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 March 31, 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 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 check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
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 April 23, 2009
was 61,511,389. 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
March 31, 2009, March 31, 2008 and audited December 31, 2008 .... 3
Condensed Consolidated Statements of Operations -
Unaudited three months ended March 31, 2009 and 2008 ............ 4
Condensed Consolidated Statements of Stockholders' Equity and
Comprehensive Income - audited year ended December 31, 2008
and unaudited three months ended March 31, 2009 ................. 5
Condensed Consolidated Statements of Cash Flows -
Unaudited three months ended March 31, 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 ................... 23
Item 3 - Quantitative and Qualitative Disclosure about Market Risk .... 37
Item 4 - Controls and Procedures ...................................... 37
PART II. OTHER INFORMATION ............................................... 38
Item 1 - Legal Proceedings ............................................ 38
Item 1A - Risk Factors ................................................ 38
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds .. 42
Item 3 - Defaults Upon Senior Securities .............................. 42
Item 4 - Submission of Matters to a Vote of Security Holders .......... 42
Item 5 - Other Information ............................................ 42
Item 6 - Exhibits ..................................................... 42
Signatures ............................................................ 43
GLACIER BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, December 31, March 31,
(Dollars in thousands, except per share data) 2009 2008 2008
--------------------------------------------- ----------- ------------ -----------
(unaudited) (audited) (unaudited)
Assets:
Cash on hand and in banks ............................................. $ 110,220 125,123 113,016
Federal funds sold .................................................... 27,520 6,480 135
Interest bearing cash deposits ........................................ 14,122 3,652 72,662
----------- ---------- ----------
Cash and cash equivalents .......................................... 151,862 135,255 185,813
Investment securities ................................................. 965,641 990,092 691,270
Loans receivable, net ................................................. 4,002,413 3,998,478 3,585,847
Loans held for sale ................................................... 74,515 54,976 39,341
Premises and equipment, net ........................................... 135,688 133,949 124,183
Real estate and other assets owned, net ............................... 18,985 11,539 2,098
Accrued interest receivable ........................................... 28,143 28,777 25,900
Deferred tax asset .................................................... 17,948 14,292 --
Core deposit intangible, net .......................................... 12,239 13,013 13,184
Goodwill .............................................................. 146,259 146,752 140,301
Other assets .......................................................... 27,107 26,847 26,935
----------- ---------- ----------
Total assets ....................................................... $ 5,580,800 5,553,970 4,834,872
=========== ========== ==========
Liabilities and stockholders' equity:
Non-interest bearing deposits ......................................... $ 743,552 747,439 770,456
Interest bearing deposits ............................................. 2,551,180 2,515,036 2,388,483
Advances from Federal Home Loan Bank .................................. 225,695 338,456 472,761
Securities sold under agreements to repurchase ........................ 199,669 188,363 191,369
Federal Reserve Bank discount window .................................. 1,005,000 914,000 57,000
U.S. Treasury Tax & Loan .............................................. 3,545 6,067 241,665
Other borrowed funds .................................................. 2,564 2,301 2,155
Accrued interest payable .............................................. 8,675 9,751 11,116
Deferred tax liability ................................................ -- -- 932
Subordinated debentures ............................................... 120,149 121,037 118,559
Other liabilities ..................................................... 38,786 34,580 37,428
----------- ---------- ----------
Total liabilities .................................................. 4,898,815 4,877,030 4,291,924
----------- ---------- ----------
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 ......................................................... 615 613 539
Paid-in capital ....................................................... 494,874 491,794 378,547
Retained earnings - substantially restricted .......................... 193,552 185,776 159,579
Accumulated other comprehensive (loss) income ......................... (7,056) (1,243) 4,283
----------- ---------- ----------
Total stockholders' equity ......................................... 681,985 676,940 542,948
----------- ---------- ----------
Total liabilities and stockholders' equity ......................... $ 5,580,800 5,553,970 4,834,872
=========== ========== ==========
Number of shares outstanding .......................................... 61,509,818 61,331,273 53,918,813
Book value per share .................................................. $ 11.09 11.04 10.07
See accompanying notes to condensed consolidated financial statements.
3
GLACIER BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31,
-----------------------------
(UNAUDITED - dollars in thousands, except per share data) 2009 2008
--------------------------------------------------------- ----------- ---------------
INTEREST INCOME:
Real estate loans ....................................... $ 14,341 12,592
Commercial loans ........................................ 37,966 42,533
Consumer and other loans ................................ 11,339 12,107
Investment securities and other ......................... 11,886 8,784
----------- ----------
Total interest income ................................ 75,532 76,016
----------- ----------
INTEREST EXPENSE:
Deposits ................................................ 10,134 16,869
Federal Home Loan Bank of Seattle advances .............. 1,819 5,718
Securities sold under agreements to repurchase .......... 594 1,341
Subordinated debentures ................................. 1,907 1,873
Other borrowed funds .................................... 700 1,586
----------- ----------
Total interest expense ............................... 15,154 27,387
----------- ----------
NET INTEREST INCOME ........................................ 60,378 48,629
Provision for loan losses ............................... 15,715 2,500
----------- ----------
Net interest income after provision for loan losses... 44,663 46,129
----------- ----------
NON-INTEREST INCOME:
Service charges and other fees .......................... 9,019 9,471
Miscellaneous loan fees and charges ..................... 1,160 1,490
Gains on sale of loans .................................. 6,150 3,880
Gain on sale of investments ............................. -- 248
Other income ............................................ 1,048 1,173
----------- ----------
Total non-interest income ............................ 17,377 16,262
----------- ----------
NON-INTEREST EXPENSE:
Compensation, employee benefits and related expense ..... 21,944 21,097
Occupancy and equipment expense ......................... 5,895 5,133
Advertising and promotions expense ...................... 1,724 1,539
Outsourced data processing expense ...................... 671 667
Core deposit intangibles amortization ................... 774 779
Other expense ........................................... 8,618 6,398
----------- ----------
Total non-interest expense ........................... 39,626 35,613
----------- ----------
EARNINGS BEFORE INCOME TAXES ............................... 22,414 26,778
Federal and state income tax expense .................... 6,635 9,379
----------- ----------
NET EARNINGS ............................................... $ 15,779 17,399
=========== ==========
Basic earnings per share ................................... $ 0.26 0.32
Diluted earnings per share ................................. $ 0.26 0.32
Dividends declared per share ............................... $ 0.13 0.13
Return on average assets (annualized) ...................... 1.15% 1.46%
Return on average equity (annualized) ...................... 9.27% 12.98%
Average outstanding shares - basic ......................... 61,460,619 53,849,608
Average outstanding shares - diluted ....................... 61,468,167 54,034,186
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 THREE MONTHS ENDED MARCH 31, 2009
Retained Accumulated Total
Common Stock earnings Other stock-
----------------- Paid-in substantially comprehensive holders'
(Dollars in thousands, except per share data) Shares 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 $613 491,794 185,776 (1,243) 676,940
Comprehensive income:
Net earnings ..................................... -- -- -- 15,779 -- 15,779
Unrealized loss on securities, net of
reclassification adjustment and taxes ......... -- -- -- -- (5,813) (5,813)
-------
Total comprehensive income .......................... 9,966
-------
Cash dividends declared ($.13 per share) ............ -- -- -- (8,003) -- (8,003)
Stock options exercised ............................. 178,545 2 2,409 -- -- 2,411
Stock based compensation and tax benefit ............ -- -- 671 -- -- 671
---------- ---- ------- ------- ------ -------
Balance at March 31, 2009 (unaudited) ............... 61,509,818 $615 494,874 193,552 (7,056) 681,985
========== ==== ======= ======= ====== =======
See accompanying notes to condensed consolidated financial statements.
5
GLACIER BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31,
----------------------------
(UNAUDITED - dollars in thousands) 2009 2008
---------------------------------- ---------- ---------------
OPERATING ACTIVITIES :
NET CASH PROVIDED BY OPERATING ACTIVITIES ........................... $ 19,752 26,541
--------- --------
INVESTING ACTIVITIES:
Proceeds from sales, maturities and prepayments of
investments available-for-sale ................................... 44,356 171,558
Purchases of investments available-for-sale ......................... (29,490) (160,771)
Principal collected on commercial and consumer loans ................ 215,076 240,504
Commercial and consumer loans originated or acquired ................ (249,997) (316,583)
Principal collections on real estate loans .......................... 40,317 83,509
Real estate loans originated or acquired ............................ (32,698) (78,778)
Net purchase of FHLB and FRB stock .................................. (276) (31)
Proceeds from sale of other real estate owned ....................... 179 99
Net addition of premises and equipment and other real estate owned... (4,561) (2,685)
--------- --------
NET CASH USED IN INVESTING ACTIVITIES ............................ (17,094) (63,178)
--------- --------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits ................................. 32,171 (25,539)
Net decrease in FHLB advances ....................................... (112,761) (66,188)
Net increase in securities sold under repurchase agreements ......... 11,306 13,328
Net increase in Federal Reserve Bank discount window ................ 91,000 57,000
Net (decrease) increase in U.S. Treasury Tax and Loan funds ......... (2,522) 20,256
Net increase (decrease) in other borrowed funds ..................... 275 (16)
Cash dividends paid ................................................. (8,003) (7,019)
Excess tax benefits from stock options .............................. 72 402
Proceeds from exercise of stock options and other stock issued ...... 2,411 2,617
--------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES .............. 13,949 (5,159)
--------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............. 16,607 (41,796)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .................... 135,255 227,609
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .......................... $ 151,862 185,813
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest .............................................. $ 16,231 29,552
Cash paid for Income taxes .......................................... 1,000 1,295
Sale and refinancing of other real estate owned ..................... 733 --
Other real estate acquired in settlement of loans ................... 8,385 129
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 March 31, 2009 and
2008, stockholders' equity and comprehensive income for the three months
ended March 31, 2009, the results of operations for the three months ended
March 31, 2009 and 2008, and cash flows for the three months ended March
31, 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 three months ended March
31, 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 valuation estimates management obtains independent appraisals for
significant items.
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 March 31, 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.
On February 9, 2009, a definitive agreement to acquire First Company and
its subsidiary First National Bank & Trust, a community bank based in
Powell, Wyoming was announced. First National Bank & Trust has three branch
locations in Powell, Cody, and Lovell, Wyoming. As of December 31, 2008,
First National Bank & Trust had total assets of $282 million. Upon
completion of the transaction, which
7
is subject to regulatory approval and other customary conditions of
closing, First National Bank & Trust will become a 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, was acquired by the Company. The results of
operations and financial condition are included from the acquisition date.
On April 30, 2008, Glacier Bank of Whitefish ("Whitefish") merged into
Glacier resulting in operations conducted under the Glacier charter. Prior
period activity of Whitefish was combined and included in Glacier's
historical results. The merger was accounted for as a combination of two
wholly-owned subsidiaries without acquisition accounting.
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 Financial Accounting Standards Board ("FASB")
Interpretation 46(R), 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 and total assets for the parent company and each of the community
bank subsidiaries. Although the consolidated total assets of the Company
were $5.6 billion at March 31, 2009, eight of the ten community banks had
total assets of less than $1 billion. First Bank-MT, the smallest community
bank subsidiary had $160 million in total assets, while Glacier Bank, the
largest community bank subsidiary, had $1.3 billion in total assets at
March 31, 2009.
The following abbreviated organizational chart illustrates the various
relationships as of March 31, 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 |
| | | | | |
|----------------------------| |---------------------------------| |----------------------------|
8
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 MARCH 31, 2009
Gross Unrealized Estimated
Weighted Amortized ---------------- Fair
(Dollars in thousands) Yield Cost Gains Losses Value
---------------------- -------- --------- ------ ------- ---------
AVAILABLE FOR SALE:
U.S. GOVERNMENT AND FEDERAL AGENCIES:
maturing one year through five years ............ 1.62% $ 212 2 -- 214
GOVERNMENT-SPONSORED ENTERPRISES:
maturing five years through ten years ........... 2.80% 235 -- (2) 233
maturing after ten years ........................ 2.05% 67 -- -- 67
-------- ------ ------- -------
2.64% 302 -- (2) 300
-------- ------ ------- -------
STATE AND LOCAL GOVERNMENTS AND OTHER ISSUES:
maturing within one year ........................ 3.61% 759 4 -- 763
maturing one year through five years ............ 4.61% 4,481 134 (3) 4,612
maturing five years through ten years ........... 5.08% 21,507 1,157 (74) 22,590
maturing after ten years ........................ 5.08% 429,773 8,597 (14,612) 423,758
-------- ------ ------- -------
5.08% 456,520 9,892 (14,689) 451,723
-------- ------ ------- -------
MORTGAGE-BACKED SECURITIES ......................... 4.73% 458,522 7,781 (14,587) 451,716
-------- ------ ------- -------
TOTAL MARKETABLE SECURITIES ..................... 4.90% 915,556 17,675 (29,278) 903,953
-------- ------ ------- -------
OTHER INVESTMENTS:
FHLB and FRB stock, at cost ........................ 1.26% 61,223 -- -- 61,223
Other stock, at cost ............................... 3.29% 465 -- -- 465
-------- ------ ------- -------
TOTAL INVESTMENTS ............................... 4.67% $977,244 17,675 (29,278) 965,641
======== ====== ======= =======
9
INVESTMENTS AS OF MARCH 31, 2009
Estimated
(Dollars in thousands) Weighted Amortized Gross Unrealized Fair
AVAILABLE-FOR-SALE: Yield Cost Gains Losses Value
---------------------- -------- --------- ------- ----------- ---------
U.S. GOVERNMENT AND FEDERAL 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 ..................... 5.08% 408,603 8,121 (9,733) 406,991
-------- ------- -------- --------
5.07% 434,244 9,261 (9,822) 433,683
-------- ------- -------- --------
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.
Investments with an unrealized loss position at March 31, 2009:
Less than 12 months 12 months or more Total
--------------------- ------------------- --------------------
Fair Unrealized Fair Unrealized Fair Unrealized
(dollars in thousands) Value Loss Value Loss Value Loss
---------------------- -------- ---------- ------ ---------- ------- ----------
Government Sponsored Enterprises ................ $ -- -- 236 2 236 2
State and Local Governments and other issues .... 154,435 13,495 6,271 1,194 160,706 14,689
Mortgage-backed Securities ...................... 45,577 2,957 35,260 11,630 80,837 14,587
-------- ------ ------ ------ ------- ------
Total temporarily impaired securities ........... $200,012 16,452 41,767 12,826 241,779 29,278
======== ====== ====== ====== ======= ======
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
---------------------- --------- ---------- ------ ---------------------- ----------
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
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
======== ====== ====== === ======= ======
10
In April 2009, FASB issued Staff Position ("FSP") FAS 115-2 and FAS 124-2,
Recognition and Presentation of Other-Than-Temporary Impairments, and FSP 157-4,
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 has decided to adopt the new FSPs effective for the interim
period ending June 30, 2009 and is currently evaluating the impact of the
adoption of the FSPs, but does not expect it to have a material effect on the
Company's financial position or results of operations. For further information
regarding the FSPs see discussion in Part I, Item 2 "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Impact of Recently
Issued Standards".
As of March 31, 2009, there were 252 investments in an unrealized loss position
and were considered to be temporarily impaired and therefore an impairment
charge has not been recorded. State and Local Government and other issued
securities have the largest unrealized loss. The fair value of these securities
increased from $154,322,000 at December 31, 2008 to $160,706,000 at March 31,
2009, and the unrealized loss increased from 6.0 percent of fair value to 9.1
percent of fair value for those same years. The fair value of mortgage backed
securities, which have underlying collateral consisting of U.S. government
sponsored enterprise guaranteed mortgages and non-guaranteed private label whole
loan mortgages, decreased from $95,867,000 at December 31, 2008 to $80,837,000
at March 31, 2009, and the unrealized loss increased from 6.7 percent of fair
value to 18.0 percent of fair value for those same years.
Interest income includes tax-exempt interest for the three months ended March
31, 2009 and 2008 of $5,331,000 and $3,174,000, respectively.
Gross proceeds from sale of marketable securities for the three months ended
March 31, 2009 and 2008 were $0 and $97,002,000, respectively, resulting in
gross gains of $0 and $0, respectively, and gross losses of $0 and $0,
respectively. The gross proceeds and gross gains for the sale of other stock was
$0 and $248,000 for the three months ended March 31, 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. The cost
of any investment sold is determined by specific identification.
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.
11
4) Loans and Leases
The following table summarizes the Company's loan and lease portfolio,
At At At
3/31/09 12/31/2008 3/31/08
TYPE OF LOAN -------------------- -------------------- --------------------
(Dollars in thousands) Amount Percent Amount Percent Amount Percent
---------------------- ---------- ------- ---------- ------- ---------- -------
Real Estate Loans:
Residential real estate $ 776,005 19.0% $ 786,869 19.4% $ 684,007 18.9%
Loans held for sale 74,515 1.8% 54,976 1.4% 39,341 1.1%
---------- ----- ---------- ----- ---------- -----
Total 850,520 20.8% 841,845 20.8% 723,348 20.0%
Commercial Loans:
Real estate 1,958,466 48.0% 1,935,341 47.8% 1,669,876 46.1%
Other commercial 652,839 16.0% 645,033 15.9% 648,202 17.9%
---------- ----- ---------- ----- ---------- -----
Total 2,611,305 64.0% 2,580,374 63.7% 2,318,078 64.0%
Consumer and other Loans:
Consumer 202,138 5.0% 208,166 5.1% 213,346 5.9%
Home equity 503,762 12.4% 507,831 12.5% 436,505 12.0%
---------- ----- ---------- ----- ---------- -----
Total 705,900 17.4% 715,997 17.6% 649,851 17.9%
Net deferred loan fees, premiums
and discounts (7,020) -0.2% (8,023) -0.2% (9,409) -0.3%
Allowance for loan and lease losses (83,777) -2.0% (76,739) -1.9% (56,680) -1.6%
---------- ----- ---------- ----- ---------- -----
Loan receivable, net $4,076,928 100.0% $4,053,454 100.0% $3,625,188 100.0%
========== ===== ========== ===== ========== =====
The following table sets forth information regarding the Company's
non-performing assets at the dates indicated:
March 31, December 31, March 31,
(Dollars in thousands) 2009 2008 2008
---------------------- --------- ------------ ---------
Real estate and other assets owned $ 18,985 11,539 2,098
Accruing Loans 90 days or more overdue 4,439 8,613 4,717
Non-accrual loans 92,288 64,301 21,747
-------- ------ ------
Total non-performing assets $115,712 84,453 28,562
======== ====== ======
Non-performing assets as a percentage of total bank assets 1.97% 1.46% 0.57%
Impaired loans, net of government guaranteed amounts, were $100,076,000,
$79,949,000, and $22,565,000 as of March 31, 2009, December 31, 2008 and March
31, 2008, respectively. The allowance for loan and lease loss includes valuation
allowances of $10,669,000, $7,999,000 and $2,128,000 specific to impaired loans
as of March 31, 2009, December 31, 2008 and March 31, 2008, respectively.
12
The following table illustrates the loan and lease loss experience:
March 31, December 31, March 31,
(Dollars in thousands) 2009 2008 2008
---------------------- --------- ------------ ---------
Balance at the beginning of the period $76,739 54,413 54,413
Charge-offs (8,994) (9,839) (408)
Recoveries 317 1,060 175
------- ------ ------
Net charge-offs $(8,677) (8,779) (233)
Acquisition (1) -- 2,625 --
Provision 15,715 28,480 2,500
------- ------ ------
Balance at the end of the period $83,777 76,739 56,680
======= ====== ======
Net charge-offs as a percentage of total loans 0.209% 0.213% 0.006%
(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 March 31, 2009:
Core Mortgage
Deposit Servicing
(Dollars in thousands) Intangible Rights (1) Total
---------------------- ---------- ---------- ------
Gross carrying value $ 27,807
Accumulated Amortization (15,568)
--------
Net carrying value $ 12,239 1,214 13,453
========
WEIGHTED-AVERAGE AMORTIZATION PERIOD
(Period in years) 10.0 9.6 10.0
AGGREGATE AMORTIZATION EXPENSE
For the three months ended March 31, 2009 $ 774 59 833
ESTIMATED AMORTIZATION EXPENSE
For the year ended December 31, 2009 $ 2,972 122 3,094
For the year ended December 31, 2010 2,603 82 2,685
For the year ended December 31, 2011 1,895 80 1,975
For the year ended December 31, 2012 1,534 78 1,612
For the year ended December 31, 2013 1,283 75 1,358
(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 were accounted for using the purchase accounting method as
prescribed by Statement of Financial Accounting Standard ("SFAS") No. 141,
Business Combinations, for acquisitions prior to January 1, 2009 and
acquisitions will subsequently be accounted for as prescribed by SFAS No.
141(R), Business Combinations. Purchase accounting under both standards
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.
13
Adjustment of the allocated purchase price may be related to fair value
estimates for which all information has not been obtained of the acquired
entity known or discovered during the allocation period, the period of time
required to identify and measure the fair values of the assets and
liabilities acquired in the business combination. The allocation period is
generally limited to one year following consummation of a business
combination.
6) Deposits
The following table illustrates the amounts outstanding for deposits
$100,000 and greater at March, 2009 according to the time remaining to
maturity.
Certificates Non-Maturity
(Dollars in thousands) of Deposit Deposits Totals
---------------------- ------------ ------------ ---------
Within three months ....................... $139,229 1,175,702 1,314,931
Three to six months ....................... 110,736 -- 110,736
Seven to twelve months .................... 117,963 -- 117,963
Over twelve months ........................ 56,168 -- 56,168
-------- --------- ---------
Totals ................................. $424,096 1,175,702 1,599,798
======== ========= =========
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 Federal Reserve Bank discount
window programs:
As of and As of and As of and
for the three for the for the three
months ended year ended months ended
(Dollars in thousands) March 31, 2009 December 31, 2008 March 31, 2008
---------------------- -------------- ----------------- --------------
FHLB advances:
Amount outstanding at end of period .... $ 225,695 338,456 472,761
Average balance ........................ $ 336,790 566,933 595,268
Maximum outstanding at any month-end ... $ 380,535 822,107 815,860
Weighted average interest rate ......... 2.19% 2.71% 3.85%
Repurchase agreements:
Amount outstanding at end of period .... $ 199,669 188,363 191,369
Average balance ........................ $ 196,064 188,952 190,064
Maximum outstanding at any month-end ... $ 199,669 196,461 191,369
Weighted average interest rate ......... 1.23% 2.02% 2.83%
U.S. Treasury Tax and Loan:
Amount outstanding at end of period .... $ 3,545 6,067 241,665
Average balance ........................ $ 3,593 165,690 172,706
Maximum outstanding at any month-end ... $ 3,545 385,246 241,665
Weighted average interest rate ......... 0.00% 2.28% 3.21%
Federal Reserve Bank discount window:
Amount outstanding at end of period .... $1,005,000 914,000 57,000
Average balance ........................ $ 946,433 277,611 20,802
Maximum outstanding at any month-end ... $1,005,000 928,000 57,000
Weighted average interest rate ......... 0.29% 1.76% 3.77%
14
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 March 31, 2009.
CONSOLIDATED Tier 1 (Core) Tier 2 (Total) Leverage
(Dollars in thousands) Capital Capital Capital
---------------------- ------------- -------------- ----------
Total stockholder's equity ................... $ 681,985 681,985 681,985
Less: Goodwill and intangibles ............... (157,705) (157,705) (157,705)
Plus: Allowance for loan and lease losses .... -- 56,494 --
Accumulated other comprehensive
Unrealized loss on AFS securities ...... 7,056 7,056 7,056
Subordinated debentures ...................... 117,500 117,500 117,500
---------- --------- ----------
Regulatory capital computed .................. $ 648,836 705,330 648,836
========== ========= ==========
Risk weighted assets ......................... $4,492,201 4,492,201
========== =========
Total adjusted average assets ................ $5,399,131
==========
Capital as % of risk weighted assets ......... 14.44% 15.70% 12.02%
Regulatory "well capitalized" requirement .... 6.00% 10.00% 5.00%
---------- --------- ----------
Excess over "well capitalized" requirement ... 8.44% 5.70% 7.02%
========== ========= ==========
9) Computation of Earnings Per Share
Basic earnings per common share is computed by dividing net earnings by the
weighted average number of shares of common stock outstanding during the
period presented. Diluted earnings per share is computed by including the
net increase in shares as if dilutive outstanding stock options were
exercised, using the treasury stock method.
The following schedule contains the data used in the calculation of basic
and diluted earnings per share:
Three Three
months ended months ended
March 31, 2009 March 31, 2008
-------------- --------------
Net earnings available to common
stockholders .............................. $15,779,000 17,399,000
Average outstanding shares - basic ........... 61,460,619 53,849,608
Add: Dilutive stock options .................. 7,548 184,578
----------- ----------
Average outstanding shares - diluted ......... 61,468,167 54,034,186
=========== ==========
Basic earnings per share ..................... $ 0.26 0.32
=========== ==========
Diluted earnings per share ................... $ 0.26 0.32
=========== ==========
15
There were approximately 2,386,064 and 2,021,921 average shares excluded
from the diluted average outstanding share calculation for the three months
ended March 31, 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
earnings is the unrealized gains and losses on available-for-sale
securities.
For the three months
ended March 31,
Dollars in thousands 2009 2008
-------------------- -------- ---------
Net earnings ............................................... $15,779 17,399
Unrealized holding (loss) gain arising during the period ... (9,552) 2,172
Tax benefit (expense) ...................................... 3,739 (855)
------- ------
Net after tax ........................................... (5,813) 1,317
Reclassification adjustment for gains
included in net earnings ................................ -- (248)
Tax expense ................................................ -- 97
------- ------
Net after tax ........................................... -- (151)
Net unrealized (loss) gain on securities ................ (5,813) 1,166
------- ------
Total comprehensive income ........................... $ 9,966 18,565
======= ======
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, 2005, 2006 and 2007 remain subject to examination by federal,
Montana, Colorado, Idaho and Utah tax authorities, income tax returns for
the year ended December 31, 2004 remain subject to examination by the state
of Colorado, and the income tax returns for the years ended December 31,
2003 and December 31, 2004 remain subject to examination by the states of
Montana and Idaho.
In accordance with FASB Interpretation No. 48 ("FIN 48"), Accounting for
Uncertainty in Income Taxes, the Company determined its unrecognized tax
benefit to be $152,000 as of March 31, 2009. If the unrecognized tax
benefit amount was recognized, it would decrease the Company's effective
tax rate from 29.6 percent to 28.9 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.
In accordance with FIN 48, the Company recognizes interest related to
unrecognized income tax benefits in interest expense and penalties are
recognized in other expense. During the three months ended March 31, 2009
and 2008, the Company recognized $0 interest expense and recognized $0
penalty with respect to income tax liabilities. The Company had
approximately $37,000 and $37,000 accrued for the payment of interest at
March 31, 2009 and 2008, respectively. The Company had accrued liabilities
of $0 for the payment of penalties at March 31, 2009 and 2008.
16
12) Segment Information
SFAS No. 131, Financial Reporting for Segments of a Business Enterprise,
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 maker 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. The following
schedule provides selected financial data for the Company's operating
segments. Centrally provided services to the banks are allocated based on
estimated usage of those services. The operating segment identified as
"Other" includes limited partnership interests that operate residential
rental real estate properties which have been allocated low income housing
tax credits. 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.
On February 1, 2009, Morgan was merged into 1st Bank resulting in
operations being conducted under the 1st Bank charter. On April 30, 2008,
Whitefish was merged into Glacier with operations conducted under the
Glacier charter. Prior period activity of the merged banks has been
combined and included in the acquiring bank subsidiaries' historical
results.
On December 1, 2008, Bank of the San Juans Bancorporation and its
subsidiary, San Juans, was acquired by the Company. The results of
operations and financial condition are included from the acquisition date.
Three months ended and as of March 31, 2009
--------------------------------------------------------------------------
Mountain First
(Dollars in thousands) Glacier West Security Western 1st Bank Big Sky Valley
-------------------------------- ---------- --------- -------- ------- -------- ------- -------
Revenues from external customers $ 20,739 21,380 13,317 8,908 8,311 5,646 5,632
Intersegment revenues 47 -- 307 163 71 -- 19
Expenses (16,211) (20,190) (10,112) (7,023) (7,303) (4,538) (3,981)
---------- --------- -------- ------- -------- ------- -------
Net Earnings $ 4,575 1,190 3,512 2,048 1,079 1,108 1,670
---------- --------- -------- ------- -------- ------- -------
Total Assets $1,275,221 1,219,421 969,912 626,018 580,891 332,661 297,008
========== ========= ======== ======= ======== ======= =======
San First Bank Total
Citizens Juans of MT Parent Other Eliminations Consolidated
-------- ------- ---------- ------- ----- ------------ ------------
Revenues from external customers $ 3,919 2,528 2,412 58 59 -- 92,909
Intersegment revenues -- -- -- 20,252 -- (20,859) --
Expenses (3,319) (2,113) (1,767) (4,531) (106) 4,064 (77,130)
-------- ------- --------- ------- ----- ---------- ---------
Net Earnings $ 600 415 645 15,779 (47) (16,795) 15,779
-------- ------- --------- ------- ----- ---------- ---------
Total Assets $227,445 171,284 159,939 817,135 3,279 (1,099,414) 5,580,800
======== ======= ========= ======= ===== ========== =========
17
Three months ended and as of March 31, 2008
--------------------------------------------------------------------------
Mountain First
(Dollars in thousands) Glacier West Security Western 1st Bank Big Sky Valley
-------------------------------- ---------- --------- -------- ------- -------- ------- -------
Revenues from external customers $ 21,238 21,704 14,222 9,227 8,421 6,276 5,352
Intersegment revenues 41 -- 472 387 561 -- 91
Expenses (16,213) (18,838) (11,193) (7,656) (7,443) (4,778) (4,193)
---------- --------- -------- ------- -------- ------- -------
Net Earnings $ 5,066 2,866 3,501 1,958 1,539 1,498 1,250
---------- --------- -------- ------- -------- ------- -------
Total Assets $1,116,642 1,049,079 805,825 540,927 546,681 311,751 285,063
========== ========= ======== ======= ======== ======= =======
First Bank Total
Citizens of MT Parent Other Eliminations Consolidated
-------- ---------- ------- ----- ------------ ------------
Revenues from external customers $ 3,427 2,214 138 59 -- 92,278
Intersegment revenues 132 101 21,888 -- (23,673) --
Expenses (3,142) (1,751) (4,627) (64) 5,019 (74,879)
-------- ------- ------- ----- -------- ---------
Net Earnings $ 417 564 17,399 (5) (18,654) 17,399
-------- ------- ------- ----- -------- ---------
Total Assets $188,249 147,634 673,388 3,374 (833,741) 4,834,872
======== ======= ======= ===== ======== =========
13) Fair Value Measurement
On January 1, 2008, the Company adopted FASB issued SFAS No. 157, Fair
Value Measurements. FASB issued FSP SFAS 157-2, Effective Date of SFAS No.
157, which delayed the effective date of SFAS 157 for nonfinancial assets
and nonfinancial liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis
(at least annually). On January 1, 2009, the delay from SFAS 157-2 expired
for the Company.
In April 2009, FASB issued FSP 157-4, 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
has decided to adopt the FSP effective for the interim period ending June
30, 2009 and is currently evaluating the impact of the adoption of the FSP,
but does not expect it to have a material effect on the Company's financial
position or results of operations. For further information regarding the
FSP see discussion in Part I, Item 2 "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Impact of Recently
Issued Standards".
SFAS 157 defines fair value 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. FAS 157 also establishes a
fair value hierarchy which requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when
measuring fair value. The standard describes three levels of inputs that
may be used to measure fair value:
Level 1 Quoted prices in active markets for identical assets or liabilities
Level 2 Observable inputs other than Level 1 prices, such as quoted prices
for similar assets or liabilities; quoted prices in markets that
are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full
term of the assets or liabilities
Level 3 Unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets
or liabilities
The following are the assets measured at fair value on a recurring basis at
and for the period ended March 31, 2009.
18
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) 03/31/09 03/31/09 (Level 1) (Level 2) (Level 3)
---------------------- -------------- ------------ ----------------- ----------- ------------
Financial Assets:
U.S. Government and Federal Agency ............ $ 214 214 -- 214 --
Government Sponsored Enterprises .............. 300 300 -- 300 --
State and Local Governments and other issues .. 451,723 451,723 -- 441,347 10,376
Mortgage-backed securities .................... 451,716 451,716 -- 446,927 4,789
Other Stock ................................... 465 465 -- 465 --
-------- ------- --- ------- ------
Total financial assets ..................... $904,418 904,418 -- 889,253 15,165
======== ======= === ======= ======
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.
Investments and mortgage-backed 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 three month period ended March 31,
2009.
Significant
unobservable
inputs
(Dollars in thousands) (Level 3)
---------------------- ------------
Balance as of December 31, 2008 ................................. $23,421
Total unrealized loss included in other comprehensive income .... (7,906)
Amortization, accretion and principal payments .................. (350)
-------
Balance as of March 31, 2009 .................................... $15,165
=======
The change in unrealized losses related to available-for-sale securities is
reported in Accumulated Other Comprehensive Income (Loss).
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 March 31, 2009.
19
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) 03/31/09 03/31/09 (Level 1) (Level 2) (Level 3)
---------------------- -------------- ----------- ----------------- ----------- ------------
Financial Assets:
Real estate and other assets owned, net .... $ 18,985 18,985 -- -- 18,985
Impaired Loans, net of allowance for loan
and lease losses ........................ 89,407 89,407 -- -- 89,407
-------- ------- --- --- -------
Total financial assets .................. $108,392 108,392 -- -- 108,392
======== ======= === === =======
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 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. 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 SFAS 114, Accounting by Creditors for Impairment of a Loan.
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.
20
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.
Three Months Ended March 31,
2009 vs. 2008
Increase (Decrease) due to:
----------------------------
(Dollars in thousands) Volume Rate Net
---------------------- ------- ------- -------
INTEREST INCOME
Residential real estate loans $ 2,392 (643) 1,749
Commercial loans 5,953 (10,520) (4,567)
Consumer and other loans 1,291 (2,059) (768)
Investment securities and other 2,582 520 3,102
------- ------- -------
Total Interest Income 12,218 (12,702) (484)
INTEREST EXPENSE
NOW accounts 87 (441) (354)
Savings accounts 41 (316) (275)
Money market accounts (295) (3,244) (3,539)
Certificates of deposit 956 (3,523) (2,567)
FHLB advances (2,483) (1,416) (3,899)
Other borrowings and repurchase agreements 7,281 (8,880) (1,599)
------- ------- -------
Total Interest Expense 5,587 (17,820) (12,233)
------- ------- -------
NET INTEREST INCOME $ 6,631 5,118 11,749
======= ======= =======
21
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.
AVERAGE BALANCE SHEET
For the Three months ended 3-31-09 For the Three months ended 3-31-08
---------------------------------- ----------------------------------
Interest Average Interest Average
Average and Yield/ Average and Yield/
(Dollars in thousands) Balance Dividends Rate Balance Dividends Rate
---------------------- ---------- --------- ------- ----------- --------- -------
ASSETS
Residential real estate loans $ 856,049 14,341 6.70% $ 719,371 12,592 7.00%
Commercial loans 2,593,490 37,966 5.94% 2 ,275,044 42,533 7.50%
Consumer and other loans 707,260 11,339 6.50% 639,091 12,107 7.60%
---------- ------- ----------- -------
Total Loans 4,156,799 63,646 6.21% 3 ,633,506 67,232 7.42%
Tax - exempt investment securities (1) 425,283 5,331 5.01% 259,894 3,174 4.89%
Other investment securities 587,091 6,555 4.47% 522,511 5,610 4.29%
---------- ------- ----------- -------
Total Earning Assets 5,169,173 75,532 5.84% 4 ,415,911 76,016 6.89%
------- -------
Goodwill and core deposit intangible 159,341 154,018
Other non-earning assets 228,322 239,529
---------- -----------
TOTAL ASSETS $5,556,836 $4 ,809,458
========== ===========
LIABILITIES
AND STOCKHOLDERS' EQUITY
NOW accounts $ 507,950 557 0.45% $ 463,716 912 0.79%
Savings accounts 287,454 272 0.38% 267,285 547 0.82%
Money market accounts 759,856 2,412 1.29% 799,407 5,950 2.99%
Certificates of deposit 947,504 6,893 2.95% 860,552 9,460 4.41%
FHLB advances 336,790 1,819 2.19% 595,268 5,718 3.85%
Repurchase agreements
and other borrowed funds 1,269,324 3,201 1.02% 504,296 4,800 3.82%
---------- ------- ----------- -------
Total Interest Bearing Liabilities 4,108,878 15,154 1.50% 3 ,490,524 27,387 3.15%
------- -------
Non-interest bearing deposits 718,290 735,205
Other liabilities 39,737 44,586
---------- -----------
Total Liabilities 4,866,905 4 ,270,315
---------- -----------
Common stock 614 538
Paid-in capital 493,597 376,451
Retained earnings 191,202 156,779
Accumulated other
comprehensive income 4,518 5,375
---------- -----------
Total Stockholders' Equity 689,931 539,143
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $5,556,836 $4 ,809,458
========== ===========
Net interest income $60,378 $48,629
======= =======
Net interest spread 4.34% 3.74%
Net Interest Margin 4.74% 4.42%
Net Interest Margin (Tax Equivalent) 4.92% 4.54%
Return on average assets (annualized) 1.15% 1.46%
Return on average equity (annualized) 9.27% 12.98%
(1) Excludes tax effect of $2,360,000 and $1,405,000 on non-taxable investment
security income for the three monthes ended March 31, 2009 and 2008,
respectively.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS - THE THREE MONTHS ENDED MARCH 31, 2009 COMPARED TO
DECEMBER 31, 2008 AND MARCH 31, 2008
Performance Summary
The Company reported net earnings of $15.779 million for the first quarter, a
decrease of $1.620 million, or 9 percent, from the $17.399 million for the first
quarter of 2008. Diluted earnings per share of $.26 for the quarter decreased 19
percent from the diluted earnings per share of $.32 for the same quarter of
2008, reflecting the increase of 7.434 million shares, or 14 percent, in average
outstanding shares on a diluted basis over last year's first quarter. Annualized
return on average assets and return on average equity for the first quarter were
1.15 percent and 9.27 percent, which compares with prior year returns for the
first quarter of 1.46 percent and 12.98 percent, respectively.
REVENUE SUMMARY
Three months ended
----------------------------------------
March 31, December 31, March 31,
2009 2008 2008
(UNAUDITED - $ IN THOUSANDS) (unaudited) (unaudited) (unaudited)
---------------------------- ----------- ------------ -----------
Net interest income
Interest income $75,532 $76,707 $76,016
Interest expense 15,154 18,599 27,387
------- ------- -------
Net interest income 60,378 58,108 48,629
Non-interest income
Service charges, loan fees, and other fees 10,179 11,522 10,961
Gain on sale of loans 6,150 3,195 3,880
Gain on sale of investments -- -- 248
Other income 1,048 920 1,173
------- ------- -------
Total non-interest income 17,377 15,637 16,262
------- ------- -------
$77,755 $73,745 $64,891
======= ======= =======
Tax equivalent net interest margin 4.92% 4.81% 4.54%
======= ======= =======
$ change from $ change from % change from % change from
December 31, March 31, December 31, March 31,
(UNAUDITED - $ IN THOUSANDS) 2008 2008 2008 2008
---------------------------- ------------- ------------- ------------- -------------
Net interest income
Interest income $(1,175) $ (484) -2% -1%
Interest expense $(3,445) $(12,233) -19% -45%
------- --------
Net interest income 2,270 11,749 4% 24%
Non-interest income
Service charges, loan fees, and other fees (1,343) (782) -12% -7%
Gain on sale of loans 2,955 2,270 92% 59%
Gain on sale of investments -- (248) n/m -100%
Other income 128 (125) 14% -11%
------- --------
Total non-interest income 1,740 1,115 11% 7%
------- --------
$ 4,010 $ 12,864 5% 20%
======= ========
n/m - not measurable
23
Net Interest Income
Net interest income for the quarter increased $12 million, or 24 percent, over
the same period in 2008. Interest income for the current quarter increased $2
million, or 4 percent, with interest expense decreasing $3 million, or 19
percent, compared to the prior quarter. While total interest income has
decreased by $484 thousand, or 1 percent, from the same period last year, total
interest expense has decreased by $12 million, or 45 percent, from the same
period last year. 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 4.92 percent which is 11 basis points higher than the 4.81
percent achieved for the prior quarter and 38 basis points higher than the 4.54
percent result for the first quarter of 2008.
Non-interest Income
Non-interest income for the quarter increased $2 million, or 11 percent, from
the prior quarter, and increased $1 million, or 7 percent, over the same period
in 2008. Fee income decreased $1.3 million, or 12 percent, during the quarter,
compared to the decrease of $782 thousand, or 7 percent, over the same period
last year. Gain on sale of loans increased $3 million, or 92 percent, for the
quarter and increased $2 million, or 59 percent, over the same period last year.
NON-INTEREST EXPENSE SUMMARY
Three months ended
----------------------------------------
March 31, December 31, March 31,
2009 2008 2008
(UNAUDITED - $ IN THOUSANDS) (unaudited) (unaudited) (unaudited)
---------------------------- ----------- ------------ -----------
Compensation and employee benefits $21,944 $18,775 $21,097
Occupancy and equipment expense 5,895 5,923 5,133
Advertising and promotion expense 1,724 1,675 1,539
Outsourced data processing 671 638 667
Core deposit intangibles amortization 774 741 779
Other expenses 8,618 8,340 6,398
------- ------- -------
Total non-interest expense $39,626 $36,092 $35,613
======= ======= =======
$ change from $ change from % change from % change from
December 31, March 31, December 31, March 31,
(UNAUDITED - $ IN THOUSANDS) 2008 2008 2008 2008
---------------------------- ------------- ------------- ------------- -------------
Compensation and employee benefits $3,169 $ 847 17% 4%
Occupancy and equipment expense (28) 762 0% 15%
Advertising and promotion expense 49 185 3% 12%
Outsourced data processing 33 4 5% 1%
Core deposit intangibles amortization 33 (5) 4% -1%
Other expenses 278 2,220 3% 35%
------ ------
Total non-interest expense $3,534 $4,013 10% 11%
====== ======
Non-interest Expense
Non-interest expense increased by $3.5 million, or 10 percent from the prior
quarter, including a $3.2 million, or 17 percent increase in compensation and
employee benefits expense. The prior quarter compensation and employee benefits
included significant reductions in commissions tied to production, as well as
significant reductions in bonuses and employee benefits tied to Company
performance. The current quarter increase in compensation and employee benefits
also reflects increased staffing with the number of full-time equivalent
employees increasing from 1,571 to 1,610 during the quarter, and increasing from
1,510 since the end of the 2008 first quarter.
24
Non-interest expense increased by $4.0 million, or 11 percent from the same
quarter of 2008, including a $2.2 million, or 35 percent increase in other
expenses. The increase in other expenses includes $931 thousand in FDIC
insurance premiums, $395 thousand in outside legal, accounting, and audit firm
expense, $263 thousand loss from sales of other real estate owned, $190 thousand
expense associated with repossessed assets, and a non-recurring payment of $169
thousand to the pension plan of the former North Side State Bank prior to
terminating the plan in March 2009. North Side State Bank was acquired in April
2007 and immediately merged into 1st Bank, the Company's subsidiary in Evanston,
Wyoming. Occupancy and equipment expense has increased $762 thousand, or 15
percent, since March 31, 2008, reflecting the cost of additional branch
locations and facility upgrades. Advertising and promotion expense increased
$185 thousand, or 12 percent, from the same quarter of 2008, such increase
attributable to branch promotions and the banks continuing focus on attracting
and retaining non-interest bearing and other low cost deposits.
The efficiency ratio (non-interest expense / net interest income plus
non-interest income) was 51 percent for the quarter, compared to 55 percent for
the 2008 first quarter, a four percentage point improvement.
Provision for Loan Losses
The Company recorded a provision for loan losses of $15.7 million, an increase
of $13.2 million from the same quarter in 2008. Net charged-off loans during the
three months ended March 31, 2009 were $8.7 million.
The determination of the allowance for loan and lease losses ("ALLL") 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.
FINANCIAL CONDITION ANALYSIS
As reflected in the following table, total assets at March 31, 2009 were $5.581
billion, which is $27 million greater than the total assets of $ 5.554 billion
at December 31, 2008 and an increase of $746 million, or 15 percent, over the
total assets of $4.835 billion at March 31, 2008.
March 31, December 31, March 31, $ change from $ change from
2009 2008 2008 December 31, March 31,
ASSETS ($ IN THOUSANDS) (unaudited) (audited) (unaudited) 2008 2008
----------------------- ----------- ------------ ----------- ------------- -------------
Cash on hand and in banks $ 110,220 125,123 113,016 (14,903) (2,796)
Investment securities, interest bearing
deposits, FHLB stock, FRB stock, and
fed funds 1,007,283 1,000,224 764,067 7,059 243,216
Loans:
Real estate 847,245 838,375 720,108 8,870 127,137
Commercial 2,607,655 2,575,828 2,312,359 31,827 295,296
Consumer and other 705,805 715,990 649,401 (10,185) 56,404
---------- --------- --------- ------ -------
Total loans 4,160,705 4,130,193 3,681,868 30,512 478,837
Allowance for loan and lease losses (83,777) (76,739) (56,680) (7,038) (27,097)
---------- --------- --------- ------ -------
Total loans, net of allowance for
loan and lease losses 4,076,928 4,053,454 3,625,188 23,474 451,740
---------- --------- --------- ------ -------
Other assets 386,369 375,169 332,601 11,200 53,768
---------- --------- --------- ------ -------
Total Assets $5,580,800 5,553,970 4,834,872 26,830 745,928
========== ========= ========= ====== =======
25
At March 31, 2009, total loans were $4.161 billion, an increase of $31 million,
or 74 basis points (3 percent annualized) over total loans of $4.130 billion at
December 31, 2008. Commercial loans grew the most with an increase of $32
million, or 1 percent, followed by real estate loans, increasing by $9 million,
or 1 percent, while consumer loans, which are primarily comprised of home equity
loans, decreased $10 million, or 1 percent from the fourth quarter of 2008.
Total loans increased $479 million, or 13 percent from March 31, 2008. Since
prior year, commercial loans have increased $295 million, or 13 percent, real
estate loans grew by $127 million, or 18 percent, and consumer loans increased
$56 million, or 9 percent.
Investment securities, including interest bearing deposits in other financial
institutions and federal funds sold, have increased $243 million, or 32 percent,
from March 31, 2008 and have increased $7 million, or 1 percent, from December
31, 2008. Investment securities represented 18 percent of total assets at March
31, 2009 versus 16 percent of total assets the prior year.
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 three months ended March 31, 2009 and 2008 were $313 million
and $176 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 March 31, 2009 was approximately $174 million.
Allowance for Loan and Lease Losses
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.
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 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 Banks 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 Company considers the ALLL balance of $83.8 million adequate to cover
inherent losses in the loan and lease portfolios as of March 31, 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.
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
26
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.
At the end of each quarter, each of the subsidiary community banks 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.
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. Each of the Bank's ALLL is generally available to absorb losses from
any segment of its loan and lease portfolio.
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 following table summarizes the allocation of the ALLL:
March 31, 2009 December 31, 2008 March 31, 2008
-------------------------- -------------------------- --------------------------
Allowance Percent Allowance Percent Allowance Percent
for loan and of loans in for loan and of loans in for loan and of loans in
(Dollars in thousands) lease Losses category lease Losses category lease Losses category
---------------------- ------------ ----------- ------------ ----------- ------------ -----------
Real estate loans $ 7,832 20.4% 7,233 20.3% 4,913 19.6%
Commercial real estate loans 39,045 47.0% 35,305 46.8% 24,298 45.2%
Other commercial loans 23,497 15.7% 21,590 15.6% 17,965 17.6%
Consumer and other loans 13,403 16.9% 12,611 17.3% 9,504 17.6%
------- ----- ------ ----- ------ -----
Totals $83,777 100.0% 76,739 100.0% 56,680 100.0%
======= ===== ====== ===== ====== =====
27
The following table summarizes ALLL experience:
Three Three
months ended Year ended months ended
March 31, December 31, March 31,
(Dollars in thousands) 2009 2008 2008
---------------------- ------------ ------------ ------------
Balance at beginning of period $ 76,739 54,413 54,413
Charge-offs:
Real estate loans (1,087) (3,233) (50)
Commercial loans (6,408) (4,957) (202)
Consumer and other loans (1,499) (1,649) (156)
-------- ------ ------
Total charge-offs $ (8,994) (9,839) (408)
-------- ------ ------
Recoveries:
Real estate loans 40 23 40
Commercial loans 158 716 82
Consumer and other loans 119 321 53
-------- ------ ------
Total recoveries $ 317 1,060 175
-------- ------ ------
Net (charge-offs) recoveries (8,677) (8,779) (233)
Acquisition (1) -- 2,625 --
Provision 15,715 28,480 2,500
-------- ------ ------
Balance at end of period $ 83,777 76,739 56,680
======== ====== ======
Allowance for loan and lease losses as a
percentage of total loan and leases 2.01% 1.86% 1.54%
Net charge-offs as a percentage of total loans 0.209% 0.213% 0.006%
(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 March 31, 2009, the ALLL was $83.777 million, an increase of $27 million, or
48 percent, from a year ago. The allowance was 2.01 percent of total loans
outstanding at March 31, 2009, up from 1.54 percent at the prior year quarter
end, and up from 1.86 percent at December 31, 2008. The current quarter
provision for loan loss expense was $15.7 million, an increase of $13.2 million
from the same quarter in 2008. Charged-off loans for the current quarter
exceeded recoveries of previously charged-off loans by $8.7 million. Loan
portfolio growth, composition, average loan size, credit quality considerations,
and other environmental factors will determine the level of additional provision
expense.
The Banks' charge-off policy is consistent with bank regulatory standards.
Consumer loans generally are charged off when the loan becomes over 120 days
delinquent. Real estate acquired as a result of foreclosure or by deed-in-lieu
of foreclosure is classified as real estate owned until such time as it is sold.
When such property is acquired, it is recorded at estimated fair value, less
estimated cost to sell. Any write-down at the time of recording real estate
owned is charged to the ALLL. Any subsequent write-downs are charged to current
expense.
28
Non-performing Assets
At At At
(Dollars in thousands) 3/31/2009 12/31/2008 3/31/2008
---------------------- --------- ---------- ---------
Non-accrual loans:
Real estate loans $ 9,641 3,575 3,356
Commercial loans 79,374 58,454 17,368
Consumer and other loans 3,273 2,272 1,023
-------- ------ ------
Total $92,288 64,301 21,747
Accruing Loans 90 days or more overdue:
Real estate loans 2,056 4,103 341
Commercial loans 1,473 2,897 4,129
Consumer and other loans 910 1,613 247
-------- ------ ------
Total $4,439 8,613 4,717
Real estate and other assets owned, net 18,985 11,539 2,098
-------- ------ ------
Total non-performing loans and real estate
and other assets owned, net $115,712 84,453 28,562
======== ====== ======
Allowance for loan and lease losses as a
percentage of non-performing assets 72% 91% 198%
Non-performing assets as a percentage of total bank assets 1.97% 1.46% 0.57%
Accruing Loans 30-89 days or more overdue $66,534 54,787 32,152
Interest Income (1) $1,374 4,434 402
(1) Amounts represent estimated interest income that would have been recognized
on loans accounted for on a non-accrual basis for the three months ended
March 31, 2009, year ended December 31, 2008 and three months ended March
31, 2008 had such loans performed pursuant to contractual terms.
The allowance was 72 percent of non-performing assets at March 31, 2009, down
from 91 percent for the prior quarter end and down from 198 percent a year ago.
Non-performing assets as a percentage of total bank assets at March 31, 2009
were at 1.97 percent, up from 1.46 percent as of December 31, 2008, and up from
..57 percent at March 31, 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 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.
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.
29
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 March 31, 2009 and 2008 was not significant. Impaired loans,
net of government guaranteed amounts, were $100.1 million and $22.6 million as
of March 31, 2009 and 2008, respectively. The ALLL includes valuation allowances
of $10.7 million and $2.1 million specific to impaired loans as of March 31,
2009 and 2008, respectively.
March 31, December 31, March 31, $ change from $ change from
2009 2008 2008 December 31, March 31,
LIABILITIES ($ IN THOUSANDS) (unaudited) (audited) (unaudited) 2008 2008
---------------------------- ----------- ------------ ----------- ------------- -------------
Non-interest bearing deposits $ 743,552 747,439 770,456 (3,887) (26,904)
Interest bearing deposits 2,551,180 2,515,036 2,388,483 36,144 162,697
Advances from Federal Home Loan Bank 225,695 338,456 472,761 (112,761) (247,066)
Securities sold under agreements to
repurchase and other borrowed funds 1,210,778 1,110,731 492,189 100,047 718,589
Other liabilities 47,461 44,331 49,476 3,130 (2,015)
Subordinated debentures 120,149 121,037 118,559 (888) 1,590
---------- --------- --------- ------ -------
Total liabilities $4,898,815 4,877,030 4,291,924 21,785 606,891
========== ========= ========= ====== =======
As of March 31, 2009, non-interest bearing deposits decreased $27 million, or 3
percent, since March 31, 2008, and decreased $4 million, or 1 percent, since
December 31, 2008. Interest bearing deposits increased $36 million, or 1 percent
from December 31, 2008. Since March 31, 2008, interest bearing deposits
increased $163 million, or 7 percent. FHLB advances at March 31, 2009 decreased
$247 million, or 52 percent, from March 31, 2008 and decreased $113 million, or
33 percent, from December 31, 2008. Repurchase agreements and other borrowed
funds were $1.2 billion at March 31, 2009, an increase of $719 million, or 146
percent, from March 31, 2008, and an increase of $100 million, or 9 percent,
from December 31, 2008. Included in this latter category are U.S. Treasury Tax
and Loan funds of $3.5 million at March 31, 2009, a decrease of $238 million
from March 31, 2008, and a decrease of $2.5 million from December 31, 2008.
Also, included in this category are Federal Reserve Bank discount window
borrowings of $1 billion at March 31, 2009, an increase of $948 million from
March 31, 2008, and an increase of $91 million from December 31, 2008.
30
STOCKHOLDERS' EQUITY
March 31, December 31, March 31, $ change from $ change from
2009 2008 2008 December 31, March 31,
($ IN THOUSANDS EXCEPT PER SHARE DATA) (unaudited) (audited) (unaudited) 2008 2008
-------------------------------------- ----------- ------------ ----------- ------------- -------------
Common equity $ 689,041 678,183 538,665 10,858 150,376
Accumulated other comprehensive (loss) income (7,056) (1,243) 4,283 (5,813) (11,339)
--------- -------- -------- ------ -------
Total stockholders' equity 681,985 676,940 542,948 5,045 139,037
Core deposit intangible, net, and goodwill (158,498) (159,765) (153,485) 1,267 (5,013)
--------- -------- -------- ------ -------
$ 523,487 517,175 389,463 6,312 134,024
========= ======== ======== ====== =======
Stockholders' equity to total assets 12.22% 12.19% 11.23%
Tangible stockholders' equity to total tangible assets 9.65% 9.59% 8.32%
Book value per common share $ 11.09 11.04 10.07 0.05 1.02
Tangible book value per common share $ 8.51 8.43 7.22 0.08 1.29
Market price per share at end of quarter $ 15.71 19.02 19.17 (3.31) (3.46)
Total stockholders' equity and book value per share amounts have increased $139
million and $1.02 per share, respectively, from March 31, 2008, the result of
earnings retention and exercised stock options, stock issued in connection with
the Bank of the San Juans acquisition, and $94 million in net proceeds from the
Company's November 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 34 percent since March 31, 2008, with tangible stockholders' equity
at 9.65 percent of total tangible assets at March 31, 2009, up from 8.32 percent
at March 31, 2008. Accumulated other comprehensive income, representing net
unrealized gains or losses (net of tax) on investment securities designated as
available for sale, decreased $11 million from March 31, 2008.
On March 25, 2009, the board of directors declared a cash dividend of $.13 per
share, payable April 16, 2009 to shareholders of record on April 7, 2009.
Acquisition Announced
On February 9, 2009, the Company announced a definitive agreement to acquire
First Company and its subsidiary First National Bank & Trust, a community bank
based in Powell, Wyoming. First National Bank & Trust has three branch locations
in Powell, Cody, and Lovell, Wyoming. As of December 31, 2008, First National
Bank & Trust had total assets of $282 million. Upon completion of the
transaction, which is subject to regulatory approval and other customary
conditions of closing, First National Bank & Trust will become a wholly-owned
subsidiary of the Company. The transaction is expected to close in the second
quarter.
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.
31
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 March 31, 2009, the bank
subsidiaries had $779 million of available FHLB credit of which $226 million was
utilized. The banking 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 $431 million and $198 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 26 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 decrease of $11
million resulting from the net unrealized losses 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 Loss 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 basis to fair value and as a charge to
earnings.
Management currently considers whether an investment security is
other-than-temporarily impaired under the guidance promulgated in SFAS 115,
Accounting for Certain Investments in Debt and Equity Securities, FSP SFAS 115-1
and SFAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments, and the guidance from the Securities and
Exchange Commission found in Staff Accounting Bulletin Topic 5M. In April 2009,
FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments, and FSP 157-4, 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 has
decided to adopt the new FSPs effective for the interim period ending June 30,
2009 and is currently evaluating the impact of the adoption of the FSPs, but
does not expect it to have a material effect on the Company's
32
financial position or results of operations. For further information regarding
the FSPs see discussion in "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Impact of Recently Issued Standards".
In evaluating impaired securities for other-than-temporary impairment losses,
management considers, among other things, (i) the severity and duration of the
impairment, (ii) the credit ratings of the security, (iii) the overall deal
structure, including the Company's position within the structure, the overall
and near term financial performance of the issuer and underlying collateral,
delinquencies, defaults, loss severities, recoveries, prepayments, cumulative
loss projections, discounted cash flows and fair value estimates. The Company
also considers its intent and ability to retain the investment security for a
period of time sufficient to allow for anticipated recovery in fair value. In so
doing, the Company considers (i) contractual constraints, liquidity and capital
needs of the Company, and (ii) management's approach to managing the investment
portfolio including intent, if any, to dispose of impaired investment securities
in periods subsequent to the impairment analysis date.
The Company believes that macroeconomic conditions occurring in 2008 and the
first quarter 2009 have unfavorably impacted the fair value of certain debt
securities in its investment portfolio. For 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).
Equity securities owned at March 31, 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 March 31, 2009.
As of March 31, 2009, the Company's investment portfolio had 252 debt
securities, the fair values of which had declined below amortized cost by
$29.278 million, or 12%, of the value of temporarily impaired investment
securities. The Company stratified the 252 debt securities for both severity and
duration of impairment. With respect to severity, 102 debt securities had
impairment that exceeded 5 percent of the respective book values, of which 19
had impairment that exceeded 15 percent of the respective book values at March
31, 2009. 2 of the 252 debt securities had impairment that exceeded 40 percent
of the respective book values at March 31, 2009, the aggregate unrealized loss
of which was $3,976,000. The remaining 150 debt securities had impairment that
was 5 percent or less of the respective book values as of March 31, 2009.
With respect to duration of the impairment, the Company identified 33 debt
securities which have been continuously impaired 12 months as of March 31, 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 were in an unrealized loss position. The most notable of these 33
securities is a non-guaranteed, non-Agency CMO which had an unrealized loss of
$1,962,000. 16 of the 33 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 $79,000.
Among the 252 debt securities with impairment at March 31, 2009, 18 are
non-guaranteed, non-Agency issued CMO tranches. 11 of the 18 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.
33
In assessing the various factors identified above, the Company evaluated the
fair value estimates provided by third party vendors, including 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. 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 issuers,
with follow up discussions with issuers' management for clarification and
verification of information relevant to the Company's impairment analysis.
With respect to the Company's intent and ability to hold the securities impaired
at March 31, 2009, the Company had no present intent to sell any of such
securities. During 2009, the Company also continued its historical approach to
managing the investment portfolio, i.e., to "buy and hold" securities to
maturity, although such securities may be sold given that all of the securities
held in the investment portfolio are designated as "available for sale." In the
first quarter of 2009 there were no securities sold by the Company. In 2008, the
Company sold only 1 security at neither gain nor loss for proceeds of
$97,002,000. Such security was acquired and held for 7 days as collateral to
support a borrowing at the U.S Treasury Tax and Loan program. Sales of
securities in 2007 occurred with respect to entire investment portfolios of
acquired banks following mergers into the Company's existing bank subsidiaries.
Such sales occurred in recognition that the acquired portfolios of investments
were not consistent with the Company's Investment Policy and Asset Liability
Management Policy. During 2006, the only investment security sold was a bond
issued by General Motors, the risk profile of which was not consistent with the
Company's revised Investment Policy.
Based on the analysis of its impaired debt securities, the Company determined it
was probable the Company will fully recover the amortized cost of the
securities, and that none of such securities had other-than-temporary
impairment.
Fair Value Measurements
On January 1, 2008, the Company adopted SFAS 157, Fair Value Measurements, which
defines fair value 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. FAS 157 also 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:
In April 2009, FASB issued FSP 157-4, 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 has decided to adopt
the FSP effective for the interim period ending June 30, 2009 and is currently
evaluating the impact of the adoption of the FSP, but does not expect it to have
a material effect on the Company's financial position or results of operations.
For further information regarding the FSP see discussion in "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Impact of Recently Issued Standards".
Level 1 Quoted prices in active markets for identical assets or liabilities
Level 2 Observable inputs other than Level 1 prices, such as quoted prices for
similar assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the assets or
liabilities
Level 3 Unobservable inputs that are supported by little or no market activity
and that are significant to the fair value of the assets or liabilities
On a recurring basis, the Company measures investment securities in accordance
with SFAS 157. 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
34
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 market 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 quarter of 2009), the fair values of which had significant reliance on
unobservable inputs, and therefore were classified as Level 3 within the
hierarchy.
On a non-recurring basis, the Company measures real estate and other assets
owned and impaired loans in accordance with SFAS 157. 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. 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.
For additional information on fair value measurements see Part I, Item 2
"Financial Statements - Note 13, Fair Value Measurements".
Impact of Recently Issued Accounting Standards
In April 2009, FASB issued FSP FAS 115-2 and FAS 124-2, 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 FSP 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 FSP does not amend existing recognition and
measurement
35
guidance related to other-than-temporary impairments of equity securities. The
FSP shall be effective for interim and annual reporting periods ending after
June 15, 2009, with early adoption permitted for periods ending after March 15,
2009. The Company has decided to adopt the FSP effective for the interim period
ending June 30, 2009 and is currently evaluating the impact of the adoption of
this FSP, 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 FSP 157-4, 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. This FSP provides additional
guidance for estimating fair value in accordance with SFAS No. 157, Fair Value
Measurements, when the volume and level of activity for the asset or liability
have significantly decreased. This FSP also includes guidance on identifying
circumstances that indicate a transaction is not orderly. This FSP 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 FSP shall be effective for interim and annual
reporting periods ending after June 15, 2009, and shall be applied
prospectively. Early adoption is permitted for periods ending after March 15,
2009. The Company has decided to adopt the FSP effective for the interim period
ending June 30, 2009 and is currently evaluating the impact of the adoption of
this FSP, 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 FSP FAS 107-1 and APB 28-1, Interim Disclosures about
Fair Value of Financial Instruments. This FSP amends SFAS No. 107, Disclosures
about Fair Value of Financial Instruments, to require disclosures about fair
value of financial instruments for interim reporting periods of publicly traded
companies as well as in annual financial statements. This FSP also amends APB
Opinion No. 28, Interim Financial Reporting, to require those disclosures in
summarized financial information at interim reporting periods. 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, as required by SFAS No. 107. 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 FSP 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 has
decided to adopt the FSP effective for the interim period ending June 30, 2009
and is currently evaluating the impact of the adoption of this FSP but does not
expect it to have a material effect on the Company's financial position or
results of operations.
In December 2007, FASB issued SFAS No. 141(R), Business Combinations. The
objective of this Statement 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.
36
Forward Looking Statements
This Form 10-Q may contain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements include, but are not limited to, statements about management's plans,
objectives, expectations and intentions that are not historical facts, and other
statements identified by words such as "expects," "anticipates," "intends,"
"plans," "believes," "should," "projects," "seeks," "estimates" or words of
similar meaning. These forward-looking statements are based on current beliefs
and expectations of management and are inherently subject to significant
business, economic and competitive uncertainties and contingencies, many of
which are beyond the Company's control. In addition, these forward-looking
statements are subject to assumptions with respect to future business strategies
and decisions that are subject to change. 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, 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.
37
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 first 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.
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 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, is
currently facing challenges of a scope unprecedented in recent history. No one
can predict the severity or duration of this national downturn, which has
adversely impacted the markets the Company serves. Any deterioration in the
Company's markets resulting from the economic slowdown would have an adverse
effect on business, financial condition, results of operations and prospects,
and could also cause the trading price of the Company's stock to decline.
A further economic 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.
The inability of borrowers to repay loans can erode earnings. Although the
adverse effects of the national economic downturn have not yet been fully
experienced in the Company's primary market areas to the extent of many other
regions of the country, there can be no assurance that the Company's market
areas will also not continue to deteriorate. A further deterioration in economic
conditions in the market areas the Company serves could result in the following
consequences, any of which could have a material adverse impact on the Company's
prospects, results of operations and financial condition:
- loan delinquencies may increase further, migrating into the
substantial commercial real estate and business lending portfolios;
- 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 managing 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
38
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 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 financial condition and results of
operation.
The Company has a high concentration of loans secured by real estate.
The Company has a concentration of loans secured by real estate. While the
Pacific Northwest economy typically lags the national economy, the effects of
the economic downturn are now significantly impacting the Company's market area.
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 recover on defaulted
loans by foreclosing and selling the real estate collateral would then be
diminished and the Company would be more likely to suffer losses on defaulted
loans.
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 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.
Based on recent events and the state of the economy, the FDIC has increased
federal deposit insurance premiums beginning in the first quarter of 2009. The
increase of these premiums will add to the cost of operations and could have a
significant impact on the Company. Depending on any future losses that the FDIC
insurance fund may suffer due to failed institutions, there can be no assurance
that there will not be additional significant premium increases in order to
replenish the fund.
On February 27, 2009 the FDIC issued a press release announcing a special
Deposit Insurance Fund assessment of 20 basis points on insured institutions and
granting the FDIC the authority to impose an additional assessment after June
30, 2009 of up to 10 basis points if necessary. The assessment will be
calculated on June 30, 2009 deposit balances and collected on September 30,
2009. Subject to the passing of certain legislation that would allow the FDIC
increased borrowing from the Treasury, the FDIC has indicated that it would
reduce the special assessment by half; however, there can be no assurance that
this will occur.
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
39
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.
The Company's ability to access markets for funding and acquire and retain
customers could be adversely affected 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
Investment securities fair value could decline as a result of factors including
changes in market interest rate, credit quality and ratings, 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 an impairment is temporary or other-than-temporary.
If an impairment is determined to be other-than-temporary, an impaired loss is
recognized by reducing the amortized cost basis to fair value and as a charge to
earnings. When the Company adopts FSP FAS 115-2 and FAS 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments, effective for the interim
period ending June 30, 2009, only the credit losses associated with an
other-than-temporary loss will be recognized as a charge to earnings. For
further information regarding the FSP 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.
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 purchase 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.
The effect of recently enacted federal legislation.
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 US financial markets. Pursuant to the EESA, the Treasury
40
has the ability to purchase or insure up to $700 billion in troubled assets held
by financial institutions under the Troubled Asset Relief Program ("TARP"). On
October 14, 2008, the Treasury announced it would initially purchase equity
stakes in financial institutions under a Capital Purchase Program (the "CPP") of
up to $350 billion of the $700 billion authorized under the TARP legislation.
The CPP provides direct equity investment of perpetual preferred stock by the
Treasury in qualified financial institutions. The EESA also increases the amount
of deposit account insurance coverage from $100,000 to $250,000 effective until
December 31, 2009. In early 2009, Treasury also announced the Financial
Stability Plan which, among other things, provides a new capital program called
the Capital Assistance Program, establishes a public-private investment fund for
the purchase of troubled assets and expands the Term Asset-Backed Securities
Loan Facility. In October 2008, the FDIC announced the Temporary Liquidity
Guarantee Program, which has two components--the Debt Guarantee Program and the
Transaction Account Guarantee Program. Under the Transaction Account Guarantee
Program any participating depository institution is able to provide full deposit
insurance coverage for non-interest bearing transaction accounts, regardless of
the dollar amount. Non-interest bearing transaction accounts include demand
accounts and NOW accounts paying 50 basis points or less. Under the program,
effective November 14, 2008, insured depository institutions that have not opted
out of the FDIC Temporary Liquidity Guarantee Program will be subject to a 0.10%
surcharge applied to non-interest bearing transaction deposit account balances
in excess of $250,000, which surcharge will be added to the institution's
existing risk-based deposit insurance assessments. Under the Debt Guarantee
Program, qualifying unsecured senior debt issued by a participating institution
can be guaranteed by the FDIC. The Company and its bank subsidiaries chose to
participate in both components of the FDIC Temporary Liquidity Guaranty Program.
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.
Growth through future acquisitions, which 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 agreement to acquire First
Company and its subsidiary First National Bank & Trust, a community bank based
in Powell, Wyoming.
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. 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.
41
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. These powers recently 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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) Not Applicable
(b) Not Applicable
(c) Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) Not Applicable
(b) Not Applicable
ITEM 4. 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 2 - Plan and Agreement of Merger dated as of February 6, 2009 by
and amount Glacier Bancorp, Inc., First Company and First
National Bank & Trust
42
(incorporated by reference to exhibit 2 of the Company's
Registration Statement on Form S-4 (File No. 333-158078).
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.
May 5, 2009 /s/ Michael J. Blodnick
----------------------------------------
Michael J. Blodnick
President/CEO
May 5, 2009 /s/ Ron J. Copher
----------------------------------------
Ron J. Copher
Senior Vice President/CFO
43