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GLACIER BANCORP, INC. - Quarter Report: 2012 June (Form 10-Q)

Quarterly Report on Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2012

 

¨ Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from              to             

Commission file number 000-18911

 

 

GLACIER BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

MONTANA   81-0519541

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

49 Commons Loop, Kalispell, Montana   59901
(Address of principal executive offices)   (Zip Code)

(406) 756-4200

Registrant’s 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.    x  Yes    No  ¨

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).    x  Yes    No  ¨

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   x    Accelerated Filer   ¨
Non-Accelerated Filer   ¨    Smaller reporting Company   ¨

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

The number of shares of Registrant’s common stock outstanding on July 25, 2012 was 71,931,972. No preferred shares are issued or outstanding.

 

 

 


Table of Contents

Glacier Bancorp, Inc.

Quarterly Report on Form 10-Q

Index

 

     Page  

Part I. Financial Information

  

Item 1 – Financial Statements

  

Unaudited Condensed Consolidated Statements of Financial Condition – June  30, 2012 and December 31, 2011

     3   

Unaudited Condensed Consolidated Statements of Operations – Three and Six Months ended June  30, 2012 and 2011

     4   

Unaudited Condensed Consolidated Statements of Comprehensive Income – Three and Six Months ended June 30, 2012 and 2011

     5   

Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity – Six Months ended June 30, 2012 and 2011

     6   

Unaudited Condensed Consolidated Statements of Cash Flows – Six Months ended June  30, 2012 and 2011

     7   

Notes to Unaudited Condensed Consolidated Financial Statements

     8   

Item  2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

     28   

Item 3 – Quantitative and Qualitative Disclosure about Market Risk

     61   

Item 4 – Controls and Procedures

     61   

Part II. Other Information

     61   

Item 1 – Legal Proceedings

     61   

Item 1A – Risk Factors

     61   

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

     62   

Item 3 – Defaults upon Senior Securities

     62   

Item 4 – Mine Safety Disclosures

     62   

Item 5 – Other Information

     62   

Item 6 – Exhibits

     62   

Signatures

     63   


Table of Contents

Glacier Bancorp, Inc.

Unaudited Condensed Consolidated Statements of Financial Condition

 

(Dollars in thousands, except per share data)

   June 30,
2012
    December 31,
2011
 

Assets

    

Cash on hand and in banks

   $ 92,119        104,674   

Interest bearing cash deposits

     48,300        23,358   
  

 

 

   

 

 

 

Cash and cash equivalents

     140,419        128,032   

Investment securities, available-for-sale

     3,404,282        3,126,743   

Loans held for sale

     88,442        95,457   

Loans receivable

     3,445,196        3,466,135   

Allowance for loan and lease losses

     (137,459     (137,516
  

 

 

   

 

 

 

Loans receivable, net

     3,307,737        3,328,619   

Premises and equipment, net

     159,432        158,872   

Other real estate owned

     69,170        78,354   

Accrued interest receivable

     37,108        34,961   

Deferred tax asset

     22,892        31,081   

Core deposit intangible, net

     7,197        8,284   

Goodwill

     106,100        106,100   

Non-marketable equity securities

     50,371        49,694   

Other assets

     40,952        41,709   
  

 

 

   

 

 

 

Total assets

   $ 7,434,102        7,187,906   
  

 

 

   

 

 

 

Liabilities

    

Non-interest bearing deposits

   $ 1,066,662        1,010,899   

Interest bearing deposits

     3,915,607        3,810,314   

Securities sold under agreements to repurchase

     466,784        258,643   

Federal Home Loan Bank advances

     906,029        1,069,046   

Other borrowed funds

     9,973        9,995   

Subordinated debentures

     125,347        125,275   

Accrued interest payable

     5,076        5,825   

Other liabilities

     62,443        47,682   
  

 

 

   

 

 

 

Total liabilities

     6,557,921        6,337,679   
  

 

 

   

 

 

 

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        719   

Paid-in capital

     641,656        642,882   

Retained earnings - substantially restricted

     189,753        173,139   

Accumulated other comprehensive income

     44,053        33,487   
  

 

 

   

 

 

 

Total stockholders’ equity

     876,181        850,227   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 7,434,102        7,187,906   
  

 

 

   

 

 

 

Number of common stock shares issued and outstanding

     71,931,386        71,915,073   

See accompanying notes to unaudited condensed consolidated financial statements.

 

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Table of Contents

Glacier Bancorp, Inc.

Unaudited Condensed Consolidated Statements of Operations

 

     Three Months ended June 30,     Six Months ended June 30,  

(Dollars in thousands, except per share data)

   2012      2011     2012      2011  

Interest Income

          

Residential real estate loans

   $ 7,495         8,156        15,279         16,872   

Commercial loans

     30,430         32,977        61,471         66,035   

Consumer and other loans

     8,813         10,211        17,983         20,661   

Investment securities

     17,454         20,218        37,343         36,367   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest income

     64,192         71,562        132,076         139,935   
  

 

 

    

 

 

   

 

 

    

 

 

 

Interest Expense

          

Deposits

     4,609         6,584        9,563         13,672   

Securities sold under agreements to repurchase

     303         319        602         676   

Federal Home Loan Bank advances

     3,218         3,093        6,599         5,641   

Federal funds purchased and other borrowed funds

     61         62        123         95   

Subordinated debentures

     853         1,273        1,755         2,916   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest expense

     9,044         11,331        18,642         23,000   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net Interest Income

     55,148         60,231        113,434         116,935   

Provision for loan losses

     7,925         19,150        16,550         38,650   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net interest income after provision for loan losses

     47,223         41,081        96,884         78,285   
  

 

 

    

 

 

   

 

 

    

 

 

 

Non-Interest Income

          

Service charges and other fees

     11,291         11,330        21,783         21,538   

Miscellaneous loan fees and charges

     1,113         928        2,059         1,905   

Gain on sale of loans

     7,522         4,291        14,335         8,985   

Loss on sale of investments

     —           (591     —           (467

Other income

     1,865         1,893        3,952         3,285   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total non-interest income

     21,791         17,851        42,129         35,246   
  

 

 

    

 

 

   

 

 

    

 

 

 

Non-Interest Expense

          

Compensation and employee benefits

     23,684         21,170        47,244         42,773   

Occupancy and equipment

     5,825         5,728        11,793         11,682   

Advertising and promotions

     1,713         1,635        3,115         3,119   

Outsourced data processing

     788         791        1,634         1,564   

Other real estate owned

     2,199         5,062        9,021         7,161   

Federal Deposit Insurance Corporation premiums

     1,300         2,197        3,012         4,521   

Core deposit intangibles amortization

     535         590        1,087         1,317   

Other expense

     10,146         9,047        18,329         16,559   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total non-interest expense

     46,190         46,220        95,235         88,696   
  

 

 

    

 

 

   

 

 

    

 

 

 

Income Before Income Taxes

     22,824         12,712        43,778         24,835   

Federal and state income tax expense

     3,843         826        8,464         2,664   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net Income

   $ 18,981         11,886        35,314         22,171   
  

 

 

    

 

 

   

 

 

    

 

 

 

Basic earnings per share

   $ 0.26         0.17        0.49         0.31   

Diluted earnings per share

   $ 0.26         0.17        0.49         0.31   

Dividends declared per share

   $ 0.13         0.13        0.26         0.26   

Average outstanding shares - basic

     71,928,697         71,915,073        71,921,885         71,915,073   

Average outstanding shares - diluted

     71,928,853         71,915,073        71,921,990         71,915,073   

See accompanying notes to unaudited condensed consolidated financial statements.

 

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Glacier Bancorp, Inc.

Unaudited Condensed Consolidated Statements of Comprehensive Income

 

     Three Months ended June 30,     Six Months ended June 30,  

(Dollars in thousands)

   2012     2011     2012     2011  

Net Income

   $ 18,981        11,886        35,314        22,171   

Other Comprehensive Income, Net of Tax

        

Unrealized holding gains on available-for-sale securities

     13,214        36,154        23,232        39,182   

Reclassification adjustment for losses included in net income

     —          591        —          467   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized gains on securities

     13,214        36,745        23,232        39,649   

Tax effect

     (5,140     (14,400     (9,037     (15,538
  

 

 

   

 

 

   

 

 

   

 

 

 

Net of tax amount

     8,074        22,345        14,195        24,111   
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in fair value of derivatives used for cash flow hedges

     (9,051     —          (5,939     —     

Tax effect

     3,521        —          2,310        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net of tax amount

     (5,530     —          (3,629     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income, net of tax

     2,544        22,345        10,566        24,111   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Comprehensive Income

   $ 21,525        34,231        45,880        46,282   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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Glacier Bancorp, Inc.

Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity

Six Months ended June 30, 2012 and 2011

 

     Common Stock      Paid-in     Retained
Earnings
Substantially
    Accumulated
Other
Comprehensive
        

(Dollars in thousands, except per share data)

   Shares      Amount      Capital     Restricted     Income      Total  

Balance at December 31, 2010

     71,915,073       $ 719         643,894        193,063        528         838,204   

Comprehensive income

     —           —           —          22,171        24,111         46,282   

Cash dividends declared ($0.26 per share)

     —           —           —          (18,698     —           (18,698

Stock-based compensation and related taxes

     —           —           (1,016     —          —           (1,016
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Balance at June 30, 2011

     71,915,073       $ 719         642,878        196,536        24,639         864,772   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Balance at December 31, 2011

     71,915,073       $ 719         642,882        173,139        33,487         850,227   

Comprehensive income

     —           —           —          35,314        10,566         45,880   

Cash dividends declared ($0.26 per share)

     —           —           —          (18,700     —           (18,700

Stock issuances under stock incentive plans

     16,313         —           233        —          —           233   

Stock-based compensation and related taxes

     —           —           (1,459     —          —           (1,459
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Balance at June 30, 2012

     71,931,386       $ 719         641,656        189,753        44,053         876,181   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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Glacier Bancorp, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

 

     Six Months ended June 30,  

(Dollars in thousands)

   2012     2011  

Operating Activities

    

Net cash provided by operating activities

   $ 133,697        135,267   
  

 

 

   

 

 

 

Investing Activities

    

Proceeds from sales, maturities and prepayments of investment securities, available-for-sale

     871,472        429,256   

Purchases of investment securities, available-for-sale

     (1,154,990     (796,155

Principal collected on loans

     441,318        459,488   

Loans originated or acquired

     (478,541     (397,174

Net addition of premises and equipment and other real estate owned

     (5,501     (7,337

Proceeds from sale of other real estate owned

     18,073        17,443   

Net (sale) purchase of non-marketable equity securities

     (671     14,278   
  

 

 

   

 

 

 

Net cash used in investment activities

     (308,840     (280,201
  

 

 

   

 

 

 

Financing Activities

    

Net increase in deposits

     161,056        182,897   

Net increase in securities sold under agreements to repurchase

     208,141        1,900   

Net decrease in Federal Home Loan Bank advances

     (163,017     (40,080

Net increase in federal funds purchased and other borrowed funds

     50        42,865   

Cash dividends paid

     (18,700     (18,698
  

 

 

   

 

 

 

Net cash provided by financing activities

     187,530        168,884   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     12,387        23,950   

Cash and cash equivalents at beginning of period

     128,032        105,091   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 140,419        129,041   
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information

    

Cash paid during the period for interest

   $ 19,391        23,985   

Cash paid during the period for income taxes

     8,221        3,681   

Sale and refinancing of other real estate owned

     668        2,521   

Other real estate acquired in settlement of loans

     16,372        49,570   

See accompanying notes to unaudited condensed consolidated financial statements.

 

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Glacier Bancorp, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

1) Nature of Operations and Summary of Significant Accounting Policies

General

Glacier Bancorp, Inc. (the “Company”) is a Montana corporation headquartered in Kalispell, Montana. The Company provides a full range of banking services to individual and corporate customers in Montana, Idaho, Wyoming, Colorado, Utah and Washington through eleven divisions of its wholly-owned bank subsidiary, Glacier Bank (the “Bank”). The Company is subject to competition from other financial service providers. The Company is also subject to the regulations of certain government agencies and undergoes periodic examinations by those regulatory authorities.

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 the Company’s financial condition as of June 30, 2012, the results of operations and comprehensive income for the three and six month periods ended June 30, 2012 and 2011, and changes in stockholders’ equity and cash flows for the six month periods ended June 30, 2012 and 2011. The condensed consolidated statement of financial condition of the Company as of December 31, 2011 has been derived from the audited consolidated statements of the Company as of that date.

The accompanying unaudited 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 (“GAAP”) for complete financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. Operating results for the six months ended June 30, 2012 are not necessarily indicative of the results anticipated for the year ending December 31, 2012.

Material estimates that are particularly susceptible to significant change include: 1) the determination of the allowance for loan and lease losses (“ALLL” or “allowance”), 2) the valuations related to investments and real estate acquired in connection with foreclosures or in satisfaction of loans, and 3) the evaluation of goodwill impairment. In connection with the determination of the ALLL and other real estate valuation estimates, management obtains independent appraisals (new or updated) for significant items. Estimates relating to investments are obtained from independent third parties. Estimates relating to the evaluation of goodwill for impairment are determined based on independent party valuations and internal calculations using significant independent party inputs.

Principles of Consolidation

The consolidated financial statements of the Company include the accounts of the parent holding company and the Bank. All significant inter-company transactions have been eliminated in consolidation.

The Company formed GBCI Other Real Estate (“GORE”) to isolate certain bank foreclosed properties for legal protection and administrative purposes and the remaining properties are currently held for sale. GORE is included in the Bank operating segment due to its insignificant activity.

 

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The Company owns the following trust subsidiaries for the purpose of issuing trust preferred securities: Glacier Capital Trust II, Glacier Capital Trust III, Glacier Capital Trust IV, Citizens (ID) Statutory Trust I, Bank of the San Juans Bancorporation Trust I, First Company Statutory Trust 2001 and First Company Statutory Trust 2003. The trust subsidiaries are not consolidated into the Company’s financial statements.

On April 30, 2012, the Company combined its eleven bank subsidiaries into eleven bank divisions within Glacier Bank, such divisions operating with the same names and management teams as before the combination. Prior to the combination of the bank subsidiaries, the Company considered its eleven bank subsidiaries, GORE, and the parent holding company to be its operating segments. Subsequent to the combination of the bank subsidiaries, the Company considers the Bank to be its sole operating segment. The change to combining the bank subsidiaries into a single segment is appropriate as the Bank 1) engages in similar bank business activity from which it earns revenues and incurs expenses, 2) the operating results of the Bank are regularly reviewed by the Chief Executive Officer (i.e., the chief operating decision maker) who makes decisions about resources to be allocated to the Bank, and 3) financial information is available for the Bank.

Variable Interest Entities

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 variable interest entities (“VIE”).

The following table summarizes the carrying amounts of the VIE’s assets and liabilities included in the Company’s consolidated financial statements at June 30, 2012 and December 31, 2011:

 

     June 30, 2012      December 31, 2011  

(Dollars in thousands)

   CDE (NMTC)      LIHTC      CDE (NMTC)      LIHTC  

Assets

           

Loans receivable

   $ 35,443         —           32,748         —     

Premises and equipment, net

     —           15,700         —           15,996   

Accrued interest receivable

     112         —           116         —     

Other assets

     1,233         66         1,439         31   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 36,788         15,766         34,303         16,027   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Other borrowed funds

   $ 4,629         3,306         4,629         3,306   

Accrued interest payable

     3         6         4         9   

Other liabilities

     92         193         186         363   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 4,724         3,505         4,819         3,678   
  

 

 

    

 

 

    

 

 

    

 

 

 

Amounts presented in the table above are adjusted for intercompany eliminations. All assets presented can be used only to settle obligations of the consolidated VIEs and all liabilities presented consist of liabilities for which creditors and other beneficial interest holders therein have no recourse to the general credit of the Company.

 

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Impact of Recent Authoritative Accounting Guidance

The Accounting Standards CodificationTM (“ASC”) is the Financial Accounting Standards Board’s (“FASB”) officially recognized source of authoritative GAAP applicable to all public and non-public non-governmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under the authority of the federal securities laws are also sources of authoritative GAAP for the Company as an SEC registrant. All other accounting literature is non-authoritative.

In September 2011, FASB amended FASB ASC Topic 350, Intangibles - Goodwill and Other. The amendment provides an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. If the entity concludes it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. The amendment is effective prospectively during interim and annual periods beginning after December 15, 2011 and early adoption is permitted. The Company has evaluated the impact of the adoption of this amendment and determined there was not a material effect on the Company’s financial position or results of operations.

In June 2011, FASB amended FASB ASC Topic 220, Comprehensive Income. The amendment provides an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement or in two separate but consecutive statements. Accounting Standards Update No. 2011-12, Comprehensive Income (Topic 220) defers the specific requirement of the amendment to present items that are reclassified from accumulated other comprehensive income to net income separately with their respective components of net income and other comprehensive income. The amendments are effective retrospectively during interim and annual periods beginning after December 15, 2011. The Company has evaluated the impact of the adoption of this amendment and determined there was not a material effect on the Company’s financial position or results of operations.

In May 2011, FASB amended FASB ASC Topic 820, Fair Value Measurement. The amendment achieves common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards. The amendment changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The amendment is effective prospectively during interim and annual periods beginning after December 15, 2011. The Company has evaluated the impact of the adoption of this amendment and determined there was not a material effect on the Company’s financial position or results of operations.

 

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2) Investment Securities, Available-for-Sale

A comparison of the amortized cost and estimated fair value of the Company’s investment securities designated as available-for-sale is presented below.

 

     June 30, 2012  
     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   $ 202         3         —          205   

U.S. government sponsored enterprises

            

Maturing within one year

     2.37     3,218         12         —          3,230   

Maturing after one year through five years

     2.34     21,727         458         —          22,185   

Maturing after five years through ten years

     1.90     73         —           —          73   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
     2.34     25,018         470         —          25,488   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

State and local governments

            

Maturing within one year

     0.99     45,759         11         (5     45,765   

Maturing after one year through five years

     2.14     127,290         3,788         (121     130,957   

Maturing after five years through ten years

     2.64     52,835         1,699         (38     54,496   

Maturing after ten years

     4.78     886,899         75,645         (682     961,862   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
     4.22     1,112,783         81,143         (846     1,193,080   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Corporate bonds

            

Maturing within one year

     1.39     19,457         27         (4     19,480   

Maturing after one year through five years

     2.41     121,697         810         (351     122,156   

Maturing after five years through ten years

     2.30     18,197         166         (73     18,290   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
     2.27     159,351         1,003         (428     159,926   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Collateralized debt obligations

            

Maturing after ten years

     8.03     2,848         —           (114     2,734   

Residential mortgage-backed securities

     1.75     2,017,135         11,358         (5,644     2,022,849   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total investment securities

     2.61   $ 3,317,337         93,977         (7,032     3,404,282   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents
     December 31, 2011  
     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   $ 204         4         —          208   

U.S. government sponsored enterprises

            

Maturing within one year

     1.58     3,979         17         —          3,996   

Maturing after one year through five years

     2.36     26,399         682         —          27,081   

Maturing after five years through ten years

     1.90     78         —           —          78   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
     2.26     30,456         699         —          31,155   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

State and local governments

            

Maturing within one year

     1.31     4,786         3         (2     4,787   

Maturing after one year through five years

     2.22     89,752         2,660         (22     92,390   

Maturing after five years through ten years

     2.59     63,143         2,094         (19     65,218   

Maturing after ten years

     4.84     845,657         57,138         (535     902,260   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
     4.44     1,003,338         61,895         (578     1,064,655   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Corporate bonds

            

Maturing after one year through five years

     2.55     60,810         261         (1,264     59,807   

Maturing after five years through ten years

     2.38     2,409         21         —          2,430   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
     2.54     63,219         282         (1,264     62,237   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Collateralized debt obligations

            

Maturing after ten years

     8.03     5,648         —           (282     5,366   

Residential mortgage-backed securities

     1.70     1,960,167         10,138         (7,183     1,963,122   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total investment securities

     2.64   $ 3,063,032         73,018         (9,307     3,126,743   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Included in the residential mortgage-backed securities are $53,145,000 and $49,252,000 as of June 30, 2012 and December 31, 2011, respectively, of non-guaranteed private label whole loan mortgage-backed securities of which none of the underlying collateral is considered “subprime.”

Maturities of securities do not reflect repricing opportunities present in adjustable rate securities, nor do they reflect expected shorter maturities based upon early prepayment of principal. Weighted yields are based on the level-yield method taking into account premium amortization and discount accretion. Weighted yields on tax-exempt investment securities exclude the federal income tax benefit.

 

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Table of Contents

The cost of each investment sold is determined by specific identification. Gain or loss on sale of investments consists of the following:

 

     Three Months
ended June 30,
    Six Months
ended June 30,
 

(Dollars in thousands)

   2012      2011     2012      2011  

Gross proceeds

   $ —           4,074        —           8,208   

Less amortized cost

     —           (4,665     —           (8,675
  

 

 

    

 

 

   

 

 

    

 

 

 

Net loss on sale of investments

   $ —           (591     —           (467
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross gain on sale of investments

   $ —           39        —           223   

Gross loss on sale of investments

     —           (630     —           (690
  

 

 

    

 

 

   

 

 

    

 

 

 

Net loss on sale of investments

   $ —           (591     —           (467
  

 

 

    

 

 

   

 

 

    

 

 

 

Investments with an unrealized loss position are summarized as follows:

 

     June 30, 2012  
     Less than 12 Months     12 Months or More     Total  

(Dollars in thousands)

   Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
 

State and local governments

   $ 77,764         (667     7,624         (179     85,388         (846

Corporate bonds

     52,812         (396     5,383         (32     58,195         (428

Collateralized debt obligations

     —           —          2,734         (114     2,734         (114

Residential mortgage-backed securities

     854,027         (4,309     74,878         (1,335     928,905         (5,644
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities

   $    984,603         (5,372     90,619         (1,660     1,075,222         (7,032
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     December 31, 2011  
     Less than 12 Months     12 Months or More     Total  

(Dollars in thousands)

   Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
 

State and local governments

   $ 26,434         (90     9,948         (488     36,382         (578

Corporate bonds

     31,782         (1,264     —           —          31,782         (1,264

Collateralized debt obligations

     —           —          5,366         (282     5,366         (282

Residential mortgage-backed securities

     943,372         (6,850     8,244         (333     951,616         (7,183
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities

   $ 1,001,588         (8,204     23,558         (1,103     1,025,146         (9,307
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

With respect to its impaired securities at June 30, 2012, management determined that it did not intend to sell and there was no expected requirement to sell any of its impaired securities. Based on an analysis of its impaired securities as of June 30, 2012 and December 31, 2011, the Company determined that none of such securities had other-than-temporary impairment.

 

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Table of Contents
3) Loans Receivable, Net

The following schedules summarize the activity in the ALLL on a portfolio class basis:

 

     Three Months ended June 30, 2012  

(Dollars in thousands)

   Total     Residential
Real Estate
    Commercial
Real Estate
    Other
Commercial
    Home
Equity
    Other
Consumer
 

Allowance for loan and lease losses

            

Balance at beginning of period

   $ 136,586        19,003        73,240        22,444        13,364        8,535   

Provision for loan losses

     7,925        22        10,374        (1,255     (1,471     255   

Charge-offs

     (8,679     (953     (5,549     (887     (1,077     (213

Recoveries

     1,627        67        1,033        268        88        171   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 137,459        18,139        79,098        20,570        10,904        8,748   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Three Months ended June 30, 2011  

(Dollars in thousands)

   Total     Residential
Real Estate
    Commercial
Real Estate
    Other
Commercial
    Home
Equity
    Other
Consumer
 

Allowance for loan and lease losses

            

Balance at beginning of period

   $ 140,829        17,004        80,098        20,960        14,206        8,561   

Provision for loan losses

     19,150        1,557        9,430        3,969        294        3,900   

Charge-offs

     (21,814     (1,388     (10,691     (5,413     (971     (3,351

Recoveries

     1,630        239        1,048        99        96        148   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 139,795        17,412        79,885        19,615        13,625        9,258   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Six Months ended June 30, 2012  

(Dollars in thousands)

   Total     Residential
Real Estate
    Commercial
Real Estate
    Other
Commercial
    Home
Equity
    Other
Consumer
 

Allowance for loan and lease losses

            

Balance at beginning of period

   $ 137,516        17,227        76,920        20,833        13,616        8,920   

Provision for loan losses

     16,550        2,085        13,010        1,304        (470     621   

Charge-offs

     (19,737     (1,320     (12,534     (2,356     (2,358     (1,169

Recoveries

     3,130        147        1,702        789        116        376   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 137,459        18,139        79,098        20,570        10,904        8,748   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Six Months ended June 30, 2011  

(Dollars in thousands)

   Total     Residential
Real Estate
    Commercial
Real Estate
    Other
Commercial
    Home
Equity
    Other
Consumer
 

Allowance for loan and lease losses

            

Balance at beginning of period

   $ 137,107        20,957        76,147        19,932        13,334        6,737   

Provision for loan losses

     38,650        (703     23,697        6,607        2,415        6,634   

Charge-offs

     (38,318     (3,157     (21,319     (7,166     (2,303     (4,373

Recoveries

     2,356        315        1,360        242        179        260   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 139,795        17,412        79,885        19,615        13,625        9,258   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

The following schedules disclose the ALLL and loans receivable on a portfolio class basis:

 

     June 30, 2012  

(Dollars in thousands)

   Total      Residential
Real Estate
     Commercial
Real Estate
     Other
Commercial
     Home
Equity
     Other
Consumer
 

Allowance for loan and lease losses

                 

Individually evaluated for impairment

   $ 19,208         3,938         9,337         3,408         690         1,835   

Collectively evaluated for impairment

     118,251         14,201         69,761         17,162         10,214         6,913   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total allowance for loan and lease losses

   $ 137,459         18,139         79,098         20,570         10,904         8,748   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans receivable

                 

Individually evaluated for impairment

   $ 237,899         33,617         144,506         38,702         13,501         7,573   

Collectively evaluated for impairment

     3,207,297         491,934         1,507,184         603,484         408,748         195,947   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans receivable

   $ 3,445,196         525,551         1,651,690         642,186         422,249         203,520   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2011  

(Dollars in thousands)

   Total      Residential
Real Estate
     Commercial
Real Estate
     Other
Commercial
     Home
Equity
     Other
Consumer
 

Allowance for loan and lease losses

                 

Individually evaluated for impairment

   $ 18,828         2,659         9,756         4,233         584         1,596   

Collectively evaluated for impairment

     118,688         14,568         67,164         16,600         13,032         7,324   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total allowance for loan and lease losses

   $ 137,516         17,227         76,920         20,833         13,616         8,920   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans receivable

                 

Individually evaluated for impairment

   $ 258,659         24,453         162,959         49,962         14,750         6,535   

Collectively evaluated for impairment

     3,207,476         492,354         1,509,100         573,906         425,819         206,297   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans receivable

   $ 3,466,135         516,807         1,672,059         623,868         440,569         212,832   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Substantially all of the Company’s loan receivables are with customers within the Company’s market areas. Although the Company has a diversified loan portfolio, a substantial portion of its customers’ ability to honor their obligations is dependent upon the economic performance in the Company’s market areas. Net deferred fees, costs, premiums, and discounts of $2,104,000 and $3,123,000 were included in the loans receivable balance at June 30, 2012 and December 31, 2011, respectively.

 

15


Table of Contents

The following schedules disclose the impaired loans by portfolio class basis:

 

     At or for the Three or Six Months ended June 30, 2012  

(Dollars in thousands)

   Total      Residential
Real Estate
     Commercial
Real Estate
     Other
Commercial
     Home
Equity
     Other
Consumer
 

Loans with a specific valuation allowance

                 

Recorded balance

   $ 81,875         18,356         36,084         21,607         1,847         3,981   

Unpaid principal balance

     92,771         18,666         46,440         21,735         1,918         4,012   

Valuation allowance

     19,208         3,938         9,337         3,408         690         1,835   

Average impaired loans - three months

     84,275         16,939         38,156         23,840         1,785         3,555   

Average impaired loans - six months

     82,089         14,996         38,761         23,255         1,597         3,480   

Loans without a specific valuation allowance

                 

Recorded balance

   $ 156,024         15,261         108,422         17,095         11,654         3,592   

Unpaid principal balance

     186,116         16,120         129,254         22,459         14,274         4,009   

Average impaired loans - three months

     170,211         15,010         116,160         22,542         12,733         3,766   

Average impaired loans - six months

     173,788         14,454         118,436         24,320         12,998         3,580   

Totals

                 

Recorded balance

   $ 237,899         33,617         144,506         38,702         13,501         7,573   

Unpaid principal balance

     278,887         34,786         175,694         44,194         16,192         8,021   

Valuation allowance

     19,208         3,938         9,337         3,408         690         1,835   

Average impaired loans - three months

     254,486         31,949         154,316         46,382         14,518         7,321   

Average impaired loans - six months

     255,877         29,450         157,197         47,575         14,595         7,060   

 

     At or for the Year ended December 31, 2011  

(Dollars in thousands)

   Total      Residential
Real Estate
     Commercial
Real Estate
     Other
Commercial
     Home
Equity
     Other
Consumer
 

Loans with a specific valuation allowance

                 

Recorded balance

   $ 77,717         11,111         39,971         22,087         1,219         3,329   

Unpaid principal balance

     85,514         11,177         47,569         22,196         1,238         3,334   

Valuation allowance

     18,828         2,659         9,756         4,233         584         1,596   

Average impaired loans

     66,871         10,330         38,805         13,395         1,284         3,057   

Loans without a specific valuation allowance

                 

Recorded balance

   $ 180,942         13,342         122,988         27,875         13,531         3,206   

Unpaid principal balance

     208,828         14,741         139,962         35,174         15,097         3,854   

Average impaired loans

     168,983         14,730         123,231         19,963         8,975         2,084   

Totals

                 

Recorded balance

   $ 258,659         24,453         162,959         49,962         14,750         6,535   

Unpaid principal balance

     294,342         25,918         187,531         57,370         16,335         7,188   

Valuation allowance

     18,828         2,659         9,756         4,233         584         1,596   

Average impaired loans

     235,854         25,060         162,036         33,358         10,259         5,141   

Interest income recognized on impaired loans for the periods ended June 30, 2012 and December 31, 2011 was not significant.

 

16


Table of Contents

The following is a loans receivable aging analysis on a portfolio class basis:

 

     June 30, 2012  

(Dollars in thousands)

   Total      Residential
Real Estate
     Commercial
Real Estate
     Other
Commercial
     Home
Equity
     Other
Consumer
 

Accruing loans 30-59 days past due

   $ 37,893         990         12,819         20,093         2,690         1,301   

Accruing loans 60-89 days past due

     10,814         5,175         2,822         1,995         472         350   

Accruing loans 90 days or more past due

     3,267         421         1,547         980         145         174   

Non-accrual loans

     126,463         19,835         77,203         15,490         10,156         3,779   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total past due and non-accrual loans

     178,437         26,421         94,391         38,558         13,463         5,604   

Current loans receivable

     3,266,759         499,130         1,557,299         603,628         408,786         197,916   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans receivable

   $ 3,445,196         525,551         1,651,690         642,186         422,249         203,520   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2011  

(Dollars in thousands)

   Total      Residential
Real Estate
     Commercial
Real Estate
     Other
Commercial
     Home
Equity
     Other
Consumer
 

Accruing loans 30-59 days past due

   $ 31,386         9,038         12,683         3,279         4,092         2,294   

Accruing loans 60-89 days past due

     17,700         2,678         11,660         1,034         1,276         1,052   

Accruing loans 90 days or more past due

     1,413         59         108         1,060         156         30   

Non-accrual loans

     133,689         11,881         87,956         21,685         10,272         1,895   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total past due and non-accrual loans

     184,188         23,656         112,407         27,058         15,796         5,271   

Current loans receivable

     3,281,947         493,151         1,559,652         596,810         424,773         207,561   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans receivable

   $ 3,466,135         516,807         1,672,059         623,868         440,569         212,832   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following is a summary of the troubled debt restructurings (“TDR”) that occurred during the periods presented and the TDRs that occurred within the previous twelve months that subsequently defaulted during the periods presented on a portfolio class basis:

 

     Three Months ended June 30, 2012  

(Dollars in thousands)

   Total      Residential
Real Estate
     Commercial
Real Estate
     Other
Commercial
     Home
Equity
     Other
Consumer
 

Troubled debt restructurings

                 

Number of loans

     47         5         15         22         1         4   

Pre-modification outstanding balance

   $ 11,929         1,342         5,736         4,309            310         232   

Post-modification outstanding balance

   $ 10,650         1,342           4,444         4,322         310         232   

Troubled debt restructurings that subsequently defaulted

                 

Number of loans

     9         —           4         2         1         2   

Recorded balance

   $ 3,127         —           2,077         531         442         77   

 

17


Table of Contents
     Six Months ended June 30, 2012  

(Dollars in thousands)

   Total      Residential
Real Estate
     Commercial
Real Estate
     Other
Commercial
     Home
Equity
     Other
Consumer
 

Troubled debt restructurings

                 

Number of loans

     103         8         40         41         7         7   

Pre-modification outstanding balance

   $ 28,455         1,701         16,846         8,432         1,095         381   

Post-modification outstanding balance

   $ 26,469         1,701         14,838         8,454         1,095         381   

Troubled debt restructurings that subsequently defaulted

                 

Number of loans

     20         —           11         5         2         2   

Recorded balance

   $ 6,207         —           4,735         798         597         77   

The majority of TDRs occurring in most loan classes was a result of an extension of the maturity date which aggregated 31 percent of total TDRs. In addition, 19 percent of total TDRs were a result of a combination of an interest rate reduction, extension of the maturity date, or reduction in the face amount and 19 percent were a result of a payment deferral or change to interest. For commercial real estate, the class with the largest dollar amount of TDRs, approximately 32 percent was due to a payment deferral or change to interest rate and 24 percent was due to a combination of an interest rate reduction, extension of the maturity date, or reduction in the face amount.

In addition to the TDRs that occurred during the period provided in the preceding table, the Company had TDRs with pre-modification loan balances of $24,390,000 for the six months ended June 30, 2012 for which other real estate owned was received in full or partial satisfaction of the loans. The majority of such TDRs was in commercial real estate.

 

4) Goodwill

The changes in the carrying amount of goodwill and accumulated impairment charge are as follows:

 

     Three Months
ended June 30,
     Six Months
ended June 30,
 

(Dollars in thousands)

   2012      2011      2012      2011  

Net carrying value at beginning of period

   $ 106,100         146,259         106,100         146,259   

Impairment charge

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net carrying value at end of period

     106,100         146,259         106,100         146,259   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(Dollars in thousands)

   June 30,
2012
    December 31,
2011
 

Gross carrying value

     146,259        146,259   

Accumulated impairment charge

     (40,159     (40,159
  

 

 

   

 

 

 

Net carrying value

   $ 106,100        106,100   
  

 

 

   

 

 

 

 

18


Table of Contents

The Company performed its annual goodwill impairment test during the third quarter of 2011. Due to high levels of volatility and dislocation in prices of shares of publicly-held, exchange listed banking companies, a goodwill impairment charge was recognized by the Company during the third quarter of 2011. Prior to April 30, 2012, the Company had eleven bank reporting units, each of which had a goodwill impairment assessment. On April 30, 2012, the Company combined its eleven bank subsidiaries into a single commercial bank and the eleven bank reporting units are now aggregated for assessment of goodwill impairment. The Company has identified that the divisions are components of the Glacier Bank operating segment since there are segment managers; however, the components can be aggregated due to the components having similar economic characteristics.

Since there were no events or circumstances, including the combining of the eleven bank subsidiaries, that occurred since third quarter 2011 that would more-likely-than-not reduce the fair value of the Bank reporting unit below its carrying value, the Company did not perform interim testing at June 30, 2012.

 

5) Derivatives and Hedging Activities

The Company’s interest rate derivative financial instruments as of June 30, 2012 are as follows:

 

(Dollars in thousands)

   Forecasted
Notional Amount
     Variable
Interest Rate 1
   Fixed
Interest Rate  1
   

Term

Interest rate swap

   $ 160,000       3 month LIBOR      3.378   Oct. 21, 2014 - Oct. 21, 2021 2

Interest rate swap

     100,000       3 month LIBOR      2.498   Nov 30, 2015 - Nov. 30, 2022 2

 

1 

The Company pays the fixed interest rate and the counterparties pay the Company the variable interest rate.

2 

No cash will be exchanged prior to the term.

The hedging strategy converts the LIBOR based variable interest rate on forecasted borrowings to a fixed interest rate, thereby protecting the Company from floating interest rate variability.

The following table summarizes the fair value of the Company’s interest rate derivative financial instruments:

 

          Fair Value  

(Dollars in thousands)

   Balance Sheet
Location
   June 30,
2012
     December
31, 2011
 

Interest rate swap

   Other liabilities    $ 14,845         8,906   

Pursuant to the interest rate swap agreements, the Company pledged collateral to the counterparties in the form of investment securities totaling $22,087,000 at June 30, 2012. There was no collateral pledged from the counterparties to the Company as of June 30, 2012. There is the possibility that the Company may need to pledge additional collateral in the future.

 

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Table of Contents
6) Accumulated Other Comprehensive Income

The components of accumulated other comprehensive income, included in stockholders’ equity, are as follows:

 

(Dollars in thousands)

   June 30,
2012
    December 31,
2011
 

Unrealized holding gains on available-for-sale securities

   $ 86,945        63,711   

Tax effect

     (33,822     (24,783
  

 

 

   

 

 

 

Net of tax amount

     53,123        38,928   
  

 

 

   

 

 

 

Change in fair value of derivatives used for cash flow hedges

     (14,845     (8,906

Tax effect

     5,775        3,465   
  

 

 

   

 

 

 

Net of tax amount

     (9,070     (5,441
  

 

 

   

 

 

 

Total accumulated other comprehensive income

   $ 44,053        33,487   
  

 

 

   

 

 

 

 

7) Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period presented. Diluted earnings per share is computed by including the net increase in shares as if dilutive outstanding stock options were exercised, using the treasury stock method.

Basic and diluted earnings per share has been computed based on the following:

 

     Three Months
ended June 30,
     Six Months
ended June 30,
 

(Dollars in thousands, except per share data)

   2012      2011      2012      2011  

Net income available to common stockholders, basic and diluted

   $ 18,981         11,886         35,314         22,171   

Average outstanding shares - basic

     71,928,697         71,915,073         71,921,885         71,915,073   

Add: dilutive stock options and awards

     156         —           105         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Average outstanding shares - diluted

     71,928,853         71,915,073         71,921,990         71,915,073   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 0.26         0.17         0.49         0.31   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share

   $ 0.26         0.17         0.49         0.31   
  

 

 

    

 

 

    

 

 

    

 

 

 

There were 945,063 and 1,641,528 options excluded from the diluted average outstanding share calculation for the six months ended June 30, 2012 and 2011, respectively, due to the option exercise price exceeding the market price of the Company’s common stock.

 

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Table of Contents
8) Fair Value of Assets and Liabilities

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There is a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are as follows:

 

Level 1    Quoted prices in active markets for identical assets or liabilities
Level 2    Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities
Level 3    Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

Recurring Measurements

The following is a description of the inputs and valuation methodologies used for assets and liabilities measured at fair value on a recurring basis, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the period ended June 30, 2012.

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. Such securities are classified in Level 2 of the valuation hierarchy. Where Level 1 or Level 2 inputs are not available, such securities are classified as Level 3 within the hierarchy.

Fair value determinations of investment securities are the responsibility of the Company’s corporate accounting department. The Company contracts with independent third party pricing vendors to generate fair value estimates on a monthly basis. The Company reviews the vendors’ inputs for fair value estimates and the recommended assignments of levels within the fair value hierarchy. The review includes the extent to which markets for investment securities are determined to have limited or no activity, or are judged to be active markets. The Company reviews the extent to which observable and unobservable inputs are used as well as the appropriateness of the underlying assumptions about risk that a market participant would use in active markets, with adjustments for limited or inactive markets. In considering the inputs to the fair value estimates, the Company places less reliance on quotes that are judged to not reflect orderly transactions, or are non-binding indications. The Company makes independent inquiries of other knowledgeable parties in testing the reliability of the inputs, including consideration for illiquidity, credit risk, and cash flow estimates. In assessing credit risk, the Company reviews payment performance, collateral adequacy, credit rating histories, and issuers’ financial statements with follow-up discussion with issuers. For those markets determined to be inactive, the valuation techniques used are models for which management verifies that discount rates are appropriately adjusted to reflect illiquidity and credit risk. The Company also independently obtains cash flow estimates that are stressed at levels that exceed those used by the independent third party pricing vendors.

 

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Table of Contents

Interest rate swap derivative agreements: fair values for interest rate swap derivative agreements are based upon the estimated amounts to settle the contracts considering current interest rates and are calculated using discounted cash flows that are observable or that can be corroborated by observable market data and, therefore, are classified within Level 2 of the valuation hierarchy. The inputs used to determine fair value include the 3 month Libor forward curve to estimate variable rate cash inflows and the spot Libor curve to estimate the discount rate. The estimated variable rate cash inflows are compared to the fixed rate outflows and such difference is discounted to a present value to estimate the fair value of the interest rate swaps. The Company also obtains and compares the reasonableness of the pricing from a secondary independent party.

The following schedules disclose the fair value measurement of assets and liabilities measured at fair value on a recurring basis:

 

            Fair Value Measurements
At the End of the Reporting Period Using
 

(Dollars in thousands)

   Fair Value
6/30/12
     Quoted Prices
in Active Markets
for Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Investment securities, available-for-sale

           

U.S. government and federal agency

   $ 205         —           205         —     

U.S. government sponsored enterprises

     25,488         —           25,488         —     

State and local governments

     1,193,080         —           1,193,080         —     

Corporate bonds

     159,926         —           159,926         —     

Collateralized debt obligations

     2,734         —           2,734         —     

Residential mortgage-backed securities

     2,022,849         —           2,022,849         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value on a recurring basis

   $ 3,404,282         —           3,404,282         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest rate swaps

   $ 14,845         —           14,845         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities measured at fair value on a recurring basis

   $ 14,845         —           14,845         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

22


Table of Contents
            Fair Value Measurements
At the End of the Reporting Period Using
 

(Dollars in thousands)

   Fair Value
12/31/11
     Quoted Prices
in Active Markets
for Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Investment securities, available-for-sale

           

U.S. government and federal agency

   $ 208         —           208         —     

U.S. government sponsored enterprises

     31,155         —           31,155         —     

State and local governments

     1,064,655         —           1,064,655         —     

Corporate bonds

     62,237         —           62,237         —     

Collateralized debt obligations

     5,366         —           5,366         —     

Residential mortgage-backed securities

     1,963,122         —           1,963,122         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value on a recurring basis

   $ 3,126,743         —           3,126,743         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest rate swaps

   $ 8,906         —           8,906         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities measured at fair value on a recurring basis

   $ 8,906         —           8,906         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Level 3 Reconciliation

There were no Level 3 fair value measurements during the six month period ended June 30, 2012.

The following schedule reconciles the opening and closing balances for assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the period ended June 30, 2011:

 

     Fair Value Measurements Using
Significant Unobservable Inputs (Level 3)
 
           Investment Securities  

(Dollars in thousands)

   Total     Collateralized
Debt
Obligations
    Residential
Mortgage-backed
Securities
 

Balance as of December 31, 2010

   $ 6,751        6,595        156   

Total unrealized gains for the period included in other comprehensive income

     1,641        1,598        43   

Amortization, accretion and principal payments

     (2,240     (2,240     —     
  

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2011

   $ 6,152        5,953        199   
  

 

 

   

 

 

   

 

 

 

Non-recurring Measurements

The following is a description of the inputs and valuation methodologies used for assets recorded at fair value on a non-recurring basis, as well as the general classification of such assets pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the period ended June 30, 2012.

Other real estate owned (“OREO”): OREO is carried at the lower of fair value at acquisition date or estimated fair value, less estimated cost to sell. Estimated fair value of other real estate owned is based on appraisals or evaluations. OREO is classified within Level 3 of the fair value hierarchy.

 

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Table of Contents

Collateral-dependent impaired loans, net of ALLL: loans included in the Company’s financials for which it is probable that the Company will not collect all principal and interest due according to contractual terms are considered impaired. Estimated fair value of collateral-dependent impaired loans is based on the fair value of the collateral, less estimated cost to sell. Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy.

The Company’s credit departments review appraisals for OREO and collateral-dependent loans, giving consideration to the highest and best use of the collateral. The appraisal or evaluation (new or updated) is considered the starting point for determining fair value. The Company also considers other factors and events in the environment that may affect the fair value. The fair values are reduced by discounts to consider lack of marketability and estimated cost to sell. The appraisals or evaluations (new or updated) are reviewed at least quarterly and more frequently based on current market conditions, including deterioration in a borrower’s financial condition and when property values may be subject to significant volatility. After review and acceptance of the collateral appraisal or evaluation (new or updated), adjustments to the impaired loan or OREO may occur. The Company generally obtains new or updated appraisals or evaluations annually.

Goodwill: Prior to April 30, 2012, goodwill was evaluated for impairment at the bank subsidiary level at least annually. On April 30, 2012, the Company combined its eleven bank subsidiaries into a single commercial bank and the eleven bank reporting units are now aggregated for assessment of goodwill impairment. The evaluation of goodwill impairment will be reviewed during the third quarter of 2012 and the inputs and valuation methods are not expected to change. The key inputs used to determine the implied fair value and the corresponding amount of the impairment charge includes quoted market prices of other banks, discounted cash flows and inputs from comparable transactions. These inputs are classified within Level 3 of the fair value hierarchy. The goodwill impairment evaluation is the responsibility of the Company’s corporate accounting department. Valuations and significant inputs developed by the independent valuation firm are reviewed by the Company for accuracy and reasonableness. For additional information regarding goodwill and reporting unit(s), see Note 4.

The following schedules disclose the fair value measurement of assets with a recorded change during the period resulting from re-measuring the assets at fair value on a non-recurring basis:

 

            Fair Value Measurements
At the End of the Reporting Period Using
 

(Dollars in thousands)

   Fair Value
6/30/12
     Quoted Prices
in Active Markets
for Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Other real estate owned

   $ 25,026         —           —           25,026   

Collateral-dependent impaired loans, net of ALLL

     37,159         —           —           37,159   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value on a non-recurring basis

   $   62,185         —           —             62,185   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

24


Table of Contents
            Fair Value Measurements
At the End of the Reporting Period Using
 

(Dollars in thousands)

   Fair Value
12/31/11
     Quoted Prices
in Active Markets
for Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Other real estate owned

   $ 38,076         —           —           38,076   

Collateral-dependent impaired loans, net of ALLL

     55,339         —           —           55,339   

Goodwill

     24,718         —           —           24,718   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value on a non-recurring basis

   $ 118,133         —           —           118,133   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fair Value of Financial Instruments

The following is a description of the methods used to estimate the fair value of all other assets and liabilities recognized at amounts other than fair value.

Cash and cash equivalents: fair value is estimated at book value.

Loans held for sale: fair value is estimated at book value due to the insignificant time between origination date and sale date.

Loans receivable, net of ALLL: fair value is estimated by discounting the future cash flows using the rates at which similar notes would be written for the same remaining maturities. The market rates used are based on current rates the Company would impose for similar loans and reflect a market participant assumption about risks associated with non-performance, illiquidity, and the structure and term of the loans along with local economic and market conditions. Estimated fair value of impaired loans is based on the fair value of the collateral, less estimated cost to sell, or the present value of the loan’s expected future cash flows (discounted at the loan’s effective interest rate). All impaired loans are classified as Level 3 and all other loans are classified as Level 2 within the hierarchy.

Accrued interest receivable: fair value is estimated at book value.

Non-marketable equity securities: fair value is estimated at book value due to restrictions that limit the sale or transfer of such securities.

Deposits: fair value of term deposits is estimated by discounting the future cash flows using rates of similar deposits with similar maturities. The market rates used were obtained from a knowledgeable independent third party and reviewed by the Company. The rates were the average of current rates offered by the Company’s local competitors. The estimated fair value of demand, NOW, savings, and money market deposits is the book value since rates are regularly adjusted to market rates and such deposits are classified in Level 1 of the valuation hierarchy. Certificate accounts and wholesale deposits are classified as Level 2 within the hierarchy.

Federal Home Loan Bank (“FHLB”) advances: fair value of non-callable FHLB advances is estimated by discounting the future cash flows using rates of similar advances with similar maturities. These rates were obtained from current rates offered by FHLB. The estimated fair value of callable FHLB advances was obtained from FHLB and the model was reviewed by the Company through discussions with FHLB.

 

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Table of Contents

Securities sold under agreements to repurchase (“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. The market rates used were averages of currently traded trust preferred securities with similar characteristics to the Company’s issuances and obtained from an independent third party.

Accrued interest payable: fair value is estimated at book value.

Off-balance sheet financial instruments: 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 an insignificant amount of off-balance sheet financial instruments.

The following schedules present the carrying amounts, estimated fair values and the level within the fair value hierarchy of the Company’s financial instruments:

 

            Fair Value Measurements
At the End of the Reporting Period Using
 

(Dollars in thousands)

   Carrying
Amount
6/30/12
     Quoted Prices
in Active Markets
for Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Financial assets

           

Cash and cash equivalents

   $ 140,419         140,419         —           —     

Investment securities, available-for-sale

     3,404,282         —           3,404,282         —     

Loans held for sale

     88,442         88,442         —           —     

Loans receivable, net of ALLL

     3,307,737         —           3,175,795         218,691   

Accrued interest receivable

     37,108         37,108         —           —     

Non-marketable equity securities

     50,371         —           50,371         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 7,028,359         265,969         6,630,448         218,691   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities

           

Deposits

   $ 4,982,269         3,300,960         1,689,452         —     

FHLB advances

     906,029         —           937,226         —     

Repurchase agreements and other borrowed funds

     476,757         —           476,757         —     

Subordinated debentures

     125,347         —           —           66,168   

Accrued interest payable

     5,076         5,076         —           —     

Interest rate swaps

     14,845         —           14,845         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 6,510,323         3,306,036         3,118,280         66,168   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

26


Table of Contents
            Fair Value Measurements
At the End of the Reporting Period Using
 

(Dollars in thousands)

   Carrying
Amount
12/31/11
     Quoted Prices
in Active Markets
for Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Financial assets

           

Cash and cash equivalents

   $ 128,032         128,032         —           —     

Investment securities, available-for-sale

     3,126,743         —           3,126,743         —     

Loans held for sale

     95,457         95,457         —           —     

Loans receivable, net of ALLL

     3,328,619         —           3,146,502         239,831   

Accrued interest receivable

     34,961         34,961         —           —     

Non-marketable equity securities

     49,694         —           49,694         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 6,763,506         258,450         6,322,939         239,831   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities

           

Deposits

   $ 4,821,213         3,132,261         1,698,382         —     

FHLB advances

     1,069,046         —           1,099,699         —     

Repurchase agreements and other borrowed funds

     268,638         —           268,642         —     

Subordinated debentures

     125,275         —           —           65,903   

Accrued interest payable

     5,825         5,825         —           —     

Interest rate swaps

     8,906         —           8,906         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 6,298,903         3,138,086         3,075,629         65,903   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

27


Table of Contents
Item 2. Management’s 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 management’s plans, objectives, expectations and intentions that are not historical facts, and other statements identified by words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “should,” “projects,” “seeks,” “estimates” or 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 Company’s control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. In addition to the factors set forth in the sections titled “Risk Factors,” “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, as applicable, in this report and the Annual Report on Form 10-K for the year ended December 31, 2011 (the “2011 Annual Report”), the following factors, among others, could cause actual results to differ materially from the anticipated results:

 

   

local and national economic conditions could be less favorable than expected or could have a more direct and pronounced effect on the Company than expected;

 

   

the risks associated with lending and potential adverse changes of the credit quality of loans in the Company’s 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 Company’s net interest income and profitability;

 

   

legislative or regulatory changes that adversely affect the Company’s business, ability to complete pending or prospective future acquisitions, limit certain sources of revenue, or increase cost of operations;

 

   

changes in accounting principles, policies and guidelines applicable to banking;

 

   

costs or difficulties related to the integration of acquisitions;

 

   

the goodwill the Company has recorded in connection with acquisitions could become additionally impaired, which may have an adverse impact on our earnings and capital;

 

   

reduced demand for banking products and services;

 

   

the risks presented by public stock market volatility, which could adversely affect the market price of our common stock and our ability to raise additional capital in the future;

 

   

competition from other financial services companies in our markets;

 

   

loss of services from the senior management team; and

 

   

the Company’s success in managing risks involved in the foregoing.

Please take into account that the forward-looking statements only apply as of the date of this report or documents incorporated by reference herein. 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.

 

28


Table of Contents

Financial Condition Analysis

Assets

The following table summarizes the asset balances as of the dates indicated, and the amount of change from December 31, 2011 and June 30, 2011:

 

(Unaudited - Dollars in thousands)

   June 30,
2012
    December 31,
2011
    June 30,
2011
    $ Change from
December 31,
2011
    $ Change from
June  30,

2011
 

Cash and cash equivalents

   $ 140,419        128,032        129,041        12,387        11,378   

Investment securities, available-for-sale

     3,404,282        3,126,743        2,784,415        277,539        619,867   

Loans receivable

          

Residential real estate

     525,551        516,807        527,808        8,744        (2,257

Commercial

     2,293,876        2,295,927        2,390,388        (2,051     (96,512

Consumer and other

     625,769        653,401        683,615        (27,632     (57,846
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans receivable

     3,445,196        3,466,135        3,601,811        (20,939     (156,615

Allowance for loan and lease losses

     (137,459     (137,516     (139,795     57        2,336   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans receivable, net

     3,307,737        3,328,619        3,462,016        (20,882     (154,279
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other assets

     581,664        604,512        602,848        (22,848     (21,184
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 7,434,102        7,187,906        6,978,320        246,196        455,782   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment securities increased $165 million, or 5 percent, during the current quarter and increased $620 million, or 22 percent, from June 30, 2011. During the current quarter and previous twelve months, the Company purchased investment securities to primarily offset the lack of loan growth and to maintain interest income. The increase in investment securities for the current quarter occurred in collateralized mortgage obligation (“CMO”), corporate and municipal bonds. The majority of the purchases were CMOs which were significantly offset by CMO principal paydowns during the quarter. Investment securities represent 46 percent of total assets at June 30, 2012 versus 44 percent at December 31, 2011 and 40 percent at June 30, 2011.

A real positive for the current quarter was the loan portfolio grew for the first time in several years. The loan portfolio increased during the current quarter by $12.0 million, or 1 percent annualized, to a total of $3.445 billion at June 30, 2012. Excluding net charge-offs of $7.1 million and loans of $5.4 million transferred to other real estate owned, loans increased $24.5 million, or 3 percent annualized, during the current quarter. The largest increase in dollars during the current quarter was in commercial loans which increased $10.4 million, or 0.5 percent, from March 31, 2012. The largest increase by percentage during the current quarter was in residential real estate loans which increased $10.1 million, or 2 percent, from March 31, 2012. The decrease in consumer and other loans was primarily driven by the Company reducing its exposure to consumer land and lot loans in combination with customers paying down lines of credit and reducing other debt. The continued slowness in the economy and low levels of loan demand could continue to place pressure on the Company in future periods and was the cause of the decrease in the loan portfolio over the prior periods. During the past twelve months, the loan portfolio decreased $157 million, or 4 percent, from total loans of $3.602 billion at June 30, 2011. The Company continues to reduce its exposure to land, lot and other construction loans which totaled $346 million as of June 30, 2012, a decrease of $92.9 million, or 21 percent, since the prior year second quarter.

 

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Table of Contents

Liabilities

The following table summarizes the liability balances as of the dates indicated, and the amount of change from December 31, 2011 and June 30, 2011:

 

(Unaudited - Dollars in thousands)

   June 30,
2012
     December 31,
2011
     June 30,
2011
     $ Change from
December 31,
2011
    $ Change from
June  30,

2011
 

Non-interest bearing deposits

   $ 1,066,662         1,010,899         916,887         55,763        149,775   

Interest bearing deposits

     3,915,607         3,810,314         3,787,912         105,293        127,695   

Federal funds purchased

     —           —           48,000         —          (48,000

Repurchase agreements

     466,784         258,643         251,303         208,141        215,481   

FHLB advances

     906,029         1,069,046         925,061         (163,017     (19,032

Other borrowed funds

     9,973         9,995         14,799         (22     (4,826

Subordinated debentures

     125,347         125,275         125,203         72        144   

Other liabilities

     67,519         53,507         44,383         14,012        23,136   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

   $ 6,557,921         6,337,679         6,113,548         220,242        444,373   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

At June 30, 2012, non-interest bearing deposits of $1.067 billion increased $27.6 million, or 3 percent, since March 31, 2012 and increased $150 million, or 16 percent, since June 30, 2011. Interest bearing deposits of $3.916 billion at June 30, 2012 included $646 million of wholesale deposits of which $180 million were reciprocal deposits (e.g., Certificate of Deposit Account Registry System deposits). In addition to reciprocal deposits, wholesale deposits include brokered deposits classified as NOW, money market deposit and certificate accounts. Interest bearing deposits increased $105 million, or 3 percent, since December 31, 2011 and included an increase of $38.2 million in wholesale deposits. Interest bearing deposits increased $128 million, or 3 percent, from June 30, 2011 and included a decrease of $43.4 million in wholesale deposits. The increase in deposits during the first half of 2012 and throughout 2011 has been driven by the Company’s success in generating new personal and business customer relationships, as well as existing customers retaining cash deposits for liquidity purposes due to the continued uncertainty in the current economic environment. These deposit increases have been beneficial to the Company in funding the investment securities portfolio growth at lower cost over the prior twelve months.

The Company’s level and mix of borrowings has fluctuated as needed to supplement deposit growth and to fund the growth in investment securities. Since the prior year end, Federal Home Loan Bank (“FHLB”) advances decreased $163 million and have decreased $19.0 million since the prior year second quarter. The increase in funding through repurchase agreements from the prior year end and the prior year second quarter was primarily due to the $195 million in wholesale repurchase agreements as of current quarter end compared to no wholesale repurchase agreements as of year end and only $15.0 million of wholesale repurchase agreements as of the prior year second quarter. The wholesale repurchase agreements were utilized as a source of low cost alternative funding.

 

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Table of Contents

Stockholders’ Equity

The following table summarizes the stockholders’ equity balances as of the dates indicated, and the amount of change from December 31, 2011 and June 30, 2011:

 

(Unaudited - Dollars in thousands, except per share data)

   June 30,
2012
    December 31,
2011
    June 30,
2011
    $ Change from
December 31,
2011
     $ Change from
June  30,

2011
 

Common equity

   $ 832,128        816,740        840,133        15,388         (8,005

Accumulated other comprehensive income

     44,053        33,487        24,639        10,566         19,414   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total stockholders’ equity

     876,181        850,227        864,772        25,954         11,409   

Goodwill and core deposit intangible, net

     (113,297     (114,384     (155,699     1,087         42,402   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Tangible stockholders’ equity

   $ 762,884        735,843        709,073        27,041         53,811   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Stockholders’ equity to total assets

     11.79     11.83     12.39     

Tangible stockholders’ equity to total tangible assets

     10.42     10.40     10.39     

Book value per common share

   $ 12.18        11.82        12.02        0.36         0.16   

Tangible book value per common share

   $ 10.61        10.23        9.86        0.38         0.75   

Market price per share at end of period

   $ 15.46        12.03        13.48        3.43         1.98   

Tangible stockholders’ equity and book value per share increased $27.0 million and $0.38 per share from the prior year end, resulting in tangible stockholders’ equity to tangible assets of 10.42 percent and tangible book value per share of $10.61 as of June 30, 2012. The increases came from earnings retention and an increase in accumulated other comprehensive income. Tangible stockholders’ equity increased $53.8 million, or $0.75 per share since June 30, 2011, primarily a result of an increase in accumulated other comprehensive income. The $8.0 million decrease in common equity from June 30, 2011 included a third quarter 2011 goodwill impairment charge (net of tax) of $32.6 million.

On June 27, 2012, the Company’s Board of Directors declared a cash dividend of $0.13 per share, payable July 19, 2012 to shareholders of record on July 10, 2012. Future cash dividends will depend on a variety of factors, including net income, capital, asset quality, general economic conditions and regulatory considerations.

Results of Operations – The Three Months ended June 30, 2012

Compared to the Three Months ended March 31, 2012 and June 30, 2011

Performance Summary

 

     Three Months ended  

(Dollars in thousands, except per share data)

   June 30,
2012
    March 31,
2012
    June 30,
2011
 

Net income

   $ 18,981        16,333        11,886   

Diluted earnings per share

   $ 0.26        0.23        0.17   

Return on average assets (annualized)

     1.04     0.91     0.69

Return on average equity (annualized)

     8.69     7.58     5.54

 

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Table of Contents

The Company reported net income for the current quarter of $19.0 million, an increase of $7.1 million, or 60 percent, compared to $11.9 million for the prior year second quarter. The earnings improvement for the current quarter and the first half of 2012 was reflective of the reduction in the provision for loan losses as a result of the improvement in the credit quality. Diluted earnings per share for the current quarter was $0.26 per share, an increase of 53 percent from the prior year second quarter earnings per share of $0.17.

Revenue Summary

The following tables summarize revenue for the periods indicated, including the amount and percentage change from March 31, 2012 and June 30, 2011:

 

     Three Months ended  

(Dollars in thousands)

   June 30,
2012
    March 31,
2012
    June 30,
2011
 

Net interest income

      

Interest income

   $ 64,192        67,884        71,562   

Interest expense

     9,044        9,598        11,331   
  

 

 

   

 

 

   

 

 

 

Total net interest income

     55,148        58,286        60,231   

Non-interest income

      

Service charges, loan fees, and other fees

     12,404        11,438        12,258   

Gain on sale of loans

     7,522        6,813        4,291   

Loss on sale of investments

     —          —          (591

Other income

     1,865        2,087        1,893   
  

 

 

   

 

 

   

 

 

 

Total non-interest income

     21,791        20,338        17,851   
  

 

 

   

 

 

   

 

 

 
   $ 76,939        78,624        78,082   
  

 

 

   

 

 

   

 

 

 

Net interest margin (tax-equivalent)

     3.49     3.73     4.01
  

 

 

   

 

 

   

 

 

 

 

(Dollars in thousands)

   $ Change from
March 31,
2012
    $ Change from
June  30,

2011
    % Change from
March 31,
2012
    % Change from
June  30,

2011
 

Net interest income

        

Interest income

   $ (3,692   $ (7,370     -5     -10

Interest expense

     (554     (2,287     -6     -20
  

 

 

   

 

 

     

Total net interest income

     (3,138     (5,083     -5     -8

Non-interest income

        

Service charges, loan fees, and other fees

     966        146        8     1

Gain on sale of loans

     709        3,231        10     75

Loss on sale of investments

     —          591        n/m        -100

Other income

     (222     (28     -11     -1
  

 

 

   

 

 

     

Total non-interest income

     1,453        3,940        7     22
  

 

 

   

 

 

     
   $ (1,685   $ (1,143     -2     -1
  

 

 

   

 

 

     

 

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Table of Contents

Net Interest Income

The current quarter net interest income of $55.1 million decreased $3.1 million, or 5 percent, over the prior quarter and decreased $5.1 million, or 8 percent, over the prior year second quarter. The current quarter interest income of $64.2 million decreased $3.7 million, or 5 percent, over the prior quarter and decreased $7.4 million, or 10 percent, over the prior year second quarter. A primary driver of the decrease in interest income was the $15.9 million of premium amortization (net of discount accretion) on investment securities in the current quarter which was an increase of $2.6 million over the prior quarter and an increase of $8.3 million over the prior year second quarter. The accelerated premium amortization during the current and prior quarters reflects the growth in the CMO investment securities over the course of the prior year as well as the increased mortgage refinance activity as mortgage rates have declined significantly to record lows over the same time period. The decrease in interest expense of $554 thousand, or 6 percent, from the prior quarter and the decrease of $2.3 million, or 20 percent, in interest expense from the prior year second quarter was the result of a decrease in interest rates on deposits as a result of the Company’s continued focus on reducing deposit and borrowing costs. The funding cost for the current quarter was 68 basis points compared to 72 basis points for the prior quarter and 89 basis points for the prior year second quarter.

The current quarter net interest margin as a percentage of earning assets, on a tax-equivalent basis, was 3.49 percent, a decrease of 24 basis points from the prior quarter net interest margin of 3.73 percent. Although there was a reduction in funding costs of 4 basis points during the current quarter compared to the prior quarter, the reduction was not enough to offset the 28 basis points reduction in yield on earning assets during the current quarter compared to the prior quarter. The decrease in yield on earning assets during the current quarter compared to the prior quarter was the result of a 12 basis points reduction in yield on the loan portfolio, and a 41 basis points reduction in yield on the investment securities. Of the 41 basis points reduction on investment securities, 28 basis points was due to the increase in premium amortization. The premium amortization in the current quarter accounted for a 94 basis points reduction in the net interest margin compared to a 79 basis points reduction in the prior quarter and 48 basis points reduction in the net interest margin in the prior year second quarter. As a result of fewer loans moving to non-accrual status and the greater dispositions of existing non-accrual loans, the reversal of interest income on non-accrual loans accounted for a 2 basis points reduction in the net interest margin during the current quarter.

Non-interest Income

Non-interest income for the current quarter totaled $21.8 million, an increase of $1.5 million over the prior quarter and an increase of $3.9 million over the same quarter last year. Gain on sale of loans increased $709 thousand, or 10 percent, over the prior quarter and $3.2 million, or 75 percent, over the prior year second quarter as there was an increase in origination and refinance volume due to lower interest rates and borrowers taking advantage of government assistance programs. Service charge fee income increased $966 thousand from the linked quarter, the majority of which was from higher overdraft fees driven by the increased number of deposit accounts. Service charge fee income increased $146 thousand, or 1 percent, from the prior year second quarter. Other income of $1.9 million for the current quarter was a decrease of $222 thousand from the prior quarter as a result of small changes in several categories. Included in other income was operating revenue of $186 thousand from other real estate owned and gains of $228 thousand on the sale of other real estate owned, which total $414 thousand for the current quarter compared to $528 thousand for the prior quarter and $697 thousand for the prior year second quarter.

 

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Table of Contents

Non-interest Expense

The following tables summarize non-interest expense for the periods indicated, including the amount and percentage change from March 31, 2012 and June 30, 2011:

 

     Three Months ended  

(Dollars in thousands)

   June 30,
2012
     March 31,
2012
     June 30,
2011
 

Compensation and employee benefits

   $ 23,684         23,560         21,170   

Occupancy and equipment

     5,825         5,968         5,728   

Advertising and promotions

     1,713         1,402         1,635   

Outsourced data processing

     788         846         791   

Other real estate owned

     2,199         6,822         5,062   

Federal Deposit Insurance Corporation premiums

     1,300         1,712         2,197   

Core deposit intangibles amortization

     535         552         590   

Other expense

     10,146         8,183         9,047   
  

 

 

    

 

 

    

 

 

 

Total non-interest expense

   $ 46,190         49,045         46,220   
  

 

 

    

 

 

    

 

 

 

 

(Dollars in thousands)

   $ Change from
March 31,
2012
    $ Change from
June  30,

2011
    % Change from
March 31,
2012
    % Change from
June  30,

2011
 

Compensation and employee benefits

   $ 124      $ 2,514        1     12

Occupancy and equipment

     (143     97        -2     2

Advertising and promotions

     311        78        22     5

Outsourced data processing

     (58     (3     -7     0

Other real estate owned

     (4,623     (2,863     -68     -57

Federal Deposit Insurance Corporation premiums

     (412     (897     -24     -41

Core deposit intangibles amortization

     (17     (55     -3     -9

Other expense

     1,963        1,099        24     12
  

 

 

   

 

 

     

Total non-interest expense

   $ (2,855   $ (30     -6     0
  

 

 

   

 

 

     

Non-interest expense of $46.2 million for the current quarter decreased by $2.9 million, or 6 percent, from the prior quarter and decreased by $30 thousand from the prior year second quarter. The changes over the prior quarter and the prior year second quarter were driven primarily by other real estate owned expense. Other real estate owned expense decreased $4.6 million, or 68 percent, from the prior quarter and decreased $2.9 million, or 57 percent, from the prior year second quarter. The current quarter other real estate owned expense of $2.2 million included $639 thousand of operating expense, $1.2 million of fair value write-downs, and $316 thousand of loss on sale of other real estate owned. Other real estate owned expense will fluctuate as the Company continues to work through non-performing loans and dispose of foreclosed properties.

Excluding other real estate owned expense, non-interest expense increased $1.8 million, or 4 percent, from the prior quarter and increased $2.8 million, or 7 percent, from the prior year second quarter. Compensation and employee benefits increased by $2.5 million, or 12 percent, from the prior year second quarter and was attributable to a revised Company incentive program and the restoration in 2012 of certain compensation cuts made in 2011. Advertising and promotion expense of $1.7 million for the current quarter increased $311 thousand over the prior quarter as the Company typically spends less on advertising in the first quarter. Other expense increased $2.0 million, or 24 percent, from the prior quarter primarily due to expenses associated with New Markets Tax Credit investments. Other expense increased $1.1 million, or 12 percent, from the prior year second quarter as a result of increases in several categories including loan expenses and miscellaneous expenses. The Company continues to work diligently in reducing expenses in areas of direct control.

 

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Table of Contents

Efficiency Ratio

The efficiency ratio for the current quarter was 54 percent compared to 52 percent for the prior year second quarter. The higher efficiency ratio was the result of a decrease in net interest income, primarily from an increase in premium amortization on investment securities, and an increase in non-interest expense, largely from higher compensation and other expenses.

Provision for Loan Losses

 

(Dollars in thousands)

   Provision
for Loan
Losses
     Net
Charge-Offs
     ALLL
as a Percent
of Loans
    Accruing
Loans 30-89
Days Past Due
as a Percent of
Loans
    Non-Performing
Assets to

Total Subsidiary
Assets
 

Q2 2012

   $ 7,925         7,052         3.99     1.41     2.69

Q1 2012

     8,625         9,555         3.98     1.24     2.91

Q4 2011

     8,675         9,252         3.97     1.42     2.92

Q3 2011

     17,175         18,877         3.92     0.60     3.49

Q2 2011

     19,150         20,184         3.88     1.14     3.68

Q1 2011

     19,500         15,778         3.86     1.44     3.78

Q4 2010

     27,375         24,525         3.66     1.21     3.91

Q3 2010

     19,162         26,570         3.47     1.06     4.03

The levels of net-charged off loans continue to trend lower as the Company continues to work through the non-performing assets. Net charged-off loans during the current quarter of $7.1 million decreased $2.5 million compared to the prior quarter and decreased $13.1 million, or 65 percent, compared to the prior year second quarter. The current quarter provision for loan losses was $7.9 million, which decreased $700 thousand compared to the $8.6 million for the prior quarter and a decrease of $11.2 million from the second quarter of 2011. Loan portfolio growth, composition, average loan size, credit quality considerations, and other environmental factors will continue to determine the level of provision for loan loss expense.

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 management’s 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 below in “Additional Management’s Discussion and Analysis.”

 

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Table of Contents

Results of Operations – The Six Months ended June 30, 2012

Compared to the Six Months ended June 30, 2011

Performance Summary

 

     Six Months ended  

(Dollars in thousands, except per share data)

   June 30,
2012
    June 30,
2011
 

Net income

   $ 35,314        22,171   

Diluted earnings per share

   $ 0.49        0.31   

Return on average assets (annualized)

     0.97     0.66

Return on average equity (annualized)

     8.14     5.25

Net income for the six months ended June 30, 2012 was $35.3 million, which was an increase of $13.1 million, or 59 percent, over the prior year first six months. Diluted earnings per share of $0.49 was an increase of $0.18, or 58 percent, earned in the first half of 2011.

Revenue Summary

The following table summarizes revenue for the periods indicated, including the amount and percentage change from June 30, 2011:

 

     Six Months ended     $ Change     % Change  

(Dollars in thousands)

   June 30,
2012
    June 30,
2011
     

Net interest income

        

Interest income

   $ 132,076      $ 139,935      $ (7,859     -6

Interest expense

     18,642        23,000        (4,358     -19
  

 

 

   

 

 

   

 

 

   

Total net interest income

     113,434        116,935        (3,501     -3

Non-interest income

        

Service charges, loan fees, and other fees

     23,842        23,443        399        2

Gain on sale of loans

     14,335        8,985        5,350        60

Loss on sale of investments

     —          (467     467        -100

Other income

     3,952        3,285        667        20
  

 

 

   

 

 

   

 

 

   

Total non-interest income

     42,129        35,246        6,883        20
  

 

 

   

 

 

   

 

 

   
   $ 155,563      $ 152,181      $ 3,382        2
  

 

 

   

 

 

   

 

 

   

Net interest margin (tax-equivalent)

     3.61     3.96    
  

 

 

   

 

 

     

 

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Net Interest Income

Net interest income for the first half of 2012 decreased $3.5 million, or 3 percent, over the same period last year. During 2012, interest income decreased $7.9 million, or 6 percent, while interest expense decreased $4.4 million, or 19 percent from the first half of 2011. The decrease in interest income from the first half of the prior year was due to the increase in premium amortization on investment securities coupled with the reduction in loan balances, the combination of which put further pressure on earning asset yields. Interest income was reduced by $29.2 million in premium amortization (net of discount accretion) on investment securities which was an increase of $11.7 million from the first six months of the prior year. This increase in premium amortization was the result of both the increased purchases of investment securities combined with the continued refinance activity. The decrease in interest expense during the current year was primarily attributable to the decreases in rates on interest bearing deposits and borrowings. The funding cost for the first half of 2012 was 70 basis points compared to 92 basis points for the first half 2011.

The net interest margin, on a tax-equivalent basis, for the first half of 2012 was 3.61 percent, a 35 basis points reduction from the net interest margin of 3.96 percent for the first half of 2011. The reduction was attributable to a lower yield and volume of loans coupled with an increase in lower yielding investment securities and higher premium amortization on investment securities. The premium amortization in 2012 accounted for an 87 basis points reduction in the net interest margin which is an increase of 31 basis points compared to a 56 basis points reduction in the net interest margin for the same period last year.

Non-interest Income

Non-interest income of $42.1 million for 2012 increased $6.9 million, or 20 percent, over non-interest income of $35.2 million for the first half of 2011. Gain on sale of loans for the first half of 2012 increased $5.4 million, or 60 percent, from the first half of 2011 due to greater refinance and loan origination activity. Other income for the first half of 2012 increased $667 thousand, or 20 percent, over the first half of 2011 of which $573 thousand of the increase was from debit card income. Included in other income was operating revenue of $237 thousand from other real estate owned and gains of $704 thousand on the sale of other real estate owned, which aggregated $942 thousand for the first half of 2012 compared to $965 thousand for the same period in the prior year.

Non-interest Expense

The following table summarizes non-interest expense for the periods indicated, including the amount and percentage change from June 30, 2011:

 

     Six Months ended      $ Change     % Change  

(Dollars in thousands)

   June 30,
2012
     June 30,
2011
      

Compensation and employee benefits

   $ 47,244       $ 42,773       $ 4,471        10

Occupancy and equipment

     11,793         11,682         111        1

Advertising and promotions

     3,115         3,119         (4     0

Outsourced data processing

     1,634         1,564         70        4

Other real estate owned

     9,021         7,161         1,860        26

Federal Deposit Insurance Corporation premiums

     3,012         4,521         (1,509     -33

Core deposit intangibles amortization

     1,087         1,317         (230     -17

Other expense

     18,329         16,559         1,770        11
  

 

 

    

 

 

    

 

 

   

Total non-interest expense

   $ 95,235       $ 88,696       $ 6,539        7
  

 

 

    

 

 

    

 

 

   

 

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Table of Contents

Compensation and employee benefits for the first half of 2012 increased $4.5 million, or 10 percent, and was attributable to a revised Company incentive program and the restoration in the first half of 2012 of certain compensation cuts made in the first half of 2011. Other real estate owned expense of $9.0 million in the first six months of 2012 increased $1.9 million, or 26 percent, from the first half of the prior year. The other real estate owned expense for the first half of 2012 included $1.5 million of operating expenses, $6.7 million of fair value write-downs, and $865 thousand of loss on sale of other real estate owned. Other expense in the first six months of 2012 increased $1.8 million, or 11 percent, from the first half of the prior year and was primarily driven by increases in loan expenses and several miscellaneous categories.

Efficiency Ratio

The efficiency ratio was 53 percent for the first half of 2012 and 52 percent for the first half of 2011. Although there were significant increases in non-interest income from the first half of the prior year, it was not enough to offset the decrease in net interest income and the increase in non-interest expense in the first half of 2012.

Provision for Loan Losses

The provision for loan losses was $16.6 million for the first half of 2012, a decrease of $22.1 million, or 57 percent, from the same period in the prior year. Net charged-off loans during the first half of 2012 was $16.6 million, a decrease of $19.4 million from the first half of 2011. The largest category of net charge-offs was in land, lot and other construction loans which had net charge-offs of $6.3 million, or 38 percent of total net charged-off loans.

 

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Additional Management’s Discussion and Analysis

Lending Activity and Practices

The Company focuses its lending activity primarily on the following types of loans: 1) first-mortgage, conventional loans secured by residential properties, particularly single-family, 2) commercial lending that concentrates on targeted businesses and 3) installment lending for consumer purposes (e.g., auto, home equity, etc.). Note 3 to the Consolidated Financial Statements in “Part I. Item 1. Financial Statements” provides more information about the loan portfolio.

The following table summarizes the Company’s loan portfolio by regulatory classification:

 

     Loans Receivable, by Loan Type     %  Change
from
12/31/11
    %  Change
from
6/30/11
 

(Dollars in thousands)

   Balance
6/30/12
    Balance
12/31/11
    Balance
6/30/11
     

Custom and owner occupied construction

   $ 39,052        35,422        32,094        10     22

Pre-sold and spec construction

     49,638        58,811        61,022        -16     -19
  

 

 

   

 

 

   

 

 

     

Total residential construction

     88,690        94,233        93,116        -6     -5

Land development

     93,361        103,881        134,539        -10     -31

Consumer land or lots

     114,475        125,396        136,255        -9     -16

Unimproved land

     59,548        66,074        74,597        -10     -20

Developed lots for operative builders

     21,101        25,180        26,976        -16     -22

Commercial lots

     25,035        26,621        27,581        -6     -9

Other construction

     32,079        34,346        38,536        -7     -17
  

 

 

   

 

 

   

 

 

     

Total land, lot, and other construction

     345,599        381,498        438,484        -9     -21

Owner occupied

     701,078        697,131        691,370        1     1

Non-owner occupied

     444,419        436,021        436,674        2     2
  

 

 

   

 

 

   

 

 

     

Total commercial real estate

     1,145,497        1,133,152        1,128,044        1     2

Commercial and industrial

     413,908        408,054        425,524        1     -3

1st lien

     690,638        688,455        659,950        0     5

Junior lien

     87,544        95,508        97,344        -8     -10
  

 

 

   

 

 

   

 

 

     

Total 1-4 family

     778,182        783,963        757,294        -1     3

Home equity lines of credit

     338,459        350,229        368,864        -3     -8

Other consumer

     109,043        109,235        112,567        0     -3
  

 

 

   

 

 

   

 

 

     

Total consumer

     447,502        459,464        481,431        -3     -7

Agriculture

     162,534        151,031        164,498        8     -1

Other

     151,726        150,197        148,860        1     2

Loans held for sale

     (88,442     (95,457     (35,440     -7     150
  

 

 

   

 

 

   

 

 

     

Total

   $ 3,445,196        3,466,135        3,601,811        -1     -4
  

 

 

   

 

 

   

 

 

     

 

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Table of Contents

Non-performing Assets

The following table summarizes information regarding non-performing assets at the dates indicated:

 

(Dollars in thousands)

   At or for the  Six
Months ended
June 30, 2012
    At or for the
Year ended
December 31, 2011
    At or for the  Six
Months ended
June 30, 2011
 

Other real estate owned

   $ 69,170        78,354        99,585   

Accruing loans 90 days or more past due

      

Residential real estate

     421        59        1,026   

Commercial

     2,527        1,168        5,469   

Consumer and other

     319        186        682   
  

 

 

   

 

 

   

 

 

 

Total

     3,267        1,413        7,177   

Non-accrual loans

      

Residential real estate

     19,835        11,881        14,444   

Commercial

     92,693        109,641        128,764   

Consumer and other

     13,935        12,167        11,576   
  

 

 

   

 

 

   

 

 

 

Total

     126,463        133,689        154,784   
  

 

 

   

 

 

   

 

 

 

Total non-performing assets 1

   $ 198,900        213,456        261,546   
  

 

 

   

 

 

   

 

 

 

Non-performing assets as a percentage of subsidiary assets

     2.69     2.92     3.68

Allowance for loan and lease losses as a percentage of non-performing loans

     106     102     86

Accruing loans 30-89 days past due

   $ 48,707        49,086        41,151   

Troubled debt restructurings not included in non-performing assets

   $ 88,483        98,859        35,687   

Interest income 2

   $ 3,392        7,441        4,298   

 

1

As of June 30, 2012, non-performing assets have not been reduced by U.S. government guarantees of $2.4 million.

2

Amounts represent estimated interest income that would have been recognized on loans accounted for on a non-accrual basis as of the end of each period had such loans performed pursuant to contractual terms.

 

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Table of Contents

The following tables summarize selected information identified by regulatory classification on the Company’s non-performing assets.

 

(Dollars in thousands)

  

 

Non-performing Assets, by Loan Type

     Non-
Accruing
Loans
6/30/12
     Accruing
Loans 90  Days
or More Past Due
6/30/12
     Other
Real Estate
Owned
6/30/12
 
   Balance
6/30/12
     Balance
12/31/11
     Balance
6/30/11
          

Custom and owner occupied construction

   $ 2,914         1,531         2,979         1,821         415         678   

Pre-sold and spec construction

     7,473         5,506         17,941         5,036         —           2,437   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total residential construction

     10,387         7,037         20,920         6,857         415         3,115   

Land development

     47,154         56,152         80,685         25,248         356         21,550   

Consumer land or lots

     9,728         8,878         12,693         4,847         127         4,754   

Unimproved land

     28,914         35,771         43,215         17,213         96         11,605   

Developed lots for operative builders

     6,932         9,001         6,731         5,089         186         1,657   

Commercial lots

     2,581         2,032         2,353         960         —           1,621   

Other construction

     5,124         5,133         4,582         212         —           4,912   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total land, lot and other construction

     100,433         116,967         150,259         53,569         765         46,099   

Owner occupied

     18,210         23,931         21,591         10,551         829         6,830   

Non-owner occupied

     3,509         4,897         8,210         3,380         —           129   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate

     21,719         28,828         29,801         13,931         829         6,959   

Commercial and industrial

     8,077         12,855         13,262         7,588         433         56   

1st lien

     34,285         31,083         31,312         26,203         15         8,067   

Junior lien

     8,861         2,506         2,687         8,536         325         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total 1-4 family

     43,146         33,589         33,999         34,739         340         8,067   

Home equity lines of credit

     6,939         6,361         5,764         6,454         227         258   

Other consumer

     405         360         382         281         47         77   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     7,344         6,721         6,146         6,735         274         335   

Agriculture

     7,541         7,010         7,159         3,044         211         4,286   

Other

     253         449         —           —           —           253   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 198,900         213,456         261,546         126,463         3,267         69,170   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     Accruing 30-89 Days Delinquent Loans, by Loan Type  

(Dollars in thousands)

   Balance
6/30/12
     Balance
12/31/11
     Balance
6/30/11
 

Custom and owner occupied construction

   $ —           —           285   

Pre-sold and spec construction

     968         250         962   
  

 

 

    

 

 

    

 

 

 

Total residential construction

     968         250         1,247   

Land development

     460         458         1,826   

Consumer land or lots

     1,650         1,801         982   

Unimproved land

     1,129         1,342         1,200   

Developed lots for operative builders

     199         1,336         125   

Commercial lots

     —           —           148   

Other construction

     —           —           120   
  

 

 

    

 

 

    

 

 

 

Total land, lot and other construction

     3,438         4,937         4,401   

Owner occupied

     10,943         8,187         10,789   

Non-owner occupied

     950         1,791         6,643   
  

 

 

    

 

 

    

 

 

 

Total commercial real estate

     11,893         9,978         17,432   

Commercial and industrial

     20,847         4,637         5,033   

1st lien

     7,220         14,405         5,618   

Junior lien

     880         6,471         1,297   
  

 

 

    

 

 

    

 

 

 

Total 1-4 family

     8,100         20,876         6,915   

Home equity lines of credit

     2,541         3,416         4,043   

Other consumer

     698         1,172         1,089   
  

 

 

    

 

 

    

 

 

 

Total consumer

     3,239         4,588         5,132   

Agriculture

     222         3,428         352   

Other

     —           392         639   
  

 

 

    

 

 

    

 

 

 

Total

   $ 48,707         49,086         41,151   
  

 

 

    

 

 

    

 

 

 

The Company continues to actively and methodically manage the disposition of non-performing assets which has resulted in a reduction of $15.7 million, or 7 percent, during the current quarter to a total of $198.9 million in non-performing assets. The non-performing assets also decreased $62.6 million, or 24 percent, from the prior year second quarter. The Company’s early stage delinquencies (accruing loans 30-89 days past due) of $48.7 million continue to fluctuate and at June 30, 2012 increased $6.1 million from the prior quarter early stage delinquencies of $42.6 million and increased $7.6 million from the prior year second quarter early stage delinquencies of $41.2 million.

The largest category of non-performing assets was the land, lot and other construction category which was $100 million, or 50 percent, of the non-performing assets at June 30, 2012. Included in this category was $47.2 million of land development loans and $28.9 million in unimproved land loans at June 30, 2012. Although land, lot and other construction loans the past three years put pressure on the Company’s credit quality, the Company has continued to reduce this category. During the current quarter, land, lot and other construction non-performing assets were reduced by $7.2 million, or 7 percent.

 

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Table of Contents

Most of the Company’s non-performing assets are secured by real estate, and based on the most current information available to management, including updated appraisals or evaluations, the Company believes the value of the underlying real estate collateral is adequate to minimize significant charge-offs or loss to the Company. The Company evaluates the level of its non-performing assets, the values of the underlying real estate and other collateral, and related trends in net charge-offs in determining the adequacy of the ALLL. Through pro-active credit administration, the Company works closely with its borrowers to seek favorable resolution to the extent possible, thereby attempting to minimize net charge-offs or losses to the Company. Throughout the year, the Company has maintained an adequate allowance for loan and lease losses while working to reduce non-performing assets. The improvement in the credit quality ratios during the previous twelve months are a product of this effort.

For non-performing construction loans involving residential structures, the percentage of completion exceeds 95 percent at June 30, 2012. For non-performing construction loans involving commercial structures, the percentage of completion ranges from projects not started to projects completed at June 30, 2012. During the construction loan term, all construction loan collateral properties are inspected at least monthly, or more frequently as needed, until completion. Draws on construction loans are predicated upon the results of the inspection and advanced based upon a percentage of completion basis versus original budget percentages. When construction loans become non-performing and the associated project is not complete, the Company on a case-by-case basis makes the decision to advance additional funds or to initiate collection/foreclosure proceedings. Such decision includes obtaining “as-is” and “at completion” appraisals for consideration of potential increases or decreases in the collateral’s value. The Company also considers the increased costs of monitoring progress to completion, and the related collection/holding period costs should collateral ownership be transferred to the Company. With very limited exception, the Company does not disburse additional funds on non-performing loans. Instead, the Company has proceeded to collection and foreclosure actions in order to reduce the Company’s exposure to loss on such loans.

Construction loans accounted for 48 percent of the non-accrual loans of which unimproved land and land development loans collectively account for the bulk of the non-accrual construction loans. The Company had non-accrual construction loans that aggregated 5 percent or more of the Company’s $60.4 million in non-accrual construction loans at June 30, 2012 in the following geographic locations: Western Montana, Northern Idaho, and Boise and Sun Valley, Idaho. With locations and operations in the contiguous northern Rocky Mountain states of Idaho and Montana, the geography and economies of each of these geographic areas are predominantly tied to real estate development given the sprawling abundance of timbered valleys and mountainous terrain with significant lakes, streams and watershed areas. Consistent with the general economic downturn, the market for upscale primary, secondary and other housing as well as the associated construction and building industries have stalled after years of significant growth. As the housing market (rental and owner-occupied) and related industries continue to recover from the downturn, the Company continues to reduce its exposure to loss in the construction loan and other segments of the total loan portfolio.

 

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Table of Contents

Impaired Loans

Loans are designated impaired when, based upon current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement and therefore, the Company has serious doubts as to the ability of such borrowers to fulfill the contractual obligation. When the ultimate collectability of the total principal of an impaired loan is in doubt and designated as non-accrual, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the total principal on an impaired loan is not in doubt, contractual interest is generally credited to interest income when received under the cash basis method. Impaired loans were $238 million and $259 million as of June 30, 2012 and December 31, 2011, respectively. The ALLL includes valuation allowances of $19.2 million and $18.8 million specific to impaired loans as of June 30, 2012 and December 31, 2011, respectively. Of the total impaired loans at June 30, 2012, there were 36 commercial real estate and other commercial loans that accounted for $97.2 million, or 41 percent, of the impaired loans. The 36 loans were collateralized by 131 percent of the loan value, the majority of which had appraisals (new or updated) during the last year, such appraisals reviewed at least quarterly taking into account current market conditions. Of the total impaired loans at June 30, 2012, there were 197 loans aggregating $124 million, or 52 percent, whereby the borrowers had more than one impaired loan. The amount of impaired loans that have had partial charge-offs during the year for which the Company continues to have concern about the collectability of the remaining loan balance was $20.8 million. Of these loans, there were charge-offs of $7.0 million during 2012.

For collateral-dependent loans and real estate loans for which foreclosure or a deed-in-lieu of foreclosure is probable, impairment is measured by the fair value of the collateral, less estimated cost to sell. The fair value of the collateral is determined primarily based upon appraisal or evaluation (new or updated) of the underlying property value. The Company reviews appraisals or evaluations, giving consideration to the highest and best use of the collateral, with values reduced by discounts to consider lack of marketability and estimated cost to sell. Appraisals or evaluations (new or updated) are reviewed at least quarterly and more frequently based on current market conditions, including deterioration in a borrower’s financial condition and when property values may be subject to significant volatility. After review and acceptance of the collateral appraisal or evaluation (new or updated), adjustments to an impaired loan’s value may occur.

In deciding whether to obtain a new or updated appraisal or evaluation, the Company considers the impact of the following factors and environmental events:

 

   

passage of time;

 

   

improvements to, or lack of maintenance of, the collateral property;

 

   

stressed and volatile economic conditions, including market values;

 

   

changes in the performance, risk profile, size and complexity of the credit exposure;

 

   

limited or specific use collateral property;

 

   

high loan-to-value credit exposures;

 

   

changes in the adequacy of the collateral protections, including loan covenants and financially responsible guarantors;

 

   

competing properties in the market area;

 

   

changes in zoning and environmental contamination;

 

   

the nature of subsequent transactions (e.g., modification, restructuring, refinancing); and

 

   

the availability of alternative financing sources.

The Company also takes into account 1) the Company’s experience with whether the appraised values of impaired collateral-dependent loans are actually realized, and 2) the timing of cash flows expected to be received from the underlying collateral to the extent such timing is significantly different than anticipated in the most recent appraisal.

 

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Table of Contents

The Company generally obtains appraisals or evaluations (new or updated) annually for collateral underlying impaired loans. For collateral-dependent loans for which the appraisal of the underlying collateral is more than twelve months old, the Company updates collateral valuations through procedures that include obtaining current inspections of the collateral property, broker price opinions, comprehensive market analyses and current data for conditions and assumptions (e.g., discounts, comparable sales and trends) underlying the appraisals’ valuation techniques. The Company’s impairment and valuation procedures take into account new and updated appraisals on similar properties in the same area in order to capture current market valuation changes, unfavorable and favorable.

Restructured Loans

A restructured loan is considered a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The Company had TDR loans of $151 million as of June 30, 2012. The Company’s TDR loans are considered impaired loans of which $62.3 million are designated as non-accrual.

Each restructured debt is separately negotiated with the borrower and includes terms and conditions that reflect the borrower’s prospective ability to service the debt as modified. The Company discourages the multiple loan strategy when restructuring loans regardless of whether or not the notes are TDR loans. The Company does not have any commercial TDR loans as of June 30, 2012 that have repayment dates extended at or near the original maturity date for which the Company has not classified as impaired. At June 30, 2012, the Company has TDR loans of $32.4 million that are in non-accrual status or that have had partial charge-offs during the year, the borrowers of which continue to have $35.9 million in other loans that are on accrual status.

Other Real Estate Owned

The loan book value prior to the acquisition and transfer of the loan into other real estate owned (“OREO”) during 2012 was $24.4 million of which $8.8 million was residential real estate, $14.8 million was commercial, and $827 thousand was consumer loans. The loan collateral acquired in foreclosure during 2012 was $16.4 million of which $6.0 million was residential real estate, $9.9 million was commercial, and $538 thousand was consumer loans. The following table sets forth the changes in OREO for the periods indicated:

 

(Dollars in thousands)

   Six Months ended
June  30,

2012
    Year ended
December 31,

2011
    Six Months ended
June  30,

2011
 

Balance at beginning of period

   $ 78,354        73,485        73,485   

Additions

     16,372        79,295        49,570   

Capital improvements

     —          669        321   

Write-downs

     (6,653     (16,246     (2,351

Sales

     (18,903     (58,849     (21,440
  

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 69,170        78,354        99,585   
  

 

 

   

 

 

   

 

 

 

The Company believes that the write-downs in 2012 and 2011 are not considered a trend in that several of such properties have characteristics unique to the property, including special or limited use, and locations of such properties. The Company also determined that the write-downs were not indicative of a trend which would likely affect the future operating results in light of the remaining holdings of real property and the Company’s experience in the geographic markets where the properties are located. However, there can be no assurance that future significant write-downs will not occur.

 

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Allowance for Loan and Lease Losses

Determining the adequacy of the ALLL involves a high degree of judgment and is inevitably imprecise as the risk of loss is difficult to quantify. The ALLL methodology is designed to reasonably estimate the probable loan and lease losses within the Company’s loan portfolio. Accordingly, the ALLL is maintained within a range of estimated losses. The determination of the ALLL, including the provision for loan losses and net charge-offs, is a critical accounting estimate that involves management’s judgments about all known relevant internal and external environmental factors that affect loan losses, including the credit risk inherent in the loan portfolio, economic conditions nationally and in the local markets in which the Company operates, changes in collateral values, delinquencies, non-performing assets and net charge-offs.

Although the Company continues to actively monitor economic trends, soft economic conditions combined with potential declines in the values of real estate that collateralize most of the Company’s loan portfolio may adversely affect the credit risk and potential for loss to the Company.

The ALLL evaluation is well documented and approved by the Company’s Board of Directors. In addition, the policy and procedures for determining the balance of the ALLL are reviewed annually by the Company’s Board of Directors, the internal audit department, independent credit reviewers and state and federal bank regulatory agencies.

At the end of each quarter, the Company analyzes its loan portfolio and maintains an ALLL at a level that is appropriate and determined in accordance with accounting principles generally accepted in the United States of America. The allowance consists of a specific valuation allowance component and a general valuation allowance component. The specific valuation allowance component relates to loans that are determined to be impaired. A specific valuation allowance is established when the fair value of a collateral-dependent loan or the present value of the loan’s expected future cash flows (discounted at the loan’s effective interest rate) is lower than the carrying value of the impaired loan. The general valuation allowance component relates to probable credit losses inherent in the balance of the loan portfolio based on prior loss experience, adjusted for changes in trends and conditions of qualitative or environmental factors.

The Bank divisions’ credit administration reviews the loan portfolio to determine which loans are impaired and estimates the specific valuation allowance. The impaired loans and related specific valuation allowance are then provided to the Company’s credit administration for further review and approval. The Company’s credit administration also determines the estimated general valuation and reviews and approves the overall ALLL for the Company. The credit administration of the Company exercises significant judgment when evaluating the effect of applicable qualitative or environmental factors on the Company’s historical loss experience for loans not identified as impaired. Quantification of the impact upon the Company’s ALLL is inherently subjective as data for any factor may not be directly applicable, consistently relevant, or reasonably available for management to determine the precise impact of a factor on the collectability of the Company’s unimpaired loan portfolio as of each evaluation date. The Company’s credit administration documents its conclusions and rationale for changes that occur in each applicable factor’s weight (i.e., measurement) and ensures that such changes are directionally consistent based on the underlying current trends and conditions for the factor. To have directional consistency, the provision for loan losses and credit quality should generally move in the same direction.

The Company is committed to a conservative management of the credit risk within the loan portfolio, including the early recognition of problem loans. The Company’s credit risk management includes stringent credit policies, individual loan approval limits, limits on concentrations of credit, and committee approval of larger loan requests. Management practices also include regular internal and external credit examinations, identification and review of individual loans and leases experiencing deterioration of credit quality, procedures for the collection of non-performing assets, quarterly monitoring of the loan portfolio, semi-annual review of loans by industry, and periodic stress testing of the loans secured by real estate.

 

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The Company’s model of eleven Bank divisions with separate management teams provides substantial local oversight to the lending and credit management function. The Company’s business model affords multiple reviews of larger loans before credit is extended, a significant benefit in mitigating and managing the Company’s credit risk. The geographic dispersion of the market areas in which the Company operates further mitigates the risk of credit loss. While this process is intended to limit credit exposure, there can be no assurance that further problem credits will not arise and additional loan losses incurred, particularly in periods of rapid economic downturns.

The primary responsibility for credit risk assessment and identification of problem loans rests with the loan officer of the account. This continuous process of identifying impaired loans is necessary to support management’s evaluation of the ALLL adequacy. An independent loan review function verifying credit risk ratings evaluates the loan officer and management’s evaluation of the loan portfolio credit quality. The loan review function also assesses the evaluation process and provides an independent analysis of the adequacy of the ALLL.

The Company considers the ALLL balance of $137 million adequate to cover inherent losses in the loan portfolio as of June 30, 2012. However, no assurance can be given that the Company will not, in any particular period, sustain losses that are significant relative to the ALLL amount, or that subsequent evaluations of the loan portfolio applying management’s judgment about then current factors, including economic and regulatory developments, will not require significant changes in the ALLL. Under such circumstances, this could result in enhanced provisions for loan losses. See additional risk factors in “Part II. Item 1A. Risk Factors.”

The following table summarizes the allocation of the ALLL as of the dates indicated:

 

     June 30, 2012     December 31, 2011     June 30, 2011  

(Dollars in thousands)

   Allowance
for Loan and
Lease Losses
     Percent
of ALLL in
Category
    Percent
of Loans in
Category
    Allowance
for Loan and
Lease Losses
     Percent
of ALLL in
Category
    Percent
of Loans in
Category
    Allowance
for Loan and
Lease Losses
     Percent
of ALLL in
Category
    Percent
of Loans in
Category
 

Residential real estate

   $ 18,139         13     15     17,227         13     15     17,412         12     15

Commercial real estate

     79,098         58     48     76,920         56     48     79,885         57     48

Other commercial

     20,570         15     19     20,833         15     18     19,615         14     18

Home equity

     10,904         8     12     13,616         10     13     13,625         10     13

Other consumer

     8,748         6     6     8,920         6     6     9,258         7     6
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Totals

   $ 137,459         100     100     137,516         100     100     139,795         100     100
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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Table of Contents

The following table summarizes the ALLL experience for the periods indicated:

 

(Dollars in thousands)

   Six Months ended
June  30,
2012
    Year ended
December 31,
2011
    Six Months ended
June  30,
2011
 

Balance at beginning of period

   $ 137,516        137,107        137,107   

Provision for loan losses

     16,550        64,500        38,650   

Charge-offs

      

Residential real estate

     (1,320     (5,671     (3,157

Commercial loans

     (14,890     (52,428     (28,485

Consumer and other loans

     (3,527     (11,267     (6,676
  

 

 

   

 

 

   

 

 

 

Total charge-offs

     (19,737     (69,366     (38,318
  

 

 

   

 

 

   

 

 

 

Recoveries

      

Residential real estate

     147        486        315   

Commercial loans

     2,491        3,830        1,602   

Consumer and other loans

     492        959        439   
  

 

 

   

 

 

   

 

 

 

Total recoveries

     3,130        5,275        2,356   
  

 

 

   

 

 

   

 

 

 

Charge-offs, net of recoveries

     (16,607     (64,091     (35,962
  

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 137,459        137,516        139,795   
  

 

 

   

 

 

   

 

 

 

Allowance for loan and lease losses as a percentage of total loans

     3.99     3.97     3.88

Net charge-offs as a percentage of total loans

     0.48     1.85     1.00

 

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Table of Contents

The following table summarizes net charge-offs at the dates indicated, including identification by regulatory classification:

 

     Net Charge-Offs (Recoveries), Year-to-Date
Period Ending, By Loan Type
    Charge-Offs
6/30/12
     Recoveries
6/30/12
 

(Dollars in thousands)

   Balance
6/30/12
    Balance
12/31/11
     Balance
6/30/11
      

Custom and owner occupied construction

   $ —          206         131        —           —     

Pre-sold and spec construction

     2,393        4,069         3,123        2,511         118   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total residential construction

     2,393        4,275         3,254        2,511         118   

Land development

     2,706        17,055         8,088        3,321         615   

Consumer land or lots

     1,957        7,456         4,570        2,187         230   

Unimproved land

     517        4,047         1,905        758         241   

Developed lots for operative builders

     1,201        943         617        1,212         11   

Commercial lots

     (81     237         184        39         120   

Other construction

     —          1,568         1,615        —           —     
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total land, lot and other construction

     6,300        31,306         16,979        7,517         1,217   

Owner occupied

     1,318        3,815         1,869        1,418         100   

Non-owner occupied

     189        3,861         1,101        549         360   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total commercial real estate

     1,507        7,676         2,970        1,967         460   

Commercial and industrial

     819        7,871         6,237        1,393         574   

1st lien

     2,122        7,031         3,635        2,232         110   

Junior lien

     2,441        1,663         1,346        2,614         173   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total 1-4 family

     4,563        8,694         4,981        4,846         283   

Home equity lines of credit

     807        3,261         1,262        911         104   

Other consumer

     32        615         245        258         226   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total consumer

     839        3,876         1,507        1,169         330   

Agriculture

     94        134         (2     230         136   

Other

     92        259         36        104         12   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 16,607        64,091         35,962        19,737         3,130   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The Company’s allowance is considered adequate to absorb losses from any class of its loan portfolio. For the periods ended June 30, 2012 and 2011, the Company believes the allowance is commensurate with the risk in the Company’s loan portfolio and is directionally consistent with the change in the quality of the Company’s loan portfolio. At June 30, 2012, the allowance was $137 million, a decrease of $57 thousand from the prior year end and a decrease of $2.3 million from a year ago. The allowance was 3.99 percent of total loans outstanding at June 30, 2012, compared to 3.97 percent at December 31, 2011 and 3.88 percent at June 30, 2011. The allowance was 106 percent of non-performing loans at June 30, 2012, an increase from 102 percent at December 31, 2011 and an increase from 86 percent at June 30, 2011.

 

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Table of Contents

The Company’s allowance consisted of the following components as of the dates indicated:

 

(Dollars in thousands)

   June 30,
2012
     December 31,
2011
     June 30,
2011
 

Specific valuation allowance

   $ 19,208         18,828         13,895   

General valuation allowance

     118,251         118,688         125,900   
  

 

 

    

 

 

    

 

 

 

Total ALLL

   $ 137,459         137,516         139,795   
  

 

 

    

 

 

    

 

 

 

During 2012, the ALLL decreased by $57 thousand, the net result of a $380 thousand increase in the specific valuation allowance and a $437 thousand decrease in the general valuation allowance. The increase in the specific valuation allowance since the prior year end was primarily due to the increase in loans with a specific valuation allowance of $4.2 million. The general valuation allowance remained stable since the prior year end due to a minimal decrease in loans collectively evaluated for impairment.

Presented below are select statistics that were also considered when determining the adequacy of the Company’s ALLL at June 30, 2012:

Positive Trends

 

   

Non-accrual construction loans (i.e., residential construction and land, lot and other construction) were $60.4 million, or 48 percent, of the $126 million of non-accrual loans at June 30, 2012, a decrease of $2.1 million from March 31, 2012 and a decrease of $24.9 million from June 30, 2011. Non-accrual construction loans accounted for 48 percent of the $131 million of non-accrual loans at March 31, 2012 and 55 percent of the $155 million of non-accrual loans at June 30, 2011.

 

   

The $21.5 million total of non-accrual loans in the commercial real estate and commercial and industrial at June 30, 2012 decreased by $4.1 million from the prior quarter end and decreased $11.8 million from June 30, 2011.

 

   

Non-performing loans as a percent of total loans decreased to 3.77 percent at June 30, 2012 as compared to 4.09 percent at March 31, 2012 and 4.50 percent at June 30, 2011.

 

   

Charge-offs, net of recoveries, for the second quarter of 2012 were $7.1 million, a $2.5 million decrease from the prior quarter and a $13.1 million decrease from the same quarter of 2011.

 

   

Net charge-offs of construction loans were $3.9 million, or 56 percent, of the $7.1 million of net charge-offs during the current quarter compared to net charge-offs of construction loans of $4.8 million, or 50 percent, of the $9.6 million of net charge-offs during the prior quarter.

 

   

The allowance as a percent of non-performing loans was 106 percent at June 30, 2012, compared to 102 percent at year end 2011 and 86 percent at June 30, 2011.

Negative Trends

 

   

The $44.5 million total of non-accrual loans in the agriculture, 1-4 family, home equity lines of credit, consumer, and other loans at June 30, 2012 increased by $1.7 million from the prior quarter end and increased by $8.4 million from June 30, 2011.

 

   

Early stage delinquencies (accruing loans 30-89 days past due) increased to $48.7 million at June 30, 2012 from $42.6 million at March 31, 2012 and $41.2 million at June 30, 2011.

 

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Table of Contents

When applied to the Company’s historical loss experience, the environmental factors result in the provision for loan losses being recorded in the period in which the loss has probably occurred. When the loss is confirmed at a later date, a charge-off is recorded. During 2012, loan charge-offs, net of recoveries, exceeded the provision for loan losses by $57 thousand. During the same period in 2011, the provision for loan losses exceeded loan charge-offs, net of recoveries, by $2.7 million.

The Company provides commercial services to individuals, small to medium size businesses, community organizations and public entities from 108 locations, including 99 branches, across Montana, Idaho, Wyoming, Colorado, Utah, and Washington. The Rocky Mountain areas in which the Company operates has diverse economies and markets that are tied to commodities (crops, livestock, minerals, oil and natural gas), tourism, real estate and land development and an assortment of industries, both manufacturing and service-related. Thus, the changes in the global, national, and local economies are not uniform across the Company’s geographic locations.

Though stabilizing, the soft economic conditions during much of 2010 continued during 2011 and the first half of 2012, including declining sales of existing real property (e.g., single family residential, multi-family, commercial buildings and land), elevated levels of existing inventory of real property, increases in real property delinquencies and foreclosures and corresponding decreases in absorption rates, and lower values of real property that collateralize most of the Company’s loan portfolio, among other factors. The weak economic conditions combined with the elevated levels of non-performing loans and charge-offs for commercial real estate loans contributed to the higher provision for loan losses in this loan portfolio class as compared to the other classes. National unemployment rates increased steadily from 5.0 in the first part of 2008 to a range of 8.5 to 10.0 during 2009 through 2011 and has recently declined to 8.2 in June of 2012. The unemployment rates for most states in which the Company conducts operations were generally lower throughout this time period compared to the national unemployment rate. Agricultural price declines in livestock and grain in 2009 have recovered significantly and remain strong. While prices for oil have held strong, prices for natural gas currently remain weak (due to excess supply) especially when compared to the exceptionally high price levels of natural gas during 2008. The tourism industry and related lodging continues to be a source of strength for the locations where the Company’s market areas have national parks and similar recreational areas in the market areas served.

In evaluating the need for a specific or general valuation allowance for impaired and unimpaired loans, respectively, within the Company’s construction loan portfolio, including residential construction and land, lot and other construction loans, the credit risk related to such loans was considered in the ongoing monitoring of such loans, including assessments based on current information, including new or updated appraisals or evaluations of the underlying collateral, expected cash flows and the timing thereof, as well as the estimated cost to sell when such costs are expected to reduce the cash flows available to repay or otherwise satisfy the construction loan. Construction loans are 13 percent of the Company’s total loan portfolio and account for 48 percent of the Company’s non-accrual loans at June 30, 2012. Collateral securing construction loans includes residential buildings (e.g., single/multi-family and condominiums), commercial buildings, and associated land (multi-acre parcels and individual lots, with and without shorelines). Outstanding balances are centered in Western Montana and Northern Idaho, as well as Boise and Sun Valley, Idaho.

For additional information regarding the ALLL, its relation to the provision for loan losses and risk related to asset quality, see Note 3 to the Consolidated Financial Statements in “Part I. Item 1. Financial Statements.”

 

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Table of Contents

Investment Activity

It has generally been the Company’s policy to maintain a liquid portfolio above policy limits. The Company’s investment securities are generally classified as available-for-sale and are carried at estimated fair value with unrealized gains or losses, net of tax, reflected as an adjustment to stockholders’ equity. The Company’s investment portfolio is primarily comprised of residential mortgage-backed securities and state and local government securities which are largely exempt from federal income tax. The Company uses the federal statutory rate of 35 percent in calculating its tax-equivalent yield. The residential mortgage-backed securities are typically short-term and provide the Company with on-going liquidity as scheduled and pre-paid principal payments are made on the securities. The Company assesses individual securities in its investment securities portfolio for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market conditions warrant.

For additional investment activity information, see Note 2 to the Consolidated Financial Statements in “Part I. Item 1. Financial Statements.”

Other-Than-Temporary Impairment on Securities Analysis

Non-marketable equity securities owned at June 30, 2012 primarily consisted of stock issued by the FHLB of Seattle and Topeka, such shares measured at cost in recognition of the transferability restrictions imposed by the issuers. Other non-marketable equity securities include Federal Agriculture Mortgage Corporation and Bankers’ Bank of the West Bancorporation, Inc.

With respect to FHLB stock, the Company evaluates such stock for other-than-temporary impairment. Such evaluation takes into consideration 1) FHLB deficiency, if any, in meeting applicable regulatory capital targets, including risk-based capital requirements, 2) the significance of any decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the time period for any such decline, 3) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, 4) the impact of legislative and regulatory changes on the FHLB, and 5) the liquidity position of the FHLB.

Based on the Company’s analysis of its impaired non-marketable equity securities as of June 30, 2012, the Company determined that none of such securities had other-than-temporary impairment.

In evaluating debt securities for other-than-temporary impairment losses, management assesses whether the Company intends to sell the security or if it is more-likely-than-not that the Company will be required to sell the debt security. In so doing, management considers contractual constraints, liquidity, capital, asset / liability management and securities portfolio objectives.

The Company believes that macroeconomic conditions occurring during the first half of 2012 and throughout 2011 have unfavorably impacted the fair value of certain debt securities in its investment portfolio. On August 5, 2011, Standard and Poor’s downgraded the United States long-term debt rating from its AAA rating to AA+. On August 8, 2011, Standard and Poor’s downgraded from AAA to AA+ the credit ratings of certain long-term debt instruments issued by Fannie Mae and Freddie Mac and other U.S. government agencies linked to long-term United States debt. 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., Moody’s, S&P, Fitch, and DBRS).

 

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Table of Contents

The following table separates investments with an unrealized loss position at June 30, 2012 into two categories: investments purchased prior to 2012 and those purchased during the first half of 2012. Of those investments purchased prior to 2012, the fair market value and unrealized loss at December 31, 2011 is also presented.

 

     June 30, 2012     December 31, 2011  

(Dollars in thousands)

   Fair Value      Unrealized
Loss
    Unrealized
Loss as a
Percent of
Fair Value
    Fair Value      Unrealized
Loss
    Unrealized
Loss as a
Percent of
Fair Value
 

Temporarily impaired securities purchased prior to 2012

              

State and local governments

   $ 17,753         (217     -1.22     17,532         (468     -2.67

Corporate bonds

     25,249         (183     -0.72     24,526         (1,254     -5.11

Collateralized debt obligations

     2,734         (114     -4.17     5,366         (282     -5.26

Residential mortgage-backed securities

     415,178         (2,612     -0.63     670,619         (6,326     -0.94
  

 

 

    

 

 

     

 

 

    

 

 

   

Total

   $ 460,914         (3,126     -0.68     718,043         (8,330     -1.16
  

 

 

    

 

 

     

 

 

    

 

 

   

Temporarily impaired securities purchased during 2012

              

State and local governments

   $ 67,635         (629     -0.93       

Corporate bonds

     32,946         (245     -0.74       

Residential mortgage-backed securities

     513,727         (3,032     -0.59       
  

 

 

    

 

 

          

Total

   $ 614,308         (3,906     -0.64       
  

 

 

    

 

 

          

Temporarily impaired securities

              

State and local governments

   $ 85,388         (846     -0.99       

Corporate bonds

     58,195         (428     -0.74       

Collateralized debt obligations

     2,734         (114     -4.17       

Residential mortgage-backed securities

     928,905         (5,644     -0.61       
  

 

 

    

 

 

          

Total

   $ 1,075,222         (7,032     -0.65       
  

 

 

    

 

 

          

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.

 

(Dollars in thousands)

   Number of
Debt
Securities
     Unrealized
Loss
 

Greater than 15.0%

     1       $ (12

10.1% to 15.0%

     3         (568

5.1% to 10.0%

     3         (169

0.1% to 5.0%

     482         (6,283
  

 

 

    

 

 

 

Total

     489       $ (7,032
  

 

 

    

 

 

 

With respect to the duration of the impaired debt securities, the Company identified 56 which have been continuously impaired for the twelve months ending June 30, 2012. 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 were in an unrealized loss position.

 

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Table of Contents

The following table provides details of the 56 securities which have been continuously impaired for the twelve months ended June 30, 2012, including the most notable loss for any one bond in each category.

 

(Dollars in thousands)

   Number of
Debt
Securities
     Unrealized
Loss for
12 Months
Or More
    Most
Notable
Loss
 

State and local governments

     10       $ (179     (69

Corporate bonds

     5         (32     (6

Collateralized debt obligations

     6         (114     (28

Residential mortgage-backed securities

     35         (1,335     (394
  

 

 

    

 

 

   

Total

     56       $ (1,660  
  

 

 

    

 

 

   

With respect to the collateralized debt obligation securities, each is in the form of a pooled trust preferred structure of which the Company owns a portion of the Senior Notes tranche. All of the assets underlying the pooled trust preferred structure are capital securities issued by trust subsidiaries of holding companies of banks and thrifts.

Of the 35 residential mortgage-backed securities, 28 have underlying collateral consisting of U.S. government guaranteed mortgages (e.g., GNMA) and U.S. government sponsored enterprise (e.g., FHLMC) guaranteed mortgages. Each of the 7 remaining residential mortgage-backed securities have underlying non-guaranteed private label whole loan collateral of which 3 have 30-year fixed rate residential mortgages considered to be “Prime” and 4 have 30-year fixed rate residential mortgages considered to be “ALT – A.” None of the underlying mortgage collateral is considered “subprime.” The Company 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.

Based on the Company’s analysis of its impaired debt securities as of June 30, 2012, the Company determined that none of such securities had other-than-temporary impairment.

Sources of Funds

The Company’s deposits have traditionally been the principal source of funds for use in lending and other business purposes. The Company has a number of different deposit programs designed to attract both short-term and long-term deposits from the general public by providing a wide selection of accounts and rates. These programs include non-interest bearing demand accounts, interest bearing checking, regular statement savings, money market deposit accounts, and fixed rate certificates of deposit with maturities ranging from three months to five years, negotiated-rate jumbo certificates, and individual retirement accounts. In addition, the Company obtains wholesale deposits through various programs including reciprocal deposit programs (e.g., Certificate of Deposit Account Registry System).

 

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The Company also obtains funds from repayment of loans and investment securities, securities sold under agreements to repurchase (“repurchase agreements”), advances from the FHLB, other borrowings, and sale of loans and investment securities. Loan repayments are a relatively stable source of funds, while interest bearing deposit inflows and outflows are significantly influenced by general interest rate levels and market conditions. Borrowings and advances may be used on a short-term basis to compensate for reductions in normal sources of funds such as deposit inflows at less than projected levels. Borrowings also may be used on a long-term basis to support expanded activities and to match maturities of longer-term assets.

Short-term borrowings

A critical component of the Company’s liquidity and capital resources is access to short-term borrowings to fund its operations. Short-term borrowings are accompanied by increased risks managed by asset liability committees (“ALCO”) such as rate increases or unfavorable change in terms which would make it more costly to obtain future short-term borrowings. The Company’s short-term borrowing sources include FHLB advances, federal funds purchased, wholesale deposits, and retail and wholesale repurchase agreements. The Company also has access to the short-term discount window borrowing programs of the Federal Reserve Bank. FHLB advances and certain other short-term borrowings may be extended as long-term borrowings to decrease certain risks such as liquidity or interest rate risk; however, the reduction in risks are weighed against the increased cost of funds.

The following table provides information relating to short-term borrowings which consists of borrowings that mature within one year of period end:

 

(Dollars in thousands)

   At or for the  Six
Months ended
June 30, 2012
    At or for the
Year ended
December 31, 2011
 

Repurchase agreements

    

Amount outstanding at end of period

   $ 466,784        258,643   

Weighted interest rate on outstanding amount

     0.38     0.42

Maximum outstanding at any month-end

   $ 466,784        338,352   

Average balance

   $ 327,240        267,058   

Weighted average interest rate

     0.37     0.51

FHLB advances

    

Amount outstanding at end of period

   $ 629,000        792,000   

Weighted interest rate on outstanding amount

     0.51     0.68

Maximum outstanding at any month-end

   $ 774,000        877,017   

Average balance

   $ 730,148        721,226   

Weighted average interest rate

     0.59     0.76

Contractual Obligations and Off-Balance Sheet Arrangements

In the normal course of business, there are various outstanding commitments to extend credit, such as letters of credit and un-advanced loan commitments, which are not reflected in the accompanying condensed consolidated financial statements. Management does not anticipate any material losses as a result of these transactions. The Company has outstanding debt maturities, the largest aggregate amount of which were FHLB advances.

 

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Liquidity Risk

Liquidity risk is the possibility that the Company will not be able to fund present and future obligations as they come due because of an inability to liquidate assets or obtain adequate funding at a reasonable cost. The objective of liquidity management is to maintain cash flows adequate to meet current and future needs for credit demand, deposit withdrawals, maturing liabilities and corporate operating expenses. Effective liquidity management entails three elements:

 

  1. Assessing on an ongoing basis, the current and expected future needs for funds, and ensuring that sufficient funds or access to funds exist to meet those needs at the appropriate time.

 

  2. Providing for an adequate cushion of liquidity to meet unanticipated cash flow needs that may arise from potential adverse circumstances ranging from high probability/low severity events to low probability/high severity.

 

  3. Balancing the benefits between providing for adequate liquidity to mitigate potential adverse events and the cost of that liquidity.

The following table identifies certain liquidity sources and capacity available to the Company at June 30, 2012:

 

(Dollars in thousands)

   June 30,
2012
 

FHLB advances

  

Borrowing capacity

   $ 1,147,337   

Amount utilized

     (906,029
  

 

 

 

Amount available

   $ 241,308   
  

 

 

 

Federal Reserve Bank discount window

  

Borrowing capacity

   $ 470,971   

Amount utilized

     —     
  

 

 

 

Amount available

   $ 470,971   
  

 

 

 

Unsecured lines of credit available

   $ 171,000   
  

 

 

 

Unencumbered investment securities

  

U.S. government and federal agency

   $ 205   

U.S. government sponsored enterprises

     5,776   

State and local governments

     1,018,711   

Corporate bonds

     159,926   

Collateralized debt obligations

     2,734   

Residential mortgage-backed securities

     761,423   
  

 

 

 

Total unencumbered securities

   $ 1,948,775   
  

 

 

 

The Company has a wide range of versatility in managing the liquidity and asset/liability mix. The Company’s ALCO committee meets regularly to assess liquidity risk, among other matters. The Company monitors liquidity and contingency funding alternatives through management reports of liquid assets (e.g., investment securities), both unencumbered and pledged, as well as borrowing capacity, both secured and unsecured.

 

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Capital Resources

Maintaining capital strength continues to be a long-term objective. Abundant capital is necessary to sustain growth, provide protection against unanticipated declines in asset values, and to safeguard the funds of depositors. Capital also is a source of funds for loan demand and enables the Company to effectively manage its assets and liabilities. Taking these considerations into account, the Company may, as it has done in the past, decide to utilize a portion of its strong capital position to repurchase shares of its outstanding common stock, from time to time, depending on market price and other relevant considerations.

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 Company and the Bank were considered well capitalized by their respective regulators as of June 30, 2012 and 2011. There are no conditions or events since June 30, 2012 that management believes have changed the Company’s or the Bank’s risk-based capital category.

The following table illustrates the Federal Reserve Board’s capital adequacy guidelines and the Company’s compliance with those guidelines as of June 30, 2012.

 

(Dollars in thousands)

   Tier 1 (Core)
Capital
    Tier 2 (Total)
Capital
    Leverage
Capital
 

Total stockholders’ equity

   $ 876,181        876,181        876,181   

Less:

      

Goodwill and intangibles

     (113,297     (113,297     (113,297

Net unrealized gains on investment securities and change in fair value of derivatives used for cash flow hedges

     (44,053     (44,053     (44,053

Other adjustments

     (35     (35     (35

Plus:

      

Allowance for loan and lease losses

     —          56,752        —     

Subordinated debentures

     124,500        124,500        124,500   
  

 

 

   

 

 

   

 

 

 

Total regulatory capital

   $ 843,296        900,048        843,296   
  

 

 

   

 

 

   

 

 

 

Risk weighted assets

   $ 4,459,465        4,459,465     
  

 

 

   

 

 

   

Total adjusted average assets

       $ 7,218,158   
      

 

 

 

Capital as % of risk weighted assets

     18.91     20.18     11.68
      

 

 

 

Regulatory “well capitalized” requirement

     6.00     10.00  
  

 

 

   

 

 

   

Excess over “well capitalized” requirement

     12.91     10.18  
  

 

 

   

 

 

   

Dividend payments were $0.26 per share for both six month periods ended June 30, 2012 and 2011. The payment of dividends is subject to government regulation in that regulatory authorities may prohibit banks and bank holding companies from paying dividends that would constitute an unsafe or unsound banking practice. Additionally, current guidance from the Federal Reserve provides, among other things, that dividends per share on the Company’s common stock generally should not exceed earnings per share measured over the previous four fiscal quarters.

In addition to the primary and safeguard liquidity sources available, the Company has the capacity to issue 117,187,500 shares of common stock of which 71,931,386 has been issued as of June 30, 2012. The Company also has the capacity to issue 1,000,000 shares of preferred shares of which none are currently issued.

 

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Federal and State Income Taxes

The Company files a consolidated federal income tax return, using the accrual method of accounting. All required tax returns have been timely filed. Financial institutions are subject to the provisions of the Internal Revenue Code of 1986, as amended, in the same general manner as other corporations.

Under Montana, Idaho, Colorado and Utah law, financial institutions are subject to a corporation income tax, which incorporates or is substantially similar to applicable provisions of the Internal Revenue Code. The corporation income tax is imposed on federal taxable income, subject to certain adjustments. State taxes are incurred at the rate of 6.75 percent in Montana, 7.6 percent in Idaho, 5 percent in Utah and 4.63 percent in Colorado. Wyoming and Washington do not impose a corporate income tax.

The Company has equity investments in Certified Development Entities which have received allocations of New Markets Tax Credits (“NMTC”). 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 equity investments in Low-Income Housing Tax Credits which are indirect federal subsidies used to finance the development of affordable rental housing for low-income households. The federal income tax credits are claimed over a ten-year credit allowance period. The Company has investments 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.

 

(Dollars in thousands)

   New
Markets
Tax Credits
     Low-Income
Housing
Tax Credits
     Investment
Securities
Tax Credits
     Total  

2012

   $ 2,681         1,270         943         4,894   

2013

     2,775         1,270         926         4,971   

2014

     2,850         1,270         904         5,024   

2015

     2,850         1,175         880         4,905   

2016

     1,014         1,175         855         3,044   

Thereafter

     450         4,208         4,432         9,090   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 12,620         10,368         8,940         31,928   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income tax expense for the six months ended June 30, 2012 and 2011 was $8.5 million and $2.7 million, respectively. The Company’s effective tax rate for the six months ended June 30, 2012 and 2011 was 19.3 percent and 10.7 percent, respectively. The primary reason for the low effective rates is the amount of tax-exempt investment income and federal tax credits. The tax-exempt income was $19.0 million and $14.6 million for the six months ended June 30, 2012 and 2011, respectively. The federal tax credit benefits were $2.2 million and $1.8 million for the six months ended June 30, 2012 and 2011, respectively. The Company continues its investments in select municipal securities and variable interest entities whereby the Company receives federal tax credits.

 

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Average Balance Sheet

The following schedule provides 1) the total dollar amount of interest and dividend income of the Company for earning assets and the average yield; 2) the total dollar amount of interest expense on interest bearing liabilities and the average rate; 3) net interest and dividend income and interest rate spread; and 4) net interest margin and net interest margin tax-equivalent.

 

     Three Months ended June 30, 2012     Six Months ended June 30, 2012  

(Dollars in thousands)

   Average
Balance
     Interest &
Dividends
     Average
Yield/
Rate
    Average
Balance
     Interest &
Dividends
     Average
Yield/
Rate
 

Assets

                

Residential real estate loans

   $ 590,516         7,495         5.08   $ 587,637         15,279         5.20

Commercial loans

     2,280,478         30,430         5.35     2,285,357         61,471         5.39

Consumer and other loans

     628,155         8,813         5.63     633,729         17,983         5.69
  

 

 

    

 

 

      

 

 

    

 

 

    

Total loans 1

     3,499,149         46,738         5.36     3,506,723         94,733         5.42

Tax-exempt investment securities 2

     882,988         9,309         4.22     875,304         18,982         4.34

Taxable investment securities 3

     2,472,893         8,145         1.32     2,427,506         18,361         1.51
  

 

 

    

 

 

      

 

 

    

 

 

    

Total earning assets

     6,855,030         64,192         3.76     6,809,533         132,076         3.89
  

 

 

    

 

 

      

 

 

    

 

 

    

Goodwill and intangibles

     113,587              113,862         

Non-earning assets

     362,873              360,584         
  

 

 

         

 

 

       

Total assets

   $ 7,331,490            $ 7,283,979         
  

 

 

         

 

 

       

Liabilities

                

NOW accounts

   $ 859,523         355         0.17   $ 845,172         724         0.17

Savings accounts

     446,431         86         0.08     436,780         177         0.08

Money market deposit accounts

     882,154         576         0.26     878,197         1,176         0.27

Certificate accounts

     1,048,941         3,013         1.15     1,060,470         6,298         1.19

Wholesale deposits 4

     640,300         579         0.36     641,903         1,188         0.37

FHLB advances

     1,001,208         3,218         1.29     1,006,459         6,599         1.31

Repurchase agreements, federal funds purchased and other borrowed funds

     487,863         1,217         1.00     472,102         2,480         1.05
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest bearing liabilities

     5,366,420         9,044         0.68     5,341,083         18,642         0.70
  

 

 

    

 

 

      

 

 

    

 

 

    

Non-interest bearing deposits

     1,030,231              1,016,917         

Other liabilities

     56,013              53,432         
  

 

 

         

 

 

       

Total liabilities

     6,452,664              6,411,432         
  

 

 

         

 

 

       

Stockholders’ Equity

                

Common stock

     719              719         

Paid-in capital

     641,765              642,317         

Retained earnings

     190,389              186,180         

Accumulated other comprehensive income

     45,953              43,331         
  

 

 

         

 

 

       

Total stockholders’ equity

     878,826              872,547         
  

 

 

         

 

 

       

Total liabilities and stockholders’ equity

   $ 7,331,490            $ 7,283,979         
  

 

 

         

 

 

       

Net interest income

      $ 55,148            $ 113,434      
     

 

 

         

 

 

    

Net interest spread

           3.08           3.19

Net interest margin

           3.23           3.34

Net interest margin (tax-equivalent)

           3.49           3.61

 

1 

Total loans are gross of the allowance for loan and lease losses, net of unearned income and include loans held for sale. Non-accrual loans were included in the average volume for the entire period.

2 

Excludes tax effect of $4,122,000 and $8,404,000 on tax-exempt investment security income for the three and six months ended June 30, 2012, respectively.

3 

Excludes tax effect of $386,000 and $772,000 on investment security tax credits for the three and six months ended June 30, 2012, respectively.

4 

Wholesale deposits include brokered deposits classified as NOW, money market deposit and certificate accounts, including reciprocal deposits.

 

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Rate/Volume Analysis

Net interest income can be evaluated from the perspective of relative dollars of change in each period. Interest income and interest expense, which are the components of net interest income, are shown in the following table on the basis of the amount of any increases (or decreases) attributable to changes in the dollar levels of the Company’s interest earning assets and interest bearing liabilities (“Volume”) and the yields earned and 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.

 

     Six Months ended June 30,
2012 vs. 2011
Increase (Decrease) Due to:
 

(Dollars in thousands)

   Volume     Rate     Net  

Interest income

      

Residential real estate loans

   $ 189        (1,782     (1,593

Commercial loans

     (3,278     (1,286     (4,564

Consumer and other loans

     (1,821     (857     (2,678

Investment securities

     9,080        (8,104     976   
  

 

 

   

 

 

   

 

 

 

Total interest income

     4,170        (12,029     (7,859

Interest expense

      

NOW accounts

     114        (455     (341

Savings accounts

     44        (161     (117

Money market deposit accounts

     14        (921     (907

Certificate accounts

     (113     (2,240     (2,353

Wholesale deposits

     136        (527     (391

FHLB advances

     273        685        958   

Repurchase agreements, federal funds purchased and other borrowed funds

     775        (1,982     (1,207
  

 

 

   

 

 

   

 

 

 

Total interest expense

     1,243        (5,601     (4,358
  

 

 

   

 

 

   

 

 

 

Net interest income

   $ 2,927        (6,428     (3,501
  

 

 

   

 

 

   

 

 

 

Net interest income decreased $3.5 million for the first half of 2012 compared to the first half of 2011. The decrease in interest income was driven primarily by the continued purchase of low yielding investment securities to offset the lower volume and reduced rate loans. Additionally, there was an increase in premium amortization on investment securities which reduced interest income. Although, the Company was able to lower interest expense by reducing deposit and borrowing interest rates, it was not enough to offset the reduction in interest income.

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 are monetary in nature; therefore, interest rates generally have a more significant impact on a company’s performance than does the effect of inflation.

 

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Item 3. Quantitative and Qualitative Disclosure about Market Risk

The Company believes there have not been any material changes in information about the Company’s market risk than was provided in the 2011 Annual Report.

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of the Company’s 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 Company’s 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 Company’s 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 second quarter 2012, to which this report relates that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting. Although the Company combined its eleven bank subsidiaries into one single commercial bank during the second quarter 2012, the Company has determined that there were no related changes in internal controls that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

The Company is involved in various claims, legal actions and complaints which arise in the ordinary course of business. In the Company’s opinion, all such matters are adequately covered by insurance, are without merit or are of such kind, or involve such amounts, that unfavorable disposition would not have a material adverse effect on the financial condition or results of operations of the Company.

 

Item 1A. Risk Factors

The Company believes there have been no material changes from risk factors previously disclosed in the 2011 Annual Report. The risks and uncertainties described in the 2011 Annual Report should be carefully reviewed. These are not the only risks and uncertainties that the Company faces. Additional risks and uncertainties that the Company does not currently know about or that the Company currently believes are immaterial, or that the Company has not predicted, may also harm its business operations or adversely affect the Company. If any of these risks or uncertainties actually occurs, the Company’s business, financial condition, operating results or liquidity could be adversely affected.

 

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Table of Contents
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 4. Mine Safety Disclosures

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, Inc’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 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.

 

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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.
August 8, 2012      

/s/ Michael J. Blodnick

      Michael J. Blodnick
      President/CEO
August 8, 2012      

/s/ Ron J. Copher

      Ron J. Copher
      Executive Vice President/CFO

 

63