 34,936 | 38,978 | 35,835 | 18,300 | 0.8 | 3.92 | % | ||||||||||||||||
Mountain West |
28,963 | 37,551 | 32,686 | 23,300 | 0.7 | 3.27 | % | |||||||||||||||||
First Security |
19,007 | 18,242 | 15,673 | 5,100 | 1.2 | 3.30 | % | |||||||||||||||||
1st Bank |
11,224 | 10,895 | 10,038 | 2,150 | 1.2 | 4.07 | % | |||||||||||||||||
Western |
8,719 | 8,762 | 8,020 | 700 | 0.9 | 2.70 | % | |||||||||||||||||
Big Sky |
10,450 | 10,536 | 8,862 | 2,900 | 1.0 | 4.03 | % | |||||||||||||||||
Valley |
4,752 | 4,367 | 4,132 | 500 | 4.3 | 2.44 | % | |||||||||||||||||
First National |
2,498 | 1,679 | | 1,453 | 2.3 | 1.65 | % | |||||||||||||||||
Citizens |
6,000 | 4,865 | 4,064 | 1,900 | 2.5 | 3.45 | % | |||||||||||||||||
First Bank MT |
3,070 | 2,904 | 2,699 | 265 | 2.7 | 2.68 | % | |||||||||||||||||
San Juans |
4,638 | 4,148 | 3,321 | 750 | 2.9 | 3.23 | % | |||||||||||||||||
Total |
$ | 134,257 | 142,927 | 125,330 | 57,318 | 0.9 | 3.37 | % | ||||||||||||||||
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Table of Contents
Net Charge-Offs, Year-to-Date Period Ending, By Bank | ||||||||||||||||||||
Balance | Balance | Balance | Charge-Offs | Recoveries | ||||||||||||||||
(Dollars in thousands) | 9/30/10 | 12/31/09 | 9/30/09 | 9/30/10 | 9/30/10 | |||||||||||||||
Glacier |
$ | 22,342 | 12,012 | 4,155 | 22,762 | 420 | ||||||||||||||
Mountain West |
31,888 | 28,931 | 21,296 | 32,521 | 633 | |||||||||||||||
First Security |
4,335 | 3,745 | 1,889 | 5,431 | 1,096 | |||||||||||||||
1st Bank |
1,821 | 5,917 | 5,024 | 2,288 | 467 | |||||||||||||||
Western |
743 | 1,500 | 1,342 | 827 | 84 | |||||||||||||||
Big Sky |
2,986 | 4,896 | 4,370 | 3,073 | 87 | |||||||||||||||
Valley |
115 | 414 | 349 | 125 | 10 | |||||||||||||||
First National |
634 | 4 | | 655 | 21 | |||||||||||||||
Citizens |
765 | 656 | 532 | 771 | 6 | |||||||||||||||
First Bank-MT |
99 | 26 | 31 | 104 | 5 | |||||||||||||||
San Juans |
260 | 329 | 326 | 311 | 51 | |||||||||||||||
Total |
$ | 65,988 | 58,430 | 39,314 | 68,868 | 2,880 | ||||||||||||||
Net Charge-Offs (Recoveries), Year-to-Date | ||||||||||||||||||||
Period Ending, By Loan Type | ||||||||||||||||||||
Balance | Balance | Balance | Charge-Offs | Recoveries | ||||||||||||||||
(Dollars in thousands) | 9/30/10 | 12/31/09 | 9/30/09 | 9/30/10 | 9/30/10 | |||||||||||||||
Residential construction |
$ | 6,248 | 13,455 | 6,363 | 6,530 | 282 | ||||||||||||||
Land, lot and other construction |
37,456 | 28,310 | 22,567 | 38,465 | 1,009 | |||||||||||||||
Commercial real estate |
7,965 | 1,187 | 763 | 8,108 | 143 | |||||||||||||||
Commercial and industrial |
4,010 | 3,610 | 2,022 | 4,655 | 645 | |||||||||||||||
1-4 family |
6,771 | 7,242 | 4,745 | 7,195 | 424 | |||||||||||||||
Home equity lines of credit |
2,987 | 2,357 | 1,419 | 3,015 | 28 | |||||||||||||||
Consumer |
583 | 1,895 | 1,370 | 854 | 271 | |||||||||||||||
Other |
(32 | ) | 374 | 65 | 46 | 78 | ||||||||||||||
Total |
$ | 65,988 | 58,430 | 39,314 | 68,868 | 2,880 | ||||||||||||||
At September 30, 2010, the allowance for loan and lease losses was $134.3 million, an increase
of $8.9 million from a year ago and a decrease of $8.7 million from year end. The allowance was
3.37 percent of total loans outstanding at September 30, 2010, such percentage was down from the
3.51 percent at June 30, 2010, but higher than the 3.10 percent at September 30, 2009. 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 subsidiary bank.
The allowance determined by each of the community bank subsidiaries is combined together into a
single allowance for the Company. As of September 30, 2010 and 2009, the Companys allowance
consisted of the following components:
September 30, | September 30, | |||||||
(Unaudited Dollars in thousands) | 2010 | 2009 | ||||||
Specific allowance |
$ | 18,622 | 23,056 | |||||
General allowance |
115,635 | 102,274 | ||||||
Total allowance |
$ | 134,257 | 125,330 | |||||
The specific valuation allowance of $18.6 million pertains to total impaired loans of $232.4
million. Included in the impaired loans is $144.5 million of loans which have no specific
valuation allowance since the fair values (less estimated costs to sell) exceed the carrying values
of such loans.
40
Table of Contents
The increase in the ALLL was primarily due to the increase in non-performing assets since September
30, 2009 and a continuing downturn in global, national and local economies. 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.
The soft economic conditions during much of 2009, though stabilized during the first nine months of
2010, included the declining sales of existing real property (e.g., single family residential,
multi-family, commercial buildings), 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 9.6 at September 30, 2010,
the unemployment rates for the states in which the community bank subsidiaries conduct operations
were significantly lower throughout 2009 and in the first nine months of 2010 than the national
unemployment percentages. Agricultural prices declines in livestock and grain in 2009 have
significantly recovered in the first nine months of 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
Companys 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.
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.
41
Table of Contents
Non-performing Assets
The following tables summarize information regarding non-performing assets at the dates indicated,
including breakouts by regulatory and bank subsidiary classification:
September 30, | December 31, | September 30, | ||||||||||
(Unaudited - Dollars in thousands) | 2010 | 2009 | 2009 | |||||||||
Non-accrual loans |
||||||||||||
Residential real estate |
$ | 23,705 | 20,093 | 17,295 | ||||||||
Commercial |
161,838 | 168,328 | 159,894 | |||||||||
Consumer and other |
7,152 | 9,860 | 8,388 | |||||||||
Total |
192,695 | 198,281 | 185,577 | |||||||||
Accruing loans 90 days or more overdue |
||||||||||||
Residential real estate |
709 | 1,965 | 371 | |||||||||
Commercial |
4,202 | 1,311 | 1,586 | |||||||||
Consumer and other |
424 | 2,261 | 934 | |||||||||
Total |
5,335 | 5,537 | 2,891 | |||||||||
Other real estate owned |
63,440 | 57,320 | 54,537 | |||||||||
Total non-performing loans and real
estate and other assets owned |
$ | 261,470 | 261,138 | 243,005 | ||||||||
Allowance for loan and lease losses as a
percentage of non-performing assets |
51 | % | 55 | % | 52 | % | ||||||
Non-performing assets as a percentage
of total subsidiary assets |
4.03 | % | 4.13 | % | 4.10 | % | ||||||
Accruing loans 30-89 days overdue |
$ | 40,923 | 87,491 | 43,606 | ||||||||
Interest income 1 |
$ | 8,263 | 11,730 | 8,175 |
1 | Amounts represent estimated interest income that would have been recognized on loans accounted for on a non-accrual basis for the nine months ended September 30, 2010, year ended December 31, 2009 and nine months ended September 30, 2009 had such loans performed pursuant to contractual terms. |
Non- | Accruing | Other | ||||||||||||||||||||||
Non-performing Assets, by Loan Type | Accruing | Loans 90 Days | Real Estate | |||||||||||||||||||||
Balance | Balance | Balance | Loans | or More Overdue | Owned | |||||||||||||||||||
(Dollars in thousands) | 9/30/10 | 12/31/09 | 9/30/09 | 9/30/10 | 9/30/10 | 9/30/10 | ||||||||||||||||||
Custom and owner
occupied construction |
$ | 4,126 | 3,281 | 1,131 | 1,752 | 1,609 | 765 | |||||||||||||||||
Pre-sold and spec construction |
19,628 | 29,580 | 39,812 | 17,016 | | 2,612 | ||||||||||||||||||
Land development |
81,505 | 88,488 | 84,929 | 58,443 | | 23,062 | ||||||||||||||||||
Consumer land or lots |
11,488 | 10,120 | 12,092 | 7,101 | 678 | 3,709 | ||||||||||||||||||
Unimproved land |
40,082 | 32,453 | 29,779 | 25,366 | | 14,716 | ||||||||||||||||||
Developed lots for operative
builders |
8,721 | 11,565 | 10,909 | 7,297 | | 1,424 | ||||||||||||||||||
Commercial lots |
3,219 | 909 | 1,011 | 3,183 | | 36 | ||||||||||||||||||
Other construction |
3,485 | | | 3,485 | | | ||||||||||||||||||
Commercial real estate |
30,107 | 32,300 | 21,475 | 20,757 | 379 | 8,971 | ||||||||||||||||||
Commercial and industrial |
14,005 | 12,271 | 9,235 | 12,195 | 1,780 | 30 | ||||||||||||||||||
Agriculture loans |
5,645 | 283 | 1,121 | 5,115 | 125 | 405 | ||||||||||||||||||
1-4 family |
31,782 | 30,868 | 24,615 | 24,652 | 412 | 6,718 | ||||||||||||||||||
Home equity lines of credit |
5,446 | 6,234 | 5,539 | 4,432 | 253 | 761 | ||||||||||||||||||
Consumer |
746 | 1,042 | 923 | 416 | 99 | 231 | ||||||||||||||||||
Other |
1,485 | 1,744 | 434 | 1,485 | | | ||||||||||||||||||
Total |
$ | 261,470 | 261,138 | 243,005 | 192,695 | 5,335 | 63,440 | |||||||||||||||||
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Non-Accrual & | ||||||||||||||||||||||||
Accruing 30-89 Days Delinquent Loans and | Accruing | Accruing Loans | Other | |||||||||||||||||||||
Non-Performing Assets, by Bank | 30-89 Days | 90 Days or | Real Estate | |||||||||||||||||||||
Balance | Balance | Balance | Overdue | More Overdue | Owned | |||||||||||||||||||
(Dollars in thousands) | 9/30/10 | 12/31/09 | 9/30/09 | 9/30/10 | 9/30/10 | 9/30/10 | ||||||||||||||||||
Glacier |
$ | 77,144 | 97,666 | 99,792 | 8,267 | 62,413 | 6,464 | |||||||||||||||||
Mountain West |
71,780 | 109,187 | 76,073 | 14,989 | 53,756 | 3,035 | ||||||||||||||||||
First Security |
55,627 | 59,351 | 46,321 | 7,245 | 35,950 | 12,432 | ||||||||||||||||||
1st Bank |
18,166 | 21,117 | 19,744 | 2,890 | 6,566 | 8,710 | ||||||||||||||||||
Western |
10,293 | 9,315 | 8,917 | 533 | 6,622 | 3,138 | ||||||||||||||||||
Big Sky |
23,882 | 31,711 | 26,941 | 1,653 | 15,910 | 6,319 | ||||||||||||||||||
Valley |
1,916 | 2,542 | 1,638 | 840 | 1,003 | 73 | ||||||||||||||||||
First National |
10,519 | 9,290 | | 701 | 9,073 | 745 | ||||||||||||||||||
Citizens |
7,989 | 5,340 | 5,653 | 1,965 | 4,412 | 1,612 | ||||||||||||||||||
First Bank MT |
669 | 800 | 538 | 245 | 320 | 104 | ||||||||||||||||||
San Juans |
5,252 | 2,310 | 994 | 1,595 | 2,005 | 1,652 | ||||||||||||||||||
GORE |
19,156 | | | | | 19,156 | ||||||||||||||||||
Total |
$ | 302,393 | 348,629 | 286,611 | 40,923 | 198,030 | 63,440 | |||||||||||||||||
The allowance was 51 percent of non-performing assets at September 30, 2010, compared to 55
percent at the prior year end and down slightly from 52 percent a year ago. Non-performing assets
as a percentage of total subsidiary assets at September 30, 2010 were at 4.03 percent, down from
4.13 percent as of prior year end, and down from 4.10 percent at September 30, 2009. 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. 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.
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.
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 unless the loan is in
process of collection and well-secured by collateral the fair value of which is sufficient to pay
off the debt in full. 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 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 the Company has serious doubts as to the ability of such
borrowers to comply with the present loan repayment terms which includes loans, based upon current
information and events, where 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. Impaired loans include non-performing loans (i.e., non-accrual loans and accruing loans
90 days or more overdue) and accruing loans under ninety days overdue where it is probable payments
will not be received according to the loan agreement. 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.
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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 costs 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 the
estimated cost to sell. The Company measures impairment on collateral-dependent loans on a
loan-by-loan basis. Fair value of collateral-dependent loans (and other real estate acquired by
foreclosure or deed-in-lieu of foreclosure) is determined primarily based upon appraisal or
evaluation of the underlying real property value.
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. Total interest income recognized for impaired loans under the cash basis for the nine
months ended September 30, 2010 and 2009 was not significant. Of the $232.4 million impaired loans
as of September 30, 2010, there were 48 commercial real estate loans that accounted for $117.4
million, or 51 percent, of the impaired loans. The 48 loans were collateralized by 142 percent of
the loan value, the majority of which had appraisals (new or updated) in the later half of 2009 or
2010. Of the $232.4 million impaired loans, there was $159.4 million, or 69 percent, of multiple
impaired loans issued to a single or related party group of borrowers. The amount of impaired
loans that have had partial charge-offs during the first nine months of 2010 for which the Company
continues to have concern about the collectability of the remaining loan balance was $38.4 million.
Of these loans, there were charge-offs of $25.8 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. With respect to the types of loan modifications
made to the identified restructured loans, the following modifications were made:
| 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 has
not restructured any commercial real estate loans that resulted in the creation of multiple new
loans. The Company does not utilize 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 September 30, 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 troubled debt
restructuring loans of $71.3 million as of September 30, 2010. The Company has troubled
debt restructured loans issued to a single borrower or related party groups that are currently in
nonaccrual status or that have had charge-offs during the year, but which continue to have other
loans that are currently recorded on accrual status. The amount of these troubled debt
restructures is $19.7 million as of September 30, 2010 and the amount of the accruing loans is
$30.6 million as of September 30, 2010.
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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 as well as land
acquisition, development and construction (ADC) 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 collateral. Interest reserves
provide an effective means for addressing the cash flow characteristics of construction and ADC
loans. In response to the downturn in the housing market and potential impact upon construction
and ADC 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, including construction and ADC loans, include assessing, based on
current information, 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 or ADC loan is performing as
expected. Loans with interest reserves may be extended, renewed or restructured only when the
related loan continues to perform as expected and meets the prudent underwriting standards
identified above. Such renewals, extension or restructuring are not permitted in order to keep the
related loan current.
In monitoring the performance and credit quality of a construction or an ADC 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
or ADC 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 designated as non-accrual when the collection of the contractual principal or interest is
unlikely and the accrual of interest and its capitalization into the loan balance will be
discontinued for such loans.
The Company had loans with interest reserves of $156.5 million and $216.4 million of which there
was remaining interest reserves of $991 thousand and $3.4 million as of September 30, 2010 and
December 31, 2009, respectively.
Income Tax Expense
Income tax expense for the nine months ended September 30, 2010 and 2009 was $7.4 million and $4.6
million, respectively. The Companys effective tax rate for the nine months ended September 30,
2010 and 2009 was 18.5 percent and 15.6 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 $17.4 million and $16.7 million for the nine months ended September 30, 2010
and 2009, respectively. The federal tax credit benefits were $300 thousand and $1.8 million for
the three and nine months ended September 30, 2010, respectively, and $359 thousand and $634
thousand for the three and nine months ended September 30, 2009, respectively. The Company
continues its investments in select municipal securities and various VIEs whereby the Company
receives federal tax credits and therefore the Company expects to maintain a moderate amount of
tax-exempt items. For additional information on income taxes see Note 10, Federal and State Income
Taxes, in ITEM 1. Financial Statements.
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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.
The Company believes that macroeconomic conditions occurring the first nine months of 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).
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 equity securities for other-than-temporary impairment losses, management assesses the
Companys ability and intent to retain the equity securities for a period of time sufficient to
allow for anticipated recovery in fair value. Equity securities owned at September 30, 2010
primarily consisted of stock issued by the Federal Home Loan Bank and the Federal Reserve Bank,
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 $5 thousand, with unrealized losses of $6 thousand or 115 percent of fair value,
at September 30, 2010.
In evaluating debt securities for other-than-temporary impairment, management assesses whether the
Company intends to sell or if it is more likely-than-not that it will be required to sell impaired
debt securities. In so doing, management considers contractual constraints, liquidity, capital,
asset / liability management and securities portfolio objectives. During the first nine months of
2010, the Company sold 83 securities of which 69 were tax-exempt state and local government
securities, 66 of which were sold at a gross realized gain aggregating $2.868 million, 3 of which
were sold at a gross realized loss aggregating $66 thousand, a net realized gain of $2.802 million.
Of the 83 securities, 11 were non-guaranteed private label whole loan mortgages, 8 of which were
sold at a gross realized gain aggregating $522 thousand, 3 of which were sold at a gross realized
loss aggregating $727 thousand, a net realized loss of $205 thousand, 3 were US Treasury bonds, 1
of which was sold at a gross realized gain of $160 dollars, 2 of which were sold at a gross
realized loss aggregating $10 dollars, a net realized gain of $150 dollars. 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.
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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 53 were tax-exempt state and local government
securities, 7 of which were each sold at a gross realized loss of $1.118 million and 46 of which
were each sold at a gross realized gain of $3.922 million, a net realized gain of $2.804 million.
Of the 59 securities sold in the second half of 2009, 6 were residential mortgage-backed
securities, with such securities sold at a gross realized gain aggregating $3.191 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 September 30, 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 September 30, 2010, there were 161 investments in an unrealized loss position of which 159
were debt securities and 2 were equity securities. With respect to the 159 debt securities,
residential mortgage-backed securities have the largest unrealized loss. The fair value of these
securities, which have underlying collateral consisting of U.S. government sponsored enterprise
guaranteed mortgages and non-guaranteed private label whole loan mortgages, were $372.867 million
at September 30, 2010 of which $212.219 million was purchased during 2010, the remainder of which
had a fair market value of $233.108 million at December 31, 2009. For the securities purchased in
2010, there has been an unrealized loss of $1.263 million since purchase. Of the remaining
residential mortgage-backed securities in a loss position, the unrealized loss decreased from 4.9
percent of fair value at December 31, 2009 to 3.23 percent of fair value at September 30, 2010.
The fair value of Collateralized Debt Obligation (CDO) securities in an unrealized loss position
is $7.292 million, with unrealized losses of $5.068 million at September 30, 2010; the unrealized
loss decreased from 162.7 percent of fair value at December 31, 2009 to 69.5 percent of fair value
at September 30, 2010. The fair value of state and local government securities in an unrealized
loss position were $29.792 million at September 30, 2010 of which $5.246 million was purchased
during 2010, the remainder of which had a fair market value of $23.565 million at December 31,
2009. For the securities purchased in 2010, there has been an unrealized loss of $109 thousand
since purchase. Of the remaining state and local government securities in a loss position, the
unrealized loss decreased from 5.9 percent of fair value at December 31, 2009 to 1.5 percent of
fair value at September 30, 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% |
$ | 5,072 | 6 | 1 | ||||||||
30.1% to 40.0% |
3 | | 1 | |||||||||
20.1% to 30.0% |
| | | |||||||||
15.1% to 20.0% |
3,264 | 4 | | |||||||||
10.1% to 15.0% |
1,221 | 6 | | |||||||||
5.1% to 10.0% |
| | | |||||||||
0.1% to 5.0% |
2,449 | 143 | | |||||||||
Total |
$ | 12,009 | 159 | 2 | ||||||||
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With respect to the duration of the impaired debt securities, the Company identified 33 which
have been continuously impaired for the 12 months ending September 30, 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. 15 of the 33
securities are state and local tax-exempt securities with an unrealized loss of $329,549, the most
notable of which had an unrealized loss of $159,376. 6 of the 33 securities are identical CDO
securities with an aggregate unrealized loss of $5,068,357, the most notable of which had an
unrealized loss of $1,267,089.
With respect to the CDO securities, each is in the in the form of 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 and rated A by Fitch. As of the end of the third and second quarters of 2010, 8 of the
26 trust subsidiaries have elected to defer the interest 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 deferring interest compared to 3 of the 26 trust subsidiaries
deferring interest 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, 17.40% of the outstanding principle of the Senior
Notes has been prepaid through September 30 and June 30, 2010 compared to 15.22% at
March 31, 2010 and 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 first three 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 first three 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 September 30, 2010 and for each of
the prior quarters of 2010 and 2009 was temporary, and not other-than-temporary.
Of the 33 securities temporarily impaired continuously for twelve months, 10 are non-guaranteed
private label whole loan mortgages with an aggregate unrealized loss of $4,324,373, the most
notable of which had an unrealized loss of $869,092. Of the 10 non-guaranteed private label whole
loan mortgages, 3 are collateralized by 30-year fixed residential mortgages considered to be
Prime and 7 are collateralized by 30-year fixed residential mortgages considered to be ALT
A. Moreover, none of the underlying mortgage collateral is considered subprime.
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Table of Contents
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).
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. Geographic Affordability 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 securities as of September 30, 2010, the Company determined
that none of such securities had other-than-temporary impairment.
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.
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Table of Contents
Nine Months ended September 30, | ||||||||||||
2010 vs. 2009 | ||||||||||||
Increase (Decrease) Due to: | ||||||||||||
(Dollars in thousands) | Volume | Rate | Net | |||||||||
Interest income |
||||||||||||
Residential real estate loans |
$ | (2,896 | ) | (4,025 | ) | (6,921 | ) | |||||
Commercial loans |
(983 | ) | (1,910 | ) | (2,893 | ) | ||||||
Consumer and other loans |
(501 | ) | (1,171 | ) | (1,672 | ) | ||||||
Investment securities |
23,982 | (17,559 | ) | 6,423 | ||||||||
Total interest income |
19,602 | (24,665 | ) | (5,063 | ) | |||||||
Interest expense |
||||||||||||
NOW accounts |
508 | 1 | 509 | |||||||||
Savings accounts |
94 | (306 | ) | (212 | ) | |||||||
Money market demand accounts |
733 | (1,478 | ) | (745 | ) | |||||||
Certificate accounts |
3,024 | (5,913 | ) | (2,889 | ) | |||||||
Wholesale deposits |
6,587 | (4,354 | ) | 2,233 | ||||||||
FHLB advances |
3,399 | (2,074 | ) | 1,325 | ||||||||
Repurchase agreements
and other borrowed funds |
(5,208 | ) | 3,307 | (1,901 | ) | |||||||
Total interest expense |
9,137 | (10,817 | ) | (1,680 | ) | |||||||
Net interest income |
$ | 10,465 | (13,848 | ) | (3,383 | ) | ||||||
Average Balance Sheet
The following schedule provides (i) the total dollar amount of interest and dividend income of the
Company for earning assets and the resultant average yield; (ii) the total dollar amount of
interest expense on interest-bearing liabilities and the resultant average rate; (iii) net interest
and dividend income and interest rate spread; and (iv) net interest margin and net interest margin
(tax-equivalent). Non-accrual loans are included in the average balance of the loans.
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Three Months ended 9/30/10 | Nine Months ended 9/30/10 | |||||||||||||||||||||||
Average | Average | |||||||||||||||||||||||
Average | Interest & | Yield/ | Average | Interest & | Yield/ | |||||||||||||||||||
(Dollars in thousands) | Balance | Dividends | Rate | Balance | Dividends | Rate | ||||||||||||||||||
Assets |
||||||||||||||||||||||||
Residential real estate loans |
$ | 773,672 | 11,367 | 5.88 | % | $ | 774,973 | 34,621 | 5.96 | % | ||||||||||||||
Commercial loans |
2,543,798 | 35,734 | 5.57 | % | 2,574,842 | 109,409 | 5.68 | % | ||||||||||||||||
Consumer and other loans |
687,139 | 10,599 | 6.12 | % | 691,373 | 31,959 | 6.18 | % | ||||||||||||||||
Total loans |
4,004,609 | 57,700 | 5.72 | % | 4,041,188 | 175,989 | 5.82 | % | ||||||||||||||||
Tax-exempt investment securities1 |
489,658 | 5,972 | 4.88 | % | 474,324 | 17,410 | 4.89 | % | ||||||||||||||||
Taxable investment securities2 |
1,339,456 | 8,431 | 2.52 | % | 1,272,642 | 25,920 | 2.72 | % | ||||||||||||||||
Total earning assets |
5,833,723 | 72,103 | 4.90 | % | 5,788,154 | 219,319 | 5.07 | % | ||||||||||||||||
Goodwill and intangibles |
158,239 | 159,037 | ||||||||||||||||||||||
Non-earning assets |
287,128 | 282,368 | ||||||||||||||||||||||
Total assets |
$ | 6,279,090 | $ | 6,229,559 | ||||||||||||||||||||
Liabilities |
||||||||||||||||||||||||
NOW accounts |
$ | 707,097 | 622 | 0.35 | % | $ | 712,650 | 2,028 | 0.38 | % | ||||||||||||||
Savings accounts |
346,652 | 175 | 0.20 | % | 340,125 | 568 | 0.22 | % | ||||||||||||||||
Money market demand accounts |
858,942 | 1,737 | 0.80 | % | 839,585 | 5,662 | 0.90 | % | ||||||||||||||||
Certificate accounts |
1,088,215 | 5,402 | 1.97 | % | 1,080,434 | 15,997 | 1.98 | % | ||||||||||||||||
Wholesale deposits3 |
622,032 | 1,206 | 0.77 | % | 533,425 | 3,440 | 0.86 | % | ||||||||||||||||
FHLB advances |
539,791 | 2,318 | 1.70 | % | 657,698 | 7,083 | 1.44 | % | ||||||||||||||||
Securities sold under agreements to
repurchase and other borrowed funds |
383,279 | 2,121 | 2.19 | % | 414,238 | 6,436 | 2.08 | % | ||||||||||||||||
Total interest bearing liabilities |
4,546,008 | 13,581 | 1.19 | % | 4,578,155 | 41,214 | 1.20 | % | ||||||||||||||||
Non-interest bearing deposits |
849,977 | 813,038 | ||||||||||||||||||||||
Other liabilities |
25,259 | 32,078 | ||||||||||||||||||||||
Total liabilities |
5,421,244 | 5,423,271 | ||||||||||||||||||||||
Stockholders Equity |
||||||||||||||||||||||||
Common stock |
719 | 689 | ||||||||||||||||||||||
Paid-in capital |
643,567 | 600,732 | ||||||||||||||||||||||
Retained earnings |
200,159 | 196,708 | ||||||||||||||||||||||
Accumulated other
comprehensive income |
13,401 | 8,159 | ||||||||||||||||||||||
Total stockholders equity |
857,846 | 806,288 | ||||||||||||||||||||||
Total liabilities and
stockholders equity |
$ | 6,279,090 | $ | 6,229,559 | ||||||||||||||||||||
Net Interest Income |
$ | 58,522 | $ | 178,105 | ||||||||||||||||||||
Net Interest Spread |
3.71 | % | 3.87 | % | ||||||||||||||||||||
Net Interest Margin |
3.98 | % | 4.11 | % | ||||||||||||||||||||
Net Interest Margin (tax-equivalent) |
4.19 | % | 4.32 | % |
1 | Excludes tax effect of $7,708,000 and $2,644,000 on tax-exempt investment security income for the year-to-date and quarter ended September 30, 2010, respectively. | |
2 | Excludes tax effect of $1,107,000 and $398,000 on investment security tax credits for the year-to-date and quarter ended September 30, 2010, respectively. | |
3 | Wholesale deposits include brokered deposits classified as NOW, money market demand, and CDs. |
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Liquidity Risk
Liquidity risk is the possibility that the Company will not be able to fund present and future
obligations. 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. The Banks source of funds is generated by deposits, principal and interest
payments on loans, sale of loans and securities, short and long-term borrowings, and net earnings.
In addition, all of the Banks are members of FHLB. As of September 30, 2010, the Banks
had $1.091 billion of available FHLB borrowing capacity of which $579 million was utilized. The
Banks may also borrow funds through the FRB and from the U.S. Treasury Tax and Loan program of
which the Banks have remaining borrowing capacity of $396 million and $9 million, respectively.
Management of the Company has a wide range of versatility in managing the liquidity and
asset/liability mix for each bank subsidiary as well as the Company as a whole.
Capital Resources and Adequacy
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 $168
million since prior year end, or 24 percent, the net result of earnings of $33 million, a public
offering of stock of $146 million, an increase of $17 million in net unrealized gains on
available-for-sale investment securities, less cash dividend payments of $28 million.
The Federal Reserve Board has adopted capital adequacy guidelines that are used to assess the
adequacy of capital in supervising a bank holding company. The following table illustrates the
Federal Reserve Boards capital adequacy guidelines and the Companys compliance with those
guidelines as of September 30, 2010.
Tier 1 (Core) | Tier 2 (Total) | Leverage | ||||||||||
(Dollars in thousands) | Capital | Capital | Capital | |||||||||
Total stockholders equity |
$ | 853,654 | 853,654 | 853,654 | ||||||||
Less: |
||||||||||||
Goodwill and intangibles |
(151,279 | ) | (151,279 | ) | (151,279 | ) | ||||||
Accumulated other comprehensive
unrealized gain on AFS securities |
(16,442 | ) | (16,442 | ) | (16,442 | ) | ||||||
Plus: |
||||||||||||
Allowance for loan and lease losses |
| 57,499 | | |||||||||
Subordinated debentures |
124,500 | 124,500 | 124,500 | |||||||||
Regulatory capital |
$ | 810,433 | 867,932 | 810,433 | ||||||||
Risk weighted assets |
$ | 4,523,412 | 4,523,412 | |||||||||
Total adjusted average assets |
$ | 6,127,811 | ||||||||||
Capital as % of risk weighted assets |
17.92 | % | 19.19 | % | 13.23 | % | ||||||
Regulatory well capitalized requirement |
6.00 | % | 10.00 | % | 5.00 | % | ||||||
Excess over well capitalized requirement |
11.92 | % | 9.19 | % | 8.23 | % | ||||||
Lending 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.
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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.
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.
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. 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 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 31030 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 standard 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 standard 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 standard and determined there was not
a material effect on the Companys financial position or results of operations.
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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 standard and determined there was not a material
effect on the Companys financial position or results of operations.
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
The Company believes that there have not been any material changes in information about the
Companys market risk than was provided in the Form 10-K/A report for the year ended December 31,
2009.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Companys Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the
effectiveness of our disclosure controls and procedures (as required by Exchange Act Rules
240.13a-15(b) and 15d-14(c)) as of the date of this quarterly report. Based on that evaluation,
the Chief Executive Officer and Chief Financial Officer have concluded that the Companys current
disclosure controls and procedures are effective and timely, providing them with material
information relating to the Company required to be disclosed in the reports the Company files or
submits under the Exchange Act.
Changes in Internal Controls
There have not been any changes in the Companys internal control over financial reporting (as such
term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the third quarter
2010, to which this report relates that have materially affected, or are reasonably likely to
materially affect the Companys internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings
There are no pending material legal proceedings to which the registrant or its subsidiaries are a
party.
ITEM 1A. Risk Factors
The Company and its eleven independent wholly-owned 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.
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The Company cannot accurately predict the effect of the continuing economic downturn on the
Companys future results of operations or the market price of its common stock.
The national economy and the financial services sector in particular continue to face challenges of
a scope unprecedented in recent history. The Company cannot accurately predict the severity or
duration of the continuing economic downturn, which has adversely impacted the Companys markets.
Any further deterioration in the economies of the nation as a whole or in the Companys markets
would have an adverse effect, which could be material, on the Companys business, financial
condition, results of operations and prospects, and could also cause the market price of the
Companys common stock to decline. 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.
Further economic deterioration in the market areas the Company serves, including Montana, Idaho,
Wyoming, Utah, Colorado and Washington, as well as the continuation of the current economic
downturn, may continue to adversely impact earnings and could increase credit risk associated with
the loan portfolio.
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. The effects of the national
economic downturn are significantly impacting the market areas the Company serves. Further
deterioration in the market areas the Company serves, as well as the continuation of the current
economic downturn, could result in the following consequences, any of which could have an adverse
impact, which could be material, on the Companys business, financial condition, results of
operations and prospects:
| 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; | ||
| 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 nonperforming 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 as a result of incorrect
assumptions by management 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.
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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.
A continuation of the downturn in the economic conditions or real estate values of the Companys
market areas, and particularly a further deterioration of such economic conditions or real estate
values, may cause the Company to have lower earnings and could increase credit risk associated with
the loan portfolio, as the collateral securing those loans may decrease in value. The continued
downturn in the local economy or a further deterioration of the local economy could have a material
adverse effect both on the borrowers ability to repay these loans, as well as the value of the
real property held as collateral. 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.
A continued tightening of the credit markets may make it difficult to obtain adequate funding for
loan growth, which could adversely affect earnings.
A continued 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 the first three quarters of
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.
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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.
The FDIC recently adopted a new deposit insurance fund restoration plan to ensure that the fund
reserve ratio reaches 1.35 percent by September 30, 2020, as required by financial reform
legislation passed in 2010.
On May 22, 2009, the FDIC imposed a special deposit insurance assessment of five basis points on
all insured institutions. This emergency assessment was calculated based on the insured
institutions assets at June 30, 2009, and collected on September 30, 2009. This
special assessment was in addition to the regular quarterly risk-based assessment.
The FDIC has required insured institutions to prepay estimated quarterly risk-based assessments for
the fourth quarter of 2009 and for 2010, 2011 and 2012. The prepayment was collected on December
30, 2009, and was accounted for as a prepaid expense amortized over the prepayment period. In
2009, the FDIC also adopted a final rule revising its risk-based assessment system, which became
effective April 1, 2009. The changes to the assessment system involve adjustments to the
risk-based calculation of an institutions unsecured debt, secured liabilities and brokered
deposits.
Despite the FDICs recently adopted plan to restore the deposit insurance fund, the fund may suffer
additional losses in the future due to bank failures. 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 significantly 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 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 can be detrimental to performance of their other responsibilities.
There can be no assurance that the Company will not experience further increases in non-performing
assets in the future.
The Companys ability to access markets for funding and acquire and retain customers could be
adversely affected by the deterioration of other financial institutions or to the extent the
financial service industrys reputation is damaged.
Reputation risk is the risk to liquidity, earnings and capital arising from negative publicity
regarding the financial services industry. The financial services industry continues to be
featured in negative headlines about the global and national credit crisis and the resulting
stabilization legislation enacted by the U.S. federal government. These reports can be damaging to
the industrys image and potentially erode consumer confidence in insured financial institutions,
such as the Companys bank subsidiaries. In addition, the Companys ability to engage in routine
funding and other transactions could be adversely affected by the actions and financial condition
of other financial institutions. Financial services institutions are interrelated as a result of
trading, clearing, correspondent, counterparty or other relationships. As a result, defaults by,
or even rumors or questions about, one or more financial services institutions, or the financial
services industry in general, could lead to market-wide liquidity problems, losses of depositor,
creditor and counterparty confidence and could lead to losses or defaults by us or by other
institutions. The Company could experience material changes in the level of deposits as a direct
or indirect result of other banks difficulties or failure, which could affect the amount of
capital needed.
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.
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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 acquirors 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.
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 our
common stock and performance measures such as earnings per share.
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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 (i) creates a new Bureau of Consumer Financial Protection
with broad powers to regulate consumer financial products such as credit cards and mortgages, (ii)
creates a Financial Stability Oversight Council comprised of the heads of other regulatory
agencies, (iii) will lead to new capital requirements from federal banking agencies, (iv) places
new limits on electronic debt card interchange fees, and (v) 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.
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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 the banks. 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.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) | Not Applicable |
(b) | Not Applicable |
(c) | Not Applicable |
ITEM 3. Defaults upon Senior Securities
(a) | Not Applicable |
(b) | Not Applicable |
ITEM 5. Other Information
(a) | Not Applicable |
(b) | Not Applicable |
ITEM 6. Exhibits
Exhibit 31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002 | |||
Exhibit 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002 | |||
Exhibit 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 | |||
Exhibit 101 | The following financial information from Glacier Bancorp, Incs Quarterly Report on Form 10-Q for the quarter ended September 30, 2010 is formatted in XBRL: (i) the Unaudited Condensed Consolidated Statements of Financial Condition, (ii) the Unaudited Condensed Consolidated Statements of Operations, (iii) the Unaudited Condensed Consolidated Statements of Stockholders Equity and Comprehensive Income, (iv) the Unaudited Condensed Consolidated Statements of Cash Flows, and (v) the Notes to Unaudited Condensed Consolidated Financial Statements, tagged as blocks of text. |
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SIGNATURES
Pursuant to the requirements 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.
GLACIER BANCORP, INC. |
||||
November 8, 2010 | /s/ Michael J. Blodnick | |||
Michael J. Blodnick | ||||
President/CEO | ||||
November 8, 2010 | /s/ Ron J. Copher | |||
Ron J. Copher | ||||
Senior Vice President/CFO | ||||
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