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 September 30, 2009
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to______________
COMMISSION FILE 0-18911
GLACIER BANCORP, INC.
(Exact name of registrant as specified in its charter)
MONTANA 81-0519541
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
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. Yes [X] 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 (Section
232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes [ ]
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 [ ]
(Do not check if a smaller reporting company)
Indicate by checkmark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares of Registrant's common stock outstanding on October 26,
2009 was 61,619,803. No preferred shares are issued or outstanding.
GLACIER BANCORP, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Statements of Financial Condition - Unaudited
September 30, 2009, September 30, 2008 and audited December 31, 2008 ... 3
Condensed Consolidated Statements of Operations -
Unaudited three and nine months ended September 30, 2009 and 2008 ...... 4
Condensed Consolidated Statements of Stockholders' Equity and
Comprehensive Income - audited year ended December 31, 2008
and unaudited nine months ended September 30, 2009 ..................... 5
Condensed Consolidated Statements of Cash Flows -
Unaudited nine months ended September 30, 2009 and 2008 ................ 6
Notes to Condensed Consolidated Financial Statements - Unaudited .......... 7
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations .......................... 28
Item 3 - Quantitative and Qualitative Disclosure about Market Risk ........... 46
Item 4 - Controls and Procedures ............................................. 46
PART II. OTHER INFORMATION ....................................................... 47
Item 1 - Legal Proceedings ................................................... 47
Item 1A - Risk Factors ....................................................... 47
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds ......... 51
Item 3 - Defaults Upon Senior Securities ..................................... 52
Item 4 - Submission of Matters to a Vote of Security Holders ................. 52
Item 5 - Other Information ................................................... 52
Item 6 - Exhibits ............................................................ 52
Signatures ................................................................... 52
GLACIER BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, December 31, September 30,
(Dollars in thousands, except per share data) 2009 2008 2008
--------------------------------------------- ------------- ------------ -------------
(unaudited) (audited) (unaudited)
ASSETS:
Cash on hand and in banks ............................................... $ 93,728 125,123 94,865
Federal funds sold ...................................................... 47,025 6,480 --
Interest bearing cash deposits .......................................... 2,570 3,652 25,018
------------- ------------ -------------
Cash and cash equivalents ............................................ 143,323 135,255 119,883
Investment securities ................................................... 1,212,947 990,092 842,348
Loans held for sale ..................................................... 54,475 54,976 41,365
Loans receivable, gross ................................................. 3,991,775 4,075,217 3,881,255
Allowance for loan and lease losses ..................................... (125,330) (76,739) (65,633)
------------- ------------ -------------
Loans receviable, net ................................................ 3,920,920 4,053,454 3,856,987
Premises and equipment, net ............................................. 136,617 133,949 123,218
Real estate and other assets owned, net ................................. 54,537 11,539 9,506
Accrued interest receivable ............................................. 29,489 28,777 29,486
Deferred tax asset ...................................................... 22,681 14,292 8,832
Core deposit intangible, net ............................................ 10,719 13,013 11,653
Goodwill ................................................................ 146,259 146,752 140,301
Other assets ............................................................ 30,808 26,847 30,895
------------- ------------ -------------
Total assets ......................................................... $ 5,708,300 5,553,970 5,173,109
============= ============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Non-interest bearing deposits ........................................... $ 801,261 747,439 754,623
Interest bearing deposits ............................................... 2,809,756 2,515,036 2,282,147
Advances from Federal Home Loan Bank .................................... 640,735 338,456 727,243
Securities sold under agreements to repurchase .......................... 210,519 188,363 189,816
Federal Reserve Bank discount window .................................... 370,000 914,000 140,500
U.S. Treasury Tax & Loan ................................................ 3,009 6,067 357,095
Other borrowed funds .................................................... 12,055 2,301 2,122
Accrued interest payable ................................................ 8,015 9,751 9,810
Subordinated debentures ................................................. 120,167 121,037 118,559
Other liabilities ....................................................... 34,681 34,580 32,203
------------- ------------ -------------
Total liabilities..................................................... 5,010,198 4,877,030 4,614,118
------------- ------------ -------------
Preferred shares, $.01 par value per share. 1,000,000 shares authorized
None issued or outstanding ........................................... -- -- --
Common stock, $.01 par value per share. 117,187,500 shares authorized .. 615 613 543
Paid-in capital ......................................................... 495,663 491,794 387,331
Retained earnings - substantially restricted ............................ 186,678 185,776 176,738
Accumulated other comprehensive gain (loss) ............................. 15,146 (1,243) (5,621)
------------- ------------ -------------
Total stockholders' equity............................................ 698,102 676,940 558,991
------------- ------------ -------------
Total liabilities and stockholders' equity ........................... $ 5,708,300 5,553,970 5,173,109
============= ============ =============
Number of shares outstanding ............................................ 61,519,808 61,331,273 54,332,527
Book value per share .................................................... $ 11.35 11.04 10.29
See accompanying notes to condensed consolidated financial statements.
3
GLACIER BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
(UNAUDITED - dollars in thousands, except per share data) 2009 2008 2009 2008
---------------------------------------------------------- ------------- -------------- ------------- --------------
INTEREST INCOME:
Real estate loans ..................................... $ 13,330 12,801 41,542 37,792
Commercial loans ...................................... 36,739 41,212 112,302 124,845
Consumer and other loans .............................. 11,150 11,967 33,631 35,864
Investment securities and other ....................... 13,211 9,709 36,907 27,777
------------- ------------- ------------ -------------
Total interest income ........................... 74,430 75,689 224,382 226,278
------------- ------------- ------------ -------------
INTEREST EXPENSE:
Deposits .............................................. 9,232 12,518 28,799 42,861
Federal Home Loan Bank advances ....................... 2,087 2,337 5,758 12,876
Securities sold under agreements to repurchase ........ 447 919 1,450 3,068
Subordinated debentures ............................... 1,641 1,852 5,224 5,578
Other borrowed funds .................................. 394 4,487 1,663 7,390
------------- ------------- ------------ -------------
Total interest expense .......................... 13,801 22,113 42,894 71,773
------------- ------------- ------------ -------------
NET INTEREST INCOME ...................................... 60,629 53,576 181,488 154,505
Provision for loan losses ............................. 47,050 8,715 87,905 16,257
------------- ------------- ------------ -------------
Net interest income after provision for
loan losses .................................. 13,579 44,861 93,583 138,248
------------- ------------- ------------ -------------
NON-INTEREST INCOME:
Service charges and other fees ........................ 10,604 11,285 29,838 31,355
Miscellaneous loan fees and charges ................... 1,499 1,515 3,821 4,629
Gains on sale of loans ................................ 5,613 3,529 20,834 11,654
Gain (loss) on investments ............................ 2,667 (7,593) 2,667 (7,345)
Other income .......................................... 1,317 3,018 3,235 5,104
------------- ------------- ------------ -------------
Total non-interest income ........................ 21,700 11,754 60,395 45,397
------------- ------------- ------------ -------------
NON-INTEREST EXPENSE:
Compensation, employee benefits and related expense ... 20,935 21,188 63,589 63,252
Occupancy and equipment expense ....................... 5,835 5,502 17,341 15,751
Advertising and promotions expense .................... 1,596 1,942 5,042 5,314
Outsourced data processing expense .................... 830 556 2,181 1,870
Core deposit intangibles amortization ................. 758 764 2,294 2,310
Other expense ......................................... 11,942 7,809 34,038 21,320
------------- ------------- ------------ -------------
Total non-interest expense ....................... 41,896 37,761 124,485 109,817
------------- ------------- ------------ -------------
(LOSS) EARNINGS BEFORE INCOME TAXES ...................... (6,617) 18,854 29,493 73,828
Federal and state income tax (benefit) expense ........ (5,086) 6,069 4,593 25,185
------------- ------------- ------------ -------------
NET (LOSS) EARNINGS ...................................... $ (1,531) 12,785 24,900 48,643
============= ============= ============ =============
Basic (loss) earnings per share .......................... $ (0.03) 0.23 0.40 0.90
Diluted (loss) earnings per share ........................ $ (0.03) 0.24 0.40 0.90
Dividends declared per share ............................. $ 0.13 0.13 0.39 0.39
Return on average assets (annualized) .................... (0.11%) 1.01% 0.60% 1.32%
Return on average equity (annualized) .................... (0.88%) 9.15% 4.81% 11.85%
Average outstanding shares - basic ....................... 61,519,808 54,104,560 61,499,662 53,975,602
Average outstanding shares - diluted ..................... 61,519,808 54,305,005 61,502,073 54,148,583
See accompanying notes to condensed consolidated financial statements.
4
GLACIER BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31, 2008 AND UNAUDITED NINE MONTHS ENDED SEPTEMBER 30, 2009
Retained Accumulated Total
Common Stock earnings Other stock-
--------------------- Paid-in substantially comprehensive holders'
(Dollars in thousands, except per share data) Shares Amount capital restricted income (loss) equity
--------------------------------------------- ---------- -------- ------- ------------- ------------- -------
Balance at December 31, 2007 .......................... 53,646,480 $ 536 374,728 150,195 3,117 528,576
Comprehensive income:
Net earnings ....................................... -- -- -- 65,657 -- 65,657
Unrealized loss on securities, net of
reclassification adjustment and taxes ............. -- -- -- -- (4,360) (4,360)
-------
Total comprehensive income ............................ 61,297
-------
Cash dividends declared ($.52 per share) .............. -- -- -- (29,079) -- (29,079)
Stock options exercised ............................... 719,858 7 9,789 -- -- 9,796
Stock issued in connection with acquisition ........... 639,935 7 9,280 -- -- 9,287
Public offering of stock issued ....................... 6,325,000 63 93,890 -- -- 93,953
Cumulative effect of change in accounting principle ... -- -- -- (997) -- (997)
Stock based compensation and tax benefit .............. -- -- 4,107 -- -- 4,107
---------- -------- ------- -------- --------- -------
Balance at December 31, 2008 .......................... 61,331,273 $ 613 491,794 185,776 (1,243) 676,940
Comprehensive income:
Net earnings ....................................... -- -- -- 24,900 -- 24,900
Unrealized gain on securities, net of
reclassification adjustment and taxes ............. -- -- -- -- 16,389 16,389
-------
Total comprehensive income ............................ 41,289
-------
Cash dividends declared ($.39 per share) .............. -- -- -- (23,998) -- (23,998)
Stock options exercised ............................... 188,535 2 2,552 -- -- 2,554
Stock based compensation and tax benefit .............. -- -- 1,317 -- -- 1,317
---------- -------- ------- -------- --------- -------
Balance at September 30, 2009 (unaudited) ............. 61,519,808 $ 615 495,663 186,678 15,146 698,102
========== ======== ======= ======== ========= =======
See accompanying notes to condensed consolidated financial statements.
5
GLACIER BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30
------------------------------
(UNAUDITED - Dollars in thousands) 2009 2008
---------------------------------- ------------- -------------
OPERATING ACTIVITIES:
NET CASH PROVIDED BY OPERATING ACTIVITIES .............................. $ 100,501 67,902
------------- -------------
INVESTING ACTIVITIES:
Proceeds from sales, maturities and prepayments of
investments available-for-sale ..................................... 194,297 250,422
Purchases of investments available-for-sale ............................ (386,502) (415,153)
Principal collected on commercial and consumer loans ................... 768,123 812,171
Commercial and consumer loans originated or acquired ................... (807,260) (1,087,908)
Principal collections on real estate loans ............................. 161,483 236,628
Real estate loans originated or acquired ............................... (133,997) (284,675)
Net purchase of FHLB and FRB stock ..................................... (701) (138)
Proceeds from sale of other real estate owned .......................... 9,833 1,740
Net addition of premises and equipment and other real estate owned ..... (11,957) (6,596)
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES .............................. (206,681) (493,509)
------------- -------------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits .................................... 348,456 (147,708)
Net increase in FHLB advances .......................................... 302,279 188,294
Net increase in securities sold under repurchase agreements ............ 22,156 11,775
Net (decrease) increase in Federal Reserve Bank discount window ........ (544,000) 140,500
Net (decrease) increase in U.S. Treasury Tax and Loan funds ............ (3,058) 135,686
Net increase (decrease) in other borrowed funds ....................... 9,784 (49)
Cash dividends paid .................................................... (23,998) (21,103)
Excess tax benefits from stock options ................................. 75 1,296
Proceeds from exercise of stock options and other stock issued ......... 2,554 9,190
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES .......................... 114,248 317,881
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............... 8,068 (107,726)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ....................... 135,255 227,609
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................. $ 143,323 119,883
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest ................................................. $ 44,630 75,244
Cash paid for Income taxes ............................................. 28,392 32,872
Sale and refinancing of other real estate owned ........................ 5,802 1,924
Other real estate acquired in settlement of loans ...................... 61,581 10,828
See accompanying notes to condensed consolidated financial statements.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1) Basis of Presentation
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of
normal recurring adjustments) necessary for a fair presentation of Glacier
Bancorp Inc.'s (the "Company") financial condition as of September 30,
2009 and 2008, stockholders' equity and comprehensive income for the nine
months ended September 30, 2009, the results of operations for the three
and nine months ended September 30, 2009 and 2008, and cash flows for the
nine months ended September 30, 2009 and 2008. The condensed consolidated
statement of financial condition and statement of stockholders' equity and
comprehensive income of the Company as of December 31, 2008 have been
derived from the audited consolidated statements of the Company as of that
date.
The accompanying condensed consolidated financial statements do not
include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. These condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements
and notes thereto contained in the Company's Annual Report on Form 10-K
for the year ended December 31, 2008. Operating results for the nine
months ended September 30, 2009 are not necessarily indicative of the
results anticipated for the year ending December 31, 2009. Certain
reclassifications have been made to the 2008 financial statements to
conform to the 2009 presentation.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan and lease losses
("ALLL" or "allowance") and the valuations related to investments,
business combinations and real estate acquired in connection with
foreclosures or in satisfaction of loans. In connection with the
determination of the ALLL and other real estate valuation estimates
management obtains independent appraisals for significant items. Estimates
relating to investments are obtained from independent parties. Estimates
relating to business combinations are determined based on internal
calculations using significant independent party inputs and independent
party valuations.
2) Organizational Structure
The Company, headquartered in Kalispell, Montana, is a Montana corporation
incorporated in 2004 as a successor corporation to the Delaware
corporation incorporated in 1990. The Company is a regional multi-bank
holding company that provides a full range of banking services to
individual and corporate customers in Montana, Idaho, Wyoming, Colorado,
Utah and Washington through its bank subsidiaries. The bank subsidiaries
are subject to competition from other financial service providers. The
bank subsidiaries are also subject to the regulations of certain
government agencies and undergo periodic examinations by those regulatory
authorities.
As of September 30, 2009, the Company is the parent holding company for
ten wholly-owned, independent community bank subsidiaries: Glacier Bank
("Glacier"), First Security Bank of Missoula ("First Security"), Western
Security Bank ("Western"), Big Sky Western Bank ("Big Sky"), Valley Bank
of Helena ("Valley"), First Bank of Montana ("First Bank-MT"), all located
in Montana, Mountain West Bank ("Mountain West") which is located in
Idaho, Utah, and Washington, Citizens Community Bank ("Citizens") located
in Idaho, 1st Bank ("1st Bank") located in Wyoming and Utah, and Bank of
the San Juans ("San Juans") located in Colorado.
7
On October 2, 2009, the Company completed the acquisition of First Company
and its subsidiary First National Bank & Trust, a community bank based in
Powell, Wyoming. First National Bank & Trust provides community banking
services from three branch locations in Powell, Cody, and Lovell, Wyoming.
As of the acquisition, First National Bank & Trust had total assets of
approximately $267 million. First National Bank & Trust will operate as a
separate wholly-owned subsidiary of the Company.
On February 1, 2009, First National Bank of Morgan ("Morgan") merged into
1st Bank resulting in operations being conducted under the 1st Bank
charter. Prior period activity of Morgan has been combined and included in
1st Bank's historical results. The merger has been accounted for as a
combination of two wholly-owned subsidiaries without acquisition
accounting.
On December 1, 2008, Bank of the San Juans Bancorporation and its
subsidiary, San Juans, were acquired by the Company. The results of
operations and financial condition are included from the acquisition date.
The Financial Accounting Standards Board ("FASB") Accounting Standards
Codification(TM) ("ASC") Topic 810, Consolidation provides guidance as to
when a company should include the assets, liabilities, and activities of a
variable interest entity ("VIE") in its financial statements, and when a
company should disclose information about its relationship with a VIE. A
VIE is a legal structure used to conduct activities or hold assets, and a
VIE must be consolidated by a company if it is the primary beneficiary
because a primary beneficiary absorbs the majority of the entity's
expected losses, the majority of the expected residual returns, or both.
The Company has equity investments in Certified Development Entities in
the form of limited liability companies ("LLC") which have received
allocations of new market tax credits ("NMTC"). The Company also has
equity investments in low-income housing tax credit partnerships
("LIHTC"). The LLCs and the partnerships are considered VIEs. The Company
has evaluated the relationships and where the Company has been determined
to be the primary beneficiary in a VIE, it has consolidated its interest
in the VIE into the community bank subsidiary which holds the investment
in the VIE.
In June 2009, FASB issued a standard that will amend FASB ASC Topic 810,
Consolidation. The objective of this standard is to amend certain
requirements to improve financial reporting by enterprises involved with
variable interest entities and to provide more relevant and reliable
information to users of financial statements. This standard shall be
effective as of the beginning of each reporting entity's first annual
reporting period that begins after November 15, 2009, for interim periods
within that first annual reporting period, and for interim and annual
reporting periods thereafter. The Company is currently evaluating the
impact of the adoption of this standard, but does not expect it to have a
material effect on the Company's financial position or results of
operations.
In addition, the Company owns five trust subsidiaries, Glacier Capital
Trust II ("Glacier Trust II"), Glacier Capital Trust III ("Glacier Trust
III"), Glacier Capital Trust IV ("Glacier Trust IV"), Citizens (ID)
Statutory Trust I ("Citizens Trust I") and Bank of the San Juans Trust I
("San Juans Trust I") for the purpose of issuing trust preferred
securities and, in accordance with FASB Topic 810, Consolidation, the
subsidiaries are not consolidated into the Company's financial statements.
The Company does not have any other off-balance sheet entities.
See Note 12 - Segment Information for selected financial data including
net earnings (loss) and total assets for the parent company and each of
the community bank subsidiaries. Although the consolidated total assets of
the Company were $5.7 billion at September 30, 2009, eight of the ten
community banks had total assets of less than $1 billion. The smallest
community bank subsidiary had $180 million in
8
total assets, while the largest community bank subsidiary had $1.3 billion
in total assets at September 30, 2009.
The following abbreviated organizational chart illustrates the various
relationships as of September 30, 2009:
|----------------------------|
| Glacier Bancorp, Inc. |
| (Parent Holding Company) |
|----------------------------|
|
|----------------------------|-|----------------------------|---|----------------------------|-|----------------------------|
| Glacier Bank | | Mountain West Bank | | | First Security Bank | | Western Security Bank |
| (MT Community Bank) | | (ID Community Bank) | | | of Missoula | | (MT Community Bank) |
| | | | | | (MT Community Bank) | | |
|----------------------------| |----------------------------| | |----------------------------| |----------------------------|
|
|----------------------------|-|----------------------------|-|-|----------------------------|-|----------------------------|
| 1st Bank | | Big Sky | | | Valley Bank | | Citizens Community Bank |
| (WY Community Bank) | | Western Bank | | | of Helena | | (ID Community Bank) |
| | | (MT Community Bank) | | | (MT Community Bank) | | |
|----------------------------| |----------------------------| | |----------------------------| |----------------------------|
|
|----------------------------|-|----------------------------|-|-|----------------------------|-|----------------------------|
| Bank of the | | First Bank of Montana | | | | | |
| San Juans | | (MT Community Bank) | | | Glacier Capital Trust II | | Glacier Capital Trust III |
| (CO Community Bank) | | | | | | | |
|----------------------------| |----------------------------| | |----------------------------| |----------------------------|
|
|----------------------------|-|---------------------------------|-|----------------------------|
| | | | | |
| Glacier Capital Trust IV | | Citizens (ID) Statutory Trust I | | San Juans Trust I |
| | | | | |
|----------------------------| |---------------------------------| |----------------------------|
9
3) Investments
A comparison of the amortized cost and estimated fair value of the
Company's investment securities, available-for-sale and other investments
is as follows:
INVESTMENTS AS OF SEPTEMBER 30, 2009
Gross Unrealized Estimated
Weighted Amortized ------------------ Fair
(Dollars in thousands) Yield Cost Gains Losses Value
---------------------- -------- ---------- ------- -------- ---------
AVAILABLE-FOR-SALE:
U.S. GOVERNMENT AGENCIES:
maturing one year through five years ...... 1.62% $ 210 -- (1) 209
GOVERNMENT-SPONSORED ENTERPRISES:
maturing one year through five years ...... 3.21% 174 -- -- 174
maturing five years through ten years ..... 1.64% 41 -- (1) 40
maturing after ten years .................. 2.05% 64 -- -- 64
---------- ------- -------- ---------
2.44% 279 -- (1) 278
---------- ------- -------- ---------
STATE AND LOCAL GOVERNMENTS AND OTHER ISSUES:
maturing within one year .................. 3.82% 865 5 -- 870
maturing one year through five years ...... 4.41% 2,548 117 -- 2,665
maturing five years through ten years ..... 4.39% 16,715 861 -- 17,576
maturing after ten years .................. 4.92% 414,547 16,918 (1,461) 430,004
---------- ------- -------- ---------
4.90% 434,675 17,901 (1,461) 451,115
---------- ------- -------- ---------
COLLATERALIZED DEBT OBLIGATIONS:
maturing after ten years .................. 8.39% 15,066 -- (8,466) 6,600
RESIDENTIAL MORTGAGE-BACKED SECURITIES ...... 3.91% 675,691 27,164 (10,230) 692,625
---------- ------- -------- ---------
TOTAL MARKETABLE SECURITIES ............. 3.91% 1,125,921 45,065 (20,159) 1,150,827
---------- ------- -------- ---------
OTHER INVESTMENTS:
FHLB and FRB stock, at cost ................. 1.28% 61,656 -- -- 61,656
Other stock, at cost ........................ 3.72% 464 -- -- 464
---------- ------- -------- ---------
TOTAL INVESTMENTS ....................... 4.19% $1,188,041 45,065 (20,159) 1,212,947
========== ======= ======== =========
10
INVESTMENTS AS OF DECEMBER 31, 2008
Gross Unrealized Estimated
Weighted Amortized ------------------ Fair
(Dollars in thousands) Yield Cost Gains Losses Value
---------------------- -------- --------- ------- -------- ---------
AVAILABLE-FOR-SALE:
U.S. GOVERNMENT AGENCIES:
maturing one year through five years ...... 1.62% $ 213 4 -- 217
GOVERNMENT-SPONSORED ENTERPRISES:
maturing five years through ten years ..... 4.12% 246 -- (2) 244
maturing after ten years .................. 3.75% 68 -- -- 68
-------- ------- -------- -------
4.04% 314 -- (2) 312
-------- ------- -------- -------
STATE AND LOCAL GOVERNMENTS AND OTHER ISSUES:
maturing within one year .................. 3.76% 940 6 -- 946
maturing one year through five years ...... 4.61% 4,482 104 (9) 4,577
maturing five years through ten years ..... 5.08% 20,219 1,030 (80) 21,169
maturing after ten years .................. 4.95% 393,377 7,807 (9,733) 391,451
-------- ------- -------- -------
4.95% 419,018 8,947 (9,822) 418,143
-------- ------- -------- -------
COLLATERALIZED DEBT OBLIGATIONS:
maturing after ten years .................. 8.39% 15,226 314 -- 15,540
RESIDENTIAL MORTGAGE-BACKED SECURITIES ...... 4.62% 495,961 4,956 (6,447) 494,470
-------- ------- -------- -------
TOTAL MARKETABLE SECURITIES ............. 4.83% 930,732 14,221 (16,271) 928,682
-------- ------- -------- -------
OTHER INVESTMENTS:
FHLB and FRB stock, at cost ................. 1.72% 60,945 -- -- 60,945
Other stock, at cost ........................ 3.10% 465 -- -- 465
-------- ------- -------- -------
TOTAL INVESTMENTS ....................... 4.64% $992,142 14,221 (16,271) 990,092
======== ======= ======== =======
Maturities of securities do not reflect repricing opportunities present in
adjustable rate securities, nor do they reflect expected shorter
maturities based upon early prepayment of principal. Weighted yields on
tax-exempt investment securities exclude the tax effect.
Interest income includes tax-exempt interest for the nine months ended
September 30, 2009 and 2008 of $16,692,000 and $9,547,000, respectively,
and for the three months ended September 30, 2009 and 2008 of $5,623,000
and $3,199,000, respectively.
Gross proceeds from sale of marketable securities for the nine months
ended September 30, 2009 and 2008 were $37,450,000 and $97,002,000,
respectively, resulting in gross gains of $2,871,000 and $0, respectively,
and gross losses of $204,000 and $0, respectively. The gross proceeds and
gross gains from the sale of other stock was $0 and $248,000 for the nine
months ended September 30, 2009 and 2008, respectively. During the first
quarter of 2008, the Company realized a gain of $130,000 from
extinguishment of the Company's share ownership in Principal Financial
Group and a gain of $118,000 from the mandatory redemption of a portion of
Visa, Inc. shares from its recent initial public offering. During the
third quarter of 2008, the Company incurred a $7,593,000 other than
temporary impairment ("OTTI") charge with respect to its investments in
Federal Home Loan Mortgage Corporation ("Freddie Mac") preferred stock and
Federal National Mortgage Association ("Fannie Mae") common stock. The
Fannie Mae and Freddie Mac stock was written down to a $0 value, however,
the shares were still owned by the Company at September 30, 2009. The cost
of any investment sold is determined by specific identification.
11
At September 30, 2009, the Company had investment securities with carrying
values of approximately $691,651,000, pledged as collateral for FHLB
advances, Federal Reserve Bank ("FRB") discount window borrowings,
securities sold under agreements to repurchase, U.S. Treasury Tax and Loan
borrowings and deposits of several local government units.
The investments in the Federal Home Loan Bank ("FHLB") stock are required
investments related to the Company's borrowings from FHLB. FHLB obtains
its funding primarily through issuance of consolidated obligations of the
FHLB system. The U.S. Government does not guarantee these obligations, and
each of the 12 FHLBs are jointly and severally liable for repayment of
each other's debt.
Investments with an unrealized loss position at September 30, 2009:
Less than 12 months 12 months or more Total
---------------------- -------------------- ---------------------
Fair Unrealized Fair Unrealized Fair Unrealized
(dollars in thousands) Value Loss Value Loss Value Loss
--------------------- -------- ---------- ------ ---------- ------- ----------
U.S. Government Agencies ......................... $ 209 1 -- -- 209 1
Government Sponsored Enterprises ................. -- -- 43 1 43 1
State and Local Governments and other issues ..... 9,924 539 20,981 922 30,905 1,461
Collateralized Debt Obligations .................. 4,600 8,466 -- -- 4,600 8,466
Residential Mortgage-backed Securities ........... 86,657 444 43,464 9,786 130,121 10,230
-------- ----- ------ ------ ------- ------
Total temporarily impaired securities ............ $101,390 9,450 64,488 10,709 165,878 20,159
======== ===== ====== ====== ======= ======
Investments with an unrealized loss position at December 31, 2008:
Less than 12 months 12 months or more Total
---------------------- -------------------- ---------------------
Fair Unrealized Fair Unrealized Fair Unrealized
(dollars in thousands) Value Loss Value Loss Value Loss
---------------------- -------- ---------- ------ ---------- ------- ----------
U.S. Government Agencies ......................... $ -- -- -- -- -- --
Government Sponsored Enterprises ................. 104 1 205 1 309 2
State and Local Governments and other issues ..... 142,826 9,772 1,621 50 144,447 9,822
Collateralized Debt Obligations .................. -- -- -- -- -- --
Residential Mortgage-backed Securities ........... 116,004 5,758 12,403 689 128,407 6,447
-------- ------ ------ --- ------- ------
Total temporarily impaired securities ............ $258,934 15,531 14,229 740 273,163 16,271
======== ====== ====== === ======= ======
The Company assesses individual securities in its investment securities
portfolio for impairment at least on a quarterly basis, and more
frequently when economic or market conditions warrant. An investment is
impaired if the fair value of the security is less than its carrying value
at the financial statement date. If impairment is determined to be
other-than-temporary, an impairment loss is recognized by reducing the
amortized cost basis to fair value and as a charge to earnings.
For fair value estimates provided by third party vendors, management also
considered the models and methodology, for appropriate consideration of
both observable and unobservable inputs, including appropriately adjusted
discount rates and credit spreads for securities with limited or inactive
markets, and whether the quoted prices reflect orderly transactions, For
certain securities, the Company obtained independent estimates of inputs,
including cash flows, in supplement to third party vendor provided
information. The Company also reviewed financial statements of select
issuers, with follow up discussions with issuers' management for
clarification and verification of information relevant to the Company's
impairment analysis.
12
In evaluating debt securities for other-than-temporary impairment losses,
management assesses whether the Company intends to sell or if it is more
likely-than-not that it will be required to sell impaired debt securities.
In so doing, management considers contractual constraints, liquidity,
capital, asset / liability management and securities portfolio objectives.
With respect to its impaired debt securities at September 30, 2009,
management determined that it does not intend to sell and that there is no
expected requirement to sell any of its impaired debt securities.
As of September 30, 2009, there were 75 investments in an unrealized loss
position and were considered to be temporarily impaired and therefore an
impairment charge has not been recorded. All of such temporarily impaired
investments are debt securities. Residential Mortgage-backed securities
have the largest unrealized loss. The fair value of these securities,
which have underlying collateral consisting of U.S. government sponsored
enterprise guaranteed mortgages and non-guaranteed private label whole
loan mortgages, were $130,121,000 at September 30, 2009 of which
$75,739,000 was purchased during 2009, the remainder of which had a fair
market value of $71,120,000 at December 31, 2008. For the securities
purchased in 2009 there has been an unrealized loss of $351,000 since
purchase. Of the remaining Residential Mortgage-backed securities in a
loss position the unrealized loss increased from 8.6 percent of fair value
at December 31, 2008 to 18.2 percent of fair value at September 30, 2009.
The fair value of Collateralized Debt Obligation securities in an
unrealized loss position is $4,600,000 with unrealized losses of
$8,466,000 or 184 percent of fair value at September 30, 2009; such
investments had an unrealized gain position at December 31, 2008. The fair
value of State and Local Government were $30,905,000 at September 30, 2009
of which $902,000 was purchased during 2009, the remainder of which had a
fair market value of $27,448,000 at December 31, 2008. For the securities
purchased in 2009 there has been an unrealized loss of $22,000 since
purchase. Of the remaining State and Local Government securities in a loss
position the unrealized loss decreased from 15.5 percent of fair value at
December 31, 2008 to 4.8 percent of fair value at September 30, 2009.
The Company stratified the 75 debt securities for both severity and
duration of impairment. With respect to severity, 29 debt securities had
impairment that exceeded 5 percent of the respective book values, of which
14 had impairment that exceeded 15 percent of the respective book values
at September 30, 2009. 6 of the 75 debt securities had impairment that
exceeded 40 percent of the respective book values at September 30, 2009.
The remaining 46 debt securities had impairment that was 5 percent or less
of the respective book values as of September 30, 2009.
With respect to the duration of the impaired securities, the Company
identified 43 securities which have been continuously impaired for the 12
months ending September 30, 2009. The valuation history of such securities
in the prior year(s) was also reviewed to determine the number of months
in prior year(s) in which the identified securities was in an unrealized
loss position. 13 of these 43 securities are non-guaranteed, non-Agency
CMOs with an aggregate unrealized loss of $9,780,000, the most notable of
which had an unrealized loss of $1,992,000. 21 of the 43 securities are
state and local tax-exempt securities with an unrealized loss of $922,000,
the most notable of which had an unrealized loss of $255,000. 7 of the 43
securities are mortgage-backed securities issued by U.S. government
sponsored agencies, i.e., GNMA, FNMA, FHLMC and SBA, the aggregate
unrealized loss of which was $6,000.
For impaired debt securities for which there was no intent or expected
requirement to sell, management considers available evidence to assess
whether it is more likely-than-not that all amounts due would not be
collected In such assessment, management considers the severity and
duration of the impairment, the credit ratings of the security, the
overall deal and payment structure, including the Company's position
within the structure, underlying obligors, financial condition and near
term prospects of the issuer, delinquencies, defaults, loss severities,
recoveries, prepayments, cumulative loss projections, discounted cash
flows and fair value estimates.
13
Based on an analysis of its impaired securities as of September 30, 2009,
the Company determined that none of such securities had
other-than-temporary impairment.
4) Loans and Leases
The following table summarizes the Company's loan and lease portfolio:
At At At
September 30, 2009 December 31, 2008 September 30, 2008
---------------------- ---------------------- ----------------------
(Dollars in thousands) Amount Percent Amount Percent Amount Percent
---------------------- ----------- ------- ----------- ------- ----------- -------
Real Estate Loans:
Residential real estate $ 736,595 18.8% $ 786,869 19.4% $ 731,929 19.0%
Loans held for sale 54,475 1.4% 54,976 1.4% 41,365 1.1%
----------- ----- ----------- ----- ----------- -----
Total 791,070 20.2% 841,845 20.8% 773,294 20.1%
Commercial Loans:
Real estate 1,934,200 49.3% 1,935,341 47.8% 1,818,472 47.1%
Other commercial 627,083 16.0% 645,033 15.9% 638,285 16.5%
----------- ----- ----------- ----- ----------- -----
Total 2,561,283 65.3% 2,580,374 63.7% 2,456,757 63.6%
Consumer and other Loans:
Consumer 195,742 5.0% 208,166 5.1% 210,557 5.5%
Home equity 504,343 12.9% 507,831 12.5% 490,405 12.7%
----------- ----- ----------- ----- ----------- -----
Total 700,085 17.9% 715,997 17.6% 700,962 18.2%
Net deferred loan fees, premiums
and discounts (6,188) -0.2% (8,023) -0.2% (8,393) -0.2%
Allowance for loan and lease losses (125,330) -3.2% (76,739) -1.9% (65,633) -1.7%
----------- ----- ----------- ----- ----------- -----
Loan receivable, net $ 3,920,920 100.0% $ 4,053,454 100.0% $ 3,856,987 100.0%
=========== ===== =========== ===== =========== =====
The following table sets forth information regarding the Company's
non-performing assets at the dates indicated:
September 30, December 31, September 30,
(Dollars in thousands) 2009 2008 2008
---------------------- ------------- ------------ -------------
Real estate and other assets owned $ 54,537 11,539 9,506
Accruing Loans 90 days or more overdue 2,891 8,613 4,924
Non-accrual loans 185,577 64,301 56,322
-------- ------ ------
Total non-performing assets $243,005 84,453 70,752
======== ====== ======
Non-performing assets as a percentage of total bank assets 4.10% 1.46% 1.30%
Impaired loans, net of government guaranteed amounts, were $207,054,000,
$79,949,000, and $66,695,000 as of September 30, 2009, December 31, 2008 and
September 30, 2008, respectively. The allowance for loan and lease loss includes
valuation allowances of $23,056,000, $7,999,000 and $7,514,000 specific to
impaired loans as of September 30, 2009, December 31, 2008 and September 30,
2008, respectively.
14
The following table illustrates the loan and lease loss experience:
September 30, December 31, September 30,
(Dollars in thousands) 2009 2008 2008
---------------------- ------------- ------------ -------------
Balance at the beginning of the year $ 76,739 54,413 54,413
Charge-offs (40,991) (9,839) (5,765)
Recoveries 1,677 1,060 728
--------- ------- -------
Net charge-offs $ (39,314) (8,779) (5,037)
Acquisition(1) -- 2,625 --
Provision 87,905 28,480 16,257
--------- ------- -------
Balance at the end of the period $ 125,330 76,739 65,633
========= ======= =======
Net charge-offs as a percentage of total loans 0.972% 0.213% 0.128%
(1) Acquisition of Bank of the San Juans in 2008
5) Intangible Assets
The following table sets forth information regarding the Company's core
deposit intangible and mortgage servicing rights as of September 30, 2009:
Core Mortgage
Deposit Servicing
(Dollars in thousands) Intangible Rights (1) Total
---------------------- ---------- --------- ------
Gross carrying value $ 27,808
Accumulated Amortization (17,089)
--------
Net carrying value $ 10,719 1,079 11,798
========
WEIGHTED-AVERAGE AMORTIZATION PERIOD
(Period in years) 10.0 9.5 10.0
AGGREGATE AMORTIZATION EXPENSE
For the three months ended September 30, 2009 $ 758 57 815
For the nine months ended September 30, 2009 2,294 197 2,491
ESTIMATED AMORTIZATION EXPENSE
For the year ended December 31, 2009 $ 2,972 254 3,226
For the year ended December 31, 2010 2,603 74 2,677
For the year ended December 31, 2011 1,895 72 1,967
For the year ended December 31, 2012 1,534 70 1,604
For the year ended December 31, 2013 1,283 68 1,351
(1) The mortgage servicing rights are included in other assets and the gross
carrying value and accumulated amortization are immaterial and therefore
not presented.
Acquisitions subsequent January 1, 2009 are accounted for as prescribed by
FASB ASC Topic 805, Business Combinations. Acquisition accounting requires
the total purchase price to be allocated to the estimated fair values of
assets acquired and liabilities assumed, including certain intangible
assets. Goodwill is recorded for the residual amount in excess of the net
fair value.
15
Adjustment of the allocated purchase price may be related to fair value
estimates for which all information has not been obtained of the acquired
entity known or discovered during the allocation period, the period of
time required to identify and measure the fair values of the assets and
liabilities acquired in the business combination.
6) Deposits
The following table illustrates the amounts outstanding for deposits
$100,000 and greater at September 30, 2009 according to the time remaining
to maturity. Included in the Certificates of Deposit are brokered deposits
of $153,140,000 issued through the Certificate of Deposit Account Registry
System. Included in the Non-Maturity Deposits are brokered deposits of
$60,816,000.
Certificates Non-Maturity
(Dollars in thousands) of Deposit Deposits Totals
----------------------- ------------ ------------ ---------
Within three months ...... $202,715 1,369,503 1,572,218
Three to six months ...... 115,957 -- 115,957
Seven to twelve months ... 197,175 -- 197,175
Over twelve months ....... 78,028 -- 78,028
-------- --------- ---------
Totals ................ $593,875 1,369,503 1,963,378
======== ========= =========
7) Advances and Other Borrowings
The following chart illustrates the average balances and the maximum
outstanding month-end balances of amounts borrowed through FHLB,
repurchase agreements, U.S. Treasury Tax and Loan and FRB discount window
programs:
As of and As of and As of and
for the nine for the for the nine
months ended year ended months ended
(Dollars in thousands) September 30, 2009 December 31, 2008 September 30, 2008
---------------------- ------------------ ----------------- ------------------
FHLB advances:
Amount outstanding at end of period ...... $ 640,735 338,456 727,243
Average balance .......................... $ 413,446 566,933 531,961
Maximum outstanding at any month-end ..... $ 640,735 822,107 815,860
Weighted average interest rate ........... 1.86% 2.71% 3.22%
Repurchase agreements:
Amount outstanding at end of period ...... $ 210,519 188,363 189,816
Average balance .......................... $ 196,562 188,952 185,682
Maximum outstanding at any month-end ..... $ 210,519 196,461 196,266
Weighted average interest rate ........... 0.99% 2.02% 2.20%
U.S. Treasury Tax and Loan:
Amount outstanding at end of period ...... $ 3,009 6,067 357,095
Average balance .......................... $ 3,511 165,690 172,805
Maximum outstanding at any month-end ..... $ 5,120 385,246 357,095
Weighted average interest rate ........... 0.00% 2.28% 2.56%
Federal Reserve Bank discount window:
Amount outstanding at end of period ...... $ 370,000 914,000 140,500
Average balance .......................... $ 776,592 277,611 217,340
Maximum outstanding at any month-end ..... $1,005,000 928,000 928,000
Weighted average interest rate ........... 0.27% 1.76% 2.25%
16
8) Stockholders' Equity
The Federal Reserve Board has adopted capital adequacy guidelines that are
used to assess the adequacy of capital in supervising a bank holding
company. The following table illustrates the Federal Reserve Board's
capital adequacy guidelines and the Company's compliance with those
guidelines as of September 30, 2009.
Tier 1 (Core) Tier 2 (Total) Leverage
(Dollars in thousands) Capital Capital Capital
---------------------- ------------- -------------- ----------
Total stockholder's equity ................... $ 698,102 698,102 698,102
Less: Goodwill and intangibles ............... (156,231) (156,231) (156,231)
Accumulated other comprehensive
Unrealized gain on AFS securities ....... (15,146) (15,146) (15,146)
Plus: Allowance for loan and lease losses .... -- 57,011 --
Subordinated debentures ................... 117,500 117,500 117,500
---------- --------- ----------
Regulatory capital computed .................. $ 644,225 701,236 644,225
========== ========= ==========
Risk weighted assets ......................... $4,492,843 4,492,843
========== =========
Total adjusted average assets ................ $5,457,673
==========
Capital as % of risk weighted assets ......... 14.34% 15.61% 11.80%
Regulatory "well capitalized" requirement .... 6.00% 10.00% 5.00%
---------- --------- ----------
Excess over "well capitalized" requirement ... 8.34% 5.61% 6.80%
========== ========= ==========
9) Computation of (Loss) Earnings Per Share
Basic (loss) earnings per common share is computed by dividing net (loss)
earnings by the weighted average number of shares of common stock
outstanding during the period presented. Diluted (loss) 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.
The following schedule contains the data used in the calculation of basic
and diluted earnings per share:
Three Three Nine Nine
months ended months ended months ended months ended
September 30, 2009 September 30, 2008 September 30, 2009 September 30, 2008
------------------ ------------------ ------------------ ------------------
Net (loss) earnings for common
stockholders ............................ $(1,531,000) 12,785,000 24,900,000 48,643,000
Average outstanding shares - basic ......... 61,519,808 54,104,560 61,499,662 53,975,602
Add: Dilutive stock options ................ -- 200,445 2,411 172,981
----------- ---------- ---------- ----------
Average outstanding shares - diluted ....... 61,519,808 54,305,005 61,502,073 54,148,583
=========== ========== ========== ==========
Basic (loss) earnings per share ............ $ (0.03) 0.23 0.40 0.90
=========== ========== ========== ==========
Diluted (loss) earnings per share .......... $ (0.03) 0.24 0.40 0.90
=========== ========== ========== ==========
17
There were approximately 2,676,071 and 1,442,110 average shares excluded
from the diluted average outstanding share calculation for the nine months
ended September 30, 2009 and 2008, respectively, due to the option
exercise price exceeding the market price.
10) Comprehensive Income
The Company's only component of comprehensive income other than net (loss)
earnings is the unrealized gains and losses on available-for-sale
securities.
For the three months For the nine months
ended September 30, ended September 30,
(Dollars in thousands) 2009 2008 2009 2008
---------------------- --------- --------- --------- --------
Net (loss) earnings ......................................... $ (1,531) 12,785 24,900 48,643
Unrealized holding gain (loss) arising during the period .... 31,492 (13,445) 29,626 (21,765)
Tax (expense) benefit ....................................... (12,342) 5,267 (11,615) 8,546
-------- ------- ------- -------
Net after tax ............................................ 19,150 (8,178) 18,011 (13,219)
Reclassification adjustment for (gains)
losses included in net (loss) earnings ................... (2,667) 7,593 (2,667) 7,345
Tax expense (benefit) ....................................... 1,045 (2,961) 1,045 (2,864)
-------- ------- ------- -------
Net after tax ............................................ (1,622) 4,632 (1,622) 4,481
Net unrealized gain (loss) on securities ................. 17,528 (3,546) 16,389 (8,738)
-------- ------- ------- -------
Total comprehensive income ........................... $ 15,997 9,239 41,289 39,905
======== ======= ======= =======
11) Federal and State Income Taxes
The Company and its financial institution subsidiaries join together in
the filing of consolidated income tax returns in the following
jurisdictions: federal, Montana, Idaho, Colorado and Utah. Although 1st
Bank has operations in Wyoming and Mountain West has operations in
Washington, neither Wyoming nor Washington impose a corporate level income
tax. All required income tax returns have been timely filed. Income tax
returns for the years ended December 31, 2006, 2007 and 2008 remain
subject to examination by the state of Utah tax authorities, income tax
returns for the years ended December 31, 2005, 2006, 2007, and 2008 remain
subject to examination by the federal, states of Montana, Colorado, Idaho
tax authorities, income tax returns for the year ended December 31, 2004
remain subject to examination by the states of Colorado, Montana and Idaho
and the income tax returns for the year ended December 31, 2003 remain
subject to examination by the states of Montana and Idaho.
During the second quarter 2009, the Company made investments in Certified
Development Entities which received NMTC allocations. Administered by the
Community Development Financial Institutions Fund of the U.S. Department
of the Treasury, the NMTC program is aimed at stimulating economic and
community development and job creation in low-income communities. The
federal tax credits received are claimed over a seven-year credit
allowance period. In addition to previous LIHTC investments, during the
third quarter 2009, the Company made another investment in a low-income
housing partnership. The LIHTC is an indirect Federal subsidy used to
finance the development of affordable rental housing for low-income
households. The federal tax credits received are claimed over a ten-year
credit allowance period. Following is a list of expected tax credits to be
received in the years indicated.
18
Years ended New Low-Income
---------------------- Market Housing
(Dollars in thousands) Tax Credits Tax Credits
---------------------- ----------- -----------
2009 $1,115 210
2010 1,115 337
2011 1,115 785
2012 1,338 785
2013 1,338 785
2014 1,338 785
2015 1,338 575
2016 - 575
2017 - 575
2018 - 575
2019 - 575
2020 - 448
------ -----
$8,697 7,010
====== =====
In accordance with FASB ASC Topic 740, Income Taxes, the Company
determined its unrecognized tax benefit to be $113,000 as of September 30,
2009. If the unrecognized tax benefit amount was recognized, it would
decrease the Company's effective tax rate from 15.6 percent to 15.2
percent. Management believes that it is unlikely that the balance of its
unrecognized tax benefits will significantly increase or decrease over the
next twelve months.
The Company recognizes interest related to unrecognized income tax
benefits in interest expense and penalties are recognized in other
expense. During the nine months ended September 30, 2009 and 2008, the
Company recognized $0 interest expense and recognized $0 penalty with
respect to income tax liabilities. The Company had approximately $20,000
and $37,000 accrued for the payment of interest at September 30, 2009 and
2008, respectively. The Company had accrued liabilities of $0 for the
payment of penalties at September 30, 2009 and 2008.
12) Segment Information
FASB ASC Topic 280, Segment Reporting requires that a public business
enterprise report financial and descriptive information about its
reportable operating segments. Operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision
makers in deciding how to allocate resources and in assessing performance.
The Company defines operating segments and evaluates segment performance
internally based on individual bank charters. Centrally provided services
to the banks are allocated based on estimated usage of those services. If
required, VIEs are consolidated into the operating segment which invested
into such entities. Intersegment revenues primarily represents interest
income on intercompany borrowings, management fees, and data processing
fees received by individual banks or the parent company. Intersegment
revenues, expenses and assets are eliminated in order to report results in
accordance with accounting principles generally accepted in the United
States of America.
19
The following schedules provide selected financial data for the Company's
operating segments:
Nine months ended and as of September 30, 2009
-------------------------------------------------------------------------
Mountain First
(Dollars in thousands) Glacier West Security Western 1st Bank Big Sky Valley
-------------------------------- ---------- --------- -------- ------- -------- ------- -------
Revenues from external customers $ 61,568 68,880 40,832 26,776 25,091 16,401 16,907
Intersegment revenues 140 7 631 436 236 -- 96
Expenses (51,761) (77,178) (32,410) (21,981) (24,496) (15,191) (12,142)
---------- --------- -------- ------- -------- ------- -------
Net (Loss) Earnings $ 9,947 (8,291) 9,053 5,231 831 1,210 4,861
========== ========= ======== ======= ======== ======= =======
Total Assets $1,289,115 1,246,907 901,579 590,689 597,536 362,396 306,937
========== ========= ======== ======= ======== ======= =======
San First Bank Total
Citizens Juans of MT Parent Eliminations Consolidated
-------- ------- ---------- ------- ------------ ------------
Revenues from external customers $ 12,557 8,020 7,576 169 -- 284,777
Intersegment revenues 2 -- 3 38,168 (39,719) --
Expenses (10,732) (6,779) (5,505) (13,437) 11,735 (259,877)
-------- ------- ------- ------- ---------- ---------
Net (Loss) Earnings $ 1,827 1,241 2,074 24,900 (27,984) 24,900
======== ======= ======= ======= ========== =========
Total Assets $244,238 179,799 204,224 827,473 (1,042,593) 5,708,300
======== ======= ======= ======= ========== =========
Nine months ended and as of September 30, 2008
--------------------------------------------------------------------------
Mountain First
(Dollars in thousands) Glacier West Security Western 1st Bank Big Sky Valley
---------------------- ---------- --------- -------- ------- -------- ------- -------
Revenues from external customers $ 63,728 64,740 41,779 22,807 25,463 18,619 16,353
Intersegment revenues 254 63 2,009 1,253 995 19 399
Expenses (49,195) (57,870) (32,910) (21,043) (21,476) (14,059) (12,509)
---------- --------- -------- ------- -------- ------- -------
Net Earnings $ 14,787 6,933 10,878 3,017 4,982 4,579 4,243
========== ========= ======== ======= ======== ======= =======
Total Assets $1,186,942 1,161,017 886,303 587,946 581,660 334,758 342,644
========== ========= ======== ======= ======== ======= =======
First Bank Total
Citizens of MT Parent Eliminations Consolidated
-------- ---------- ------- ------------ ------------
Revenues from external customers $ 10,855 7,036 295 -- 271,675
Intersegment revenues 168 125 62,394 (67,679) --
Expenses (9,447) (5,452) (14,046) 14,975 (223,032)
-------- ------- ------- -------- ---------
Net Earnings $ 1,576 1,709 48,643 (52,704) 48,643
======== ======= ======= ======== =========
Total Assets $212,750 160,349 691,760 (973,020) 5,173,109
======== ======= ======= ======== =========
20
Three months ended and as of September 30, 2009
--------------------------------------------------------------------------
Mountain First
(Dollars in thousands) Glacier West Security Western 1st Bank Big Sky Valley
-------------------------------- ---------- --------- -------- ------- -------- ------- -------
Revenues from external customers $ 20,546 23,641 14,188 8,782 8,310 5,233 5,433
Intersegment revenues 47 6 76 65 110 -- 11
Expenses (17,995) (34,135) (12,019) (7,170) (7,556) (5,907) (3,865)
---------- --------- ------- ------- ------- ------- -------
Net (Loss) Earnings $ 2,598 (10,488) 2,245 1,677 864 (674) 1,579
========== ========= ======= ======= ======= ======= =======
Total Assets $1,289,115 1,246,907 901,579 590,689 597,536 362,396 306,937
========== ========= ======= ======= ======= ======= =======
San First Bank Total
Citizens Juans of MT Parent Eliminations Consolidated
-------- ------- ---------- ------- ------------ ------------
Revenues from external customers $ 4,452 2,849 2,643 53 -- 96,130
Intersegment revenues -- -- 3 2,926 (3,244) --
Expenses (3,822) (2,473) (1,894) (4,510) 3,685 (97,661)
-------- ------- ------- ------- ---------- ---------
Net (Loss) Earnings $ 630 376 752 (1,531) 441 (1,531)
======== ======= ======= ======= ========== =========
Total Assets $244,238 179,799 204,224 827,473 (1,042,593) 5,708,300
======== ======= ======= ======= ========== =========
Three months ended and as of September 30, 2008
--------------------------------------------------------------------------
Mountain First
(Dollars in thousands) Glacier West Security Western 1st Bank Big Sky Valley
---------------------- ---------- --------- -------- ------- -------- ------- -------
Revenues from external customers $ 21,369 21,190 13,882 4,273 8,765 6,159 5,403
Intersegment revenues 172 38 1,062 609 124 19 187
Expenses (17,028) (20,223) (11,156) (5,919) (7,093) (4,635) (4,058)
---------- --------- ------- ------- ------- ------- -------
Net (Loss) Earnings $ 4,513 1,005 3,788 (1,037) 1,796 1,543 1,532
========== ========= ======= ======= ======= ======= =======
Total Assets $1,186,942 1,161,017 886,303 587,946 581,660 334,758 342,644
========== ========= ======= ======= ======= ======= =======
First Bank Total
Citizens of MT Parent Eliminations Consolidated
-------- ---------- ------- ------------ ------------
Revenues from external customers $ 3,848 2,488 66 -- 87,443
Intersegment revenues 3 1 17,596 (19,811) --
Expenses (3,217) (1,905) (4,877) 5,453 (74,658)
-------- ------- ------- -------- ---------
Net (Loss) Earnings $ 634 584 12,785 (14,358) 12,785
======== ======= ======= ======== =========
Total Assets $212,750 160,349 691,760 (973,020) 5,173,109
======== ======= ======= ======== =========
13) Fair Value Measurement
FASB ASC Topic 820, Fair Value Measurements and Disclosures requires the
Company to disclose information relating to fair value. Fair value is
defined as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants
at the measurement date. The Standard establishes a fair value hierarchy
which requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value. The
standard describes three levels of inputs that may be used to measure fair
value:
Level 1 Quoted prices in active markets for identical assets or
liabilities
Level 2 Observable inputs other than Level 1 prices, such as quoted
prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are observable
or can be corroborated by observable market data for
substantially the full term of the assets or liabilities
21
Level 3 Unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets
or liabilities
The following are the assets measured at fair value on a recurring basis at
and for the period ended September 30, 2009.
Carrying Assets/ Quoted prices Significant
value of Liabilities in active markets other Significant
Assets/ measured at for identical observable Unobservable
Liabilities at Fair Value assets inputs Inputs
(Dollars in thousands) 9/30/09 9/30/09 (Level 1) (Level 2) (Level 3)
---------------------- -------------- ------------ ----------------- ------------ ------------
Financial Assets:
U.S. Government Agencies........................ $ 209 209 -- 209 --
Government Sponsored Enterprises................ 278 278 -- 278 --
State and Local Governments and other issues.... 451,115 451,115 -- 450,851 264
Collateralized Debt Obligations................. 6,600 6,600 -- -- 6,600
Residential Mortgage-backed securities.......... 692,625 692,625 -- 615,466 77,159
---------- --------- --- --------- ------
Total financial assets........................ $1,150,827 1,150,827 -- 1,066,804 84,023
========== ========= === ========= ======
The following is a description of the inputs and valuation methodologies
used for financial assets measured at fair value on a recurring basis.
There have been no significant changes in the valuation techniques during
the period.
Investment securities - fair value for available-for-sale securities is
estimated by obtaining quoted market prices for identical assets, where
available. If such prices are not available, fair value is based on
independent asset pricing services and models, the inputs of which are
market-based or independently sourced market parameters, including, but not
limited to, yield curves, interest rates, volatilities, prepayments,
defaults, cumulative loss projections, and cash flows. For those securities
where greater reliance on unobservable inputs occurs, such securities are
classified as Level 3 within the hierarchy.
The following is a reconciliation of the beginning and ending balances for
assets measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) during the nine month period ended September
30, 2009.
Significant
unobservable
inputs
(Dollars in thousands) (Level 3)
---------------------- ------------
Balance as of December 31, 2008.................. $23,421
Total unrealized gain included in
other comprehensive income.................... 7,865
Transfers out of Level 3......................... (7,597)
Purchases, issuances and settlements............. 60,515
Amortization, accretion and principal payments... (181)
-------
Balance as of September 30, 2009................. $84,023
=======
The change in unrealized gains (losses) related to available-for-sale
securities is reported in Accumulated Other Comprehensive Income (Loss).
22
Certain financial assets or liabilities are not measured at fair value on a
recurring basis, but are subject to fair value measurement in certain
circumstances, for example upon acquisition or when there is evidence of
impairment. The following are the assets measured at fair value on a
nonrecurring basis at September 30, 2009.
Carrying
value of Assets/ Quoted prices Significant
Assets/ Liabilities in active markets other Significant
Liabilities measured at for identical observable Unobservable
at Fair Value assets inputs Inputs
(Dollars in thousands) 9/30/09 9/30/09 (Level 1) (Level 2) (Level 3)
---------------------- ------------- ------------ ----------------- ------------ ------------
Real estate and other assets owned, net.. $ 54,537 54,537 -- -- 54,537
Impaired Loans, net of allowance for
loan and lease losses.................. 183,998 183,998 -- -- 183,998
-------- ------- --- --- -------
Total.................................. $238,535 238,535 -- -- 238,535
======== ======= === === =======
The following is a description of the inputs and valuation methodologies
used for financial assets measured at fair value on a nonrecurring basis.
There have been no significant changes in the valuation techniques during
the period.
Real estate and other assets owned, net - real estate and other assets
owned are carried at the lower of fair value at acquisition date or current
estimated fair value, less estimated cost to sell. Estimated fair value of
real estate and other assets owned is based on appraisals. Real estate and
other assets owned are classified within Level 3 of the fair value
hierarchy.
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 in
accordance with FASB ASC Topic 310, Receivables. Allowable methods for
estimating fair value include using the fair value of the collateral for
collateral dependent loans or, where a loan is determined not to be
collateral dependent, using the discounted cash flow method. Impaired loans
are primarily collateral-dependent and the estimated fair value is based on
the fair value of the collateral. Impaired loans are classified within
Level 3 of the fair value hierarchy.
23
The following presents the estimated fair values as in accordance with FASB
ASC Topic 825, Financial Instruments, as of September 30, 2009.
September 30, 2009
-----------------------
(Dollars in thousands) Amount Fair Value
----------------------- ---------- ------------
Financial Assets:
Cash on hand and in banks...................................... $ 93,728 93,728
Federal funds sold............................................. 47,025 47,025
Interest bearing cash deposits................................. 2,570 2,570
Investment securities.......................................... 458,666 458,666
Residential Mortgage-backed securities......................... 692,625 692,625
FHLB and FRB stock............................................. 61,656 61,656
Loans receivable, net of allowance for loan and lease losses... 3,920,920 3,919,067
Accrued interest receivable.................................... 29,489 29,489
---------- ---------
Total financial assets...................................... $5,306,679 5,304,826
========== =========
Financial Liabilities:
Deposits....................................................... $3,611,017 3,621,869
Advances from the FHLB......................................... 640,735 645,829
Federal Reserve Bank discount window........................... 370,000 370,000
Repurchase agreements and other borrowed funds................. 225,583 225,603
Subordinated debentures........................................ 120,167 69,935
Accrued interest payable....................................... 8,015 8,015
---------- ---------
Total financial liabilities................................. $4,975,517 4,941,251
========== =========
The following is a description of the methods used to estimate the fair
value of all other financial instruments recognized at amounts other than
fair value.
Financial Assets
The estimated fair value of cash, federal funds sold, interest bearing cash
deposits, and accrued interest receivable is the book value of such
financial assets.
The estimated fair value of FHLB and FRB stock is book value due to the
restrictions that such stock may only be sold to another member institution
or the FHLB or FRB at par value.
Loans receivable, net of ALLL - fair value for unimpaired loans, net of
ALLL, is estimated by discounting the future cash flows using the rates at
which similar notes would be written for the same remaining maturities.
Impaired loans are primarily collateral-dependent and the estimated fair
value is based on the fair value of the collateral.
Financial Liabilities
The estimated fair value of accrued interest payable is the book value of
such financial liabilities.
Deposits - fair value of term deposits is estimated by discounting the
future cash flows using rates of similar deposits with similar maturities.
The estimated fair value of demand, NOW, savings, and money market deposits
is the book value since rates are regularly adjusted to market rates.
Advances from FHLB - fair value of advances is estimated based on borrowing
rates currently available to the Company for advances with similar terms
and maturities.
24
FRB discount window - fair value of FRB discount window borrowings is
estimated based on borrowing rates currently available to the Company for
FRB discount window borrowings with similar terms and maturities.
Repurchase agreements and other borrowed funds - fair value of term
repurchase agreements and other term borrowings are estimated based on
current repurchase rates and borrowing rates currently available to the
Company for repurchases and borrowings with similar terms and maturities.
The estimated fair value for overnight repurchase agreements and other
borrowings is book value.
Subordinated debentures - fair value of the subordinated debt is estimated
by discounting the estimated future cash flows using current estimated
market rates for subordinated debt issuances with similar characteristics.
Off-balance sheet financial instruments - commitments to extend credit and
letters of credit represent the principal categories of off-balance sheet
financial instruments. Rates for these commitments are set at time of loan
closing, such that no adjustment is necessary to reflect these commitments
at market value.
14) 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.
Nine Months Ended September 30,
2009 vs. 2008
Increase (Decrease) due to:
--------------------------------
(Dollars in thousands) Volume Rate Net
------------------------------- ------- ------- -------
INTEREST INCOME
Residential real estate loans $ 5,138 (1,388) 3,750
Commercial loans 13,022 (25,564) (12,542)
Consumer and other loans 2,212 (4,445) (2,233)
Investment securities and other 9,002 128 9,130
------- ------- -------
Total Interest Income 29,374 (31,269) (1,895)
INTEREST EXPENSE
NOW accounts 359 (1,171) (812)
Savings accounts 171 (826) (655)
Money market accounts (206) (7,037) (7,243)
Certificates of deposit 4,720 (10,072) (5,352)
FHLB advances (2,869) (4,249) (7,118)
Other borrowings and
repurchase agreements 8,907 (16,606) (7,699)
------- ------- -------
Total Interest Expense 11,082 (39,961) (28,879)
------- ------- -------
NET INTEREST INCOME $18,292 8,692 26,984
======= ======= =======
25
15) Average Balance Sheet
The following schedule provides (i) the total dollar amount of interest
and dividend income of the Company for earning assets and the resultant
average yield; (ii) the total dollar amount of interest expense on
interest-bearing liabilities and the resultant average rate; (iii) net
interest and dividend income; (iv) interest rate spread; and (v) net
interest margin. Non-accrual loans are included in the average balance of
the loans.
For the Three months ended 9/30/09 For the Nine months ended 9/30/09
-------------------------------------- -------------------------------------
Average Average
Average Interest & Yield/ Average Interest & Yield/
(Dollars in thousands) Balance Dividends Rate Balance Dividends Rate
---------------------- ----------- ------------ --------- ----------- ---------- -------
ASSETS
Residential real estate loans $ 796,781 13,330 6.69% $ 833,049 41,542 6.65%
Commercial loans 2,583,367 36,739 5.64% 2,597,585 112,302 5.78%
Consumer and other loans 697,015 11,150 6.35% 701,827 33,631 6.41%
---------- ------- ---------- ---------
Total Loans 4,077,163 61,219 5.96% 4,132,461 187,475 6.07%
Tax - exempt investment securities (1) 441,309 5,623 5.10% 439,856 16,692 5.06%
Other investment securities 693,217 7,588 4.38% 619,041 20,215 4.35%
---------- ------- ---------- ---------
Total Earning Assets 5,211,689 74,430 5.67% 5,191,358 224,382 5.78%
------- ---------
Goodwill and core deposit intangible 157,407 158,297
Other non-earning assets 244,808 232,789
---------- ----------
TOTAL ASSETS $5,613,904 $5,582,444
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
NOW accounts $ 557,003 496 0.35% $ 534,329 1,520 0.38%
Savings accounts 325,367 258 0.31% 303,628 780 0.34%
Money market accounts 756,171 1,938 1.02% 756,821 6,423 1.13%
Certificates of deposit 1,071,346 6,540 2.42% 1,010,269 20,076 2.66%
FHLB advances 533,976 2,087 1.55% 413,446 5,758 1.86%
Repurchase agreements
and other borrowed funds 892,581 2,482 1.10% 1,103,629 8,337 1.01%
---------- ------- ---------- ---------
Total Interest Bearing Liabilities 4,136,444 13,801 1.32% 4,122,122 42,894 1.39%
------- ---------
Non-interest bearing deposits 755,682 734,060
Other liabilities 27,956 34,548
---------- ----------
Total Liabilities 4,920,082 4,890,730
---------- ----------
Common stock 615 615
Paid-in capital 495,410 494,703
Retained earnings 198,475 195,443
Accumulated other
comprehensive (loss) gain (678) 953
---------- ----------
Total Stockholders' Equity 693,822 691,714
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $5,613,904 $5,582,444
========== ==========
Net interest income $60,629 $181,488
======= ========
Net interest spread 4.35% 4.39%
Net Interest Margin 4.62% 4.67%
Net Interest Margin (Tax Equivalent) 4.80% 4.87%
Return on average assets (annualized) (0.11%) 0.60%
Return on average equity (annualized) (0.88%) 4.81%
(1) Excludes tax effect of $7,390,000 and $2,489,000 on non-taxable investment
security income for the three and nine months ended September 30, 2009.
26
16) Subsequent Events
Subsequent events have been evaluated through November 6, 2009, which is
the date the financial statements were issued.
In October of 2009, the Company sold Residential Mortgage-Backed
securities and received gross proceeds of $2,238,000, which resulted in
gross gains of $2,117,000. Had such securities been sold on September 30,
2009, the after-tax effect of $1,287,000 would have decreased the net loss
for the quarter from $1,531,000 to $244,000.
On October 2, 2009, the Company completed the acquisition of First Company
and its subsidiary First National Bank & Trust, a community bank based in
Powell, Wyoming. First National Bank & Trust provides community banking
services from three branch locations in Powell, Cody, and Lovell, Wyoming.
As of the acquisition, First National Bank & Trust had total assets of
approximately $267 million. First National Bank & Trust will operate as a
separate wholly-owned subsidiary of the Company.
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS - THE THREE MONTHS ENDED SEPTEMBER 30, 2009 COMPARED TO
JUNE 30, 2009 AND SEPTEMBER 30, 2008
Performance Summary
The Company reported a net loss of $1.531 million for the third quarter, a
decrease of $14.316 million, or 112 percent, from the $12.785 million net income
reported for the third quarter of 2008. The diluted loss per share of $.03 for
the quarter represented a 113 percent decrease from the diluted earnings per
share of $.24 for the same quarter of 2008. Annualized return on average assets
and return on average equity for the third quarter were (.11) percent and (.88)
percent, which compares with prior year returns for the third quarter of 1.01
percent and 9.15 percent, respectively.
REVENUE SUMMARY
Three months ended
-------------------------------------------
September 30, June 30, September 30,
2009 2009 2008
(UNAUDITED - DOLLARS IN THOUSANDS) (unaudited) (unaudited) (unaudited)
---------------------------------- ------------- ----------- -------------
Net interest income
Interest income $74,430 $74,420 $75,689
Interest expense 13,801 13,939 22,113
------- ------- -------
Net interest income 60,629 60,481 53,576
Non-interest income
Service charges, loan fees, and other fees 12,103 11,377 12,800
Gain on sale of loans 5,613 9,071 3,529
Gain (loss) on investments 2,667 - (7,593)
Other income 1,317 870 3,018
------- ------- -------
Total non-interest income 21,700 21,318 11,754
------- ------- -------
$82,329 $81,799 $65,330
======= ======= =======
Tax equivalent net interest margin 4.80% 4.87% 4.65%
======= ======= =======
$ change from $ change from % change from % change from
June 30, September 30, June 30, September 30,
(UNAUDITED - DOLLARS IN THOUSANDS) 2009 2008 2009 2008
---------------------------------- ------------- -------------- ------------- -------------
Net interest income
Interest income $ 10 $(1,259) 0% -2%
Interest expense (138) (8,312) -1% -38%
------- --------
Net interest income 148 7,053 0% 13%
Non-interest income
Service charges, loan fees, and other fees 726 (697) 6% -5%
Gain on sale of loans (3,458) 2,084 -38% 59%
Gain on investments 2,667 10,260 n/m 135%
Other income 447 (1,701) 51% -56%
------- --------
Total non-interest income 382 9,946 2% 85%
------- --------
$ 530 $ 16,999 1% 26%
======= ========
n/m - not measurable
28
Net Interest Income
Net interest income for the quarter increased $7 million, or 13 percent, with
interest expense decreasing $8 million, or 38 percent, over the same period in
2008. Net interest income for the current quarter increased $148 thousand with
interest expense decreasing $138 thousand, or 1 percent, compared to the prior
quarter. The decrease in total interest expense is primarily attributable to
rate decreases in interest bearing deposits and lower cost borrowings. The net
interest margin as a percentage of earning assets, on a tax equivalent basis,
was 4.80 percent which is 7 basis points lower than the 4.87 percent achieved
for the prior quarter; however 15 basis points higher than the 4.65 percent
result for the third quarter of 2008.
Non-interest Income
Non-interest income for the quarter increased $382 thousand, or 2 percent, from
the prior quarter, and increased $10 million, or 85 percent, over the same
period in 2008. Fee income increased $726 thousand, or 6 percent, during the
quarter, compared to the decrease of $697 thousand, or 5 percent, over the same
period last year. Gain on sale of loans decreased $3.5 million, or 38 percent,
for the quarter a result of the slowdown in refinance activity from a very
active second quarter. Gain on sale of loans from the prior year increased $2
million, or 59 percent, primarily the result of increased refinancing of
residential loans originated and sold in the secondary market. Investments sold
during the quarter resulted in a $2.7 million gain compared to the prior year
loss of $7.6 million from an other than temporary impairment on investments in
Federal Home Loan Mortgage Corporation ("Freddie Mac") preferred stock and
Federal National Mortgage Association ("Fannie Mae") common stock. Other income
decreased $1.7 million from prior year, the result of a $1.7 million gain from
the sale and relocation of Mountain West Bank's office facility in Ketchum,
Idaho during the third quarter of 2008.
NON-INTEREST EXPENSE
Three months ended
-------------------------------------------
September 30, June 30, September 30,
2009 2009 2008
(UNAUDITED - DOLLARS IN THOUSANDS) (unaudited) (unaudited) (unaudited)
---------------------------------- ------------- ------------ -------------
Compensation and employee benefits $20,935 $20,710 $21,188
Occupancy and equipment expense 5,835 5,611 5,502
Advertising and promotion expense 1,596 1,722 1,942
Outsourced data processing 830 680 556
Core deposit intangibles amortization 758 762 764
Other expenses 11,942 13,478 7,809
------- ------- -------
Total non-interest expense $41,896 $42,963 $37,761
======= ======= =======
$ change from $ change from % change from % change from
June 30, September 30, June 30, September 30,
(UNAUDITED - DOLLARS IN THOUSANDS) 2009 2008 2009 2008
---------------------------------- ------------- ------------- ------------- -------------
Compensation and employee benefits $ 225 $ (253) 1% -1%
Occupancy and equipment expense 224 333 4% 6%
Advertising and promotion expense (126) (346) -7% -18%
Outsourced data processing 150 274 22% 49%
Core deposit intangibles amortization (4) (6) -1% -1%
Other expenses (1,536) 4,133 -11% 53%
------- ------
Total non-interest expense $(1,067) $4,135 -2% 11%
======= ======
Non-interest expense decreased by $1 million, or 2 percent from the prior
quarter and increased $4 million, or 11 percent, from prior year's third
quarter. Compensation and employee benefits increased $225 thousand, or 1
percent, from prior quarter and decreased $253 thousand, or 1 percent, from
prior year's third quarter. The current quarter increase in compensation and
employee benefits is a result of prior quarter's significant reductions in
29
bonuses and employee benefits tied to Company performance. The number of
full-time equivalent employees decreased from 1,597 to 1,577 during the quarter,
and increased from 1,539 since the end of the 2008 third quarter. Occupancy and
equipment expense has increased $224 thousand, or 4 percent, and $333 thousand,
or 6 percent, from prior quarter and prior year's third quarter, respectively,
reflecting the cost of additional branch locations and facility upgrades.
Advertising and promotion expense decreased $126 thousand, or 7 percent, from
prior quarter and decreased $346 thousand, or 18 percent, from the same quarter
of 2008. The decrease of $1.5 million, or 11 percent, in other expense from
prior quarter is a result of a decrease in $2.1 million in FDIC insurance and an
increase of $565 thousand in expenses associated with repossessed assets. The
increase of $4.1 million, or 53 percent, in other expense from prior year's
third quarter is a result of an increase of $1.3 million in FDIC insurance, $1.8
million of loss from sales of other real estate owned, and $830 thousand in
expenses associated with repossessed assets.
The efficiency ratio (non-interest expense / net interest income plus
non-interest income) was 51 percent for the quarter, compared to 53 percent,
excluding the effects of the other than temporary impairment on investments and
gain on sale of branch, for the 2008 third quarter.
Allowance for Loan and Lease Losses
The current quarter provision for loan loss expense was $47 million, an increase
of $38 million from the same quarter in 2008. Net charged-off loans for the
quarter were $19 million.
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 in
"Financial Condition Analysis" - Allowance for Loan and Lease Losses.
30
RESULTS OF OPERATIONS - THE NINE MONTHS ENDED SEPTEMBER 30, 2009 COMPARED TO
THE NINE MONTHS ENDED SEPTEMBER 30, 2008
Performance Summary
Net earnings for the nine months ended September 30, 2009 were $24.900 million,
which is a decrease of $23.743 million, or 49 percent, over the prior year.
Diluted earnings per share of $.40, is a decrease of 56 percent from the $.90
earned in 2008.
REVENUE SUMMARY
Nine months ended
-----------------------------
September 30, September 30,
2009 2008
(UNAUDITED - DOLLARS IN THOUSANDS) (unaudited) (unaudited) $ change % change
---------------------------------- ------------- ------------- -------- ----------
Interest income $224,382 $226,278 $ (1,896) -1%
Interest expense 42,894 71,773 (28,879) -40%
-------- -------- --------
Net interest income 181,488 154,505 26,983 17%
Non-interest income
Service charges, loan fees, and other fees 33,659 35,984 (2,325) -6%
Gain on sale of loans 20,834 11,654 9,180 79%
Gain (loss) on investments 2,667 (7,345) 10,012 136%
Other income 3,235 5,104 (1,869) -37%
-------- -------- --------
Total non-interest income 60,395 45,397 14,998 33%
-------- -------- --------
$241,883 $199,902 $ 41,981 21%
======== ======== ========
Tax equivalent net interest margin 4.87% 4.65%
======== ========
Net Interest Income
Net interest income for the nine months increased $27 million, or 17 percent,
over the same period in 2008. Total interest income decreased $1.9 million, or 1
percent, while total interest expense decreased $29 million, or 40 percent. The
decrease in interest expense is primarily attributable to the rate decreases on
interest bearing deposits and lower cost borrowings. The net interest margin as
a percentage of earning assets, on a tax equivalent basis, was 4.87 percent, an
increase of 22 basis points from the 4.65 percent for the same period in 2008.
Non-interest Income
Total non-interest income for the nine months increased $15 million, or 33
percent over the same period in 2008. Fee income for the year decreased $2.3
million, or 6 percent, as compared to 2008. Gain on sale of loans increased $9
million, or 79 percent, from the first nine months of last year, primarily the
result of increased refinancing of residential loans originated and sold in the
secondary market. Gain on investments during 2009 included a $2.7 million gain
on sale of securities. Loss from investments during 2008 included a $7.6 million
other than temporary impairment on investments in Freddie Mac preferred stock
and Fannie Mae common stock and a $248 thousand combined gain from the sale of
Principal Financial Group stock and mandatory redemption of a portion of Visa,
Inc. Other income decreased $1.9 million from prior year, the result of a $1.7
million gain from the sale and relocation of Mountain West Bank's office
facility in Ketchum, Idaho during the third quarter of 2008.
31
NON-INTEREST EXPENSE
Nine months ended
-----------------------------
September 30, September 30,
2009 2008
(UNAUDITED - DOLLARS IN THOUSANDS) (unaudited) (unaudited) $ change % change
---------------------------------- ------------- ------------- -------- --------
Compensation and employee benefits $ 63,589 $ 63,252 $ 337 1%
Occupancy and equipment expense 17,341 15,751 1,590 10%
Advertising and promotion expense 5,042 5,314 (272) -5%
Outsourced data processing 2,181 1,870 311 17%
Core deposit intangibles amortization 2,294 2,310 (16) -1%
Other expenses 34,038 21,320 12,718 60%
-------- -------- -------
Total non-interest expense $124,485 $109,817 $14,668 13%
======== ======== =======
Non-interest expense increased by $15 million, or 13 percent, from the first
nine months of 2008. Compensation and employee benefit expense increased $337
thousand, or 1 percent, from the first nine months of 2008, due to the increased
number of employees added since September 30, 2008, which was partially offset
by the reductions in bonuses and employee benefits. Occupancy and equipment
expense increased $2 million, or 10 percent, reflecting the cost of additional
locations and facility upgrades. Advertising and promotion expense decreased
$272 thousand, or 5 percent, from 2008. Other expenses increased $13 million, or
60 percent, since September 30, 2008. The increase in other expenses includes
$5.7 million in FDIC insurance premiums, $1.3 million in outside legal,
accounting, and audit firm expense, $3.8 million loss from sales of other real
estate owned, and $1.5 million expense associated with repossessed assets. Of
the increase in FDIC insurance premiums year-to-date, $2.5 million is
attributable to the second quarter asset-based special assessment. The
efficiency ratio (non-interest expense/net interest income plus non-interest
income) was 51 percent for 2009 compared favorably to 55 percent for 2008.
Allowance for Loan and Lease Losses
The provision for loan loss expense was $88 million for the first nine months of
2009, an increase of $72 million, or 441 percent, from the same period in 2008.
Net charged-off loans during the nine months ended September 30, 2009 was $39
million, an increase of $34 million from the same period in 2008.
32
FINANCIAL CONDITION ANALYSIS
As reflected in the following table, total assets at September 30, 2009 were
$5.708 billion, which is $154 million, or 3 percent, greater than the total
assets of $5.554 billion at December 31, 2008 and an increase of $535 million,
or 10 percent, over the total assets of $5.173 billion at September 30, 2008.
September 30, December 31, September 30, $ change from $ change from
2009 2008 2008 December 31, September 30,
ASSETS (DOLLARS IN THOUSANDS) (unaudited) (audited) (unaudited) 2008 2008
----------------------------- ------------- ------------ ------------- ------------- -------------
Cash on hand and in banks $ 93,728 125,123 94,865 (31,395) (1,137)
Investment securities, interest bearing
deposits, FHLB stock, FRB stock, and
fed funds 1,262,542 1,000,224 867,366 262,318 395,176
Loans:
Real estate 787,911 838,375 769,860 (50,464) 18,051
Commercial 2,558,270 2,575,828 2,452,102 (17,558) 106,168
Consumer and other 700,069 715,990 700,658 (15,921) (589)
---------- --------- --------- --------- -------
Total loans 4,046,250 4,130,193 3,922,620 (83,943) 123,630
Allowance for loan and lease losses (125,330) (76,739) (65,633) (48,591) (59,697)
---------- --------- --------- --------- -------
Total loans, net of allowance for
loan and lease losses 3,920,920 4,053,454 3,856,987 (132,534) 63,933
---------- --------- --------- --------- -------
Other assets 431,110 375,169 353,891 55,941 77,219
---------- --------- --------- --------- -------
Total Assets $5,708,300 5,553,970 5,173,109 154,330 535,191
========== ========= ========= ========= =======
At September 30, 2009, total loans were $4.046 billion, a decrease of $84
million, over total loans of $4.130 billion at December 31, 2008, primarily the
result of decreased loan demand. Real estate loans decreased $50 million, or 6
percent, from the fourth quarter of 2008. Consumer loans, which are primarily
comprised of home equity loans, decreased by $16 million, or 2 percent, while
commercial loans decreased $18 million, or less than 1 percent, during the first
nine months of 2009. Total loans increased $124 million, or 3 percent from
September 30, 2008. Since September 30, 2008, commercial loans increased $106
million, or 4 percent, real estate loans grew by $18 million, or 2 percent, and
consumer loans decreased $589 thousand, or less than 1 percent.
Investment securities, including interest bearing deposits in other financial
institutions and federal funds sold, have increased $262 million, or 26 percent,
from December 31, 2008 and increased $395 million, or 46 percent, from September
30, 2008. Investment securities represented 22 percent of total assets at
September 30, 2009 versus 17 percent of total assets at September 30, 2008. The
Company continues to purchase investment securities when high quality loan
originations slow.
The Company typically sells a majority of long-term mortgage loans originated,
retaining servicing only on loans sold to certain lenders. The sale of loans in
the secondary mortgage market reduces the Company's risk of holding long-term
fixed rate loans in the loan portfolio. Mortgage loans sold with servicing
released for the nine months ended September 30, 2009 and 2008 were $982 million
and $520 million, respectively, and for the three months ended September 30,
2009 and 2008 were $276 million and $164 million, respectively. The Company has
also been active in originating commercial SBA loans, some of which are sold to
investors. The amount of loans sold and serviced for others at September 30,
2009 was approximately $179 million.
Allowance for Loan and Lease Losses
Determining the adequacy of the ALLL involves a high degree of judgment and is
inevitably imprecise as the risk of loss is difficult to quantify. The ALLL
methodology is designed to reasonably estimate the probable loan and lease
losses within each bank subsidiary's loan and lease portfolios. Accordingly, the
ALLL is maintained within a range of estimated losses. The determination of the
ALLL and the related provision for credit losses is a critical
33
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 and lease portfolios, economic
conditions nationally and in the local markets in which the community bank
subsidiaries operate, changes in collateral values, delinquencies,
non-performing assets and net charge-offs. Although the Company and the banks
continue to actively monitor economic trends, a softening of economic conditions
combined with declines in the values of real estate that collateralize most of
the Company's loan and lease portfolios may adversely affect the credit risk and
potential for loss to the Company.
The ALLL evaluation is well documented and approved by each bank subsidiary's
Board of Directors and reviewed by the Parent's Board of Directors. In addition,
the policy and procedures for determining the balance of the ALLL are reviewed
annually by each bank subsidiary's Board of Directors, the Parent's Board of
Directors, independent credit reviewer and state and federal bank regulatory
agencies.
At the end of each quarter, each of the community bank subsidiaries analyzes its
loan and lease portfolio and maintain an ALLL at a level that is appropriate and
determined in accordance with accounting principles generally accepted in the
United States of America. The ALLL balance covers estimated credit losses on
individually evaluated loans, including those which are determined to be
impaired, as well as estimated credit losses inherent in the remainder of the
loan and lease portfolios. Each of the Bank's ALLL is adequate to absorb losses
from any segment of its loan and lease portfolio.
The Company is committed to a conservative management of the credit risk within
the loan and lease portfolios, including the early recognition of problem loans.
The 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 and lease portfolios, semi-annual review of loans by industry, and
periodic stress testing of the loans secured by real estate.
The Company's model of ten wholly-owned, independent community banks, each with
its own loan committee, chief credit officer and Board of Directors, provides
substantial local oversight to the lending and credit management function.
Unlike a traditional, single-bank holding company, the Company's decentralized
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 and the
community bank subsidiaries operate further mitigates the risk of credit loss.
While this process is intended to limit credit exposure, there can be no
assurance that problem credits will not arise and loan losses incurred,
particularly in periods of rapid economic downturns.
The primary responsibility for credit risk assessment and identification of
problem loans rests with the loan officer of the account. This continuous
process, utilizing each of the Bank's internal credit risk rating process, 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 $125.3 million adequate to cover
inherent losses in the loan and lease portfolios as of September 30, 2009.
However, no assurance can be given that the Company will not, in any particular
period, sustain losses that are significant relative to the amount reserved, or
that subsequent evaluations of the loan and lease portfolios applying
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 credit losses.
See additional risk factors in Part II - Other information, Item 1A - Risk
Factors.
34
The following table summarizes the allocation of the ALLL:
September 30, 2009 December 31, 2008 September 30, 2008
-------------------------- -------------------------- --------------------------
Allowance Allowance Allowance
for loan and Percent for loan and Percent for loan and Percent
lease losses of loans in lease losses of loans in lease losses of loans in
(Dollars in thousands) (unaudited) category (audited) category (unaudited) category
---------------------- ------------ ----------- ------------ ----------- ------------ -----------
Real estate loans $ 11,959 19.5% 7,233 20.3% 5,971 19.7%
Commercial real estate loans 59,471 47.7% 35,305 46.8% 29,388 46.3%
Other commercial loans 33,406 15.5% 21,590 15.6% 19,321 16.2%
Consumer and other loans 20,494 17.3% 12,611 17.3% 10,953 17.8%
-------- ----- ------ ----- ------ -----
Totals $125,330 100.0% 76,739 100.0% 65,633 100.0%
======== ===== ====== ===== ====== =====
The following table summarizes ALLL experience:
Nine months ended Year ended Nine months ended
September 30, December 31, September 30,
2009 2008 2008
(Dollars in thousands) (unaudited) (audited) (unaudited)
---------------------- ----------------- ------------ -----------------
Balance at beginning of period $ 76,739 54,413 54,413
Charge-offs:
Real estate loans (10,031) (3,233) (1,211)
Commercial loans (26,408) (4,957) (3,692)
Consumer and other loans (4,552) (1,649) (862)
-------- ------ ------
Total charge-offs $(40,991) (9,839) (5,765)
-------- ------ ------
Recoveries:
Real estate loans 372 23 14
Commercial loans 1,011 716 466
Consumer and other loans 294 321 248
-------- ------ ------
Total recoveries $ 1,677 1,060 728
======== ====== ======
Net charge-offs (39,314) (8,779) (5,037)
Acquisition (1) - 2,625 -
Provision 87,905 28,480 16,257
-------- ------ ------
Balance at end of period $125,330 76,739 65,633
======== ====== ======
Allowance for loan and lease losses
as a percentage of total loan and
leases 3.10% 1.86% 1.67%
Net charge-offs as a percentage of
total loans 0.972% 0.213% 0.128%
(1) Acquisition of Bank of the San Juans in 2008
The increase in the ALLL was primarily due to the increase in non-performing
assets since December 31, 2008 and a downturn in global, national and local
economies.
At September 30, 2009, the allowance for loan and lease losses was $125.33
million, an increase of $60 million, or 91 percent, from a year ago. The
allowance was 3.10 percent of total loans outstanding at September 30, 2009, up
from 2.36 percent at the prior quarter end, and up from 1.67 percent at
September 30, 2008. Loan portfolio growth,
35
composition, average loan size, credit quality considerations, and other
environmental factors will continue to determine the level of additional
provision expense.
Each of the bank subsidiaries' charge-off policy is consistent with bank
regulatory standards. Consumer loans generally are charged off when the loan
becomes over 120 days delinquent. Real estate acquired as a result of
foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned
until such time as it is sold. When such property is acquired, it is recorded at
estimated fair value, less estimated cost to sell. Any write-down at the time of
recording real estate owned is charged to the ALLL. Any subsequent write-downs
are charged to current expense.
Non-performing Assets
At At At
9/30/09 12/31/08 9/30/08
(Dollars in thousands) (unaudited) (audited) (unaudited)
---------------------- ---------- --------- ------------
Non-accrual loans:
Real estate loans $ 17,295 3,575 2,475
Commercial loans 159,894 58,454 52,458
Consumer and other loans 8,388 2,272 1,389
-------- ------ ------
Total $185,577 64,301 56,322
Accruing Loans 90 days or more overdue:
Real estate loans 371 4,103 319
Commercial loans 1,586 2,897 3,839
Consumer and other loans 934 1,613 766
-------- ------ ------
Total $ 2,891 8,613 4,924
Real estate and other assets owned, net 54,537 11,539 9,506
-------- ------ ------
Total non-performing loans and real estate
and other assets owned, net $243,005 84,453 70,752
======== ====== ======
Allowance for loan and lease losses as a
percentage of non-performing assets 52% 91% 93%
Non-performing assets as a percentage of
total bank assets 4.10% 1.46% 1.30%
Accruing Loans 30-89 days or more overdue $ 43,606 54,787 25,690
Interest Income (1) $ 8,175 4,434 2,979
(1) Amounts represent estimated interest income that would have been recognized
on loans accounted for on a non-accrual basis for the nine months ended
September 30, 2009, year ended December 31, 2008 and nine months ended
September 30, 2008 had such loans performed pursuant to contractual terms.
The allowance was 52 percent of non-performing assets at September 30, 2009,
down from 56 percent for the prior quarter end and down from 93 percent a year
ago. Non-performing assets as a percentage of total bank assets at September 30,
2009 were at 4.10 percent, up from 3.06 percent as of prior quarter end, and up
from 1.30 percent at September 30, 2008. Each bank subsidiary evaluates the
level of its non-performing assets, the values of the underlying real estate and
other collateral, and related trends in net charge-offs. Through pro-active
credit administration, the Banks work closely with borrowers to seek favorable
resolution to the extent possible, thereby attempting to minimize net
charge-offs or losses to the Company.
Most of the Company's non-performing assets are secured by real estate. Based on
the most current information available to management, including updated
appraisals where appropriate, the Company believes the value of the
36
underlying real estate collateral is adequate to minimize significant
charge-offs or loss to the Company. For collateral dependent loans, impairment
is measured by the fair value of the collateral less cost to sell.
Loans are reviewed on a regular basis and are placed on a non-accrual status
when the collection of the contractual principal or interest is unlikely. The
Company typically places loans on non-accrual when principal or interest is due
and has remained unpaid for 90 days or more unless the loan is in process of
collection and well-secured by collateral the fair value of which is sufficient
to discharge the debt in full. When a loan is placed on non-accrual status,
interest previously accrued but not collected is generally reversed against
current period interest income. Subsequent payments are either applied to the
outstanding principal balance or recorded as interest income, depending on the
assessment of the ultimate repayment of the loan. Interest accruals are resumed
on such loans only when they are brought fully current with respect to interest
and principal and when, in the judgment of management, the loans are estimated
to be fully collectible as to both principal and interest.
A loan is considered 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. The amount of the impairment is measured using cash flows discounted
at the loan's effective interest rate, except when it is determined that
repayment of the loan is expected to be provided solely by the underlying
collateral. For collateral dependent loans, impairment is measured by the fair
value of the collateral less the cost to sell. When the ultimate collectability
of the total principal of an impaired loan is in doubt, all payments are applied
to principal under the cost recovery method. When the ultimate collectability of
the total principal on an impaired loan is not in doubt, contractual interest is
generally credited to interest income when received under the cash basis method.
Total interest income recognized for impaired loans under the cash basis for the
three months ended September 30, 2009 and 2008 was not significant. Impaired
loans, net of government guaranteed amounts, were $207.1 million and $66.7
million as of September 30, 2009 and 2008, respectively. The ALLL includes
valuation allowances of $23.1 million and $7.5 million specific to impaired
loans as of September 30, 2009 and 2008, respectively.
September 30, December 31, September 30, $ change from $ change from
2009 2008 2008 December 31, September 30,
LIABILITIES (DOLLARS IN THOUSANDS) (unaudited) (audited) (unaudited) 2008 2008
---------------------------------- ------------- ------------- -------------- -------------- --------------
Non-interest bearing deposits $ 801,261 747,439 754,623 53,822 46,638
Interest bearing deposits 2,809,756 2,515,036 2,282,147 294,720 527,609
Advances from Federal Home Loan Bank 640,735 338,456 727,243 302,279 (86,508)
Federal Reserve Bank discount window 370,000 914,000 140,500 (544,000) 229,500
U.S. Treasury Tax & Loan 3,009 6,067 357,095 (3,058) (354,086)
Securities sold under agreements to
repurchase and other borrowed funds 222,574 190,664 191,938 31,910 30,636
Other liabilities 42,696 44,331 42,013 (1,635) 683
Subordinated debentures 120,167 121,037 118,559 (870) 1,608
---------- ---------- ---------- ---------- ----------
Total liabilities $5,010,198 4,877,030 4,614,118 133,168 396,080
========== ========== ========== ========== ==========
As of September 30, 2009, non-interest bearing deposits increased $54 million,
or 7 percent, since December 31, 2008 and increased $47 million, or 6 percent,
since September 30, 2008. Interest bearing deposits of $2.810 billion at
September 30, 2009 includes brokered deposits of $233 million, of which $173
million are issued through the Certificate of Deposit Account Registry System.
Interest bearing deposits increased $295 million, or 12 percent from December
31, 2008, of which $203 million is from brokered deposits. Since September 30,
2008, interest bearing deposits increased $528 million, or 23 percent, resulting
from the banks' continued focus on attracting and retaining low cost core
deposits. Federal Home Loan Bank ("FHLB") advances increased $302 million, or 89
percent, from December 31, 2008 and decreased $87 million, or 12 percent, from
37
September 30, 2008. Federal Reserve Bank Discount Window borrowings decreased
$544 million, or 60 percent, from December 31, 2008 and increased $230 million,
or 163 percent, from September 30, 2008. U.S. Treasury Tax and Loan funds
decreased $3 million and $354 million from December 31, 2008 and September 30,
2008, respectively, resulting from the decrease in availability of the treasury
investment option term funds. Repurchase agreements and other borrowed funds
were $223 million at September 30, 2009, an increase of $32 million from
December 31, 2008 and an increase of $31 million, or 16 percent, from September
30, 2008.
STOCKHOLDERS' EQUITY
September 30, December 31, September 30, $ change from $ change from
2009 2008 2008 December 31, September 30,
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) (unaudited) (audited) (unaudited) 2008 2008
-------------------------------------------- ------------- ------------- -------------- -------------- --------------
Common equity $ 682,956 678,183 564,612 4,773 118,344
Accumulated other comprehensive gain (loss) 15,146 (1,243) (5,621) 16,389 20,767
--------- -------- -------- ------ -------
Total stockholders' equity 698,102 676,940 558,991 21,162 139,111
Core deposit intangible, net, and goodwill (156,978) (159,765) (151,954) 2,787 (5,024)
--------- -------- -------- ------ -------
Tangible stockholders' equity $ 541,124 517,175 407,037 23,949 134,087
========= ======== ======== ====== =======
Stockholders' equity to total assets 12.23% 12.19% 10.81%
Tangible stockholders' equity to total
tangible assets 9.75% 9.59% 8.11%
Book value per common share $ 11.35 11.04 10.29 0.31 1.06
Tangible book value per common share $ 8.80 8.43 7.49 0.37 1.31
Market price per share at end of quarter $ 14.94 19.02 24.77 (4.08) (9.83)
Total stockholders' equity and book value per share amounts have increased $139
million and $1.06 per share, respectively, from September 30, 2008, the result
of earnings retention and exercised stock options, increase in accumulated
comprehensive gains, stock issued in connection with the Bank of the San Juans
acquisition, and $94 million in net proceeds from the Company's November 2008
equity offering of 6,325,000 shares of common stock at a price of $15.50 per
share. Tangible stockholders' equity has increased $134 million, or 33 percent
since September 30, 2008, with tangible stockholders' equity at 9.75 percent of
total tangible assets at September 30, 2009, up from 8.11 percent at September
30, 2008. Accumulated other comprehensive income (loss), representing net
unrealized gains or losses (net of tax) on investment securities designated as
available for sale, increased $21 million from September 30, 2008.
On September 30, 2009, the board of directors declared a cash dividend of $.13
per share, payable October 15, 2009 to shareholders of record on October 6,
2009. Future cash dividends will depend on a variety of factors including net
income, capital, asset quality and general economic conditions.
Recent Acquisition
On October 2, 2009, the Company completed the acquisition of First Company and
its subsidiary First National Bank & Trust, a community bank based in Powell,
Wyoming. First National Bank & Trust provides community banking services from
three branch locations in Powell, Cody, and Lovell, Wyoming. As of the
acquisition, First National Bank & Trust had total assets of approximately $267
million. First National Bank & Trust will operate as a separate wholly-owned
subsidiary of the Company.
Effect of inflation and changing prices
Generally accepted accounting principles often require the measurement of
financial position and operating results in terms of historical dollars, without
consideration for change in relative purchasing power over time due to
inflation. Virtually all assets of the Company and each subsidiary bank are
monetary in nature; therefore, interest rates generally have a more significant
impact on a company's performance than does the effect of inflation.
38
Lending Commitments
In the normal course of business, there are various outstanding commitments to
extend credit, such as letters of credit and un-advanced loan commitments, which
are not reflected in the accompanying condensed consolidated financial
statements. Management does not anticipate any material losses as a result of
these transactions.
Liquidity Risk
Liquidity risk is the possibility that the Company will not be able to fund
present and future obligations. The objective of liquidity management is to
maintain cash flows adequate to meet current and future needs for credit demand,
deposit withdrawals, maturing liabilities and corporate operating expenses. The
principal source of the Company's cash revenues are dividends received from the
Company's bank subsidiaries. The payment of dividends is subject to government
regulation, in that regulatory authorities may prohibit banks and bank holding
companies from paying dividends which would constitute an unsafe or unsound
banking practice. The bank subsidiaries' source of funds is generated by
deposits, principal and interest payments on loans, sale of loans and
securities, short and long-term borrowings, and net earnings. In addition, all
of the bank subsidiaries are members of the FHLB. As of September 30, 2009, the
bank subsidiaries had $757 million of available FHLB credit of which $641
million was utilized. The bank subsidiaries may also borrow funds from the FRB
discount window or from the U.S. Treasury Tax and Loan program of which the
banks have remaining borrowing availability of $737 million and $10 million,
respectively. Management of the Company has a wide range of versatility in
managing the liquidity and asset/liability mix for each bank subsidiary as well
as the Company as a whole.
Capital Resources and Adequacy
Maintaining capital strength has been a long term objective. Ample 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. Shareholders' equity increased $139 million since
prior year, or 25 percent, the net result of earnings, a public offering of
stock of $94 million, common stock issued for the acquisition of San Juans,
stock options exercised, less cash dividend payments and a increase of $21
million resulting from the net unrealized gains on available-for-sale investment
securities. The FRB has adopted capital adequacy guidelines pursuant to which it
assesses the adequacy of capital in supervising a bank holding company.
Other-Than-Temporary Impairment on Securities Accounting Policy and Analysis
The Company views the determination of whether an investment security is
temporarily or other-than-temporarily impaired as a critical accounting policy,
as the estimate is susceptible to significant change from period to period
because it requires management to make significant judgments, assumptions and
estimates in the preparation of its consolidated financial statements. The
Company assesses individual securities in its investment securities portfolio
for impairment at least on a quarterly basis, and more frequently when economic
or market conditions warrant. An investment is impaired if the fair value of the
security is less than its carrying value at the financial statement date. If
impairment is determined to be other-than-temporary, an impairment loss is
recognized by reducing the amortized cost for the credit loss portion of the
impairment with a corresponding charge to earnings for a like amount.
Management considers whether an investment security is other-than-temporarily
impaired under the guidance promulgated in FASB ASC Topic 320, Investments -
Debt and Equity Securities. The Company adopted the standard relating to the
recognition and presentation of other-than-temporary impairments effective for
the interim period ending June 30, 2009 and determined there was not a material
effect on the Company's financial position or results of operations. For further
information regarding the new standards, see discussion in "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Impact of Recently Issued Standards".
39
The Company believes that macroeconomic conditions occurring in 2008 and the
first nine months of 2009 have unfavorably impacted the fair value of certain
debt securities in its investment portfolio. For debt securities with limited or
inactive markets, the impact of these macroeconomic conditions upon fair value
estimates includes higher risk-adjusted discount rates and downgrades in credit
ratings provided by nationally recognized credit rating agencies, (e.g.,
Moody's, S&P, and Fitch).
In evaluating equity securities for other-than-temporary impairment losses,
management assesses the Company's ability and intent to retain the equity
securities for a period of time sufficient to allow for anticipated recovery in
fair value. Equity securities owned at September 30, 2009 consisted of stock
issued by the Federal Home Loan Bank and the Federal Reserve Bank, such shares
measured at cost for fair value purposes in recognition of the transferability
restrictions imposed by the issuers. In addition, the Company owns 150,000
shares of Series O preferred stock issued by Federal Home Loan Mortgage
Corporation ("Freddie Mac") and 1,200 shares of common stock issued by the
Federal National Mortgage Association ("Fannie Mae"). The Freddie Mac and Fannie
Mae stock had a cost basis of $0 at year end due to the recognition of an
other-than-temporary impairment charge against earnings at September 30, 2008
for the entire amount of the Company's investment therein. Hence, none of the
equity securities were impaired as of September 30, 2009.
In evaluating debt securities for other-than-temporary impairment losses,
management assesses whether the Company intends to sell or if it is more
likely-than-not that it will be required to sell impaired debt securities. In so
doing, management considers contractual constraints, liquidity, capital, asset /
liability management and securities portfolio objectives. With respect to its
impaired debt securities at September 30, 2009, management determined that it
does not intend to sell and that there is no expected requirement to sell any of
its impaired debt securities.
For fair value estimates provided by third party vendors, management also
considered the models and methodology, for appropriate consideration of both
observable and unobservable inputs, including appropriately adjusted discount
rates and credit spreads for securities with limited or inactive markets, and
whether the quoted prices reflect orderly transactions. For certain securities,
the Company obtained independent estimates of inputs, including cash flows, in
supplement to third party vendor provided information. The Company also reviewed
financial statements of select issuers, with follow up discussions with issuers'
management for clarification and verification of information relevant to the
Company's impairment analysis.
As of September 30, 2009, there were 75 investments in an unrealized loss
position and were considered to be temporarily impaired and therefore an
impairment charge has not been recorded. All of such temporarily impaired
investments are debt securities. Residential Mortgage-backed securities have the
largest unrealized loss. The fair value of these securities, which have
underlying collateral consisting of U.S. government sponsored enterprise
guaranteed mortgages and non-guaranteed private label whole loan mortgages, were
$130,121,000 at September 30, 2009 of which $75,739,000 was purchased during
2009, the remainder of which had a fair market value of $71,120,000 at December
31, 2008. For the securities purchased in 2009 there has been an unrealized loss
of $352,000 since purchase. Of the remaining Residential Mortgage-backed
securities in a loss position the unrealized loss increased from 8.6 percent of
fair value at December 31, 2008 to 18.2 percent of fair value at September 30,
2009. The fair value of Collateralized Debt Obligation ("CDO") securities in an
unrealized loss position is $4,600,000 with unrealized losses of $8,466,000 or
184 percent of fair value at September 30, 2009; such investments had an
unrealized gain position at December 31, 2008. The fair value of State and Local
Government were $30,905,000 at September 30, 2009 of which $902,000 was
purchased during 2009, the remainder of which had a fair market value of
$27,448,000 at December 31, 2008. For the securities purchased in 2009 there has
been an unrealized loss of $22,000 since purchase. Of the remaining State and
Local Government securities in a loss position the unrealized loss decreased
from 15.5 percent of fair value at December 31, 2008 to 4.7 percent of fair
value at September 30, 2009.
40
With respect to the CDO securities, the fair value decline is attributable to a
single CDO structure that is a pooled trust preferred security of which the
Company owns a portion of only the Senior Note tranche. All of the assets
underlying the CDO structure are capital securities issued by trust subsidiaries
of holding companies of banks and thrifts. As of September 30, 2009, the Senior
Note is rated "A3" by Moody's and is rated "A" by Fitch, and 3 of the 26 trust
subsidiaries have elected to defer the interest on their respective obligations
underlying the CDO structure. In accordance with the prospectus for the CDO
structure, the priority of payments favors holders of the Senior Notes over
holders of the Mezzanine Notes and Income Notes. Though the maturity of the CDO
structure is June 15, 2031, 12.69% of the outstanding principle of the Senior
Notes has been prepaid. Further, the Senior Principle and Senior Interest
Coverage tests performed by the Trustee (Bank of New York Mellon) have exceeded
the threshold levels for the quarter ending September 30, 2009 and the prior
quarters of 2009 and 2008. Moreover, in its assessment of the Senior Note for
potential "other than temporary" impairment, the Company evaluated the
underlying issuers and engaged a third party vendor to stress test the
performance of the underlying capital securities and related obligors. Such
stress testing has been performed as of September 30, 2009 and as of the end of
each of the prior three quarters, i.e., June 30 and March 31, 2009 and December
31, 2008. In each instance of stress testing, the results reflect no credit loss
for the Senior Note. In evaluating such results, the Company reviewed with the
third party vendor the stress test assumptions and concurred with the analyses
in concluding that the impairment at September 30, 2009 and prior quarters of
2009 was temporary, and not "other-than-temporary."
The Company stratified the 75 debt securities for both severity and duration of
impairment. With respect to severity, 29 debt securities had impairment that
exceeded 5 percent of the respective book values, of which 14 had impairment
that exceeded 15 percent of the respective book values at September 30, 2009. 6
of the 75 debt securities had impairment that exceeded 40 percent of the
respective book values at September 30, 2009. The remaining 46 debt securities
had impairment that was 5 percent or less of the respective book values as of
September 30, 2009.
With respect to the duration of the impaired securities, the Company identified
43 securities which have been continuously impaired for the 12 months ending
September 30, 2009. The valuation history of such securities in the prior
year(s) was also reviewed to determine the number of months in prior year(s) in
which the identified securities was in an unrealized loss position. 13 of these
43 securities are non-guaranteed, non-Agency CMOs with an aggregate unrealized
loss of $9,780,000, the most notable of which had an unrealized loss of
$1,992,000. 21 of the 43 securities are state and local tax-exempt securities
with an unrealized loss of $922,000, the most notable of which had an unrealized
loss of $255,000. 7 of the 43 securities are mortgage-backed securities issued
by U.S. government sponsored agencies, i.e., GNMA, FNMA, FHLMC and SBA, the
aggregate unrealized loss of which was $6,000.
Included in the 75 debt securities with impairment at September 30, 2009 are 13
non-guaranteed, non-Agency issued CMOs tranches. 6 of the 13 CMOs tranches are
collateralized by 30 year fixed residential mortgages considered to be "Prime,"
and 7 are collateralized by 30 year fixed residential mortgages considered to be
"ALT - A." Moreover, none of the underlying mortgage collateral is considered
"subprime".
For impaired debt securities for which there was no intent or expected
requirement to sell, management considers available evidence to assess whether
it is more likely-than-not that all amounts due would not be collected In such
assessment, management considers the severity and duration of the impairment,
the credit ratings of the security, the overall deal and payment structure,
including the Company's position within the structure, underlying obligors,
financial condition and near term prospects of the issuer, delinquencies,
defaults, loss severities, recoveries, prepayments, cumulative loss projections,
discounted cash flows and fair value estimates. Based on the analysis of its
impaired securities as of September 30, 2009, the Company determined that none
of such securities had other-than-temporary impairment.
41
Fair Value Measurements
FASB ASC Topic 820, Fair Value Measurements and Disclosures requires the Company
to disclose information relating to fair value. Fair value is defined as the
price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date. FASB
established a fair value hierarchy which requires an entity to maximize the use
of observable inputs and minimize the use of unobservable inputs when measuring
fair value. The standard describes three levels of inputs that may be used to
measure fair value:
Level 1 Quoted prices in active markets for identical assets or liabilities
Level 2 Observable inputs other than Level 1 prices, such as quoted prices
for similar assets or liabilities; quoted prices in markets that are
not active; or other inputs that are observable or can be corroborated
by observable market data for substantially the full term of the
assets or liabilities
Level 3 Unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the
assets or liabilities
In April 2009, FASB issued an amendment to ASC Topic 820, Fair Value
Measurements and Disclosures, relating to determining fair value when the volume
and level of activity for the asset or liability have significantly decreased
and identifying transactions that are not orderly. The Company adopted the
standard effective for the interim period ending June 30, 2009 and determined
there was not a material effect on the Company's financial position or results
of operations. For further information regarding the new standard, see
discussion in "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Impact of Recently Issued Standards."
On a recurring basis, the Company measures investment securities at fair value.
The fair value of such investments is estimated by obtaining quoted market
prices for identical assets, where available. If such prices are not available,
fair value is based on independent asset pricing services and models, the inputs
of which are market-based or independently sourced market parameters, including,
but not limited to, yield curves, interest rates, volatilities, prepayments,
defaults, cumulative loss projections, and cash flows. For those securities
where greater reliance on unobservable inputs occurs, such securities are
classified as Level 3 within the hierarchy.
In performing due diligence reviews of the independent asset pricing services
and models for investment securities, the Company reviewed the vendors' inputs
for fair value estimates and the recommended assignments of levels within the
fair value hierarchy. The Company's review included the extent to which markets
for investment securities were determined to have limited or no activity, or was
judged to be an active market. The Company reviewed the extent to which
observable and unobservable inputs were used as well as the appropriateness of
the underlying assumptions about risk that a market participant would use in
active markets, with adjustments for limited or inactive markets. In considering
the inputs to the fair value estimates, the Company placed less reliance on
quotes that were judged to not reflect orderly transactions, or were non-binding
indications. The Company made independent inquires of other knowledgeable
parties in testing the reliability of the inputs, including consideration for
illiquidity, credit risk, and cash flow estimates. In assessing credit risk, the
Company reviewed payment performance, collateral adequacy, credit rating
histories, and issuers' financial statements with follow-up discussion with
issuers. For those markets determined to be inactive, the valuation techniques
used were models for which management verified that discount rates were
appropriately adjusted to reflect illiquidity and credit risk. The Company
independently obtained cash flow estimates that were stressed at levels that
exceeded those used by independent third party pricing vendors. Based on the
Company's due diligence review, investment securities are placed in the
appropriate hierarchy levels with adjustment to vendors' recommendations made as
necessary. Most notably, the Company determined that its collateralized debt
obligation securities, i.e., trust preferred securities, were illiquid due to
inactive markets (i.e., due to the absence of trade volume during 2008 and the
first nine months of 2009), the fair values of which had significant reliance on
unobservable inputs, and therefore were classified as Level 3 within the
hierarchy.
42
On a non-recurring basis, the Company measures real estate and other assets
owned and impaired loans at fair value. Real estate and other assets owned is
carried at the lower of cost or estimated fair value, less estimated cost to
sell. Estimated fair value of real estate and other assets owned is based on
appraisals. The Company reviews the appraisals, giving consideration to the
highest and best use of the collateral. The appraised values are reduced by
discounts to consider lack of marketability and estimated cost to sell. Real
estate and other assets owned are classified within Level 3 of the fair value
hierarchy. Allowable methods for estimating fair value of impaired loans include
using the fair value of the collateral for collateral dependent loans or, where
a loan is determined not to be collateral dependent, using the discounted cash
flow method. Impaired loans are primarily collateral-dependent and the estimated
fair value is based on the appraised fair value of the collateral, less
estimated cost to sell. The Company reviews the appraisals, giving consideration
to the highest and best use of the collateral. The appraised values are reduced
by discounts to consider lack of marketability and estimated cost to sell.
Impaired loans are classified within Level 3 of the fair value hierarchy.
In addition to measuring certain financial assets and liabilities on a recurring
or non-recurring basis, the Company discloses estimated fair value on financial
assets and liabilities. The following is a description of the methods and inputs
used to estimate the fair value of other financial instruments recognized at
amounts other than fair value.
The fair value for unimpaired loans, net of ALLL, is estimated by discounting
the future cash flows using the rates at which similar notes would be originated
for the same remaining maturities. The market rates used are based on current
rates the bank subsidiaries 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.
The 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 local
competitors of the bank subsidiaries. The estimated fair value of demand, NOW,
savings, and money market deposits is the book value since rates are regularly
adjusted to market rates.
The fair value of the 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.
The fair value of FRB discount window borrowings is estimated based on borrowing
rates currently available to the Company for FRB discount window borrowings with
similar terms and maturities. The current outstanding borrowings are short term
and current rates offered by FRB equal the rates on the outstanding borrowings,
resulting in the estimated fair value being the same as the book value.
The fair value of term repurchase agreements is estimated based on current
repurchase rates currently available to the Company for repurchases agreements
with similar terms and maturities. The market rates used are based on current
rates the bank subsidiaries would incur for similar borrowings. The estimated
fair value for overnight repurchase agreements and other borrowings is book
value.
The fair value of the subordinated debentures is estimated by discounting the
estimated future cash flows using current estimated market rates for
subordinated debt issuances with similar characteristics. The market rates used
were based on an independent third party's judgment and include inputs such as
implied yield curves and interest rate spreads.
For additional information on fair value measurements see Part I, Item 2
"Financial Statements - Note 13, Fair Value Measurements."
43
Impact of Recently Issued Accounting Standards
In August 2009, FASB issued a standard that will amend FASB ASC Subtopic 820-10,
Fair Value Measurements and Disclosures - Overall, for the fair value
measurement of liabilities. The Update provides clarification that in
circumstances in which a quoted price in an active market for the identical
liability is not available, a reporting unit is required to measure fair value
using one or more of the following techniques: 1) A valuation technique that
uses a) the quoted price of the identical liability when trades as an asset b)
quoted prices for similar liabilities or similar liabilities when traded as
assets 2) Another valuation technique that is consistent with the principals
FASB ASC Topic 820, Fair Value Measurements and Disclosures. The Update is
effective for the first reporting period (including interim periods) beginning
after issuance. The Company adopted the standard effective for the period ending
September 30, 2009 and determined there was not a material effect on the
Company's financial position or results of operations.
In June 2009, FASB issued a standard that will amend FASB ASC Topic 105,
Generally Accepted Accounting Principles, the objective of which is to establish
the FASB ASC as the source of authoritative accounting principles recognized by
the FASB to be applied by nongovernmental entities in the preparation of
financial statements in conformity with GAAP. Rules and interpretive releases of
the Securities and Exchange Commission ("SEC") under authority of federal
securities laws are also sources of authoritative GAAP for SEC registrants. This
Statement is effective for the Company's financial statements issued for interim
and annual periods ending after September 15, 2009. The Company adopted the
standard effective for the period ending September 30, 2009 and determined there
was not a material effect on the Company's financial position or results of
operations.
In June 2009, FASB issued a standard that will amend FASB ASC Topic 810,
Consolidation. The objective of this standard is to amend certain requirements
to improve financial reporting by enterprises involved with variable interest
entities and to provide more relevant and reliable information to users of
financial statements. This standard shall be effective as of the beginning of
each reporting entity's first annual reporting period that begins after November
15, 2009, for interim periods within that first annual reporting period, and for
interim and annual reporting periods thereafter. The Company is currently
evaluating the impact of the adoption of this standard, but does not expect it
to have a material effect on the Company's financial position or results of
operations.
In June 2009, FASB issued a standard that will amend FASB ASC Topic 860,
Transfers and Servicing. The objective of this standard is to improve the
relevance, representational faithfulness, and comparability of the information
that a reporting entity provides in its financial reports about a transfer of
financial assets; the effects of a transfer on its financial position, financial
performance, and cash flows; and a transferor's continuing involvement in
transferred financial assets. This standard shall be effective as of the
beginning of each reporting entity's first annual reporting period that begins
after November 15, 2009, for interim periods within that first annual reporting
period, and for interim and annual reporting periods thereafter. The Company is
currently evaluating the impact of the adoption of this standard, but does not
expect it to have a material effect on the Company's financial position or
results of operations.
In April 2009, FASB issued an amendment to FASB ASC Topic 320, Investments -
Debt and Equity Securities relating to the recognition and presentation of
other-than-temporary impairments. The objective of an other-than-temporary
impairment analysis under existing U.S. generally accepted accounting principles
("GAAP") is to determine whether the holder of an investment in a debt or equity
security for which changes in fair value are not regularly recognized in
earnings (such as securities classified as held-to-maturity or
available-for-sale) should recognize a loss in earnings when the investment is
impaired. An investment is impaired if the fair value of the investment is less
than its amortized cost basis. This standard amends the other-than-temporary
impairment guidance in U.S. GAAP for debt securities to make the guidance more
operational and to improve the presentation and disclosure of
other-than-temporary impairments on debt and equity securities in the financial
statements. This standard does not amend existing recognition and measurement
guidance related to other-than-temporary impairments of equity securities. The
standard is effective for interim and annual reporting periods ending after
44
June 15, 2009, with early adoption permitted for periods ending after March 15,
2009. The Company adopted the standard effective for the interim period ending
June 30, 2009 and determined there was not a material effect on the Company's
financial position or results of operations.
In April 2009, FASB issued an amendment to FASB ASC Topic 820, Fair Value
Measurements and Disclosures which provides additional guidance for estimating
fair value when the volume and level of activity for the asset or liability have
significantly decreased. This standard also includes guidance on identifying
circumstances that indicate a transaction is not orderly. This standard
emphasizes that even if there has been a significant decrease in the volume and
level of activity for the asset or liability and regardless of the valuation
technique(s) used, the objective of a fair value measurement remains the same.
Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction (that is, not a forced
liquidation or distressed sale) between market participants at the measurement
date under current market conditions. This standard is effective for interim and
annual reporting periods ending after June 15, 2009, and shall be applied
prospectively. Early adoption was permitted for periods ending after March 15,
2009. The Company adopted the standard effective for the interim period ending
June 30, 2009 and determined there was not a material effect on the Company's
financial position or results of operations.
In April 2009, FASB issued and amendment to FASB ASC Topic 825, Financial
Instruments which requires disclosures about fair value of financial instruments
for interim reporting periods of publicly traded companies as well as in annual
financial statements. An entity shall disclose in the body or in the
accompanying notes of its summarized financial information for interim reporting
periods and in its financial statements for annual reporting periods the fair
value of all financial instruments for which it is practicable to estimate that
value, whether recognized or not recognized in the statement of financial
position. Fair value information disclosed in the notes shall be presented
together with the related carrying amount in a form that makes it clear whether
the fair value and carrying amount represent assets or liabilities and how the
carrying amount relates to what is reported in the statement of financial
position. An entity also shall disclose the method(s) and significant
assumptions used to estimate the fair value of financial instruments and shall
describe changes in method(s) and significant assumptions, if any, during the
period. This standard shall be effective for interim reporting periods ending
after June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009. The Company adopted the standard effective for the interim
period ending June 30, 2009 and determined there was not a material effect on
the Company's financial position or results of operations. For additional
information on disclosures about fair value of financial instruments see Part I,
Item 2 "Financial Statements - Note 13, Fair Value Measurements".
In December 2007, FASB issued new standards relating to business combinations
and included in FASB ASC Topic 805, Business Combinations. The objective of this
standard is to improve the relevance, representational faithfulness, and
comparability of the information that a reporting entity provides in its
financial reports about a business combination and its effects. The Statement
establishes principles and requirements for how the acquirer: a) recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree, b)
recognizes and measures the goodwill acquired in the business combination or a
gain from a bargain purchase, and c) determines what information to disclose to
enable users of the financial statements to evaluate the nature and financial
effects of the business combination. This Statement applies prospectively to
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008. An entity may not apply it before that date. The Company is currently
evaluating the impact of the adoption of this standard, but does not expect it
to have a material effect on the Company's financial position or results of
operations with any future business combinations.
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,"
45
"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.
The following factors, among others, could cause actual results to differ
materially from the anticipated results or other expectations in the
forward-looking statements, including those set forth in this Form 10-Q:
- the risks associated with lending and potential adverse changes in
credit quality;
- increased loan delinquency rates;
- the risks presented by a continued economic slowdown, which could
adversely affect credit quality, loan collateral values, other real
estate owned values, investment values, liquidity levels, and loan
originations;
- changes in market interest rates, which could adversely affect our net
interest income and profitability;
- legislative or regulatory changes that adversely affect our business
or our ability to complete pending or prospective future acquisitions;
- costs or difficulties related to the integration of acquisitions;
- reduced demand for banking products and services;
- the risks presented by public stock market volatility, which could
adversely affect the Company's stock value and the ability to raise
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.
Additional factors that could cause actual results to differ materially from
those expressed in the forward-looking statements are discussed in Risk Factors
in Item 1A. Please take into account that forward-looking statements speak only
as of the date of this 10Q. The Company does not undertake any obligation to
publicly correct or update any forward-looking statement if it later becomes
aware that it is not likely to be achieved.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company believes that there have not been any material changes in
information about the Company's market risk than was provided in the Form 10-K
report for the year ended December 31, 2008.
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 our disclosure controls and procedures (as
required by Exchange Act Rules 240.13a-15(b) and 15d-14(c)) as of the date of
this quarterly report. Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that the 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 third quarter 2009, to which this report relates that
have materially affected, or are reasonably likely to materially affect the
Company's internal control over financial reporting.
46
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no pending material legal proceedings to which the registrant or its
subsidiaries are a party.
ITEM 1A. RISK FACTORS
The Company and its ten wholly-owned, independent community bank subsidiaries
are exposed to certain risks. The following is a discussion of the most
significant risks and uncertainties that may affect the Company's business,
financial condition and future results.
The Company cannot accurately predict the effect of the national economic
situation on the Company's future results of operations or stock trading price.
The national economy and the financial services sector in particular are
currently facing challenges of a scope unprecedented in recent history. The
Company cannot accurately predict the severity or duration of the current
economic downturn, which has adversely impacted the markets we serve. Any
further deterioration in the economies of the nation as a whole or in our
markets would have an adverse effect, which could be material, on our business,
financial condition, results of operations and prospects, and could also cause
the market price of our stock to decline. While it is impossible to predict how
long these conditions may exist, the economic downturn could continue to present
risks for some time for the industry and our company.
A further economic downturn in the market areas the Company serves may continue
to adversely impact earnings and could increase credit risk associated with the
loan portfolio.
The inability of borrowers to repay loans can erode earnings. The effects of the
national economic downturn are significantly impacting the market areas the
Company serves. A further deterioration in the market areas the Company serves
could result in the following consequences, any of which could have an adverse
impact, which could be material, on the Company's business, financial condition,
results of operations and prospects:
- loan delinquencies may increase further;
- problem assets and foreclosures may increase further;
- collateral for loans made may decline further in value, in turn
reducing customers' borrowing power, reducing the value of assets and
collateral associated with existing loans;
- demand for banking products and services may decline; and
- low cost or non-interest bearing deposits may decrease.
The allowance for loan and lease losses may not be adequate to cover actual loan
losses, which could adversely affect earnings.
The Company maintains an ALLL in an amount that it believes is adequate to
provide for losses inherent in the portfolio. While the Company strives to
carefully manage and monitor credit quality and to identify loans that may
become nonperforming, at any time there are loans included in the portfolio that
will result in losses, but that have not been identified as nonperforming or
potential problem loans. By closely monitoring credit quality, the Company
attempts to identify deteriorating loans before they become nonperforming assets
and adjust the ALLL accordingly. However, because future events are uncertain,
and if the economy continues to deteriorate, there may be loans that deteriorate
to a nonperforming status in an accelerated time frame. As a result, future
additions to the ALLL may be necessary. Because the loan portfolio contains a
number of loans with relatively large balances, the deterioration of one or a
few of these loans may cause a significant increase in nonperforming loans,
requiring an increase to the ALLL. Additionally, future significant additions to
the ALLL may be required based on changes in the mix of loans comprising the
portfolio, changes in the financial condition of borrowers, such as may result
from changes in economic conditions, or as a result of incorrect assumptions by
management in determining the ALLL. Additionally, federal banking regulators, as
an integral part of their supervisory function, periodically review the
Company's loan portfolio and the adequacy of the ALLL. These regulatory agencies
may require the Company to recognize further loan loss provisions or
47
charge-offs based upon their judgments, which may be different from the
Company's judgments. Any increase in the ALLL could have a negative effect on
the Company's financial condition and results of operations.
The Company has a high concentration of loans secured by real estate, so any
further deterioration in the real estate markets could require material
increases in ALLL and adversely affect the Company's financial condition and
results of operations.
The Company has a concentration of loans secured by real estate. Further
downturn in the market areas the Company serves may cause the Company to have
lower earnings and could increase credit risk associated with the loan
portfolio, as the collateral securing those loans may decrease in value. A
continued downturn in the local economy could have a material adverse effect
both on the borrowers' ability to repay these loans, as well as the value of the
real property held as collateral. The Company's ability to sell or dispose of
the underlying real estate collateral is adversely impacted by declining real
estate values, which increases the likelihood that the Company will suffer
losses on defaulted loans secured by real estate. This increased likelihood of
loss in the event of default would adversely affect the Company's financial
condition and results of operations, perhaps materially.
A continued tightening of the credit markets may make it difficult to obtain
adequate funding for loan growth, which could adversely affect earnings.
A continued tightening of the credit market and the inability to obtain or
retain adequate money to fund continued loan growth at an acceptable cost may
negatively affect the Company's asset growth and liquidity position and,
therefore, earnings capability. In addition to core deposit growth, maturity of
investment securities and loan payments, the Company also relies on alternative
funding sources through correspondent banking, and borrowing lines with the FRB
and FHLB to fund loans. In the event the current economic downturn continues,
particularly in the housing market, these resources could be negatively
affected, both as to price and availability, which would limit and or raise the
cost of the funds available to the Company.
The FDIC has increased insurance premiums to rebuild and maintain the federal
deposit insurance fund which has increased the Company's costs and could
adversely affect its business.
The FDIC adopted a final rule revising its risk-based assessment system,
effective April 1, 2009. The changes to the assessment system involve
adjustments to the risk-based calculation of an institution's unsecured debt,
secured liabilities and brokered deposits. The potential increase in FDIC
insurance premiums could have a significant impact on the Company.
On May 22, 2009, the FDIC imposed a special deposit insurance assessment of five
basis points on all insured institutions. This emergency assessment was
calculated based on the insured institution's assets at June 30, 2009, and
collected on September 30, 2009. This special assessment is in addition to the
regular quarterly risk-based assessment.
The FDIC has recently proposed requiring insured institutions to prepay
estimated quarterly risk-based assessments for the fourth quarter of 2009 and
for 2010, 2011 and 2012, and to increase the regular assessment rate by three
basis points effective January 1, 2011, as a means of replenishing the deposit
insurance fund. The prepayment would be collected on December 30, 2009, and
would be accounted for as a prepaid expense amortized over the prepayment
period. Although the FDIC could exempt institutions from the prepayment
requirement when prepayment would impact the institution's safety and soundness,
the FDIC has stated it expects few exemptions to be granted, and the Company
would not expect to apply for an exemption. If the proposed rule becomes final,
the prepayment of premiums could have an adverse impact on the Company's
liquidity.
The FDIC deposit insurance fund may suffer additional losses in the future due
to bank failures. There can be no assurance that there will not be additional
significant deposit insurance premium increases or special assessments in order
to restore the insurance fund's reserve ratio
48
The Company's loan portfolio mix could result in increased credit risk in an
economic downturn.
The loan portfolio contains a high percentage of commercial, commercial real
estate, real estate acquisition and development loans in relation to the total
loans and total assets. These types of loans have historically been viewed as
having more risk of default than residential real estate loans or certain other
types of loans or investments. In fact, the FDIC has issued pronouncements
alerting banks of its concern about banks with a heavy concentration of
commercial real estate loans. These types of loans also typically are larger
than residential real estate loans and other commercial loans. Because the
Company's loan portfolio contains a significant number of commercial and
commercial real estate loans with relatively large balances, the deterioration
of one or more of these loans may cause a significant increase in non-performing
loans. An increase in non-performing loans could result in a loss of earnings
from these loans, an increase in the provision for loan losses, or an increase
in loan charge-offs, which could have an adverse impact on results of operations
and financial condition.
Nonperforming assets take significant time to resolve and adversely affect our
results of operations and financial condition.
Nonperforming assets (which include foreclosed real estate) adversely affect the
Company's net income in various ways. Until economic and market conditions
improve, the Company expects to continue to incur additional losses relating to
an increase in nonperforming loans. The Company does not record interest income
on non-accrual loans or other real estate owned, thereby adversely affecting its
income, and increasing loan administration costs. When the Company takes
collateral in foreclosures and similar proceedings, it is required to mark the
related asset to the then fair market value of the collateral less cost to sell,
which may result in a loss. An increase in the level of nonperforming assets
also increases the Company's risk profile and may impact the capital levels its
regulators believe is appropriate in light of such risks. While the Company has
reduced its problem assets through, workouts, restructurings and otherwise,
decreases in the value of these assets, or the underlying collateral, or in
these borrowers' performance or financial conditions, whether or not due to
economic and market conditions beyond the Company's control, could adversely
affect the Company's business, results of operations and financial condition. In
addition to the carrying costs to maintain other real estate owned, the
resolution of nonperforming assets requires significant commitments of time from
management and the Company's directors, which can be detrimental to performance
of their other responsibilities. There can be no assurance that the Company will
not experience further increases in nonperforming assets in the future.
The Company's ability to access markets for funding and acquire and retain
customers could be adversely affected by the deterioration of other financial
institutions or to the extent the financial service industry's reputation is
damaged.
Reputation risk is the risk to liquidity, earnings and capital arising
from negative publicity regarding the financial services industry. The financial
services industry continues to be featured in negative headlines about the
global and national credit crisis and the resulting stabilization legislation
enacted by the U.S. federal government. These reports can be damaging to the
industry's image and potentially erode consumer confidence in insured financial
institutions, such as the Company's bank subsidiaries.
Decline in the fair value of the Company's investment portfolio could adversely
affect earnings
The fair value of the Company's investment securities could decline as a result
of factors including changes in market interest rates, credit quality and
ratings, lack of market liquidity and other economic conditions. Investment
securities are impaired if the fair value of the security is less than the
carrying value. When a security is impaired, the Company determines whether
impairment is temporary or other-than-temporary. The Company adopted FASB ASC
Topic 320, Investments - Debt and Equity Securities relating to the recognition
and presentation of other-than-temporary impairments, effective for the interim
period ended June 30, 2009, and accordingly if an impairment is determined to be
other-than temporary, an impairment loss is recognized by reducing the amortized
cost only for the credit loss associated with an other-than-temporary loss with
a corresponding charge to earnings
49
for a like amount. For further information regarding the standard see
discussion in "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Impact of Recently Issued Standards".
Fluctuating interest rates can adversely affect profitability.
The Company's profitability is dependent to a large extent upon net interest
income, which is the difference (or "spread") between the interest earned on
loans, securities and other interest-earning assets and interest paid on
deposits, borrowings, and other interest-bearing liabilities. Because of the
differences in maturities and repricing characteristics of interest-earning
assets and interest-bearing liabilities, changes in interest rates do not
produce equivalent changes in interest income earned on interest-earning assets
and interest paid on interest-bearing liabilities. Accordingly, fluctuations in
interest rates could adversely affect the Company's interest rate spread, and,
in turn, profitability. The Company seeks to manage its interest rate risk
within well established guidelines. Generally, the Company seeks an asset and
liability structure that insulates net interest income from large deviations
attributable to changes in market rates. However, the Company's structures and
practices to manage interest rate risk may not be effective in a highly volatile
rate environment.
If the goodwill recorded in connection with acquisitions becomes impaired, it
could have an adverse impact on earnings and capital.
Accounting standards require that the Company account for acquisitions using the
purchase method of accounting. Under acquisition accounting, if the purchase
price of an acquired company exceeds the fair value of its net assets, the
excess is carried on the acquiror's balance sheet as goodwill. In accordance
with generally accepted accounting principles, goodwill is not amortized but
rather is evaluated for impairment on an annual basis or more frequently if
events or circumstances indicate that a potential impairment exists. Although at
the current time the Company has not incurred an impairment of goodwill, there
can be no assurance that future evaluations of goodwill will not result in
findings of impairment and write-downs, which could be material.
Growth through future acquisitions could, in some circumstances, adversely
affect profitability measures.
The Company has in recent years acquired other financial institutions. The
Company may in the future engage in selected acquisitions of additional
financial institutions, including transactions that may receive assistance from
the FDIC. There are risks associated with any such acquisitions that could
adversely affect profitability. These risks include, among other things,
incorrectly assessing the asset quality of a financial institution being
acquired, encountering greater than anticipated cost of incorporating acquired
businesses into the Company's operations, and being unable to profitably deploy
funds acquired in an acquisition.
The Company anticipates that it might issue capital stock in connection with
future acquisitions. Acquisitions and related issuances of stock may have a
dilutive effect on earnings per share and the percentage ownership of current
shareholders. The Company currently does not have any definitive understandings
or agreements for any acquisitions other than the recent acquisition of First
Company and its subsidiary First National Bank & Trust, a community bank based
in Powell, Wyoming. For additional information on the acquisition see Part I,
Item 2 "Financial Statements - Note 16, Subsequent Events."
Business would be harmed if the Company lost the services of any of the senior
management team.
The Company believes its success to date has been substantially dependent on its
Chief Executive Officer and other members of the executive management team, and
on the Presidents of its bank subsidiaries. The loss of any of these persons
could have an adverse affect on the Company's business and future growth
prospects.
Competition in the Company's market areas may limit future success.
Commercial banking is a highly competitive business. The Company competes with
other commercial banks, savings and loan associations, credit unions, finance,
insurance and other non-depository companies operating in its market areas. The
Company is subject to substantial competition for loans and deposits from other
financial institutions. Some of its competitors are not subject to the same
degree of regulation and restriction as the Company is. Some of the Company's
competitors have greater financial resources than the Company does.
50
If the Company is unable to effectively compete in its market areas, the
Company's business, results of operations and prospects could be adversely
affected.
The Company operates in a highly regulated environment and may be adversely
affected by changes in federal state and local laws and regulations.
The Company is subject to extensive regulation, supervision and examination by
federal and state banking authorities. Any change in applicable regulations or
federal, state or local legislation could have a substantial impact on the
Company and its operations. Additional legislation and regulations that could
significantly affect the Company's powers, authority and operations may be
enacted or adopted in the future, which could have a material adverse effect on
the Company's financial condition and results of operations. Further, regulators
have significant discretion and authority to prevent or remedy unsafe or unsound
practices or violations of laws or regulations by financial institutions and
holding companies in the performance of their supervisory and enforcement
duties. Recently these powers have been utilized more frequently due to the
serious national, regional and local economic conditions the Company is facing.
The exercise of regulatory authority may have a negative impact on the Company's
financial condition and results of operations.
On October 3, 2008, Congress enacted the Emergency Economic Stabilization Act of
2008 ("EESA"), which provides the United States Treasury Department ("Treasury")
with broad authority to implement action intended to help restore stability and
liquidity to the U.S. financial markets. The EESA also increased the amount of
deposit account insurance coverage from $100,000 to $250,000 effective until
December 31, 2009, which was recently extended to December 31, 2013 under the
Helping Families Save Their Homes Act of 2009.
In early 2009, the Treasury also announced the Financial Stability Plan which,
among other things, provides a new capital program called the Capital Assistance
Program, which establishes a public-private investment fund for the purchase of
troubled assets, and expands the Term Asset-Backed Securities Loan Facility. The
full effect of this broad legislation on the national economy and financial
institutions, particularly on mid-sized institutions like the Company, cannot
now be predicted. In addition, the American Recovery and Reinvestment Act of
2009 ("ARRA") was signed into law on February 17, 2009, and includes, among
other things, extensive new restrictions on the compensation and governance
arrangements of financial institutions participating in the Treasury's Troubled
Asset Relief Program. The SEC recently has proposed expanding some of the
reforms in ARRA to apply to all public companies. Other recent proposals include
the Secretary of the Treasury's June 17, 2009 proposal to fundamentally change
the regulation of financial institutions, markets and products, and the Federal
Reserve's proposed guidance issued on October 22, 2009 regarding incentive
compensation practices at institutions it regulates, including the Company.
In summary, numerous actions have been taken by the Federal Reserve, the U.S.
Congress, the Treasury, the FDIC, the SEC and others to address the liquidity
and credit crisis. The Company cannot predict the actual effects of EESA, the
ARRA, the proposed regulatory reform measures and various governmental,
regulatory, monetary and fiscal initiatives which have been and may be enacted
on the financial markets, on the Company and its subsidiaries. The terms and
costs of these activities, or the failure of these actions to help stabilize the
financial markets, asset prices, market liquidity and a continuation or
worsening of current financial market and economic conditions could materially
and adversely affect the Company's business, financial condition, results of
operations, and the trading price of common stock.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) Not Applicable
(b) Not Applicable
(c) Not Applicable
51
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) Not Applicable
(b) Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
(a) None
(b) Not Applicable
(c) None
(d) None
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
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GLACIER BANCORP, INC.
November 6, 2009 /s/ Michael J. Blodnick
--------------------------------------
Michael J. Blodnick
President/CEO
November 6, 2009 /s/ Ron J. Copher
--------------------------------------
Ron J. Copher
Senior Vice President/CFO
52