UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2009 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE 000-18911
GLACIER BANCORP, INC.
MONTANA 81-0519541
(State of Incorporation) (IRS Employer Identification Number)
49 Commons Loop, Kalispell, MT 59901
(Address of Principal Office)
Registrant's telephone number, including area code: (406) 756-4200
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value per share Nasdaq Global Select Market
(Title of Each Class) (Name of Each Exchange on Which
Registered)
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. [X] Yes [ ] No
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. [ ] Yes [X] No
Indicate by check mark whether the registrant (i) 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 (ii) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Website every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months. [ ] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company (as
defined by Exchange Act Rule 12b-2).
[X] Large accelerated filer [ ] Accelerated filer
[ ] Non-accelerated filer [ ] Smaller reporting company
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
The aggregate market value of the voting common equity held by non-affiliates of
the Registrant at June 30, 2009 (the last business day of the most recent second
quarter), was $876,495,372 (based on the average bid and ask price as quoted on
the NASDAQ Global Select Market at the close of business on that date).
As of February 15, 2010, there were issued and outstanding 61,619,803 shares of
the Registrant's common stock. No preferred shares are issued or outstanding.
DOCUMENT INCORPORATED BY REFERENCE
Portions of the 2010 Annual Meeting Proxy Statement dated March 29, 2010 are
incorporated by reference into Part III of this Form 10-K.
GLACIER BANCORP, INC.
FORM 10-K ANNUAL REPORT
For the year ended December 31, 2009
TABLE OF CONTENTS
Page
----
PART I
Item 1 Business 3
Item 1a Risk Factors 30
Item 1b Unresolved Staff Comments 34
Item 2 Properties 35
Item 3 Legal Proceedings 35
Item 4 Submission of Matter to a Vote of Security Holders 35
PART II
Item 5 Market for the Registrant's Common Equity, Related Stockholder
Matters, and Issuer Purchases of Equity Securities 36
Item 6 Selected Financial Data 37
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 39
Item 7a Quantitative and Qualitative Disclosure about Market Risk 56
Item 8 Financial Statements and Supplementary Data 56
Item 9 Changes in and Disagreements with Accountants in Accounting
and Financial Disclosures 103
Item 9a Controls and Procedures 103
Item 9b Other Information 103
PART III
Item 10 Directors, Executive Officers and Corporate Governance 104
Item 11 Executive Compensation 104
Item 12 Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 104
Item 13 Certain Relationships and Related Transactions, and Director Independence 104
Item 14 Principal Accounting Fees and Services 104
PART IV
Item 15 Exhibits and Financial Statement Schedules 105
PART I
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K may contain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements include, but are not limited to, statements about
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 Annual Report on Form 10-K, or the
documents incorporated by reference:
- the risks associated with lending and potential adverse changes of the
credit quality of loans in the Company's portfolio, including as a
result of declines in the housing and real estate markets in its
geographic areas;
- increased loan delinquency rates;
- the risks presented by a continued economic downturn, which could
adversely affect credit quality, loan collateral values, other real
estate owned values, investment values, liquidity and capital levels,
dividends and loan originations;
- changes in market interest rates, which could adversely affect the
Company's net interest income and profitability;
- legislative or regulatory changes that adversely affect the Company's
business, ability to complete pending or prospective future
acquisitions, limit certain sources of revenue, or increase cost of
operations;
- costs or difficulties related to the integration of acquisitions;
- the goodwill we have recorded in connection with acquisitions could
become impaired, which may have an adverse impact on our earnings and
capital;
- reduced demand for banking products and services;
- the risks presented by public stock market volatility, which could
adversely affect the market price of our common stock and our ability
to raise additional capital in the future;
- competition from other financial services companies in our markets;
- loss of services from the senior management team; and
- the 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 Annual Report on Form 10-K (or documents incorporated by
reference, if applicable). The Company does not undertake any obligation to
publicly correct or update any forward-looking statement if it later becomes
aware that actual results are likely to differ materially from those expressed
in such forward-looking statement.
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Glacier Bancorp, Inc. headquartered in Kalispell, Montana (the "Company"), is a
Montana corporation incorporated in 2004 as a successor corporation to the
Delaware corporation originally incorporated in 1990. The Company is a regional
multi-bank holding company providing commercial banking services from 106
locations in Montana, Idaho, Wyoming, Colorado, Utah and Washington. The Company
offers a wide range of banking products and services, including transaction and
savings deposits, commercial, consumer, and real estate loans, mortgage
origination services, and retail brokerage services. The Company serves
individuals, small to medium-sized businesses, community organizations and
public entities.
3
SUBSIDIARIES
The Company includes the parent holding company and the following eighteen
subsidiaries which consist of eleven bank subsidiaries and seven trust
subsidiaries.
Bank Subsidiaries
Montana Idaho
Glacier Bank ("Glacier") founded in 1955 Mountain West Bank ("Mountain West") founded in 1993
First Security Bank of Missoula ("First Security") founded in 1973 Citizens Community Bank ("Citizens") founded in 1996
Western Security Bank ("Western") founded in 2001
Big Sky Western Bank ("Big Sky") founded in 1990 Wyoming
Valley Bank of Helena ("Valley") founded in 1978 1st Bank ("1st Bank") founded in 1989
First Bank of Montana ("First Bank-MT") founded in 1924 First National Bank & Trust ("First National")
founded in 1912
Colorado
Bank of the San Juans ("San Juans") founded in 1998
Trust Subsidiaries
Glacier Capital Trust II ("Glacier Trust II")
Glacier Capital Trust III ("Glacier Trust III")
Glacier Capital Trust IV ("Glacier Trust IV")
Citizens (ID) Statutory Trust I ("Citizens Trust I")
Bank of the San Juans Bancorporation Trust I ("San Juans Trust I")
First Company Statutory Trust 2001 ("First Co Trust 01")
First Company Statutory Trust 2003 ("First Co Trust 03")
The Company formed or acquired First Co Trust 01, First Co Trust 03, San Juans
Trust I, Glacier Trust IV, Glacier Trust III, Citizens Trust I, and Glacier
Trust II as financing subsidiaries on October 2, 2009, October 2, 2009, December
1, 2008, August 15, 2006, January 31, 2006, April 1, 2005, and March 24, 2004,
respectively. The trusts were formed for the purpose of issuing trust preferred
securities and, in accordance with Financial Accounting Standards Board ("FASB")
Accounting Standards Codification(TM) ("ASC") Topic 810, Consolidation, the
subsidiaries are not consolidated into the Company's financial statements. The
preferred securities entitle the shareholder to receive cumulative cash
distributions from payments on Subordinated Debentures of the Company. For
additional information regarding the Subordinated Debentures, see Note 10 to the
Consolidated Financial Statements in "Item 8 - Financial Statements and
Supplementary Data."
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.
The Company provides full service brokerage services (selling products such as
stocks, bonds, mutual funds, limited partnerships, annuities and other insurance
products) through Raymond James Financial Services and Morgan Stanley Smith
Barney, both non-affiliated companies. The Company shares in the commissions
generated, without devoting significant management and staff time to this
portion of the business.
RECENT AND PENDING ACQUISITIONS
The Company's strategy has been to profitably grow its business through internal
growth and selective acquisitions. The Company continues to look for profitable
expansion opportunities in existing markets and new markets in the Rocky
Mountain states. During the last five years, the Company has completed the
following acquisitions: On October 2, 2009, First Company and its subsidiary,
First National Bank & Trust, was acquired by the Company. On December 1, 2008,
Bank of the San Juans Bancorporation and its subsidiary, Bank of the San Juans
in Durango, Colorado, was acquired by the Company. On April 30, 2007, North Side
State Bank in Rock Springs, Wyoming was acquired and became a part of 1st Bank.
On October 1, 2006, Citizens Development Company ("CDC") and its five bank
subsidiaries located across Montana were acquired by the Company. On September
1, 2006, First National Bank of Morgan and its one branch office in Mountain
Green, Utah was acquired. On October 31, 2005, First State Bank of Thompson
Falls, Montana was acquired and its two branches were merged into First
Security. On May 20, 2005, Zions National Bank branch office in Bonners Ferry,
Idaho was acquired and became a branch of Mountain West. On April 1, 2005,
Citizens Bank Holding Co. and its subsidiary Citizens Community Bank in
Pocatello, Idaho was acquired. On February 28, 2005, First National Bank-West
Co. and its subsidiary, 1st Bank, in Evanston, Wyoming were acquired.
4
FDIC, FHLB AND FRB
The Federal Deposit Insurance Corporation ("FDIC") insures each bank
subsidiary's deposit accounts. All bank subsidiaries, except San Juans are
members of the Federal Home Loan Bank ("FHLB") of Seattle; however, San Juans is
a member of the FHLB of Topeka, which are two of twelve banks that comprise the
FHLB System. All bank subsidiaries, with the exception of Mountain West,
Citizens and San Juans, are members of the Federal Reserve Bank ("FRB").
BANK LOCATIONS AT DECEMBER 31, 2009
The following is a list of the parent company and bank subsidiaries' main office
locations as of December 31, 2009. See "Item 2. Properties."
Glacier Bancorp, Inc. 49 Commons Loop, Kalispell, MT 59901 (406) 756-4200
Glacier 202 Main Street, Kalispell, MT 59901 (406) 756-4200
Mountain West 125 Ironwood Drive, Coeur d'Alene, Idaho 83814 (208) 765-0284
First Security 1704 Dearborn, Missoula, MT 59801 (406) 728-3115
1st Bank 1001 Main Street, Evanston, WY 82930 (307) 789-3864
Western 2812 1st Avenue North, Billings, MT 59101 (406) 371-8258
Big Sky 4150 Valley Commons, Bozeman, MT 59718 (406) 587-2922
Valley 3030 North Montana Avenue, Helena, MT 59601 (406) 495-2400
First National 245 East First Street, Powell, WY 82435 (307) 754-2201
Citizens 280 South Arthur, Pocatello, ID 83204 (208) 232-5373
First Bank-MT 224 West Main, Lewistown, MT 59457 (406) 538-7471
San Juans 144 East Eighth Street, Durango, CO 81301 (970) 247-1818
FINANCIAL INFORMATION ABOUT SEGMENTS
The following abbreviated organizational chart illustrates the various existing
parent and subsidiary relationships at December 31, 2009:
|----------------------------|
| Glacier Bancorp, Inc. |
| (Parent Holding Company) |
|----------------------------|
|
|----------------------------|-|----------------------------|---|----------------------------|-|----------------------------|
| Glacier Bank | | Mountain West Bank | | | First Security Bank | | 1st Bank |
| (MT Community Bank) | | (ID Community Bank) | | | of Missoula | | (WY Community Bank) |
| | | | | | (MT Community Bank) | | |
|----------------------------| |----------------------------| | |----------------------------| |----------------------------|
|
|----------------------------|-|----------------------------|-|-|----------------------------|-|----------------------------|
| Western Security Bank | | Big Sky | | | Valley Bank | | First National Bank |
| (MT Community Bank) | | Western Bank | | | of Helena | | & Trust |
| | | (MT Community Bank) | | | (MT Community Bank) | | (WY Community Bank) |
|----------------------------| |----------------------------| | |----------------------------| |----------------------------|
|
|----------------------------|-|----------------------------|-|-|----------------------------|-|----------------------------|
| Citizens Community Bank | | First Bank of Montana | | | Bank of the | | |
| (ID Community Bank) | | (MT Community Bank) | | | San Juans | | Glacier Capital Trust II |
| | | | | | (CO Community Bank) | | |
|----------------------------| |----------------------------| | |----------------------------| |----------------------------|
|
|----------------------------|-|----------------------------|-|-|----------------------------|-|----------------------------|
| | | | | | Citizens (ID) Statutory | | |
| Glacier Capital Trust II | | Glacier Capital Trust IV | | | Trust I | | San Juan Trust I |
| | | | | | | | |
|----------------------------| |----------------------------| | |----------------------------| |----------------------------|
|
|----------------------------| -------------------- |----------------------------|
| First Company | | First Company |
| Statutory Trust 2001 | | Statutory Trust 2003 |
| | | |
|----------------------------| |----------------------------|
For information regarding the parent company, separate from the subsidiaries,
see "Item 7 - Management's Discussion & Analysis" and Note 16 to the
Consolidated Financial Statements in "Item 8 - Financial Statements and
Supplementary Data."
5
The business of the Company's bank subsidiaries (collectively referred to
hereafter as the "Banks") consists primarily of attracting deposit accounts from
the general public and originating commercial, residential, and consumer loans.
The Banks' principal sources of revenue are interest on loans, loan origination
fees, fees on deposit accounts and interest and dividends on investment
securities. The principal sources of expenses are interest on deposits, FHLB
advances, repurchase agreements, subordinated debentures, and other borrowings,
as well as general and administrative expenses.
BUSINESS SEGMENT RESULTS
The Company defines operating segments and evaluates segment performance
internally based on individual bank charters. Centrally provided services to the
banks are allocated based on estimated usage of those services. If required,
variable interest entities ("VIEs") are consolidated into the operating segment
which invested into such entities. Intersegment revenues primarily represents
interest income on intercompany borrowings, management fees, and data processing
fees received by individual banks or the parent company. Intersegment revenues,
expenses and assets are eliminated in order to report results in accordance with
accounting principles generally accepted in the United States of America.
On February 1, 2009, Morgan merged into 1st Bank resulting in operations being
conducted under the 1st Bank charter. On April 30, 2008, Glacier Bank of
Whitefish ("Whitefish") merged into Glacier with operations conducted under the
Glacier charter. The five bank subsidiaries acquired as a result of the
acquisition of CDC included Citizens State Bank, First Citizens Bank of
Billings, First National Bank of Lewistown, Western Bank of Chinook, and First
Citizens Bank, N.A. On January 26, 2007, Citizens State Bank, First Citizens
Bank of Billings, and First Citizens Bank, N.A. were merged into First Security,
Western, and Glacier, respectively. On June 21, 2007, Western Bank of Chinook
merged into First National Bank of Lewistown and renamed First Bank of Montana.
Prior period activity of the merged banks has been combined and included in the
acquiring bank subsidiaries' historical results.
Glacier Mountain West First Security
-------------------------------- ------------------------------- -------------------------
(Dollars in thousands) 2009 2008 2007 2009 2008 2007 2009 2008 2007
---------------------- ---------- --------- --------- --------- --------- --------- ------- ------- -------
Condensed Income Statements
Net interest income $ 57,139 52,900 40,270 53,302 45,614 41,115 35,788 34,212 32,674
Noninterest income 15,387 13,926 13,473 27,882 20,353 19,861 8,103 6,987 6,844
---------- --------- --------- --------- --------- --------- ------- ------- -------
Total revenues 72,526 66,826 53,743 81,184 65,967 60,976 43,891 41,199 39,518
Provision for loan losses (32,000) (8,825) (1,580) (50,500) (11,150) (2,225) (10,450) (1,750) (1,100)
Core deposit intangible expense (330) (392) (415) (184) (196) (208) (468) (511) (554)
Other noninterest expense (27,325) (27,074) (25,231) (51,525) (41,922) (36,745) (18,897) (17,128) (17,295)
---------- --------- --------- --------- --------- --------- ------- ------- -------
Pretax earnings 12,871 30,535 26,517 (21,025) 12,699 21,798 14,076 21,810 20,569
Income tax (expense) benefit (2,803) (10,910) (9,294) 9,764 (3,628) (7,701) (3,372) (7,282) (7,027)
---------- --------- --------- --------- --------- --------- ------- ------- -------
Net income (loss) 10,068 19,625 17,223 (11,261) 9,071 14,097 10,704 14,528 13,542
========== ========= ========= ========= ========= ========= ======= ======= =======
Average Balance Sheet Data
Total assets $1,249,755 1,165,234 1,032,420 1,219,435 1,105,761 966,955 916,115 862,203 812,554
Total loans 967,239 938,824 797,705 976,132 897,841 774,784 580,401 561,258 549,869
Total deposits 605,928 546,569 610,869 709,834 662,505 693,768 567,649 536,400 553,923
Stockholders' equity 137,188 124,163 111,191 135,932 120,606 109,378 122,153 113,653 107,503
End of Year Balance Sheet Data
Total assets $1,325,039 1,250,774 1,101,112 1,172,331 1,226,869 1,038,294 890,672 954,218 792,882
Loans, net of ALLL 903,276 963,107 863,253 919,901 955,486 836,426 548,471 561,691 548,379
Total deposits 726,403 609,473 579,190 793,006 680,404 666,330 588,858 545,199 533,260
Stockholders' equity 139,799 129,890 115,247 146,720 124,881 114,538 120,044 116,856 109,320
Performance Ratios
Return on average assets 0.81% 1.68% 1.67% -0.92% 0.82% 1.46% 1.17% 1.68% 1.67%
Return on average equity 7.34% 15.81% 15.49% -8.28% 7.52% 12.89% 8.76% 12.78% 12.60%
Efficiency ratio 38.13% 41.10% 47.72% 63.69% 63.85% 60.60% 44.12% 42.81% 45.17%
Regulatory Capital Ratios & Other
Tier I risk-based capital ratio 12.33% 11.31% 10.75% 13.39% 10.62% 10.45% 14.91% 14.29% 13.67%
Total risk-based capital ratio 13.61% 12.57% 11.92% 14.67% 11.88% 11.67% 16.18% 15.55% 14.92%
Leverage capital ratio 10.09% 9.79% 9.62% 10.98% 8.68% 9.01% 11.32% 11.31% 11.11%
Full time equivalent employees 274 283 274 376 393 354 178 178 181
Locations 17 17 16 29 29 30 13 13 13
6
1st Bank Western Big Sky
-------------------------- ------------------------- -------------------------
(Dollars in thousands) 2009 2008 2007 2009 2008 2007 2009 2008 2007
---------------------- -------- ------- ------- ------- ------- ------- ------- ------- -------
Condensed Income Statements
Net interest income $ 24,057 22,695 20,135 21,233 20,713 19,043 15,700 15,595 12,610
Noninterest income 4,628 4,728 4,212 8,631 3,306 8,896 3,564 3,608 3,583
-------- ------- ------- ------- ------- ------- ------- ------- -------
Total revenues 28,685 27,423 24,347 29,864 24,019 27,939 19,264 19,203 16,193
Provision for loan losses (10,800) (2,012) (630) (3,200) (540) -- (9,200) (2,200) (645)
Core deposit intangible expense (652) (712) (688) (571) (623) (675) (23) (23) (23)
Other noninterest expense (14,943) (14,143) (13,015) (16,342) (16,151) (16,050) (8,441) (7,390) (7,220)
-------- ------- ------- ------- ------- ------- ------- ------- -------
Pretax earnings 2,290 10,556 10,014 9,751 6,705 11,214 1,600 9,590 8,305
Income tax (expense) benefit (309) (3,631) (3,482) (2,813) (1,818) (4,129) (121) (3,587) (3,144)
-------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) 1,981 6,925 6,532 6,938 4,887 7,085 1,479 6,003 5,161
======== ======= ======= ======= ======= ======= ======= ======= =======
Average Balance Sheet Data
Total assets $606,649 563,588 510,449 604,020 566,364 545,074 340,827 325,976 286,537
Total loans 312,372 315,007 255,401 344,456 347,075 322,845 287,338 283,512 239,919
Total deposits 414,059 416,173 406,300 410,490 342,793 373,682 178,465 180,860 215,784
Stockholders' equity 97,859 87,948 79,942 87,837 83,915 85,581 45,683 38,220 33,833
End of Year Balance Sheet Data
Total assets $650,072 566,869 551,327 624,077 609,868 508,915 368,571 332,325 315,885
Loans, net of ALLL 286,019 320,370 298,800 314,613 354,199 321,533 260,433 287,394 262,934
Total deposits 421,271 418,231 439,281 504,619 357,729 345,273 184,278 179,834 215,771
Stockholders' equity 101,789 95,200 87,523 85,259 83,843 83,226 51,614 40,384 35,406
Performance Ratios
Return on average assets 0.33% 1.23% 1.28% 1.15% 0.86% 1.30% 0.43% 1.84% 1.80%
Return on average equity 2.02% 7.87% 8.17% 7.90% 5.82% 8.28% 3.24% 15.71% 15.25%
Efficiency ratio 54.37% 54.17% 56.28% 56.63% 69.84% 59.86% 43.94% 38.60% 44.73%
Regulatory Capital Ratios & Other
Tier I risk-based capital ratio 14.99% 12.58% 11.27% 14.67% 13.26% 14.22% 16.06% 11.89% 11.04%
Total risk-based capital ratio 16.26% 13.83% 12.50% 15.93% 14.52% 15.48% 17.34% 13.15% 12.29%
Leverage capital ratio 9.74% 8.08% 7.41% 10.19% 10.71% 11.18% 13.67% 11.62% 11.17%
Full time equivalent employees 141 148 153 161 161 161 83 83 82
Locations 12 12 11 8 8 8 5 5 5
Valley First National Citizens
-------------------------- ------------------- -------------------------
(Dollars in thousands) 2009 2008 2007 2009(1) 2008 2007 2009 2008 2007
---------------------- -------- ------- ------- ------- ---- ---- ------- ------- -------
Condensed Income Statements
Net interest income $ 14,051 12,719 10,641 3,964 -- -- 10,437 7,676 7,532
Noninterest income 5,717 4,673 4,807 4,187 -- -- 4,235 2,855 2,550
-------- ------- ------- ------- --- --- ------- ------- -------
Total revenues 19,768 17,392 15,448 8,151 -- -- 14,672 10,531 10,082
------- -------
Provision for loan losses (1,200) (810) (405) (1,683) -- -- (2,800) (750) (75)
Core deposit intangible expense (42) (42) (42) (144) -- -- (111) (128) (146)
Other noninterest expense (9,229) (8,770) (8,335) (2,011) -- -- (7,992) (6,407) (6,102)
-------- ------- ------- ------- --- --- ------- ------- -------
Pretax earnings 9,297 7,770 6,666 4,313 -- -- 3,769 3,246 3,759
Income tax (expense) benefit (2,740) (2,251) (1,955) (230) -- -- (1,332) (1,092) (1,403)
-------- ------- ------- ------- --- --- ------- ------- -------
Net income (loss) 6,557 5,519 4,711 4,083 -- -- 2,437 2,154 2,356
======== ======= ======= ======= === === ======= ======= =======
Average Balance Sheet Data
Total assets $312,273 302,754 277,569 72,641 -- -- 234,382 201,258 178,994
Total loans 195,007 199,080 190,718 39,416 -- -- 168,675 143,946 134,353
Total deposits 196,506 186,004 189,547 60,832 -- -- 146,780 136,997 137,861
Stockholders' equity 34,246 29,487 25,951 7,870 -- -- 30,814 28,137 26,888
End of Year Balance Sheet Data
Total assets $351,228 298,392 283,155 295,953 -- -- 241,807 217,697 182,769
Loans, net of ALLL 182,916 195,504 194,912 151,379 -- -- 161,182 159,412 131,988
Total deposits 211,935 185,505 187,657 247,256 -- -- 159,763 135,970 139,228
Stockholders' equity 30,585 31,483 27,323 31,364 -- -- 31,969 29,110 27,808
Performance Ratios
Return on average assets 2.10% 1.82% 1.70% 5.62% -- -- 1.04% 1.07% 1.32%
Return on average equity 19.15% 18.72% 18.15% 51.88% -- -- 7.91% 7.66% 8.76%
Efficiency ratio 46.90% 50.67% 54.23% 26.44% -- -- 55.23% 62.05% 61.97%
Regulatory Capital Ratios & Other
Tier I risk-based capital ratio 13.11% 13.65% 11.68% 15.98% -- -- 11.32% 10.84% 11.92%
Total risk-based capital ratio 14.37% 14.91% 12.93% 16.89% -- -- 12.59% 12.10% 13.17%
Leverage capital ratio 8.57% 9.11% 9.03% 10.38% -- -- 9.62% 9.46% 10.10%
Full time equivalent employees 85 83 80 75 -- -- 70 63 61
Locations 6 6 6 3 -- -- 6 5 5
7
First Bank - MT San Juans Parent
-------------------------- ---------------------- -------------------------
(Dollars in thousands) 2009 2008 2007 2009 2008(2) 2007 2009 2008 2007
---------------------- -------- ------- ------- ------- ------- ---- ------- ------- -------
Condensed Income Statements
Net interest income $ 7,900 6,676 6,308 8,021 575 -- (6,265) (6,762) (6,859)
Noninterest income 929 768 736 1,329 85 -- 52,466 83,891 84,025
-------- ------- ------- ------- ------- --- ------- ------- -------
Total revenues 8,829 7,444 7,044 9,350 660 -- 46,201 77,129 77,166
Provision for loan losses (985) (390) (20) (1,800) (53) -- -- -- --
Core deposit intangible expense (358) (405) (451) (233) (19) -- -- -- --
Other noninterest expense (3,189) (3,083) (3,426) (5,435) (397) -- (13,769) (13,424) (13,006)
-------- ------- ------- ------- ------- --- ------- ------- -------
Pretax earnings 4,297 3,566 3,147 1,882 191 -- 32,432 63,705 64,160
Income tax (expense) benefit (1,426) (1,279) (1,395) (551) (75) -- 1,942 1,952 4,443
-------- ------- ------- ------- ------- --- ------- ------- -------
Net income (loss) 2,871 2,287 1,752 1,331 116 -- 34,374 65,657 68,603
======== ======= ======= ======= ======= === ======= ======= =======
Average Balance Sheet Data
Total assets $179,885 152,354 142,401 175,107 12,983 -- 824,527 689,132 619,391
Total loans 119,840 109,706 98,402 149,665 12,172 -- -- -- --
Total deposits 121,770 109,067 107,491 140,528 11,292 -- -- -- --
Stockholders' equity 30,955 28,172 26,557 23,396 1,171 -- 691,922 564,785 496,393
End of Year Balance Sheet Data
Total assets $217,379 154,645 149,483 184,528 165,784 -- 832,916 814,883 660,892
Loans, net of ALLL 114,113 114,177 98,897 145,015 142,114 -- -- -- --
Total deposits 143,552 113,531 113,692 148,474 143,056 -- -- -- --
Stockholders' equity 32,627 29,329 26,941 25,410 21,207 -- 685,890 676,940 528,576
Performance Ratios
Return on average assets 1.60% 1.50% 1.23% 0.76% 0.89% --
Return on average equity 9.27% 8.12% 6.60% 5.69% 9.91% --
Efficiency ratio 40.17% 46.86% 55.04% 60.62% 63.03% --
Regulatory Capital Ratios & Other
Tier I risk-based capital ratio 12.73% 11.70% 10.79% 11.11% 9.26% --
Total risk-based capital ratio 13.99% 12.95% 12.04% 12.37% 10.51% --
Leverage capital ratio 9.19% 10.17% 9.26% 10.33% 9.66% --
Full time equivalent employees 40 37 35 41 31 -- 119 111 99
Locations 3 3 3 3 3 -- 1 -- --
Eliminations Consolidation
--------------------------------- -------------------------------
(Dollars in thousands) 2009 2008 2007 2009 2008 2007
---------------------- ----------- ---------- -------- --------- --------- ---------
Condensed Income Statements
Net interest income $ -- -- -- 245,327 212,613 183,469
Noninterest income (50,584) (84,146) (84,169) 86,474 61,034 64,818
----------- ---------- -------- --------- --------- ---------
Total revenues (50,584) (84,146) (84,169) 331,801 273,647 248,287
Provision for loan losses -- -- -- (124,618) (28,480) (6,680)
Core deposit intangible expense -- -- -- (3,116) (3,051) (3,202)
Other noninterest expense 13,396 13,031 11,710 (165,702) (142,858) (134,715)
----------- ---------- -------- --------- --------- ---------
Pretax earnings (37,188) (71,115) (72,459) 38,365 99,258 103,690
Income tax (expense) benefit -- -- -- (3,991) (33,601) (35,087)
----------- ---------- -------- --------- --------- ---------
Net income (loss) (37,188) (71,115) (72,459) 34,374 65,657 68,603
=========== ========== ======== ========= ========= =========
Average Balance Sheet Data
Total assets $(1,043,687) (918,204) (766,262) 5,691,929 5,029,403 4,606,082
Total loans -- -- (3,669) 4,140,541 3,808,421 3,360,327
Total deposits (59,234) (28,155) (23,470) 3,493,607 3,100,505 3,265,755
Stockholders' equity (753,933) (655,472) (606,824) 691,922 564,785 496,393
End of Year Balance Sheet Data
Total assets $ (962,778) (1,038,354) (767,384) 6,191,795 5,553,970 4,817,330
Loans, net of ALLL -- -- -- 3,987,318 4,053,454 3,557,122
Total deposits (29,263) (106,457) (35,204) 4,100,152 3,262,475 3,184,478
Stockholders' equity (797,180) (702,183) (627,332) 685,890 676,940 528,576
Performance Ratios
Return on average assets 0.60% 1.31% 1.49%
Return on average equity 4.97% 11.63% 13.82%
Efficiency ratio 50.88% 53.32% 55.55%
Regulatory Capital Ratios & Other
Tier I risk-based capital ratio 14.02% 14.30% 12.17%
Total risk-based capital ratio 15.29% 15.55% 13.42%
Leverage capital ratio 11.20% 12.38% 10.48%
Full time equivalent employees 1,643 1,571 1,480
Locations 106 101 97
(1) The average balance sheet data is based on daily averages for the entire
year, with First National being acquired October 2, 2009.
(2) The average balance sheet data is based on daily averages for the entire
year, with San Juans being acquired December 1, 2008.
8
INTERNET ACCESS
Copies of the Company's Annual Report on Form 10-K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934 are available free of charge through the Company's website
(www.glacierbancorp.com) as soon as reasonably practicable after the Company has
filed the material with, or furnished it to, the Securities and Exchange
Commission ("SEC"). Copies can also be obtained by accessing the SEC's website
(www.sec.gov).
MARKET AREA
The Company has 106 locations, of which 9 are loan or administration offices, in
35 counties within 6 states including Montana, Idaho, Wyoming, Colorado, Utah,
and Washington. The Company has 53 locations in Montana. In Idaho there are 30
locations. In Wyoming, there are 13 locations. In Utah, there are 4 locations.
In Washington, there are 3 locations. In Colorado, there are 3 locations.
The market area's economic base primarily focuses on tourism, construction,
manufacturing, service industry, and health care. The tourism industry is highly
influenced by two national parks, several ski resorts, large lakes, and rural
scenic areas. Construction development is a result of the high population growth
that has occurred in the market areas, in particular Idaho and western Montana.
COMPETITION
Based on the FDIC summary of deposits survey as of June 30, 2009, the Company
has approximately 20 percent of the total FDIC insured deposits in the 13
counties that it services in Montana. In Idaho, the Company has approximately 6
percent of the deposits in the 9 counties that it services. In Wyoming, the
Company has 22 percent of the deposits in the 6 counties it services. In
Colorado, the Company has 10 percent of the deposits in the 2 counties it
serves. In Utah, the Company has 3 percent of the deposits in the 3 counties it
services.
There are a large number of depository institutions including savings banks,
commercial banks, and credit unions in the counties in which the Company has
offices. The Banks, like other depository institutions, are operating in a
rapidly changing environment. Non-depository financial service institutions,
primarily in the securities and insurance industries, have become competitors
for retail savings and investment funds. Mortgage banking/brokerage firms are
actively competing for residential mortgage business. In addition to offering
competitive interest rates, the principal methods used by banking institutions
to attract deposits include the offering of a variety of services including
on-line banking and convenient office locations and business hours. The primary
factors in competing for loans are interest rates and rate adjustment
provisions, loan maturities, loan fees, and the quality of service to borrowers
and brokers.
9
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
AVERAGE BALANCE SHEET
The following three-year schedule provides (i) the total dollar amount of
interest and dividend income of the Company for earning assets and the resultant
average yield; (ii) the total dollar amount of interest expense on
interest-bearing liabilities and the resultant average rate; (iii) net interest
and dividend income and interest rate spread; and (iv) net interest margin and
net interest margin tax-equivalent; and (v) return on average assets and return
on average equity.
Year ended 12/31/2009 Year ended 12/31/2008 Year ended 12/31/2007
------------------------------ ------------------------------ ------------------------------
Interest Average Interest Average Interest Average
Average and Yield/ Average and Yield/ Average and Yield/
(Dollars in thousands) Balance Dividends Rate Balance Dividends Rate Balance Dividends Rate
---------------------- ---------- --------- ------- ---------- --------- ------- ---------- ---------- -------
ASSETS:
Residential real estate loans $ 829,348 $ 54,498 6.57% $ 746,135 $ 51,166 6.86% $ 798,841 $ 59,664 7.47%
Commercial loans 2,608,961 151,580 5.81% 2,390,990 165,119 6.91% 1,957,252 157,644 8.05%
Consumer and other loans 702,232 44,844 6.39% 671,296 47,725 7.11% 604,234 48,105 7.96%
---------- -------- ---------- -------- ---------- ----------
Total loans 4,140,541 250,922 6.06% 3,808,421 264,010 6.93% 3,360,327 265,413 7.90%
Tax-exempt investment
securities (1) 445,063 22,196 4.99% 282,884 13,901 4.91% 272,042 13,427 4.94%
Taxable investment securities 707,062 29,376 4.15% 555,955 25,074 4.51% 574,913 25,920 4.51%
---------- -------- ---------- -------- ---------- ----------
Total earning assets 5,292,666 302,494 5.72% 4,647,260 302,985 6.52% 4,207,282 304,760 7.24%
Goodwill and intangibles 158,896 152,822 149,934
Non-earning assets 240,367 229,321 248,866
---------- ---------- ----------
Total assets $5,691,929 $5,029,403 $4,606,082
========== ========== ==========
LIABILITIES:
NOW accounts $ 572,260 $ 2,275 0.40% $ 467,374 $ 3,014 0.64% $ 461,341 $ 4,708 1.02%
Savings accounts 303,794 947 0.31% 272,673 1,865 0.68% 268,175 2,679 1.00%
Money market demand accounts 768,939 8,436 1.10% 760,599 17,234 2.27% 754,995 27,248 3.61%
Certificate accounts 960,403 24,719 2.57% 853,076 32,634 3.83% 1,000,797 46,824 4.68%
Wholesale deposits (2) 133,083 2,052 1.54% 7,704 265 3.44% -- -- 0.00%
Advances from FHLB 473,038 7,952 1.68% 566,933 15,355 2.71% 382,243 18,897 4.94%
Securities sold under
agreements to repurchase
and other borrowed funds 995,006 10,786 1.08% 752,958 20,005 2.66% 412,237 20,935 5.08%
---------- -------- ---------- -------- ---------- ----------
Total interest bearing
liabilities 4,206,523 57,167 1.36% 3,681,317 90,372 2.46% 3,279,788 121,291 3.70%
-------- -------- ----------
Non-interest bearing deposits 755,128 739,079 781,447
Other liabilities 38,356 44,222 48,454
---------- ---------- ----------
Total liabilities 5,000,007 4,464,618 4,109,689
---------- ---------- ----------
STOCKHOLDERS' EQUITY:
Common stock 615 548 532
Paid-in capital 495,340 393,158 361,003
Retained earnings 193,973 171,385 132,352
Accumulated other
comprehensive income
(loss) 1,994 (306) 2,506
---------- ---------- ----------
Total stockholders' equity 691,922 564,785 496,393
Total liabilities and
stockholders' equity $5,691,929 $5,029,403 $4,606,082
========== ========== ==========
NET INTEREST INCOME $245,327 $212,613 $ 183,469
-------- -------- ----------
NET INTEREST SPREAD 4.36% 4.06% 3.54%
NET INTEREST MARGIN 4.64% 4.58% 4.36%
NET INTEREST MARGIN
(TAX-EQUIVALENT) 4.82% 4.70% 4.50%
(1) Without tax effect on non-taxable securities income of $9,827,000,
$6,155,000 and $5,944,000 for the years ended December 31, 2009, 2008, and
2007, respectively.
(2) Wholesale deposits include brokered deposits classified as NOW, money
market demand, and certificate accounts.
10
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.
Years ended December 31, Years ended December 31,
2009 vs. 2008 2008 vs. 2007
Increase (Decrease) Due to: Increase (Decrease) Due to:
----------------------------- -----------------------------
(Dollars in thousands) Volume Rate Net Volume Rate Net
---------------------- ------- -------- -------- ------- -------- --------
INTEREST INCOME:
Residential real estate loans $ 5,706 $ (2,374) $ 3,332 $(3,936) $ (4,562) $ (8,498)
Commercial loans 15,053 (28,592) (13,539) 34,934 (27,459) 7,475
Consumer and other loans 2,199 (5,080) (2,881) 5,339 (5,719) (380)
Investment securities 14,556 (1,959) 12,597 (377) 5 (372)
------- -------- -------- ------- -------- --------
Total interest income 37,514 (38,005) (491) 35,960 (37,735) (1,775)
------- -------- -------- ------- -------- --------
INTEREST EXPENSE:
NOW accounts 676 (1,415) (739) 62 (1,756) (1,694)
Savings accounts 213 (1,130) (917) 45 (860) (815)
Money market demand accounts 188 (8,987) (8,799) 202 (10,215) (10,013)
Certificate accounts 4,106 (12,021) (7,915) (6,911) (7,278) (14,189)
Wholesale deposits 4,310 (2,523) 1,787 360 (96) 264
FHLB advances (2,544) (4,859) (7,403) 9,131 (12,673) (3,542)
Repurchase agreements
and other borrowed funds 6,432 (15,651) (9,219) 17,303 (18,233) (930)
------- -------- -------- ------- -------- --------
Total Interest Expense 13,381 (46,586) (33,205) 20,192 (51,111) (30,919)
------- -------- -------- ------- -------- --------
NET INTEREST INCOME $24,133 $ 8,581 $ 32,714 $15,768 $ 13,376 $ 29,144
======= ======== ======== ======= ======== ========
Net interest income increased $33 million in 2009 over 2008. The increase was
primarily due to increases in loan and investment volumes and decrease in
deposit and borrowing rates which combined outpaced the decrease in loan rates.
For additional information see "Item 7 - Management's Discussion and Analysis".
INVESTMENT ACTIVITIES
It has generally been the Company's policy to maintain a liquid portfolio above
policy limits. The Company's investment securities are generally classified as
available-for-sale and are carried at estimated fair value with unrealized gains
or losses, net of tax, reflected as an adjustment to stockholders' equity. The
Company uses the federal statutory rate of 35 percent in calculating its
tax-equivalent yield. Approximately $467 million of the investment portfolio is
comprised of tax-exempt investments which is an increase of $49 million from the
prior year.
For information about the Company's equity investment in the stock of the FHLB,
see "Sources of Funds - Advances and Other Borrowings".
For additional investment activity information, see "Item 7 - Management's
Discussion & Analysis" and Note 3 to the Consolidated Financial Statements in
"Item 8 - Financial Statements and Supplementary Data".
11
LENDING ACTIVITY
GENERAL
The Banks focus their lending activity primarily on the following types of
loans: 1) first-mortgage, conventional loans secured by residential properties,
particularly single-family, 2) installment lending for consumer purposes (e.g.,
auto, home equity, etc.), and 3) commercial lending that concentrates on
targeted businesses. "Item 7 - Management's Discussion & Analysis" and Note 4 to
the Consolidated Financial Statements in "Item 8 - Financial Statements and
Supplementary Data" provide more information about the loan portfolio.
LOAN PORTFOLIO COMPOSITION
The following table summarizes the Company's loan portfolio:
AT At At At At
12/31/2009 12/31/2008 12/31/2007 12/31/2006 12/31/2005
------------------- ------------------- ------------------- ------------------- -------------------
(Dollars in thousands) AMOUNT PERCENT Amount Percent Amount Percent Amount Percent Amount Percent
---------------------- ---------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- -------
REAL ESTATE LOANS:
Residential $ 746,050 18.71% $ 786,869 19.41% $ 689,238 19.38% $ 758,921 23.97% $ 589,260 24.58%
Held for sale 66,330 1.66% 54,976 1.36% 40,123 1.13% 35,135 1.11% 22,540 0.94%
---------- ----- ---------- ----- ---------- ------ ---------- ------ ---------- ------
Total 812,380 20.37% 841,845 20.77% 729,361 20.51% 794,056 25.08% 611,800 25.52%
========== ====== ========== ====== ========== ====== ========== ====== ========== ======
COMMERCIAL LOANS:
Real estate 1,900,438 47.66% 1,935,341 47.74% 1,617,076 45.46% 1,165,617 36.83% 935,460 39.02%
Other commercial 724,966 18.18% 645,033 15.91% 636,351 17.89% 691,667 21.85% 425,236 17.74%
---------- ----- ---------- ----- ---------- ------ ---------- ------ ---------- ------
Total 2,625,404 65.84% 2,580,374 63.65% 2,253,427 63.35% 1,857,284 58.68% 1,360,696 56.76%
========== ====== ========== ====== ========== ====== ========== ====== ========== ======
CONSUMER AND OTHER LOANS:
Consumer 201,001 5.04% 208,166 5.14% 206,724 5.81% 218,640 6.91% 175,503 7.32%
Home equity 501,920 12.59% 507,831 12.53% 432,217 12.15% 356,477 11.26% 295,992 12.35%
---------- ----- ---------- ----- ---------- ------ ---------- ------ ---------- ------
Total 702,921 17.63% 715,997 17.67% 638,941 17.96% 575,117 18.17% 471,495 19.67%
========== ====== ========== ====== ========== ====== ========== ====== ========== ======
Net deferred loan fees,
premiums and
discounts (10,460) -0.26% (8,023) -0.20% (10,194) -0.29% (11,674) -0.37% (8,149) -0.34%
---------- ----- ---------- ----- ---------- ------ ---------- ------ ---------- ------
LOANS RECEIVABLE, GROSS 4,130,245 103.58% 4,130,193 101.89% 3,611,535 101.53% 3,214,783 101.56% 2,435,842 101.61%
Allowance for loan and
lease losses (142,927) -3.58% (76,739) -1.89% (54,413) -1.53% (49,259) -1.56% (38,655) -1.61%
---------- ----- ---------- ----- ---------- ------ ---------- ------ ---------- ------
LOANS RECEIVABLE, NET $3,987,318 100.00% $4,053,454 100.00% $3,557,122 100.00% $3,165,524 100.00% $2,397,187 100.00%
========== ====== ========== ====== ========== ====== ========== ====== ========== ======
LOAN PORTFOLIO MATURITIES OR REPRICING TERM
The stated maturities or first repricing term (if applicable) for the loan
portfolio at December 31, 2009 was as follows:
Residential Consumer
(Dollars in thousands) Real Estate Commercial and Other Totals
---------------------- ----------- ---------- --------- ---------
Variable rate maturing or repricing in:
One year or less $207,181 939,514 290,003 1,436,698
One to five years 177,185 779,525 49,569 1,006,279
Thereafter 10,932 115,084 2,054 128,070
Fixed rate maturing or repricing in:
One year or less 261,162 281,282 146,013 688,457
One to five years 130,329 328,365 193,475 652,169
Thereafter 25,591 181,634 21,807 229,032
-------- --------- ------- ---------
Totals $812,380 2,625,404 702,921 4,140,705
======== ========= ======= =========
12
RESIDENTIAL REAL ESTATE LENDING
The Company's lending activities consist of the origination of both construction
and permanent loans on residential real estate loans. The Company actively
solicits residential real estate loan applications from real estate brokers,
contractors, existing customers, customer referrals, and walk-ins to their
offices. The Company's lending policies generally limit the maximum
loan-to-value ratio on residential mortgage loans to 80 percent of the lesser of
the appraised value or purchase price or above 80 percent of the loan if insured
by a private mortgage insurance company. The Company also provides interim
construction financing for single-family dwellings. These loans are supported by
a term take out commitment.
CONSUMER LAND OR LOT LOANS
The Company originates land and lot acquisition loans to borrowers who intend to
construct their primary residence on the respective land or lot. These loans are
generally for a term of three to five years and are secured by the developed
land or lot with the loan to value limited to the lesser of 75% of cost or
appraised value.
UNIMPROVED LAND AND LAND DEVELOPMENT LOANS
Where real estate market conditions warrant, the Company makes land acquisition
and development loans on properties intended for residential and commercial use.
These loans are generally made for a term of 18 months to two years and secured
by the developed property with a loan-to-value not to exceed the lesser of 75
percent of cost or 65 percent of the appraised discounted bulk sale value upon
completion of the improvements. The loans are made to borrowers with real estate
development experience and appropriate financial strength. Generally it is
required that a certain percentage of the development be pre-sold or that
construction and term take out commitments are in place prior to funding the
loan.
RESIDENTIAL BUILDER GUIDANCE LINES
The Company provides Builder Guidance Lines that are comprised of pre-sold and
spec-home construction and lot acquisition loans. The spec-home construction and
lot acquisition loans are limited to a set number and maximum amount. Generally
the individual loans will not exceed a one year maturity. The homes under
construction are inspected on a regular basis and advances made on a percentage
of completion basis.
COMMERCIAL REAL ESTATE LOANS
Loans are made to purchase, construct and finance commercial real estate
properties. These loans are generally made to borrowers who own and will occupy
the property. Loans to finance investment or income properties are made, but
require additional equity and a higher debt service coverage margin commensurate
with the specific property and projected income.
CONSUMER LENDING
The majority of consumer loans are secured by real estate, automobiles, or other
assets. The Banks intend to continue making such loans because of their
short-term nature, generally between three months and five years. Moreover,
interest rates on consumer loans are generally higher than on residential
mortgage loans. The Banks also originate second mortgage and home equity loans,
especially to its existing customers in instances where the first and second
mortgage loans are less than 80 percent of the current appraised value of the
property.
13
LOAN PORTFOLIO BY BANK SUBSIDIARY AND REGULATORY CLASSIFICATION
The following tables summarize selected information on the Company's loan
portfolio:
LOANS RECEIVABLE, GROSS BY BANK
December 31,
----------------------
(Dollars in thousands) 2009 2008 $ Change % Change
---------------------- ---------- --------- -------- --------
Glacier $ 942,254 982,098 (39,844) -4%
Mountain West 957,451 971,468 (14,017) -1%
First Security 566,713 573,228 (6,515) -1%
1st Bank 296,913 326,381 (29,468) -9%
Western 323,375 361,261 (37,886) -10%
Big Sky 270,970 293,626 (22,656) -8%
Valley 187,283 199,085 (11,802) -6%
First National 153,058 -- 153,058 n/m
Citizens 166,049 162,133 3,916 2%
First Bank-MT 117,017 116,122 895 1%
San Juans 149,162 144,791 4,371 3%
---------- --------- -------
Total $4,130,245 4,130,193 52 0%
========== ========= =======
LAND, LOT AND OTHER CONSTRUCTION LOANS BY BANK
December 31,
------------------
(Dollars in thousands) 2009 2008 $ Change % Change
---------------------- -------- ------- -------- --------
Glacier $165,734 204,479 (38,745) -19%
Mountain West 217,078 249,916 (32,838) -13%
First Security 71,404 95,960 (24,556) -26%
1st Bank 36,888 41,667 (4,779) -11%
Western 32,045 45,457 (13,412) -30%
Big Sky 71,365 81,869 (10,504) -13%
Valley 14,704 17,918 (3,214) -18%
First National 10,247 -- 10,247 n/m
Citizens 13,263 14,827 (1,564) -11%
First Bank-MT 1,010 4,507 (3,497) -78%
San Juans 39,621 36,793 2,828 8%
-------- ------- --------
Total $673,359 793,393 (120,034) -15%
======== ======= ========
LAND, LOT AND OTHER CONSTRUCTION LOANS AT 12/31/09 BY BANK, BY TYPE
Developed
Consumer Lots for Commercial
Land Land or Unimproved Operative Developed Other
(Dollars in thousands) Development Lot Land Builders Lot Construction
---------------------- ----------- -------- ---------- --------- ---------- ------------
Glacier $ 80,881 33,025 29,850 8,625 13,353 --
Mountain West 55,908 74,914 29,684 31,655 10,664 14,253
First Security 30,569 7,208 26,372 4,525 518 2,212
1st Bank 14,447 12,223 4,448 225 2,513 3,032
Western 16,309 7,823 5,159 587 1,914 253
Big Sky 22,909 18,882 9,925 1,992 8,420 9,237
Valley 2,597 5,867 4,513 159 349 1,219
First National 1,961 2,934 733 250 2,245 2,124
Citizens 2,868 2,633 2,652 506 655 3,949
First Bank-MT -- 65 820 -- -- 125
San Juans 417 26,838 45 -- 3,878 8,443
-------- ------- ------- ------ ------ ------
Total $228,866 192,412 114,201 48,524 44,509 44,847
======== ======= ======= ====== ====== ======
14
RESIDENTIAL CONSTRUCTION LOANS BY BANK, BY TYPE
Custom and
December 31, Owner Pre-Sold
------------------ Occupied and Spec
(Dollars in thousands) 2009 2008 $ Change % Change 12/31/2009 12/31/2009
---------------------- -------- ------- -------- -------- ---------- ----------
Glacier $ 57,183 84,161 (26,978) -32% $ 9,762 47,421
Mountain West 57,437 100,289 (42,852) -43% 23,606 33,831
First Security 19,664 19,910 (246) -1% 9,985 9,679
1st Bank 17,633 30,742 (13,109) -43% 11,010 6,623
Western 2,245 6,993 (4,748) -68% 1,830 415
Big Sky 20,679 28,356 (7,677) -27% 3,169 17,510
Valley 5,170 8,265 (3,095) -37% 4,222 948
First National 2,612 -- 2,612 n/m 1,505 1,107
Citizens 13,211 17,909 (4,698) -26% 6,619 6,592
First Bank-MT 234 1,384 (1,150) -83% 174 60
San Juans 13,811 11,425 2,386 21% 6,753 7,058
-------- ------- ------- ------- -------
Total $209,879 309,434 (99,555) -32% $78,635 131,244
======== ======= ======= ======= =======
SINGLE FAMILY RESIDENTIAL LOANS BY BANK, BY TYPE
December 31, 1st Junior
------------------ Lien Lien
(Dollars in thousands) 2009 2008 $ Change % Change 12/31/2009 12/31/2009
---------------------- -------- ------- -------- -------- ---------- ----------
Glacier $204,789 198,654 6,135 3% $183,647 21,142
Mountain West 278,158 274,119 4,039 1% 236,962 41,196
First Security 82,141 79,107 3,034 4% 68,266 13,875
1st Bank 65,555 62,954 2,601 4% 60,566 4,989
Western 50,502 56,789 (6,287) -11% 48,099 2,403
Big Sky 33,308 29,493 3,815 13% 29,482 3,826
Valley 66,644 70,935 (4,291) -6% 54,255 12,389
First National 19,239 -- 19,239 n/m 16,150 3,089
Citizens 20,937 18,903 2,034 11% 18,695 2,242
First Bank-MT 10,003 10,341 (338) -3% 8,536 1,467
San Juans 22,811 23,605 (794) -3% 21,305 1,506
-------- ------- ------ -------- -------
Total $854,087 824,900 29,187 4% $745,963 108,124
======== ======= ====== ======== =======
COMMERCIAL REAL ESTATE LOANS BY BANK, BY TYPE
December 31, Owner Non-Owner
---------------------- Occupied Occupied
(Dollars in thousands) 2009 2008 $ Change % Change 12/31/2009 12/31/2009
---------------------- ---------- --------- -------- -------- ---------- ----------
Glacier $ 232,552 223,449 9,103 4% $117,243 115,309
Mountain West 230,383 180,215 50,168 28% 164,625 65,758
First Security 224,425 192,352 32,073 17% 150,733 73,692
1st Bank 64,008 67,249 (3,241) -5% 54,852 9,156
Western 107,173 98,290 8,883 9% 54,113 53,060
Big Sky 82,303 80,053 2,250 3% 50,699 31,604
Valley 48,144 46,850 1,294 3% 31,353 16,791
First National 26,703 -- 26,703 n/m 18,329 8,374
Citizens 55,660 53,813 1,847 3% 42,786 12,874
First Bank-MT 18,827 17,397 1,430 8% 12,597 6,230
San Juans 47,838 50,925 (3,087) -6% 27,306 20,532
---------- --------- ------- -------- -------
Total $1,138,016 1,010,593 127,423 13% $724,636 413,380
========== ========= ======= ======== =======
15
CONSUMER AND OTHER LOANS BY BANK, BY TYPE
December 31, Home Equity Other
------------------- Line of Credit Consumer
(Dollars in thousands) 2009 2008 $ Change % Change 12/31/2009 12/31/2009
---------------------- -------- -------- -------- -------- -------------- ----------
Glacier $162,723 170,713 (7,990) -5% $145,377 17,346
Mountain West 71,702 72,584 (882) -1% 61,896 9,806
First Security 78,345 85,646 (7,301) -9% 51,110 27,235
1st Bank 46,455 50,723 (4,268) -8% 17,575 28,880
Western 48,946 55,714 (6,768) -12% 33,679 15,267
Big Sky 28,903 33,147 (4,244) -13% 25,569 3,334
Valley 24,625 25,802 (1,177) -5% 15,938 8,687
First National 27,320 -- 27,320 n/m 16,803 10,517
Citizens 29,253 28,633 620 2% 22,872 6,381
First Bank-MT 7,650 7,251 399 6% 3,777 3,873
San Juans 14,189 12,204 1,985 16% 12,439 1,750
-------- -------- ------ -------- -------
Total $540,111 542,417 (2,306) 0% $407,035 133,076
======== ======== ====== ======== =======
n/m - not measurable
CREDIT RISK MANAGEMENT
The Company's credit risk management includes stringent credit policies,
concentration limits, individual loan approval limits and committee approval of
larger loan requests. Management practices also include regular internal and
external credit examinations and an independent stress testing of the land
acquisition/development and commercial real estate portfolios. On a quarterly
basis, both the Banks and parent company management review loans experiencing
deterioration of credit quality, including a review of the acquisition and
development loans, and spec/pre-sold home loans. A review of loans by
concentration limits is performed on a quarterly basis. Federal and state
regulatory safety and soundness examinations are conducted annually at Glacier,
Mountain West, First Security, 1st Bank and Western and every eighteen months
for all other bank subsidiaries.
LOAN APPROVAL LIMITS
Individual loan approval limits have been established for each lender based on
the loan types and experience of the individual. Each bank subsidiary has an
Officer Loan Committee consisting of senior lenders and members of senior
management. The Officer Loan Committee for each bank has approval authority up
to its respective bank's Board of Directors loan approval authority. The Banks'
Board of Directors approval authority is $1,000,000 at First National and
$2,000,000 at all other banks. Loans over these limits up to $10,000,000 are
subject to approval by the Executive Loan Committee consisting of the Banks'
senior loan officers and the Company's Credit Administrator. Loans greater than
$10,000,000 are subject to approval by the Company's Board of Directors. Under
banking laws, loans to one borrower and related entities are limited to a set
percentage of the unimpaired capital and surplus of each bank subsidiary.
LOAN PURCHASES AND SALES
Fixed-rate, long-term mortgage loans are generally sold in the secondary market.
The Company is active in the secondary market, primarily through the origination
of conventional, FHA and VA residential mortgages. The sale of loans in the
secondary mortgage market reduces the Company's risk of holding long-term,
fixed-rate loans during periods of rising rates. The sale of loans also allows
the Company to make loans during periods when funds are not otherwise available
for lending purposes. In connection with conventional loan sales, the Company
typically sells a majority of mortgage loans originated with servicing released.
The Company has also been very active in generating commercial SBA loans, and
other commercial loans, with a portion of those loans sold to investors. As of
December 31, 2009, loans serviced for others aggregated approximately $176
million. The Company has not originated any type of subprime mortgages, either
for the loan portfolio or for sale to investors. In addition, the Company has
not purchased securities that were collateralized with subprime mortgages. The
Company has not purchased loans outside the Company or originate loans outside
the existing geographic market area.
LOAN ORIGINATION AND OTHER FEES
In addition to interest earned on loans, the Company receives fees for
originating loans. Loan fees generally are a percentage of the principal amount
of the loan and are charged to the borrower, and are normally deducted from the
proceeds of the loan. Loan origination fees are generally 1.0 percent to 1.5
percent on residential mortgages and .5 percent to 1.5 percent on commercial
loans. Consumer loans require a flat fee as well as a minimum interest amount.
The Company also receives other fees and charges relating to existing loans,
which include charges and fees collected in connection with loan modifications.
16
NON-PERFORMING LOANS AND REAL ESTATE OWNED
Loans are designated non-accrual and the accrual of interest is discontinued
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 ninety days or more unless the loan is in process of
collection and well-secured by collateral the fair value of which is sufficient
to pay off the debt in full. When a loan is placed on non-accrual status,
interest previously accrued but not collected is reversed against current period
interest income. Subsequent payments are applied to the outstanding principal
balance if doubt remains as to the ultimate collectability of the loan. Interest
accruals are resumed on such loans only when they are brought fully current with
respect to interest and principal and when, in the judgment of management, the
loans are estimated to be fully collectible as to both principal and interest.
The following tables set forth information regarding non-performing assets at
the dates indicated, including breakouts by regulatory and bank subsidiary
classification:
AT At At At At
(Dollars in thousands) 12/31/2009 12/31/2008 12/31/2007 12/31/2006 12/31/2005
---------------------- ---------- ---------- ---------- ---------- ----------
NON-ACCRUAL LOANS:
Residential real estate $ 20,093 $ 3,575 $ 934 $1,806 $ 726
Commercial 168,328 58,454 7,192 3,721 4,045
Consumer and other 9,860 2,272 434 538 481
-------- ------- ------- ------ -------
Total 198,281 64,301 8,560 6,065 5,252
======== ======= ======= ====== =======
ACCRUING LOANS 90 DAYS OR MORE OVERDUE:
Residential real estate 1,965 4,103 840 554 1,659
Commercial 1,311 2,897 1,216 638 2,199
Consumer and other 2,261 1,613 629 153 647
-------- ------- ------- ------ -------
Total 5,537 8,613 2,685 1,345 4,505
======== ======= ======= ====== =======
REAL ESTATE AND OTHER ASSETS OWNED 57,320 11,539 2,043 1,484 332
Total non-performing loans and real
estate and other assets owned 261,138 84,453 13,288 8,894 10,089
======== ======= ======= ====== =======
As a percentage of total bank assets 4.13% 1.46% 0.27% 0.19% 0.26%
-------- ------- ------- ------ -------
Interest income (1) $ 11,730 $ 4,434 $ 683 $ 462 $ 359
-------- ------- ------- ------ -------
(1) Amount of interest that would have been recorded on loans accounted for on
a non-accrual basis as of the end of each period if such loans had been
current for the entire period.
17
Non-Performing Assets,
Net of Gov't.
Guarantees by Loan Type
----------------------- Non- Accruing Other
December 31, Accruing Loans 90 Real Estate
----------------------- Loans Days or More Owned
(Dollars in thousands) 2009 2008 12/31/2009 12/31/2009 12/31/2009
---------------------- -------- ------ ---------- ------------ -----------
Custom and owner occupied
construction $ 3,281 451 2,499 -- 782
Pre-sold and spec construction 29,580 21,903 20,849 420 8,311
Land development 88,488 23,597 70,277 18,211
Consumer land or lots 10,120 1,511 6,161 54 3,905
Unimproved land 32,453 8,920 20,303 135 12,015
Developed lots for operative
builders 11,565 5,567 6,350 114 5,101
Commercial lots 909 280 909 -- --
Other construction -- 2,668 -- -- --
Commercial real estate 32,300 3,391 29,859 144 2,297
Commercial and industrial 12,271 6,983 11,669 565 37
1-4 family 30,868 6,666 22,596 2,750 5,522
Home equity lines of credit 6,234 1,807 4,711 1,183 340
Consumer 1,042 602 476 172 394
Other 2,027 107 1,622 -- 405
-------- ------ ------- ------ ------
Total $261,138 84,453 198,281 5,537 57,320
======== ====== ======= ====== ======
Accruing 30 - 89 Days Delinquent
Loans and Non-Performing Assets,
Net of Gov't. Guarantees by Bank
-------------------------------- Accruing Non-Accrual and Other
December 31, 30-89 Days Accruing Loans 90 Real Estate
-------------------------------- Delinquent Days or More Owned
(Dollars in thousands) 2009 2008 12/31/2009 12/31/2009 12/31/2009
---------------------- -------- ------- ---------- ----------------- -----------
Glacier $ 97,666 41,691 18,677 72,157 6,832
Mountain West 109,187 41,415 32,506 62,855 13,826
First Security 59,351 18,793 14,934 31,665 12,752
1st Bank 21,117 14,355 4,210 7,673 9,234
Western 9,315 3,364 1,796 3,295 4,224
Big Sky 31,711 10,978 5,280 17,908 8,523
Valley 2,542 2,855 1,783 679 80
First National 9,290 -- 5,744 3,407 139
Citizens 5,340 5,080 1,910 1,873 1,557
First Bank - MT 800 563 608 39 153
San Juans 2,310 146 43 2,267 --
-------- ------- ------ ------- ------
Total $348,629 139,240 87,491 203,818 57,320
======== ======= ====== ======= ======
Non-performing assets as a percentage of the Bank's total assets at December 31,
2009 were at 4.13 percent, up from 1.46 percent as of December 31, 2008. The
allowance for loan and lease losses ("ALLL" or "allowance") was 55 percent of
non-performing assets at December 31, 2009, down from 91 percent for the prior
year end. The Company increased the provision for loan loss from $28.5 million
in 2008 to $124.6 million in 2009 resulting in a significant increase in the
ALLL. Such increase was outpaced by the increase in non-performing assets,
resulting in a decrease in the ALLL as a percentage of non-performing assets.
Most of the Company's non-performing assets are secured by real estate and,
based on the most current information available to management, including updated
appraisals 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. 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.
18
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 and is designated as
non-accrual, all payments are applied to principal under the cost recovery
method. When the ultimate collectability of the total principal on an impaired
loan is not in doubt, contractual interest is generally credited to interest
income when received under the cash basis method. Total interest income
recognized for impaired loans under the cash basis for the years ended December
31, 2009 and 2008 was not significant. Impaired loans, net of government
guaranteed amounts, were $218.7 million and $79.9 million as of December 31,
2009 and 2008, respectively. The ALLL includes valuation allowances of $19.8
million and $8.0 million specific to impaired loans as of December 31, 2009 and
2008, respectively. The Company's troubled debt restructuring loans are included
in the impaired loans amount. As of December 31, 2009, the Company had troubled
debt restructuring loans of $64.6 million, of which there were $1.2 million of
additional outstanding commitments.
The combined total of lot acquisition loans to borrowers who intend to construct
a primary residence on the lot, and other construction and land acquisition and
development loans is $883 million and represents 21.4 percent of the total loans
as of December 31, 2009. At December 31, 2008, the comparable total was $1.103
billion, or 26.7 percent of total loans. Outstanding balances are centered in
Western Montana, and Northern Idaho as well as Boise, Ketchum and Sun Valley
Idaho.
Property acquired by foreclosure or deed-in-lieu of foreclosure is carried at
the lower of fair value at acquisition date or current estimated fair value,
less selling costs. Costs, excluding interest, relating to the improvement of
property are capitalized, whereas those relating to holding the property are
charged to expense. Fair value is determined as the amount that could be
reasonably expected in a current sale (other than a forced or liquidation sale)
between a willing buyer and a willing seller. If the fair value of the asset
minus the estimated cost to sell is less than the cost of the property, a loss
is recognized in other expenses and the asset carrying value is reduced. Any
gain or loss on disposition of real estate owned is recorded in other income or
other expense. The following table sets forth the changes in real estate and
other assets owned for the years ended December 31, 2009 and 2008:
Years ended December 31,
------------------------
(Dollars in thousands) 2009 2008
---------------------- -------- ------
Balance at beginning of period $ 11,539 2,043
Additions 71,967 16,661
Capital improvments 2,403 188
Sales and write-downs (28,589) (7,353)
-------- ------
Balance at end of period $ 57,320 11,539
======== ======
ALLOWANCE FOR LOAN AND LEASE LOSSES
Determining the adequacy of the ALLL involves a high degree of judgment and is
inevitably imprecise as the risk of loss is difficult to quantify. The ALLL
methodology is designed to reasonably estimate the probable loan and lease
losses within each bank subsidiary's loan and lease portfolios. Accordingly, the
ALLL is maintained within a range of estimated losses. The determination of the
ALLL and the related provision for loan 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 community bank subsidiaries operate,
changes in collateral values, delinquencies, non-performing assets and net
charge-offs. Although the Company and the Banks continue to actively monitor
economic trends, a softening of economic conditions combined with declines in
the values of real estate that collateralize most of the Company's loan and
lease portfolios may adversely affect the credit risk and potential for loss to
the Company.
The ALLL evaluation is well documented and approved by each bank subsidiary's
Board of Directors and reviewed by the parent company'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
company's Board of Directors, independent credit reviewer and state and federal
bank regulatory agencies.
At the end of each quarter, each of the community bank subsidiaries analyzes its
loan and lease portfolio and maintain an ALLL at a level that is appropriate and
determined in accordance with accounting principles generally accepted in the
United States of America. The ALLL balance covers estimated credit losses on
individually evaluated loans, including those which are determined to be
impaired, as well as estimated credit losses inherent in the remainder of the
loan and lease portfolios. Each of the Bank's ALLL is considered adequate to
absorb losses from any segment of its loan and lease portfolio.
19
The Company is committed to a conservative management of the credit risk within
the loan and lease portfolios, including the early recognition of problem loans.
The Company's credit risk management includes stringent credit policies,
individual loan approval limits, limits on concentrations of credit, and
committee approval of larger loan requests. Management practices also include
regular internal and external credit examinations, identification and review of
individual loans and leases experiencing deterioration of credit quality,
procedures for the collection of non-performing assets, quarterly monitoring of
the loan and lease portfolios, semi-annual review of loans by industry, and
periodic stress testing of the loans secured by real estate.
The Company's model of eleven wholly-owned, independent community banks, each
with its own loan committee, chief credit officer and Board of Directors,
provides substantial local oversight to the lending and credit management
function. Unlike a traditional, single-bank holding company, the Company's
decentralized business model affords multiple reviews of larger loans before
credit is extended, a significant benefit in mitigating and managing the
Company's credit risk. The geographic dispersion of the market areas in which
the Company and the community bank subsidiaries operate further mitigates the
risk of credit loss. While this process is intended to limit credit exposure,
there can be no assurance that problem credits will not arise and loan losses
incurred, particularly in periods of rapid economic downturns.
The primary responsibility for credit risk assessment and identification of
problem loans rests with the loan officer of the account. This continuous
process, utilizing each of the Banks' internal credit risk rating process, is
necessary to support management's evaluation of the ALLL adequacy. An
independent loan review function verifying credit risk ratings evaluates the
loan officer and management's evaluation of the loan portfolio credit quality.
The loan review function also assesses the evaluation process and provides an
independent analysis of the adequacy of the ALLL.
The Company considers the ALLL balance of $142.9 million adequate to cover
inherent losses in the loan and lease portfolios as of December 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 loan losses.
See additional risk factors in Part I - Item 1A - Risk Factors.
LOAN LOSS EXPERIENCE
The following tables set forth information regarding the Banks' loan loss
experience for the periods indicated:
Years ended December 31,
--------------------------------------------
(Dollars in thousands) 2009 2008 2007 2006 2005
---------------------- -------- ------ ------ ------ ------
BALANCE AT BEGINNING OF PERIOD $ 76,739 54,413 49,259 38,655 26,492
CHARGE-OFFS:
Residential real estate (18,854) (3,233) (306) (14) (115)
Commercial loans (35,077) (4,957) (2,367) (1,187) (744)
Consumer and other loans (6,965) (1,649) (714) (448) (539)
-------- ------ ------ ------ ------
Total charge offs (60,896) (9,839) (3,387) (1,649) (1,398)
-------- ------ ------ ------ ------
RECOVERIES:
Residential real estate 423 23 208 341 82
Commercial loans 1,636 716 656 331 414
Consumer and other loans 407 321 358 298 415
-------- ------ ------ ------ ------
Total recoveries 2,466 1,060 1,222 970 911
-------- ------ ------ ------ ------
CHARGE-OFFS, NET OF RECOVERIES (58,430) (8,779) (2,165) (679) (487)
Acquisitions (1) -- 2,625 639 6,091 6,627
PROVISION FOR LOAN LOSSES 124,618 28,480 6,680 5,192 6,023
-------- ------ ------ ------ ------
BALANCE AT END OF PERIOD $142,927 76,739 54,413 49,259 38,655
======== ====== ====== ====== ======
Ratio of net charge-offs to average
loans outstanding during the period 1.41% 0.23% 0.06% 0.02% 0.02%
Allowance for loan and lease losses as a
percentage of total loan and leases 3.46% 1.86% 1.51% 1.53% 1.59%
(1) Acquisition of San Juans in 2008, North Side in 2007, CDC and Morgan in
2006, First State Bank, Citizens and 1st Bank in 2005
20
Allowance for Loan
and Lease Losses Provision
------------------ Provision for Year ALLL
December 31, for Year Ended 12/31/09 as a Percent
------------------ Ended Over Net of Loans
(Dollars in thousands) 2009 2008 12/31/2009 Charge-Offs 12/31/2009
---------------------- -------- ------ ---------- -------------- ------------
Glacier $ 38,978 18,990 32,000 2.7 4.14%
Mountain West 37,551 15,982 50,500 1.7 3.92%
First Security 18,242 11,537 10,450 2.8 3.22%
1st Bank 10,895 6,012 10,800 1.8 3.67%
Western 8,762 7,062 3,200 2.1 2.71%
Big Sky 10,536 6,232 9,200 1.9 3.89%
Valley 4,367 3,581 1,200 2.9 2.33%
First National 1,679 -- 1,683 420.8 1.10%
Citizens 4,865 2,721 2,800 4.3 2.93%
First Bank - MT 2,904 1,945 985 37.9 2.48%
San Juans 4,148 2,677 1,800 5.5 2.78%
-------- ------ -------
Total $142,927 76,739 124,618 2.1 3.46%
======== ====== =======
Net Charge-Offs,
Year-to-Date Period Ending
--------------------------
Year Ended December 31,
-------------------------- Charge-Offs Recoveries
(Dollars in thousands) 2009 2008 12/31/2009 12/31/2009
---------------------- ------- ----- ----------- ----------
Glacier $12,012 1,121 12,117 105
Mountain West 28,931 5,557 29,766 835
First Security 3,745 425 3,931 186
1st Bank 5,917 347 6,215 298
Western 1,500 282 1,896 396
Big Sky 4,896 600 5,433 537
Valley 414 127 457 43
First National 4 -- 4 --
Citizens 656 302 683 27
First Bank-MT 26 17 57 31
San Juans 329 1 337 8
------- ----- ------ -----
Total $58,430 8,779 60,896 2,466
======= ===== ====== =====
ALLOCATION OF THE ALLOWANCE FOR LOAN AND LEASE LOSSES
2009 2008 2007
-------------------------- -------------------------- --------------------------
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
---------------------- ------------ ----------- ------------ ----------- ------------ -----------
Residential real estate $ 13,496 19.6% 7,233 20.3% 4,755 20.2%
Commercial real estate 66,791 45.9% 35,305 46.8% 23,010 44.6%
Other commercial 39,558 17.5% 21,590 15.6% 17,453 17.6%
Consumer and other loans 23,082 17.0% 12,611 17.3% 9,195 17.6%
-------- ----- ------ ----- ------ -----
Totals $142,927 100.0% 76,739 100.0% 54,413 100.0%
======== ===== ====== ====== ====== =====
2006 2005
-------------------------- --------------------------
Allowance Percent Allowance Percent
for Loan and of Loans in for Loan and of Loans in
(Dollars in thousands) Lease Losses Category Lease Losses Category
---------------------- ------------ ----------- ------------ -----------
Residential real estate 5,421 24.6% 4,318 25.0%
Commercial real estate 16,741 36.1% 14,370 38.3%
Other commercial 18,361 21.5% 12,566 17.4%
Consumer and other loans 8,736 17.8% 7,401 19.3%
------ ----- ----- -----
Totals 49,259 100.0% 38,655 100.0%
====== ===== ====== =====
21
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. The ALLL has increased $66.2 million, or 86 percent, from a year ago.
The ALLL of $142.9 million is 3.46 percent of December 31, 2009 total loans
outstanding, up from 1.86 percent at prior year end. The provision for loan
losses expense was $124.6 million, an increase of $96.1 million from 2008. Net
loans and lease charge-offs were $58.4 million, or 1.41 percent of average loans
and leases in 2009, compared to net charge-offs of $8.8 million, or 0.23 percent
of average loans and leases in 2008. Each of the Banks' charge-off policy is
consistent with bank regulatory standards. Consumer loans are generally charged
off when the loan becomes over 120 days delinquent. Loan portfolio growth,
composition, average loan size, credit quality considerations, and other
environmental factors will continue to determine the level of additional
provision expense.
For additional information regarding the ALLL, its relation to the provision for
loan losses and risk related to asset quality, see Note 4 to the Consolidated
Financial Statements in "Item 8 - Financial Statements and Supplementary Data."
SOURCES OF FUNDS
GENERAL
Deposits obtained through the Banks have traditionally been the principal source
of funds for use in lending and other business purposes. Currently, the Banks
have a number of different deposit programs designed to attract both short-term
and long-term deposits from the general public by providing a wide selection of
accounts and rates. These programs include regular statement savings,
interest-bearing checking, money market deposit accounts, and fixed rate
certificates of deposit with maturities ranging form three months to five years,
negotiated-rate jumbo certificates, non-interest demand accounts, and individual
retirement accounts. In addition, the Banks obtain wholesale deposits through
various programs including the Certificate of Deposit Account Registry System
("CDARS").
The Banks also obtain funds from loan repayments, advances from the FHLB,
borrowings through the FRB, borrowings from the U.S. Treasury Tax and Loan
funds, repurchase agreements, and loan sales. Loan repayments are a relatively
stable source of funds, while interest bearing deposit inflows and outflows are
significantly influenced by general interest rate levels and market conditions.
Borrowings and advances may be used on a short-term basis to compensate for
reductions in normal sources of funds such as deposit inflows at less than
projected levels. They also may be used on a long-term basis to support expanded
activities and to match maturities of longer-term assets.
DEPOSITS
Deposits are obtained primarily from individual and business residents of the
Banks' market area. The Banks issue negotiated-rate certificate of deposits
accounts and have paid a limited amount of fees to brokers to obtain deposits.
The following table illustrates the amounts outstanding for deposits $100,000
and greater, according to the time remaining to maturity, of which $224 million
consists of CDARS deposits.
Certificate Demand
(Dollars in thousands) of Deposits Deposits Totals
---------------------- ----------- --------- ---------
Within three months............. $231,811 1,586,604 1,818,415
Three months to six months...... 144,914 -- 144,914
Seven months to twelve months... 260,038 -- 260,038
Over twelve months.............. 92,383 -- 92,383
-------- --------- ---------
Totals $729,146 1,586,604 2,315,750
======== ========= =========
For additional deposit information, see "Item 7 - Management's Discussion &
Analysis" and Note 7 to the Consolidated Financial Statements in "Item 8 -
Financial Statements and Supplementary Data".
22
ADVANCES AND OTHER BORROWINGS
As members of the FHLB, the Banks may borrow from such entity on the security of
FHLB stock, which the Banks are required to own as a member. The borrowings are
collateralized by eligible categories of loans and investment securities
(principally, securities which are obligations of, or guaranteed by, the United
States and its agencies), provided certain standards related to
credit-worthiness have been met. Advances are made pursuant to several different
credit programs, each of which has its own interest rate and range of
maturities. Depending on the program, limitations on the amount of advances are
based either on a fixed percentage of an institution's total assets or on the
FHLB's assessment of the institution's credit-worthiness. FHLB advances have
been used from time to time to meet seasonal and other withdrawals of deposits
and to expand lending by matching a portion of the estimated amortization and
prepayments of retained fixed rate mortgages. All bank subsidiaries, except San
Juans, are members of the FHLB of Seattle; however, San Juans is a member of the
FHLB of Topeka.
The Banks also borrow funds from the FRB and from the U.S. Treasury Tax and Loan
program. Both programs require pledging of certain loans or investment
securities of the Banks and are generally short term obligations.
From time to time, primarily as a short-term financing arrangement for
investment or liquidity purposes, the Banks have made use of repurchase
agreements. This process involves the "selling" of one or more of the securities
in the Banks' portfolio and by entering into an agreement to "repurchase" that
same security at an agreed upon later date. A rate of interest is paid for the
subject period of time. In addition, although the Banks have offered retail
repurchase agreements to its retail customers, the Government Securities Act of
1986 imposed confirmation and other requirements which generally made it
impractical for financial institutions to offer such investments on a broad
basis. Through policies adopted by each of the bank's Board of Directors, the
Banks enter into repurchase agreements with local municipalities, and certain
customers, and have adopted procedures designed to ensure proper transfer of
title and safekeeping of the underlying securities.
The following chart illustrates the average balances and the maximum outstanding
month-end balances for FHLB advances, repurchase agreements, U.S. Treasury Tax
and Loan borrowings, and FRB borrowings:
Years ended December 31,
------------------------------
(Dollars in thousands) 2009 2008 2007
---------------------- ---------- ------- -------
FHLB advances:
Amount outstanding at end of period ...... $ 790,367 338,456 538,949
Average balance .......................... $ 473,038 566,933 382,243
Maximum outstanding at any month-end ..... $ 790,367 822,107 538,949
Weighted average interest rate ........... 1.68% 2.71% 4.94%
Repurchase agreements:
Amount outstanding at end of period ...... $ 212,506 188,363 178,041
Average balance .......................... $ 204,503 188,952 171,290
Maximum outstanding at any month-end ..... $ 234,914 196,461 193,421
Weighted average interest rate ........... 0.98% 2.02% 4.35%
U.S. Treasury Tax and Loan:
Amount outstanding at end of period ...... $ 5,136 6,067 221,409
Average balance .......................... $ 3,686 165,690 120,188
Maximum outstanding at any month-end ..... $ 5,136 385,246 244,012
Weighted average interest rate ........... 0.00% 2.28% 5.03%
Federal Reserve Bank discount window:
Amount outstanding at end of period ...... $ 225,000 914,000 --
Average balance .......................... $ 658,262 277,611 --
Maximum outstanding at any month-end ..... $1,005,000 928,000 --
Weighted average interest rate ........... 0.26% 1.76% --
For additional information concerning the Company's borrowings and repurchase
agreements, see Notes 8 and 9 to the Consolidated Financial Statements in "Item
8 - Financial Statements and Supplementary Data".
23
SUBORDINATED DEBENTURES
In addition to funds obtained in the ordinary course of business, the Company
formed Glacier Trust II, Glacier Trust III, and Glacier Trust IV as financing
subsidiaries and obtained Citizens Trust I in connection with the acquisition of
Citizens on April 1, 2005, San Juans Trust I in connection with the acquisition
of San Juans on December 1, 2008, and First Co Trust 01 and First Co Trust 03 in
connection with the acquisition of First National on October 2, 2009. The trusts
issued preferred securities that entitle the shareholder to receive cumulative
cash distributions from payments thereon. The Subordinated Debentures
outstanding as of December 31, 2009 are $124,988,000, including fair value
adjustments from acquisitions. For additional information regarding the
subordinated debentures, see Note 10 to the Consolidated Financial Statements
"Item 8 - Financial Statements and Supplementary Data".
EMPLOYEES
As of December 31, 2009, the Company employed 1,739 persons, 1,497 of whom were
full time, none of whom were represented by a collective bargaining group. The
Company provides its employees with a comprehensive benefit program, including
medical insurance, dental plan, life and accident insurance, long-term
disability coverage, sick leave, profit sharing plan, savings plan and employee
stock options. The Company considers its employee relations to be excellent. See
Note 13 in the Consolidated Financial Statements in "Item 8 - Financial
Statements and Supplementary Data" for detailed information regarding employee
benefit plans and eligibility.
SUPERVISION AND REGULATION
INTRODUCTION
The following discussion provides an overview of certain elements of the
extensive regulatory framework applicable to the Company and the Banks. This
regulatory framework is primarily designed for the protection of depositors,
federal deposit insurance funds and the banking system as a whole, rather than
specifically for the protection of shareholders. Due to the breadth and growth
of this regulatory framework, the costs of compliance continue to increase in
order to monitor and satisfy these requirements.
To the extent that this section describes statutory and regulatory provisions,
it is qualified by reference to those provisions. These statutes and
regulations, as well as related policies, are subject to change by Congress,
state legislatures and federal and state regulators. Changes in statutes,
regulations or regulatory policies applicable to the Company, including the
interpretation or implementation thereof, could have a material effect on the
Company's business or operations. Recently, in light of the recent financial
crisis, numerous proposals to modify or expand banking regulation have surfaced.
Based on past history, if any are approved, they will add to the complexity and
cost of the Company's business.
BANK HOLDING COMPANY REGULATION
General. The Company is a bank holding company as defined in the Bank Holding
Company Act of 1956, as amended ("BHCA"), due to its ownership of the bank
subsidiaries listed below. Glacier, First Security, Western, Big Sky, Valley,
and First Bank-MT are Montana state-chartered banks and are members of the
Federal Reserve System; Mountain West and Citizens are Idaho state-chartered
banks; 1st Bank is a Wyoming state-chartered bank and is a member of the Federal
Reserve System; First National is a nationally chartered bank and is a member of
the Federal Reserve System; and San Juans is a Colorado state-chartered bank.
The deposits of the Banks are insured by the FDIC.
As a bank holding company, the Company is subject to regulation, supervision and
examination by the Federal Reserve. In general, the BHCA limits the business of
bank holding companies to owning or controlling banks and engaging in other
activities closely related to banking. The Company must also file reports with
and provide additional information to the Federal Reserve. Under the Financial
Services Modernization Act of 1999, a bank holding company may apply to the
Federal Reserve to become a financial holding company, and thereby engage
(directly or through a subsidiary) in certain expanded activities deemed
financial in nature, such as securities brokerage and insurance underwriting.
Holding Company Bank Ownership. The BHCA requires every bank holding company to
obtain the prior approval of the Federal Reserve before (i) acquiring, directly
or indirectly, ownership or control of any voting shares of another bank or bank
holding company if, after such acquisition, it would own or control more than 5%
of such shares; (ii) acquiring all or substantially all of the assets of another
bank or bank holding company; or (iii) merging or consolidating with another
bank holding company.
24
Holding Company Control of Nonbanks. With some exceptions, the BHCA also
prohibits a bank holding company from acquiring or retaining direct or indirect
ownership or control of more than 5% of the voting shares of any company that is
not a bank or bank holding company, or from engaging directly or indirectly in
activities other than those of banking, managing or controlling banks or
providing services for its subsidiaries. The principal exceptions to these
prohibitions involve certain non-bank activities that, by federal statute,
agency regulation or order, have been identified as activities closely related
to the business of banking or of managing or controlling banks.
Transactions with Affiliates.
Bank subsidiaries of a bank holding company are subject to restrictions imposed
by the Federal Reserve Act on extensions of credit to the holding company or its
subsidiaries, on investments in their securities, and on the use of their
securities as collateral for loans to any borrower. These regulations and
restrictions may limit the Company's ability to obtain funds from the bank
subsidiaries for its cash needs, including funds for payment of dividends,
interest and operational expenses.
Tying Arrangements. The Company is prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit, sale or lease of
property or furnishing of services. For example, with certain exceptions,
neither the Company nor the Banks may condition an extension of credit to a
customer on either (i) a requirement that the customer obtain additional
services provided by the Company or Banks; or (ii) an agreement by the customer
to refrain from obtaining other services from a competitor.
Support of Bank Subsidiaries. Under Federal Reserve policy, the Company is
expected to act as a source of financial and managerial strength to its banks.
This means that the Company is required to commit, as necessary, resources to
support the Banks. Any capital loans a bank holding company makes to its bank
subsidiaries are subordinate to deposits and to certain other indebtedness of
those bank subsidiaries.
State Law Restrictions. As a Montana corporation, the Company is subject to
certain limitations and restrictions under applicable Montana corporate law. For
example, state law restrictions in Montana include limitations and restrictions
relating to indemnification of directors, distributions to shareholders,
transactions involving directors, officers or interested shareholders,
maintenance of books, records and minutes, and observance of certain corporate
formalities.
THE BANK SUBSIDIARIES
Glacier, First Security, Western, Big Sky, Valley, and First Bank-MT are subject
to regulation and supervision by the Montana Department of Administration's
Banking and Financial Institutions Division and the Federal Reserve as a result
of their membership in the Federal Reserve System.
Mountain West and Citizens are subject to regulation by the Idaho Department of
Finance and by the FDIC. In addition, Mountain West's Utah and Washington
branches are primarily regulated by the Utah Department of Financial
Institutions and the Washington Department of Financial Institutions,
respectively.
1st Bank is a member of the Federal Reserve System and is subject to regulation
and supervision by the Federal Reserve and also the Wyoming Division of Banking
as a Wyoming state chartered bank. First National is a member of the Federal
Reserve System and is subject to regulation and supervision by the Federal
Reserve and also the Office of Comptroller of the Currency ("OCC") as a
nationally chartered bank, and to a certain extent, by the Wyoming Division of
Banking.
San Juans is subject to regulation by the Colorado Department of Regulatory
Agencies-Division of Banking and by the FDIC.
The federal laws that apply to the Banks regulate, among other things, the scope
of their business, their investments, their reserves against deposits, the
timing of the availability of deposited funds, and the nature, amount of, and
collateral for loans. Federal laws also regulate community reinvestment and
insider credit transactions and impose safety and soundness standards.
Community Reinvestment. The Community Reinvestment Act of 1977 requires that, in
connection with examinations of financial institutions within their
jurisdiction, federal bank regulators must evaluate the record of financial
institutions in meeting the credit needs of their local communities, including
low and moderate-income neighborhoods, consistent with the safe and sound
operation of those banks. A bank's community reinvestment record is also
considered by the applicable banking agencies in evaluating mergers,
acquisitions, and applications to open a branch or facility.
25
Insider Credit Transactions. Banks are also subject to certain restrictions on
extensions of credit to executive officers, directors, principal shareholders,
and their related interests. Extensions of credit (i) must be made on
substantially the same terms, including interest rates and collateral, and
follow credit underwriting procedures that are at least as stringent, as those
prevailing at the time for comparable transactions with persons not covered
above and who are not employees; and (ii) must not involve more than the normal
risk of repayment or present other unfavorable features. Banks are also subject
to certain lending limits and restrictions on overdrafts to insiders. A
violation of these restrictions may result in the assessment of substantial
civil monetary penalties, the imposition of a cease and desist order, and other
regulatory sanctions.
Regulation of Management. Federal law (i) sets forth circumstances under which
officers or directors of a bank may be removed by the institution's federal
supervisory agency; (ii) places restraints on lending by a bank to its executive
officers, directors, principal shareholders, and their related interests; and
(iii) prohibits management personnel of a bank from serving as a director or in
other management positions of another financial institution whose assets exceed
a specified amount or which has an office within a specified geographic area.
Safety and Soundness Standards.
Federal law imposes upon banks certain non-capital safety and soundness
standards. These standards cover, among other things, internal controls,
information systems and internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, compensation, fees and
benefits, such other operational and managerial standards as the agency
determines to be appropriate, and standards for asset quality, earnings and
stock valuation. An institution that fails to meet these standards must develop
a plan acceptable to its regulators, specifying the steps that the institution
will take to meet the standards. Failure to submit or implement such a plan may
subject the institution to regulatory sanctions.
INTERSTATE BANKING AND BRANCHING
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Act") relaxed prior interstate branching restrictions under federal
law by permitting nationwide interstate banking and branching under certain
circumstances. Generally, bank holding companies may purchase banks in any state
and states may not prohibit these purchases. Additionally, banks are permitted
to merge with banks in other states as long as the home state of neither merging
bank has opted out under the legislation. The Interstate Act requires regulators
to consult with community organizations before permitting an interstate
institution to close a branch in a low-income area. Federal bank regulations
prohibit banks from using their interstate branches primarily for deposit
production and federal bank regulatory agencies have implemented a
loan-to-deposit ratio screen to ensure compliance with this prohibition.
With regard to interstate bank mergers, Montana "opted-out" of the Interstate
Act. Subject to certain conditions, an in-state bank that has been in existence
for at least 5 years may merge with an out-of-state bank. Banks, bank holding
companies, and their respective subsidiaries cannot acquire control of a bank
located in Montana if, after the acquisition, the acquiring institution,
together with its affiliates, would directly or indirectly control more than 22%
of the total deposits of insured depository institutions and credit unions
located in Montana. Montana law does not authorize the establishment of a branch
bank in Montana by an out-of-state bank.
Idaho has enacted "opting in" legislation in accordance with the Interstate Act
provisions allowing banks to engage in interstate merger transactions subject to
certain "aging" requirements. Branches may not be acquired or opened separately
in Idaho by an out-of-state bank, but once an out-of-state bank has acquired a
bank within Idaho, either through merger or acquisition of all or substantially
all of the bank's assets, the out-of-state bank may open additional branches
within Idaho.
Under Wyoming law, banks located in Wyoming may be acquired by out-of-state
banks so long as (i) with certain exceptions, the resulting bank and its
affiliates would not control 30% or more of the total deposits held by all
insured depository institutions in Wyoming; and (ii) the in-state bank has been
in existence for at least three years. Branches may not be acquired or opened
separately in Wyoming by an out-of-state bank, but once an out-of-state bank has
acquired a bank within Wyoming, either through merger or acquisition of all or
substantially all of the bank's assets, the out-of-state bank may open
additional branches within Wyoming.
Under Colorado law, an out-of-state bank holding company may not acquire control
of, or acquire all or substantially all of the assets of, a Colorado bank unless
such bank has been in operation for at least five years. An out-of-state bank
holding company acquiring control of a Colorado bank holding company may acquire
control of any Colorado bank controlled by the Colorado bank holding company
even though such bank has been in operation for less than five years.
26
Utah and Washington have each enacted "opting in" legislation similar in certain
respects to that enacted by Idaho, allowing banks to engage in interstate merger
transactions subject to certain aging requirements. Under Utah law, an
out-of-state bank may acquire a bank branch located in Utah, but it may not
establish a de novo branch in Utah if its home state does not have reciprocal
laws on de novo branching. Under Washington law, an out-of-state bank may,
subject to the Director's approval, open de novo branches in Washington or
acquire an in-state branch so long as the home state of the out-of-state bank
has reciprocal laws with respect to de novo branching or branch acquisitions.
DIVIDENDS
The principal source of the Company's cash is from dividends received from the
Banks, which are subject to government regulation and limitation. Regulatory
authorities may prohibit banks and bank holding companies from paying dividends
in a manner that would constitute an unsafe or unsound banking practice. In
addition, a bank may not pay cash dividends if that payment could reduce the
amount of its capital below that necessary to meet minimum applicable regulatory
capital requirements. State law and, in the case of First National, national
banking laws and related OCC regulations, limit a bank's ability to pay
dividends that are greater than a certain amount without approval of the
applicable agency. Additionally, current guidance from the Federal Reserve
provides, among other things, that dividends per share on the Company's common
stock generally should not exceed earnings per share, measured over the previous
four fiscal quarters.
CAPITAL ADEQUACY
Regulatory Capital Guidelines. Federal bank regulatory agencies use capital
adequacy guidelines in the examination and regulation of bank holding companies
and banks. The guidelines are "risk-based," meaning that they are designed to
make capital requirements more sensitive to differences in risk profiles among
banks and bank holding companies.
Tier I and Tier II Capital. Under the guidelines, an institution's capital is
divided into two broad categories, Tier I capital and Tier II capital. Tier I
capital generally consists of common shareholders' equity, surplus, undivided
profits, and subordinated debentures. Tier II capital generally consists of the
allowance for loan and lease losses, hybrid capital instruments, and
subordinated debt. The sum of Tier I capital and Tier II capital represents an
institution's total capital. The guidelines require that at least 50% of an
institution's total capital consist of Tier I capital.
Risk-based Capital Ratios. The adequacy of an institution's capital is gauged
primarily with reference to the institution's risk-weighted assets. The
guidelines assign risk weightings to an institution's assets in an effort to
quantify the relative risk of each asset and to determine the minimum capital
required to support that risk. An institution's risk-weighted assets are then
compared with its Tier I capital and total capital to arrive at a Tier I
risk-based ratio and a total risk-based ratio, respectively. The guidelines
provide that an institution must have a minimum Tier I risk-based ratio of 4%
and a minimum total risk-based ratio of 8%.
Leverage Ratio. The guidelines also employ a leverage ratio, which is Tier I
capital as a percentage of average total assets, less intangibles. The principal
objective of the leverage ratio is to constrain the maximum degree to which a
bank holding company may leverage its equity capital base. The minimum leverage
ratio is 4%.
Prompt Corrective Action. Under the guidelines, an institution is assigned to
one of five capital categories depending on its total risk-based capital ratio,
Tier I risk-based capital ratio, and leverage ratio, together with certain
subjective factors. The categories range from "well capitalized" to "critically
undercapitalized." Institutions that are "undercapitalized" or lower are subject
to certain mandatory supervisory corrective actions. During these challenging
economic time, the federal banking regulators have actively enforced these
provisions.
REGULATORY OVERSIGHT AND EXAMINATION
The Federal Reserve conducts periodic inspections of bank holding companies,
which are performed both onsite and offsite. The supervisory objectives of the
inspection program are to ascertain whether the financial strength of the bank
holding company is being maintained on an ongoing basis and to determine the
effects or consequences of transactions between a holding company or its
non-banking subsidiaries and its bank subsidiaries. For holding companies under
$10 billion in assets, the inspection type and frequency varies depending on
asset size, complexity of the organization, and the holding company's rating at
its last inspection.
27
Banks are subject to periodic examinations by their primary regulators. Bank
examinations have evolved from reliance on transaction testing in assessing a
bank's condition to a risk-focused approach. These examinations are extensive
and cover the entire breadth of operations of the bank. Generally, safety and
soundness examinations occur on an 18-month cycle for banks under $500 million
in total assets that are well capitalized and without regulatory issues, and
12-months otherwise. Examinations alternate between the federal and state bank
regulatory agency or may occur on a combined schedule. The frequency of consumer
compliance and CRA examinations is linked to the size of the institution and its
compliance and CRA ratings at its most recent examinations. However, the
examination authority of the Federal Reserve and the FDIC allows them to examine
supervised banks as frequently as deemed necessary based on the condition of the
bank or as a result of certain triggering events.
CORPORATE GOVERNANCE AND ACCOUNTING LEGISLATION
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 (the "Act")
addresses, among other things, corporate governance, auditing and accounting,
enhanced and timely disclosure of corporate information, and penalties for
non-compliance. Generally, the Act (i) requires chief executive officers and
chief financial officers to certify to the accuracy of periodic reports filed
with the Securities and Exchange Commission (the 'SEC"); (ii) imposes specific
and enhanced corporate disclosure requirements; (iii) accelerates the time frame
for reporting of insider transactions and periodic disclosures by public
companies; (iv) requires companies to adopt and disclose information about
corporate governance practices, including whether or not they have adopted a
code of ethics for senior financial officers and whether the audit committee
includes at least one "audit committee financial expert;" and (v) requires the
SEC, based on certain enumerated factors, to regularly and systematically review
corporate filings.
To deter wrongdoing, the Act: (i) subjects bonuses issued to top executives to
disgorgement if a restatement of a company's financial statements was due to
corporate misconduct; (ii) prohibits an officer or director misleading or
coercing an auditor; (iii) prohibits insider trades during retirement plan
"blackout periods"; (iv) imposes new criminal penalties for fraud and other
wrongful acts; and (v) extends the period during which certain securities fraud
lawsuits can be brought against a company or its officers.
As a publicly reporting company, the Company is subject to the requirements of
the Act and related rules and regulations issued by the SEC and NASDAQ. After
enactment, the Company updated its policies and procedures to comply with the
Act's requirements and has found that such compliance, including compliance with
Section 404 of the Act relating to management control over financial reporting,
has resulted in significant additional expense for the Company. The Company
anticipates that it will continue to incur such additional expense in its
ongoing compliance.
ANTI-TERRORISM LEGISLATION
USA Patriot Act of 2001. The Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001,
intended to combat terrorism, was renewed with certain amendments in 2006 (the
"Patriot Act"). Certain provisions of the Patriot Act were made permanent and
other sections were made subject to extended "sunset" provisions. The Patriot
Act, in relevant part, (i) prohibits banks from providing correspondent accounts
directly to foreign shell banks; (ii) imposes due diligence requirements on
banks opening or holding accounts for foreign financial institutions or wealthy
foreign individuals; (iii) requires financial institutions to establish an
anti-money-laundering compliance program; and (iv) eliminates civil liability
for persons who file suspicious activity reports. The Act also includes
provisions providing the government with power to investigate terrorism,
including expanded government access to bank account records. While the Patriot
Act has had minimal affect on the Company's and the bank subsidiaries' record
keeping and reporting expenses, it is likely that the renewal and amendment will
not have a material adverse effect on business or operations.
FINANCIAL SERVICES MODERNIZATION
Gramm-Leach-Bliley Act of 1999. The Gramm-Leach-Bliley Financial Services
Modernization Act of 1999 brought about significant changes to the laws
affecting banks and bank holding companies. Generally, the Act (i) repeals
historical restrictions on preventing banks from affiliating with securities
firms; (ii) provides a uniform framework for the activities of banks, savings
institutions and their holding companies; (iii) broadens the activities that may
be conducted by national banks and banking subsidiaries of bank holding
companies; (iv) provides an enhanced framework for protecting the privacy of
consumer information and requires notification to consumers of bank privacy
policies; and (v) addresses a variety of other legal and regulatory issues
affecting both day-to-day operations and long-term activities of financial
institutions. Bank holding companies that qualify and elect to become financial
holding companies can engage in a wider variety of financial activities than
permitted under previous law, particularly with respect to insurance and
securities underwriting activities.
28
RECENT LEGISLATION
Emergency Economic Stabilization Act of 2008. In response to the recent
financial crisis, the United States government passed the Emergency Economic
Stabilization Act of 2008 (the "EESA") on October 3, 2008, which provides the
United States Treasury Department (the "Treasury") with broad authority to
implement certain actions intended to help restore stability and liquidity to
the U.S. financial markets.
Insurance of Deposit Accounts. The EESA included a provision for a temporary
increase from $100,000 to $250,000 per depositor in deposit insurance effective
October 3, 2008 through December 31, 2013.
Deposit Insurance Assessments. The FDIC imposes an assessment against
institutions for deposit insurance. This assessment is based on the risk
category of the institution and ranges from 7 to 77.5 basis points of the
institution's deposits. In December 2008, the FDIC adopted a rule that raised
the current deposit insurance assessment rates uniformly for all institutions by
7 basis points (to a range from 12 to 50 basis points) for the first quarter of
2009. In February of 2009, the FDIC adopted a final rule modifying the
risk-based assessment system and setting initial base assessment rates beginning
April 1, 2009 at 12 to 45 basis points. The rule also gives the FDIC the
authority to, as necessary, implement emergency special assessments to maintain
the deposit insurance fund.
Prepaid Assessments. On November 12, 2009, the FDIC approved a final rule
requiring all FDIC-insured depository institutions to prepay estimated quarterly
assessments for the fourth quarter of 2009 and for all of 2010, 2011, and 2012.
The prepayment was collected on December 30, 2009, along with institutions'
regular quarterly deposit insurance assessments for the third quarter of 2009.
For the fourth quarter of 2009 and all of 2010, the prepaid assessments will be
based on an institution's total base assessment rate in effect on September 30,
2009. That rate will be increased by three basis points for 2011 and 2012
prepayments. The prepaid assessments will be accounted for as a prepaid expense
amortized over the three year period.
Troubled Asset Relief Program. Pursuant to the EESA, the Treasury 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 program is voluntary and
requires an institution to comply with a number of restrictions and provisions,
including limits on executive compensation, stock redemptions and declaration of
dividends. The Company received approval for, but determined not to participate
in the CPP in light of its successful sale of common stock in November 2008.
Temporary Liquidity Guarantee Program. 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 contractually
limited to 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.
American Recovery and Reinvestment Act of 2009. On February 17, 2009 the
American Recovery and Reinvestment Act of 2009 ("ARRA") was signed into law.
ARRA is intended to help stimulate the economy and is a combination of tax cuts
and spending provisions applicable to a broad range of areas with an estimated
cost of about $780 billion. The impact that ARRA may have on the US economy, the
Company and the Banks cannot be predicted with reasonable certainty.
29
PROPOSED LEGISLATION
Proposed legislation is introduced in almost every legislative session. Such
legislation could dramatically affect the regulation of the banking industry. In
light of the 2008 financial crisis, legislation reshaping the regulatory
landscape for financial institutions has been proposed. A current proposal
includes measures aimed to prevent another financial crisis like the one in 2008
by forming a federal regulatory body to protect the interests of consumers by
preventing abusive and risky lending practices, increasing supervision and
regulation on financial firms deemed too big to fail, giving shareholders an
advisory vote on executive pay, and regulating complex derivatives instruments.
The Company cannot predict if any such legislation will be adopted or if it is
adopted how it would affect the business of the Company or the Banks. Past
history has demonstrated that new legislation or changes to existing laws or
regulations usually results in a greater compliance burden and, therefore,
generally increases the cost of doing business.
EFFECTS OF GOVERNMENT MONETARY POLICY
The Company's earnings and growth are affected not only by general economic
conditions, but also by the fiscal and monetary policies of the federal
government, particularly the Federal Reserve. The Federal Reserve implements
national monetary policy for such purposes as curbing inflation and combating
recession, but its open market operations in U.S. government securities, control
of the discount rate applicable to borrowings from the Federal Reserve, and
establishment of reserve requirements against certain deposits, influence the
growth of bank loans, investments and deposits, and also affect interest rates
charged on loans or paid on deposits. The nature and impact of future changes in
monetary policies and their impact on the Company or the Banks cannot be
predicted with certainty.
TAXATION
FEDERAL TAXATION
The Company files a consolidated federal income tax return, using the accrual
method of accounting. All required tax returns have been timely filed. Financial
institutions are subject to the provisions of the Internal Revenue Code of 1986,
as amended, in the same general manner as other corporations.
STATE TAXATION
Under Montana, Idaho, Colorado and Utah law, financial institutions are subject
to a corporation tax, which incorporates or is substantially similar to
applicable provisions of the Internal Revenue Code. The corporation tax is
imposed on federal taxable income, subject to certain adjustments. State taxes
are incurred at the rate of 6.75 percent in Montana, 7.6 percent in Idaho, 5
percent in Utah and 4.63 percent in Colorado. Wyoming and Washington do not
impose a corporate income tax.
See Note 12 to the Consolidated Financial Statements in "Item 8 - Financial
Statements and Supplementary Data" for additional information.
ITEM 1A. RISK FACTORS
The Company and its eleven wholly-owned, independent community bank subsidiaries
are exposed to certain risks. The following is a discussion of the most
significant risks and uncertainties that may affect the Company's business,
financial condition and future results.
The Company cannot accurately predict the effect of the current economic
downturn on the Company's future results of operations or the market price of
its common stock.
The national economy and the financial services sector in particular are
currently facing challenges of a scope unprecedented in recent history. The
Company cannot accurately predict the severity or duration of the current
economic downturn, which has adversely impacted the Company's markets. Any
further deterioration in the economies of the nation as a whole or in the
Company's markets would have an adverse effect, which could be material, on the
Company's business, financial condition, results of operations and prospects,
and could also cause the market price of the Company's stock to decline. While
the Company cannot accurately predict how long these conditions may exist, the
economic downturn could continue to present risks for some time for the industry
and Company.
30
A further economic downturn in the market areas the Company serves may continue
to adversely impact earnings and could increase credit risk associated with the
loan portfolio.
The inability of borrowers to repay loans can erode earnings by requiring the
Company to add to its allowance for loan and lease losses. The effects of the
national economic downturn are significantly impacting the market areas the
Company serves. A further deterioration in the market areas the Company serves
could result in the following consequences, any of which could have an adverse
impact, which could be material, on the Company's business, financial condition,
results of operations and prospects:
- loan delinquencies may increase further;
- problem assets and foreclosures may increase further;
- collateral for loans made may decline further in value, in turn
reducing customers' borrowing power, reducing the value of assets and
collateral associated with existing loans;
- demand for banking products and services may decline; and
- low cost or non-interest bearing deposits may decrease.
The allowance for loan and lease losses may not be adequate to cover actual loan
losses, which could adversely affect earnings.
The Company maintains an ALLL in an amount that it believes is adequate to
provide for losses inherent in the loan portfolio. While the Company strives to
carefully manage and monitor credit quality and to identify loans that may
become nonperforming, at any time there are loans included in the portfolio that
will result in losses, but that have not been identified as nonperforming or
potential problem loans. By closely monitoring credit quality, the Company
attempts to identify deteriorating loans before they become nonperforming assets
and adjust the ALLL accordingly. However, because future events are uncertain,
and if the economy continues to deteriorate, there may be loans that deteriorate
to a nonperforming status in an accelerated time frame. As a result, future
additions to the ALLL may be necessary. Because the loan portfolio contains a
number of loans with relatively large balances, the deterioration of one or a
few of these loans may cause a significant increase in nonperforming loans,
requiring an increase to the ALLL. Additionally, future significant additions to
the ALLL may be required based on changes in the mix of loans comprising the
portfolio, changes in the financial condition of borrowers, which may result
from changes in economic conditions, or as a result of incorrect assumptions by
management in determining the ALLL. Additionally, federal banking regulators, as
an integral part of their supervisory function, periodically review the
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 would have an adverse effect, which could be material,
on the Company's financial condition and results of operations.
The Company has a high concentration of loans secured by real estate, so any
further deterioration in the real estate markets could require material
increases in ALLL and adversely affect the Company's financial condition and
results of operations.
The Company has a high concentration of loans secured by real estate. Further
downturn in the market areas the Company serves may cause the Company to have
lower earnings and could increase credit risk associated with the loan
portfolio, as the collateral securing those loans may decrease in value. A
continued downturn in the local economy could have a material adverse effect
both on the borrowers' ability to repay these loans, as well as the value of the
real property held as collateral. The Company's ability to recover on these
loans by selling or disposing of the underlying real estate collateral is
adversely impacted by declining real estate values, which increases the
likelihood that the Company will suffer losses on defaulted loans secured by
real estate beyond the amounts provided for in the ALLL. This, in turn, could
require material increases in the ALLL which would adversely affect the
Company's financial condition and results of operations, perhaps materially.
A continued tightening of the credit markets may make it difficult to obtain
adequate funding for loan growth, which could adversely affect earnings.
A continued tightening of the credit market and the inability to obtain or
retain adequate funds for continued loan growth at an acceptable cost may
negatively affect the Company's asset growth and liquidity position and,
therefore, earnings capability. In addition to core deposit growth, maturity of
investment securities and loan payments, the Company also relies on alternative
funding sources through correspondent banking, and borrowing lines with the FRB
and FHLB to fund loans. In the event the current economic downturn continues,
particularly in the housing market, these resources could be negatively
affected, both as to price and availability, which would limit and or raise the
cost of the funds available to the Company.
There can be no assurance the Company will be able to continue paying dividends
on the common stock at recent levels.
The ability to pay dividends on the Company's common stock depends on a variety
of factors. The Company paid dividends of $0.13 per share in each quarter of
2009. There can be no assurance that the Company will be able to continue paying
quarterly dividends commensurate with recent levels. Current guidance from the
Federal Reserve provides, among other things, that dividends per share generally
should not exceed earnings per share, measured over the previous four fiscal
quarters. As a result, future dividends will depend on sufficient earnings to
support them.
31
The FDIC has increased insurance premiums to rebuild and maintain the federal
deposit insurance fund and there may be additional future premium increases and
special assessments.
The FDIC adopted a final rule revising its risk-based assessment system,
effective April 1, 2009. The changes to the assessment system involve
adjustments to the risk-based calculation of an institution's unsecured debt,
secured liabilities and brokered deposits. The revisions effectively result in a
range of possible assessments under the risk-based system of 7 to 77.5 basis
points. The potential increase in FDIC insurance premiums could have a
significant impact on the Company.
On May 22, 2009, the FDIC imposed a special deposit insurance assessment of five
basis points on all insured institutions. This emergency assessment was
calculated based on the insured institution's assets at June 30, 2009, and
collected on September 30, 2009. This special assessment was in addition to the
regular quarterly risk-based assessment.
The FDIC also has recently required insured institutions to prepay estimated
quarterly risk-based assessments for the fourth quarter of 2009 and for 2010,
2011 and 2012, and increased the regular assessment rate by three basis points
effective January 1, 2011, as a means of replenishing the deposit insurance
fund. The prepayment was collected on December 30, 2009, and was accounted for
as a prepaid expense amortized over the prepayment period.
The FDIC deposit insurance fund may suffer additional losses in the future due
to bank failures. There can be no assurance that there will not be additional
significant deposit insurance premium increases, special assessments or
prepayments in order to restore the insurance fund's reserve ratio. Any
significant premium increases or special assessments could have a material
adverse effect on the Company's financial condition and results of operations.
The Company's loan portfolio mix could result in increased credit risk in an
economic downturn.
The loan portfolio contains a high percentage of commercial, commercial real
estate, real estate acquisition and development loans in relation to the total
loans and total assets. These types of loans have historically been viewed as
having more risk of default than residential real estate loans or certain other
types of loans or investments. In fact, the FDIC has issued pronouncements
alerting banks of its concern about banks with a heavy concentration of
commercial real estate loans. These types of loans also typically are larger
than residential real estate loans and other commercial loans. Because the
Company's loan portfolio contains a significant number of commercial and
commercial real estate loans with relatively large balances, the deterioration
of one or more of these loans may cause a significant increase in non-performing
loans. An increase in non-performing loans could result in a loss of earnings
from these loans, an increase in the provision for loan losses, or an increase
in loan charge-offs, which could have an adverse impact on results of operations
and financial condition.
Nonperforming assets take significant time to resolve and adversely affect the
Company's results of operations and financial condition.
Nonperforming assets (which include foreclosed real estate) adversely affect the
Company's net income in various ways. Until economic and market conditions
improve, the Company expects to continue to incur additional losses relating to
an increase in nonperforming loans. The Company does not record interest income
on non-accrual loans or other real estate owned, thereby adversely affecting its
income, and increasing loan administration costs. When the Company takes
collateral in foreclosures and similar proceedings, it is required to mark the
related asset to the then fair market value of the collateral less cost to sell,
which may result in a loss. An increase in the level of nonperforming assets
also increases the Company's risk profile and may impact the capital levels its
regulators believe is appropriate in light of such risks. While the Company has
reduced its problem assets through workouts, restructurings and otherwise,
decreases in the value of these assets, or the underlying collateral, or in
these borrowers' performance or financial condition, whether or not due to
economic and market conditions beyond the Company's control, could adversely
affect the Company's business, results of operations and financial condition,
perhaps materially. In addition to the carrying costs to maintain other real
estate owned, the resolution of nonperforming assets requires significant
commitments of time from management and the Company's directors, which can be
detrimental to performance of their other responsibilities. There can be no
assurance that the Company will not experience further increases in
nonperforming assets in the future.
32
The Company's ability to access markets for funding and acquire and retain
customers could be adversely affected by the deterioration of other financial
institutions or to the extent the financial service industry's reputation is
damaged.
Reputation risk is the risk to liquidity, earnings and capital arising from
negative publicity regarding the financial services industry. The financial
services industry continues to be featured in negative headlines about the
global and national credit crisis and the resulting stabilization legislation
enacted by the U.S. federal government. These reports can be damaging to the
industry's image and potentially erode consumer confidence in insured financial
institutions, such as the Company's bank subsidiaries. In addition, the
Company's ability to engage in routine funding and other transactions could be
adversely affected by the actions and financial condition of other financial
institutions. Financial services institutions are interrelated as a result of
trading, clearing, correspondent, counterparty or other relationships. As a
result, defaults by, or even rumors or questions about, one or more financial
services institutions, or the financial services industry in general, could lead
to market-wide liquidity problems, losses of depositor, creditor and
counterparty confidence and could lead to losses or defaults by us or by other
institutions. The Company could experience material changes in the level of
deposits as a direct or indirect result of other banks' difficulties or failure,
which could affect the amount of capital needed.
Decline in the fair value of the Company's investment portfolio could adversely
affect earnings
The fair value of the Company's investment securities could decline as a result
of factors including changes in market interest rates, credit quality and
ratings, lack of market liquidity and other economic conditions. Investment
securities are impaired if the fair value of the security is less than the
carrying value. When a security is impaired, the Company determines whether
impairment is temporary or other-than-temporary. The Company adopted FASB ASC
Topic 320, Investments - Debt and Equity Securities, relating to the recognition
and presentation of other-than-temporary impairments, effective for the interim
period ended June 30, 2009, and accordingly, if an impairment is determined to
be other-than temporary, an impairment loss is recognized by reducing the
amortized cost only for the credit loss associated with an other-than-temporary
loss with a corresponding charge to earnings for a like amount. For further
information regarding the standard see discussion in "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Impact of
Recently Issued Standards".
Fluctuating interest rates can adversely affect profitability.
The Company's profitability is dependent to a large extent upon net interest
income, which is the difference (or "spread") between the interest earned on
loans, securities and other interest-earning assets and interest paid on
deposits, borrowings, and other interest-bearing liabilities. Because of the
differences in maturities and repricing characteristics of interest-earning
assets and interest-bearing liabilities, changes in interest rates do not
produce equivalent changes in interest income earned on interest-earning assets
and interest paid on interest-bearing liabilities. Accordingly, fluctuations in
interest rates could adversely affect the Company's interest rate spread, and,
in turn, profitability. The Company seeks to manage its interest rate risk
within well established guidelines. Generally, the Company seeks an asset and
liability structure that insulates net interest income from large deviations
attributable to changes in market rates. However, the Company's structures and
practices to manage interest rate risk may not be effective in a highly volatile
rate environment.
If the goodwill recorded in connection with acquisitions becomes impaired, it
could have an adverse impact on earnings and capital.
Accounting standards require that the Company account for acquisitions using the
acquisition method of accounting. Under acquisition accounting, if the purchase
price of an acquired company exceeds the fair value of its net assets, the
excess is carried on the acquiror's balance sheet as goodwill. In accordance
with generally accepted accounting principles, goodwill is not amortized but
rather is evaluated for impairment on an annual basis or more frequently if
events or circumstances indicate that a potential impairment exists. Although at
the current time the Company has not incurred an impairment of goodwill, there
can be no assurance that future evaluations of goodwill will not result in
findings of impairment and write-downs, which could be material.
Growth through future acquisitions could, in some circumstances, adversely
affect profitability measures.
The Company has in recent years acquired other financial institutions. The
Company may in the future engage in selected acquisitions of additional
financial institutions, including transactions that may receive assistance from
the FDIC. There are risks associated with any such acquisitions that could
adversely affect profitability. These risks include, among other things,
incorrectly assessing the asset quality of a financial institution being
acquired, encountering greater than anticipated cost of integrating acquired
businesses into the Company's operations, and being unable to profitably deploy
funds acquired in an acquisition. Furthermore, the Company cannot provide any
assurance as to the extent to which the Company can continue to grow through
acquisitions.
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. See Note 23 to the Consolidated Financial Statements in "Item 8 -
Financial Statements and Supplementary Data" for additional information.
33
The Company may pursue additional capital in the future, which could dilute the
holders of the Company's outstanding common stock and may adversely affect the
market price of common stock.
In the current economic environment, the Company believes it is prudent to
consider alternatives for raising capital when opportunities to raise capital at
attractive prices present themselves, in order to further strengthen the
Company's capital and better position itself to take advantage of opportunities
that may arise in the future. Such alternatives may include issuance and sale of
common or preferred stock, trust preferred securities, or borrowings by the
Company, with proceeds contributed to the Bank. Any such capital raising
alternatives could dilute the holders of the Company's outstanding common stock,
and may adversely affect the market price of our common stock and performance
measures such as earnings per share.
Business would be harmed if the Company lost the services of any of the senior
management team.
The Company believes its success to date has been substantially dependent on its
Chief Executive Officer and other members of the executive management team, and
on the Presidents of its bank subsidiaries. The loss of any of these persons
could have an adverse effect on the 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. Some of the Company's
competitors have greater financial resources than the Company. If the Company is
unable to effectively compete in its market areas, the Company's business,
results of operations and prospects could be adversely effected.
The Company operates in a highly regulated environment and may be adversely
effected by changes in federal state and local laws and regulations.
As discussed more fully in the section entitled "Supervision and Regulation",
the Company is subject to extensive regulation, supervision and examination by
federal and state banking authorities. In addition, as a publicly traded
company, the Company is subject to regulation by the Securities and Exchange
Commission. Any change in applicable regulations or federal, state or local
legislation could have a substantial impact on the Company and its operations.
Additional legislation and regulations that could significantly affect the
Company's powers, authority and operations may be enacted or adopted in the
future, which could have a material adverse effect on the Company's financial
condition and results of operations. Further, regulators have significant
discretion and authority to prevent or remedy unsafe or unsound practices or
violations of laws or regulations by financial institutions and holding
companies in the performance of their supervisory and enforcement duties.
Recently these powers have been utilized more frequently due to the serious
national, regional and local economic conditions the Company is facing. The
exercise of regulatory authority may have a negative impact on the Company's
financial condition and results of operations.
The Company cannot predict the actual effects of recent legislation or the
proposed regulatory reform measures and various governmental, regulatory,
monetary and fiscal initiatives which have been and may be enacted on the
financial markets, on the Company and its subsidiaries. The terms and costs of
these activities, or the failure of these actions to help stabilize the
financial markets, asset prices, market liquidity and a continuation or
worsening of current financial market and economic conditions could materially
and adversely affect the Company's business, financial condition, results of
operations, and the trading price of common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
34
ITEM 2. PROPERTIES
At December 31, 2009, the Company owned 81 of its 106 offices, of which 9 are
loan or administration offices. Including its headquarters and other owned
properties, the aggregate book value of Company-owned properties is
approximately $113 million. The remaining offices are leased and include 7
offices in Montana, 13 offices in Idaho, 2 offices in Wyoming, 1 office in
Colorado, 1 office in Utah, and 1 office in Washington. The following schedule
provides property information for the Company's bank subsidiaries as of December
31, 2009.
Properties Properties Net Book
(Dollars in thousands) Leased Owned Value
---------------------- ---------- ---------- --------
Glacier 2 15 $ 23,934
Mountain West 15 14 15,930
First Security 2 11 9,548
1st Bank 1 11 10,363
Western 1 7 14,560
Big Sky 1 4 10,452
Valley -- 6 5,198
First National 1 2 6,633
Citizens -- 6 6,579
First Bank-MT 1 2 624
San Juans 1 2 4,182
Parent -- 1 4,968
--- --- --------
25 81 $112,971
=== === ========
The Company believes that all of its facilities are well maintained, generally
adequate and suitable for the current operations of its business, as well as
fully utilized. In the normal course of business, new locations and facility
upgrades occur.
For additional information concerning the Company's premises and equipment and
lease obligations, see Notes 5 and 19 to the Consolidated Financial Statements
in "Item 8 - Financial Statements and Supplementary Data".
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to various claims, legal actions
and complaints in the ordinary course of their businesses. In the Company's
opinion, all such matters are adequately covered by insurance, are without merit
or are of such kind, or involve such amounts, that unfavorable disposition would
not have a material adverse effect on the consolidated financial position or
results of operations of the Company.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the fourth quarter of
2009.
35
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES
The Company's stock trades on the NASDAQ Global Select Market under the symbol:
GBCI. The primary market makers during the year are listed below:
Automated Trading Desk
D.A. Davidson & Co., Inc.
Goldman, Sachs & Co.
J.P. Morgan Securities Inc.
Liquidnet, Inc.
Morgan Stanley & Co., Inc.
RBC Capital Markets Corp.
Wedbush Morgan Securities Inc
Barclays Capital Inc./Le
Deutsche Banc Alex Brown
Instinet, LLC
Keefe, Bruyette & Woods, Inc.
Lime Brokerage, LLC
Newedge USA, LLC
SG Americas Securities LLC
Credit Suisse Securities USA
Direct Edge ECN LLC
Investment Technology Group
Knight Equity Markets, L.P.
Merrill Lynch, Pierce, Fenner
Octeg, LLC
UBS Securities, LLC.
The market range of high and low closing prices for the Company's common stock
for the periods indicated are shown below. The sale price information has been
adjusted retroactively for all stock dividends and splits previously issued. As
of December 31, 2009, there were approximately 1,979 shareholders of record of
the Company's common stock. Following is a schedule of quarterly common stock
closing price ranges:
2009 2008
--------------- ---------------
Quarter HIGH LOW High Low
--------- ------ ------ ------ ------
First ... $19.36 $12.15 $20.48 $15.54
Second .. 18.97 14.67 21.78 15.99
Third ... 16.80 12.92 27.72 14.46
Fourth .. 14.62 11.92 25.36 14.12
The Company paid cash dividends on its common stock of $0.52 per share for the
years ended December 31, 2009 and 2008.
On November 19, 2008, the Company completed the common stock offering of
6,325,000 shares generating net proceeds, after underwriter discounts and
offering expenses, of $94.0 million. Such offering was completed pursuant to the
$250 million shelf registration filed with the SEC on November 3, 2008.
UNREGISTERED SECURITIES
There have been no securities of the Company sold within the last three years
which were not registered under the Securities Act.
ISSUER STOCK PURCHASES
The Company made no stock repurchases during 2009.
EQUITY COMPENSATION PLAN INFORMATION
The Company currently maintains the 2005 Employee Stock Incentive Plan which was
approved by the shareholders and provides for the issuance of stock-based
compensation to officers and other employees and directors. Although the 1994
Director Stock Option Plan and the 1995 Employee Stock Option Plan expired in
March 2009 and April 2005, respectively, there are issued options outstanding
under both plans that have not been exercised as of year end.
36
The following table sets forth information regarding outstanding options and
shares reserved for future issuance under the foregoing plans as of December 31,
2009:
Number of Shares Remaining
Available for Future
Number of Shares to be Weighted-Average Issuance Under Equity
Issued Upon Exercise of Exercise Price of Compensation Plans
Outstanding Options, Outstanding Options, (Excluding Shares
Warrants and Rights Warrants and Rights Reflected in Column (a))
Plan Category (a) (b) (c)
------------------------------- ----------------------- -------------------- --------------------------
Equity compensation plans
approved by the shareholders 2,695,645 $19.52 2,716,109
Equity compensation plans not
approved by shareholders -- $ -- --
ITEM 6. SELECTED FINANCIAL DATA
The following financial data of the Company are derived from the Company's
historical audited financial statements and related notes. The information set
forth below should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations and the financial
statements and related notes contained elsewhere in this report.
37
Compounded Annual
Growth Rate
At December 31, -------------------
------------------------------------------------------ 1-Year 5-Year
(Dollars in thousands, except per share data) 2009 2008 2007 2006 2005 2009/2008 2009/2004
------------------------------------------------ ---------- --------- --------- --------- --------- --------- ---------
SUMMARY OF FINANCIAL CONDITION:
Total assets ................................ $6,191,795 5,553,970 4,817,330 4,471,298 3,708,975 11.5% 15.5%
Investment securities, available-for-sale ... 1,506,394 990,092 700,324 825,637 970,055 52.1% 6.7%
Loans receivable, net ....................... 3,987,318 4,053,454 3,557,122 3,165,524 2,397,187 (1.6%) 18.6%
Allowance for loan and lease losses ......... (142,927) (76,739) (54,413) (49,259) (38,655) 86.3% 40.1%
Goodwill and intangibles .................... 160,196 159,765 154,264 144,466 87,114 0.3% 30.5%
Deposits .................................... 4,100,152 3,262,475 3,184,478 3,207,533 2,534,712 25.7% 18.8%
Advances from Federal Home Loan Bank ........ 790,367 338,456 538,949 307,522 402,191 133.5% (0.7%)
Securities sold under agreements to
repurchase and other borrowed funds ...... 451,251 1,110,731 401,621 338,986 317,222 (59.4%) 40.9%
Stockholders' equity ........................ 685,890 676,940 528,576 456,143 333,239 1.3% 20.5%
Equity per common share(1) .................. 11.13 11.04 9.85 8.72 6.91 0.8% 13.6%
Equity as a percentage of total assets ...... 11.08% 12.19% 10.97% 10.20% 8.98% (9.1%) 4.3%
Compounded Annual
Growth Rate
Years ended December 31, -------------------
------------------------------------------------------ 1-Year 5-Year
(Dollars in thousands, except per share data) 2009 2008 2007 2006 2005 2009/2008 2009/2004
------------------------------------------------ ---------- --------- --------- --------- --------- --------- ---------
SUMMARY OF OPERATIONS:
Interest income ............................. $302,494 302,985 304,760 253,326 189,985 (0.2%) 15.5%
Interest expense ............................ 57,167 90,372 121,291 95,038 59,978 (36.7%) 7.5%
-------- ------- ------- ------- -------
Net interest income ...................... 245,327 212,613 183,469 158,288 130,007 15.4% 18.0%
Provision for loan losses ................... 124,618 28,480 6,680 5,192 6,023 337.6% 97.0%
Non-interest income ......................... 86,474 61,034 64,818 51,842 44,626 41.7% 20.1%
Non-interest expense ........................ 168,818 145,909 137,917 112,550 90,926 15.7% 18.5%
-------- ------- ------- ------- -------
Earnings before income taxes ............. 38,365 99,258 103,690 92,388 77,684 (61.3%) (10.2%)
Income taxes ................................ 3,991 33,601 35,087 31,257 25,311 (88.1%) (28.3%)
-------- ------- ------- ------- -------
Net earnings ............................. 34,374 65,657 68,603 61,131 52,373 (47.6%) (5.1%)
======== ======= ======= ======= =======
Basic earnings per common share(1) ....... 0.56 1.20 1.29 1.23 1.12 (53.3%) (10.4%)
Diluted earnings per common share(1) ..... 0.56 1.19 1.28 1.21 1.09 (52.9%) (10.2%)
Dividends declared per share(1) .......... 0.52 0.52 0.50 0.45 0.40 0.0% 7.6%
At or for the years ended December 31,
------------------------------------------------------
2009 2008 2007 2006 2005
---------- --------- --------- --------- ---------
RATIOS:
Net earnings as a percent of
average assets ........................... 0.60% 1.31% 1.49% 1.52% 1.52%
average stockholders' equity ............. 4.97% 11.63% 13.82% 16.00% 17.62%
Dividend payout ratio ....................... 92.86% 43.33% 38.76% 36.59% 35.93%
Average equity to average asset ratio ....... 12.16% 11.23% 10.78% 9.52% 8.61%
Net interest margin on average earning assets
(tax equivalent) ......................... 4.82% 4.70% 4.50% 4.44% 4.25%
Allowance for loan and lease losses as a
percent of loans ......................... 3.46% 1.86% 1.51% 1.53% 1.59%
Allowance for loan and lease losses as a
percent of nonperforming assets .......... 55% 91% 409% 554% 383%
At or for the years ended December 31,
------------------------------------------------------
(Dollars in thousands) 2009 2008 2007 2006 2005
---------------------- ---------- --------- --------- --------- ---------
OTHER DATA:
Loans originated and acquired ............... $2,430,967 2,456,749 2,576,260 2,389,341 2,113,777
Loans serviced for others ................... 176,231 181,351 177,173 177,518 145,279
Number of full time equivalent employees .... 1,643 1,571 1,480 1,356 1,125
Number of offices ........................... 106 101 97 93 75
Number of shareholders of record ............ 1,979 2,032 1,992 1,973 1,907
(1) Revised for stock splits and dividends.
38
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2009 COMPARED TO DECEMBER 31, 2008
The following discussion is intended to provide a more comprehensive review of
the Company's operating results and financial condition than can be obtained
from reading the Consolidated Financial Statements alone. The discussion should
be read in conjunction with the audited financial statements and the notes
thereto included in "Item 8 - Financial Statements and Supplementary Data."
HIGHLIGHTS AND OVERVIEW
On October 2, 2009, the Company acquired First National which accounted for an
increase in total assets of $272 million, including loans of $161 million, and
deposits of $237 million. Cash of $621 thousand and 99,995 shares of the
Company's common stock were issued in the acquisition. The Company also
contributed $15.3 million in capital to the bank. The acquisition resulted in a
$3.5 million one-time bargain purchase gain which was based on the estimated
fair value of the assets acquired and liabilities assumed.
On February 1, 2009, 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 Company experienced minimal loan growth with gross loans outstanding
increasing by $52 thousand, or less than 1 percent from the prior year. Without
the acquisition, loans decreased $153 million, or 4 percent. Investments,
including interest bearing deposits and fed funds sold, increased $596 million,
or 60 percent, from the prior year as the Company continues to deploy loan
payments into investment securities, when loan growth slows.
Non-interest bearing deposits increased $63 million, or 8 percent, during the
year. The Company increased interest bearing deposits by $775 million, or 31
percent. The acquisition of First National contributed $41 million and $206
million of the non-interest bearing and interest-bearing deposits, respectively,
at year-end. FHLB advances increased $452 million during the year, while FRB
borrowings decreased $689 million. Repurchase agreements and other borrowed
funds increased $30 million from the prior year.
Stockholders' equity increased $9 million, or 1 percent, during the year and the
Company and each of the bank subsidiaries have remained above the well
capitalized levels required by regulators. Although the stockholders' equity
increase was smaller than the prior year, the Company was able to maintain the
shareholder dividend while also increasing the ALLL to 3.46 percent of loans up
from 1.86 percent at the end of 2008.
Net earnings for 2009 were $34.374 million, which is a decrease of $31.283
million, or 48 percent, over the prior year. Diluted earnings per share of $0.56
is a decrease of 53 percent from the $1.19 earned in 2008. The primary reason
for the reduction in earnings is the provision for loan losses of $124.6 million
compared to $28.5 million during the prior year. Included in net earnings for
2009 is a $3.482 million one-time bargain purchase gain from the acquisition of
First National. Included in net earnings for 2008 is a nonrecurring charge of
$4.602 million ($7.6 million pre-tax) for other-than-temporary impairment with
respect to investments in Federal Home Loan Mortgage Corporation ("Freddie Mac")
preferred stock and Federal National Mortgage Association ("Fannie Mae") common
stock and a nonrecurring gain of $1.0 million ($1.7 million pre-tax) from the
sale and relocation of Mountain West's office facility in Ketchum, Idaho.
Net interest income for 2009 increased $33 million, or 15 percent, over the
prior year. The net interest margin as a percentage of earning assets, on a
tax-equivalent basis, was 4.82 percent, an increase of 12 basis points over the
4.70 percent for 2008. The increase in net interest margin is a result of the
Banks' continued focus on low cost deposits and borrowings.
Excluding nonrecurring items, the efficiency ratio (non-interest expense / net
interest income plus non-interest income) decreased from 52 percent to 51
percent during 2009, a 1 percentage point improvement.
Looking forward, the Company's future performance will depend on many factors
including economic conditions in the markets the Company serves, interest rate
changes, increasing competition for deposits, loan quality, and regulatory
burden. The Company's goal of its asset and liability management practices is to
maintain or increase the level of net interest income within an acceptable level
of interest rate risk.
39
FINANCIAL CONDITION
ACQUISITION
The results of operations and financial condition include the acquisition of
First Company and its subsidiary First National from October 2, 2009. Cash of
$621 thousand and 99,995 shares of the Company's common stock were issued in the
acquisition. The Company also contributed $15.3 million in capital to the bank.
The acquisition resulted in a $3.482 million one-time bargain purchase gain
recorded in other income. The bargain purchase gain was based on the estimated
fair value of the assets and liabilities assumed and was a result of the net
fair value of assets acquired exceeding the purchase price. Adjustment of the
allocated purchase price may be related to fair value estimates for which all
information has not been obtained on the acquired entity known or discovered
during the allocation period, the period of time required to identify and
measure the fair values of the assets and liabilities acquired in the business
combination.
Effective January 1, 2009, FASB ASC Topic 805, Business Combinations, prohibits
the carryover of the ALLL at acquisition date. Fair value of the loan portfolio
includes assessment of credit quality, interest rates and other factors. As a
result of no carryover of the ALLL, many of the traditional credit quality
ratios (e.g., ALLL as a percent of loans) used to monitor trends in credit
quality have been skewed at First National; however, at the Company level the
asset quality ratios are impacted less by such accounting. Subsequent to
acquisition, First National maintains an ALLL for losses inherent in the loan
portfolio at period end.
The following table provides the estimated fair value of selected
classifications of assets and liabilities acquired:
(Dollars in thousands) First National
---------------------- ---------------
Acquisition Date October 2, 2009
Total assets $272,280
Investments, including fed funds 60,802
Loans 160,538
Non-interest bearing deposits 39,221
Interest bearing deposits 197,308
Borrowed funds 26,686
ASSETS
As reflected in the following table, total assets at December 31, 2009 were
$6.192 billion, which is $638 million, or 11 percent, greater than the total
assets of $5.554 billion at December 31, 2008.
December 31,
-----------------------
(Dollars in thousands) 2009 2008 $ Change % Change
---------------------- ---------- ---------- -------- --------
ASSETS
Cash on hand and in banks $ 120,731 $ 125,123 $ (4,392) -4%
Investments, interest bearing deposits,
FHLB stock, FRB stock, and fed funds 1,596,238 1,000,224 596,014 60%
Loans:
Residential real estate 797,626 838,375 (40,749) -5%
Commercial 2,613,218 2,575,828 37,390 1%
Consumer and other 719,401 715,990 3,411 0%
---------- ---------- -------- ---
Total loans 4,130,245 4,130,193 52 0%
Allowance for loan and lease losses (142,927) (76,739) (66,188) 86%
---------- ---------- -------- ---
Total loans, net of allowance for
loan and lease losses 3,987,318 4,053,454 (66,136) -2%
---------- ---------- -------- ---
Other assets 487,508 375,169 112,339 30%
---------- ---------- -------- ---
Total assets $6,191,795 $5,553,970 $637,825 11%
========== ========== ======== ===
At December 31, 2009, total loans were $4.130 billion, an increase of $52
thousand over total loans at December 31, 2008. Residential real estate loans
decreased $41 million, or 5 percent, during the year. Consumer and other loans,
which are primarily comprised of home equity loans, increased by $3 million, or
less than 1 percent, and commercial loans increased by $37 million, or 1
percent, during 2009. Excluding the loan growth of $153 million attributable to
the acquisition of First National, the loan portfolio decreased organically 4
percent for 2009 and, primarily the result of decreased loan demand.
40
Investment securities, including interest bearing deposits in other financial
institutions and federal funds sold, have increased $596 million, or 60 percent,
from December 31, 2008. The increase in investments for the year includes $112
million at First National. Investment securities represented 26 percent of total
assets at December 31, 2009 versus 18 percent of total assets at December 31,
2008. The Company continues to purchase investment securities when loan growth
slows.
The following table summarizes the major asset components as a percentage of
total assets as of December 31, 2009, 2008, and 2007:
December 31,
---------------------
2009 2008 2007
----- ----- -----
ASSETS
Cash and cash equivalents, investment securities,
FHLB and FRB stock............................ 27.7% 20.3% 19.2%
Residential real estate loans.................... 12.7% 15.0% 15.0%
Commercial loans................................. 40.5% 45.3% 45.8%
Consumer and other loans......................... 11.2% 12.7% 13.1%
Other assets..................................... 7.9% 6.7% 6.9%
----- ----- -----
Total assets.................................. 100.0% 100.0% 100.0%
===== ===== =====
The mix of assets was relatively stable from 2007 to 2008 and as loan growth
slowed during 2009, the Company purchased investment securities contributing
significantly to the 7.4 percent increase in cash, cash equivalents, investment
securities, FHLB and FRB stock. Although, commercial and consumer and other
loans resulted in dollar increases from prior year, the percent mix decreased as
investments continue to grow.
LIABILITIES
The following table summarizes the liability balances as of December 31, 2009
and 2008, the amount of change, and percentage change during 2009:
December 31,
-----------------------
(Dollars in thousands) 2009 2008 $ Change % Change
---------------------- ---------- ---------- --------- --------
LIABILITIES
Non-interest bearing deposits $ 810,550 $ 747,439 $ 63,111 8%
Interest bearing deposits 3,289,602 2,515,036 774,566 31%
Advances from Federal Home Loan Bank 790,367 338,456 451,911 134%
Federal Reserve Bank discount window 225,000 914,000 (689,000) -75%
Securities sold under agreements to
repurchase and other borrowed funds 226,251 196,731 29,520 15%
Other liabilities 39,147 44,331 (5,184) -12%
Subordinated debentures 124,988 121,037 3,951 3%
---------- ---------- --------- ---
Total liabilities $5,505,905 $4,877,030 $ 628,875 13%
========== ========== ========= ===
As of December 31, 2009, non-interest bearing deposits increased $63 million, or
8 percent, since December 31, 2008. Interest bearing deposits of $3.290 billion
at December 31, 2009 include wholesale deposits of $351 million, of which $151
million were issued through CDARS. Interest bearing deposits increased $775
million, or 31 percent from December 31, 2008, of which $321 million was from
wholesale deposits. The increase in non-interest bearing deposits and interest
bearing deposits included $41 million and $206 million, respectively, for First
National as of year end.
FHLB advances increased $452 million, or 134 percent, from December 31, 2008.
FRB borrowings decreased $689 million, or 75 percent, from December 31, 2008.
Repurchase agreements and other borrowed funds were $226 million at December 31,
2009, an increase of $30 million, or 15 percent, from December 31, 2008.
41
The following table summarizes the major liability and equity components as a
percentage of total liabilities and equity as of December 31, 2009, 2008, and
2007:
December 31,
---------------------
2009 2008 2007
----- ----- -----
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposit accounts ................................. 66.2% 58.7% 66.1%
FHLB advances .................................... 12.8% 6.1% 11.2%
FRB discount window .............................. 3.6% 16.5% 0.0%
Other borrowings and repurchase agreements ....... 3.7% 3.5% 8.3%
Subordinated debentures .......................... 2.0% 2.2% 2.5%
Other liabilities ................................ 0.6% 0.8% 0.9%
Stockholders' equity ............................. 11.1% 12.2% 11.0%
----- ----- -----
Total liabilities and stockholders' equity .... 100.0% 100.0% 100.0%
===== ===== =====
Deposits have increased from 58.7 percent of total liabilities and stockholders'
equity at December 31, 2008 to 66.2 percent at December 31, 2009, as a result of
the Banks continued focus on growing and retaining deposits. The increase in
deposits reduced the need for funding asset growth with alternative wholesale
borrowings, which was the primary reason for the 6.0 percent decrease in the
combined FHLB advances, FRB, and other borrowings and repurchase agreement
categories. Stockholders' equity as a percentage of total liabilities and
stockholders' equity decreased 1.1 percent during the year, primarily a result
of the $9 million, or 1 percent, increase in stockholders equity which was not
sufficient to outpace the $629 million, or 13 percent, increase in total
liabilities.
STOCKHOLDERS' EQUITY
The following table summarizes the stockholders' equity balances as of December
31, 2009 and 2008, the amount of change, and percentage change during 2009:
December 31,
--------------------
(Dollars in thousands, except per share data) 2009 2008 $ Change % Change
--------------------------------------------- --------- --------- -------- --------
STOCKHOLDERS' EQUITY
Common equity $ 686,238 $ 678,183 $8,055 1%
Accumulated other comprehensive loss (348) (1,243) 895 -72%
--------- --------- ------
Total stockholders' equity 685,890 676,940 8,950 1%
Goodwill and core deposit intangible, net (160,196) (159,765) (431) 0%
--------- --------- ------
Tangible stockholders' equity $ 525,694 $ 517,175 $8,519 2%
========= ========= ======
Stockholders' equity to total assets 11.08% 12.19%
Tangible stockholders' equity to total tangible
assets 8.72% 9.59%
Book value per common share $ 11.13 $ 11.04 $ 0.09 1%
Tangible book value per common share $ 8.53 $ 8.43 $ 0.10 1%
Market price per share at end of year $ 13.72 $ 19.02 $(5.30) -28%
Total stockholders' equity and book value per share increased $9 million and
$0.09 per share, respectively, from December 31, 2008, the result of earnings
retention, exercised stock options, decrease in accumulated comprehensive loss,
and stock issued in connection with the First National acquisition. Tangible
stockholders' equity increased $9 million, or 2 percent since December 31, 2008,
with tangible stockholders' equity at 8.72 percent of total tangible assets at
December 31, 2009, down from 9.59 percent at December 31, 2008. Accumulated
other comprehensive loss, representing net unrealized losses (net of tax) on
investment securities designated as available-for-sale, decreased $1 million
from December 31, 2008.
42
RESULTS OF OPERATIONS
The following table summarizes revenue for the years ended December 31, 2009 and
2008, including the amount and percentage change during 2009:
REVENUE SUMMARY
Years ended
December 31,
-------------------
(Dollars in thousands) 2009 2008 $ Change % Change
---------------------- -------- -------- -------- --------
Net interest income
Interest income $302,494 $302,985 $ (491) 0%
Interest expense 57,167 90,372 (33,205) -37%
-------- -------- --------
Total net interest income 245,327 212,613 32,714 15%
Non-interest income:
Service charges, loan fees, and other fees 45,871 47,506 (1,635) -3%
Gain on sale of loans 26,923 14,849 12,074 81%
Gain (loss) on investments 5,995 (7,345) 13,340 -182%
Other income 7,685 6,024 1,661 28%
-------- -------- --------
Total non-interest income 86,474 61,034 25,440 42%
-------- -------- --------
$331,801 $273,647 $ 58,154 21%
======== ======== ========
Net interest margin (tax-equivalent) 4.82% 4.70%
======== ========
NET INTEREST INCOME
Net interest income for 2009 increased $33 million, or 15 percent, over 2008.
Total interest income during 2009 decreased $491 thousand, or less than 1
percent, while total interest expense decreased $33 million, or 37 percent. The
decrease in total interest expense from the prior year is primarily attributable
to rate decreases in interest bearing deposits and lower cost borrowings. The
net interest margin as a percentage of earning assets, on a tax-equivalent basis
for the year, was 4.82 percent for the current year, an increase of 12 basis
points from the 4.70 percent for 2008.
NON-INTEREST INCOME
Total non-interest income for 2009 increased $25 million, or 42 percent over
2008. Fee income for 2009 decreased $1.6 million, or 3 percent, as compared to
2008. Gain on sale of loans increased $12 million, or 81 percent, primarily the
result of the increase in purchase and refinance residential loans originated
and sold in the secondary market. Gain on investments during 2009 of $6.0
million is the net gain from sales of investment securities. Loss from
investments during 2008 included a non-recurring $7.6 million
other-than-temporary impairment charge on investments in Freddie Mac preferred
stock and Fannie Mae common stock. Other income of $7.7 million includes a $3.5
million one-time bargain purchase gain from the acquisition of First National in
2009. In 2008, other income of $6.0 million included a $1.7 million gain from
the sale and relocation of Mountain West's office facility in Ketchum, Idaho.
The following table summarizes non-interest expense for the years ended December
31, 2009 and 2008, including the amount and percentage change during 2009:
NON-INTEREST EXPENSE SUMMARY
Years ended
December 31,
-------------------
(Dollars in thousands) 2009 2008 $ Change % Change
---------------------- -------- -------- -------- --------
Compensation and employee
benefits and related expense $ 84,965 $ 82,027 $ 2,938 4%
Occupancy and equipment expense 23,471 21,674 1,797 8%
Advertising and promotions 6,477 6,989 (512) -7%
Outsourced data processing 3,031 2,508 523 21%
Core deposit intangibles amortization 3,116 3,051 65 2%
Other expenses 47,758 29,660 18,098 61%
-------- -------- -------
Total non-interest expense $168,818 $145,909 $22,909 16%
======== ======== =======
43
NON-INTEREST EXPENSE
Non-interest expense increased by $23 million, or 16 percent, during 2009.
Compensation and employee benefit expense increased $2.9 million, or 4 percent,
from 2008, due to the increased number of employees from the acquisition of San
Juans in December 2008 and First National in October 2009. Occupancy and
equipment expense increased $2 million, or 8 percent, over 2008 reflecting the
cost of additional locations and facility upgrades in 2009. Advertising and
promotion expense decreased $512 thousand, or 7 percent, from 2008 reflecting
the Banks' continuing focus on reducing operating expenses. Outsourced data
processing expenses increased $523 thousand, or 21 percent, from 2008 as a
result of additional locations and general operating increases. Other expenses
increased $18 million, or 61 percent, from 2008. The increase in other expenses
includes $7.3 million in FDIC insurance premiums, $5.2 million loss from sales
of other real estate owned, $2.7 million expense associated with repossessed
assets and $1.4 million in legal and outside firm expense. Of the increase in
FDIC insurance premiums, $2.5 million is attributable to the second quarter
asset-based special assessment.
EFFICIENCY RATIO
The efficiency ratio (non-interest expense/net interest income plus non-interest
income) of 51 percent for 2009 compared favorably to 52 percent for 2008,
excluding non-recurring items.
CREDIT QUALITY SUMMARY
The following table summarizes the Company's credit quality:
December 31,
------------------
(Dollars in thousands) 2009 2008
---------------------- -------- -------
Allowance for loan and lease losses at beginning of year $ 76,739 $54,413
Provision 124,618 28,480
Acquisition -- 2,625
Charge-offs (60,896) (9,839)
Recoveries 2,466 1,060
-------- -------
Allowance for loan and lease losses at end of year 142,927 76,739
Real estate and other assets owned 57,320 11,539
Accruing loans 90 days or more overdue 5,537 8,613
Non-accrual loans 198,281 64,301
-------- -------
Total non-performing assets 261,138 84,453
Allowance for loan and lease losses as a percentage
of non-performing assets 55% 91%
Non-performing assets as a percentage of total bank assets 4.13% 1.46%
Allowance for loan and lease losses as a
percentage of total loans 3.46% 1.86%
Net charge-offs as a percentage of loans 1.415% 0.213%
Accruing loans 30-89 days or more overdue $ 87,491 $54,787
At December 31, 2009, the ALLL was $142.9 million, an increase of $66 million,
or 86 percent, from a year ago. The allowance was 3.46 percent of total loans
outstanding at December 31, 2009, up from 1.86 percent at December 31, 2008. The
allowance was 55 percent of non-performing assets at December 31, 2009, down
from 91 percent a year ago. Non-performing assets as a percentage of total bank
assets at December 31, 2009 were at 4.13 percent, up from 1.46 percent at
December 31, 2008. Loan portfolio growth, composition, average loan size, credit
quality considerations, and other environmental factors will continue to
determine the level of additional provision expense.
Non-performing assets as a percentage of the Banks' assets at December 31, 2009
were 4.13 percent, up from 1.46 percent at December 31, 2008. Most of the
Company's non-performing assets are secured by real estate. Based on the most
current information available, including updated appraisals where appropriate,
the Company believes the value of the underlying real estate collateral is
adequate to minimize additional charge-offs or loss to the Company. For
collateral dependent loans, impairment is measured by the fair value of the
collateral less cost to sell.
44
PROVISION FOR LOAN LOSSES
The provision for loan losses expense was $125 million for 2009, an increase of
$96 million, or 338 percent, from 2008. Net charged-off loans for the year were
$58 million compared to $9 million for the prior year. For the year, the
provision covered net charge-offs 2.1 times.
For additional information regarding the loan portfolio, credit quality, the
ALLL and lending practices, see lending activity in "Item 1 - Business".
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2008 COMPARED TO DECEMBER 31, 2007
The following table summarizes revenue for the years ended December 31, 2008 and
2007, including the amount and percentage change during 2008:
REVENUE SUMMARY
Years ended
December 31,
-------------------
(Dollars in thousands) 2008 2007 $ Change % Change
---------------------- -------- -------- -------- --------
Net interest income
Interest income $302,985 $304,760 $ (1,775) -1%
Interest expense 90,372 121,291 (30,919) -25%
------- -------- --------
Total net interest income 212,613 183,469 29,144 16%
Non-interest income:
Service charges, loan fees, and other fees 47,506 45,486 2,020 4%
Gain on sale of loans 14,849 13,283 1,566 12%
Loss on investments (7,345) (8) (7,337) 91713%
Other income 6,024 6,057 (33) -1%
-------- -------- --------
Total non-interest income 61,034 64,818 (3,784) -6%
-------- -------- --------
$273,647 $248,287 $ 25,360 10%
======== ======== ========
Net interest margin (tax-equivalent) 4.70% 4.50%
======== ========
NET INTEREST INCOME
Net interest income for 2008 increased $29 million, or 16 percent, over the same
period in 2007. Total interest income decreased $1.8 million, or 1 percent, for
2008, while total interest expense decreased $31 million, or 25 percent, over
the same period in 2007. The decrease in interest expense was primarily
attributable to the rate decreases on interest bearing deposits and lower cost
borrowings. The net interest margin as a percentage of earning assets, on a
tax-equivalent basis, was 4.70 percent, an increase of 20 basis points from the
4.50 percent for the same period in 2007.
NON-INTEREST INCOME
Total non-interest income decreased $4 million, or 6 percent in 2008. Excluding
the 2008 nonrecurring items, consisting of the $7.6 million charge for
other-than-temporary impairment on the Freddie Mac and Fannie Mae securities,
the $1.7 million gain from the sale and relocation of Mountain West's branch in
Ketchum, Idaho, the first quarter $248 thousand combined gain from the sale of
Principal Financial Group stock and mandatory redemption of a portion of Visa,
Inc. shares, and also excluding the prior year nonrecurring $1.6 million gain
from the first quarter sale of Western's Lewistown, Montana branch, non-interest
income for 2008 increased $3.5 million from the same period in 2007. Fee income
increased $2 million, or 4 percent, over last year, driven primarily by an
increased number of loan and deposit accounts, as well as additional products
and service offerings. Gain on sale of loans increased $2 million, or 12
percent, from last year.
45
The following table summarizes non-interest expense for the years ended December
31, 2008 and 2007, including the amount and percentage change during 2008:
NON-INTEREST EXPENSE SUMMARY
Years ended
December 31,
-------------------
(Dollars in thousands) 2008 2007 $ Change % Change
---------------------- -------- -------- -------- --------
Compensation and employee
benefits and related expense $ 82,027 $ 79,070 $ 2,957 4%
Occupancy and equipment expense 21,674 19,152 2,522 13%
Advertising and promotions 6,989 6,306 683 11%
Outsourced data processing 2,508 2,755 (247) -9%
Core deposit intangibles amortization 3,051 3,202 (151) -5%
Other expenses 29,660 27,432 2,228 8%
-------- -------- --------
Total non-interest expense $145,909 $137,917 $ 7,992 6%
======== ======== ========
NON-INTEREST EXPENSE
Non-interest expense increased in 2008 by $8 million, or 6 percent, compared to
2007. Included in 2007 is approximately $500,000 of non-recurring expenses and
costs, including overtime, associated with the January 2007 merger of three of
the five CDC subsidiaries into the Company's subsidiaries, and related operating
system conversions. Compensation and employee benefit expense increased $3
million, or 4 percent, from 2007, such increase attributable to the increase in
full-time equivalent employees from 1,480 to 1,571 in 2008. Occupancy and
equipment expense increased $3 million, or 13 percent, while other expenses
increased $2 million, or 8 percent, since December 31, 2007, reflecting the
addition of San Juans in December, cost of additional locations and facility
upgrades. Advertising and promotion expense increased $683 thousand, or 11
percent, from 2007, due primarily to branch promotions and the Banks continuing
focus on attracting and retaining non-interest bearing and other low cost
deposits.
CREDIT QUALITY SUMMARY
December 31,
-----------------
(Dollars in thousands) 2008 2007
---------------------------------------------------------- ------- -------
Allowance for loan and lease losses at beginning of year $54,413 $49,259
Provision 28,480 6,680
Acquisition 2,625 639
Charge-offs (9,839) (3,387)
Recoveries 1,060 1,222
------- -------
Allowance for loan and lease losses at end of year 76,739 54,413
Real estate and other assets owned 11,539 2,043
Accruing loans 90 days or more overdue 8,613 2,685
Non-accrual loans 64,301 8,560
------- -------
Total non-performing assets 84,453 13,288
Allowance for loan and lease losses as a percentage
of non-performing assets 91% 409%
Non-performing assets as a percentage of total bank assets 1.46% 0.27%
Allowance for loan and lease losses as a
percentage of total loans 1.86% 1.51%
Net charge-offs as a percentage of loans 0.213% 0.060%
Accruing loans 30-89 days or more overdue $54,787 $45,490
Non-performing assets as a percentage of the Banks' assets at December 31, 2008
were 1.46 percent, up from .27 percent at December 31, 2007. 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 less cost to sell.
46
The allowance was 1.86 percent of total loans outstanding at December 31, 2008,
up from 1.51 percent at December 31, 2007. The allowance was 91 percent of
non-performing assets at December 31, 2008, down from 409 percent for 2007.
PROVISION FOR LOAN LOSSES
At December 31, 2008, the ALLL was $76.739 million, an increase of $22 million,
or 41 percent, from a year ago. The provision for loan losses expense was $28.5
million for 2008, an increase of $21.8 million, or 326 percent, from 2007. Net
charged-off loans for the year were $8.779 million, compared to $2.165 million
of net charged-off loans during 2007. Loan portfolio growth, composition,
average loan size, credit quality considerations, and other environmental
factors will determine the level of additional provision expense.
ADDITIONAL MANAGEMENT'S DISCUSSION AND ANALYSIS
EFFECT OF INFLATION AND CHANGING PRICES
Generally accepted accounting principles 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 a financial institution are monetary in
nature; therefore, interest rates generally have a more significant impact on a
company's performance than does the effect of inflation.
COMMITMENTS
In the normal course of business, there are various outstanding commitments to
extend credit, such as letter of credits and un-advanced loan commitments, and
lease obligation commitments, which are not reflected in the accompanying
consolidated financial statements. Management does not anticipate any material
losses as a result of these transactions. The Company has outstanding debt
maturities, the largest of which are FRB and FHLB advances. For the maturity
schedule of advances and schedule of future minimum lease payments see Notes 8
and 19, respectively, to the Consolidated Financial Statements in "Item 8 -
Financial Statements and Supplementary Data."
The following table represents the Company's contractual obligations as of
December 31, 2009:
Payments Due by Period
----------------------------------------------------------------------------
Indeterminate
(Dollars in thousands) TOTAL Maturity (1) 2010 2011 2012 2013 2014 Thereafter
------------------------------ ---------- ------------- --------- ------- ------- ------ ------ ----------
Deposits ..................... $4,100,152 2,792,268 1,091,380 141,277 47,284 11,063 16,592 288
FHLB advances ................ 790,367 -- 586,057 207 82,000 -- -- 122,103
Repurchase agreements ........ 212,506 -- 212,506 -- -- -- -- --
FRB discount window .......... 225,000 -- 225,000 -- -- -- -- --
Subordinated debentures ...... 124,988 -- -- -- -- -- -- 124,988
Other borrowings ............. 11,708 -- 10,137 -- -- -- -- 1,571
Capital lease obligations .... 3,116 -- 231 233 235 238 838 1,341
Operating lease obligations .. 20,837 -- 2,912 2,621 2,130 1,902 1,739 9,533
---------- --------- --------- ------- ------- ------ ------ -------
$5,488,674 2,792,268 2,128,223 144,338 131,649 13,203 19,169 259,824
========== ========= ========= ======= ======= ====== ====== =======
(1) Represents interest and non-interest bearing checking, money market and
savings.
MARKET RISK
Market risk is the risk of loss in a financial instrument arising from adverse
changes in market rates/prices such as interest rates, foreign currency exchange
rates, commodity prices, and equity prices. The Company's primary market risk
exposure is interest rate risk. The ongoing monitoring and management of this
risk is an important component of the Company's asset/liability management
process which is governed by policies established by its Board of Directors that
are reviewed and approved annually. The Board of Directors delegates
responsibility for carrying out the asset/liability management policies to the
Asset/Liability Committee ("ALCO"). In this capacity, ALCO develops guidelines
and strategies impacting the Company's asset/liability management related
activities based upon estimated market risk sensitivity, policy limits and
overall market interest rate levels/trends.
47
INTEREST RATE RISK
The objective of interest rate risk management is to contain the risks
associated with interest rate fluctuations. The process involves identification
and management of the sensitivity of net interest income to changing interest
rates. Managing interest rate risk is not an exact science. The interval between
repricing of interest rates of assets and liabilities changes from day to day as
the assets and liabilities change. For some assets and liabilities, contractual
maturity and the actual cash flows experienced are not the same. A good example
is residential mortgages that have long term contractual maturities but may be
repaid well in advance of the maturity when current prevailing interest rates
become lower than the contractual rate. Interest-bearing deposits without a
stated maturity could be withdrawn after seven days. However, the Banks'
experience indicates that these funding pools have a much longer duration and
are not as sensitive to interest rate changes as other financial instruments.
Prime based loans generally have rate changes when the FRB changes short term
interest rates. However, depending on the magnitude of the rate change and the
relationship of the current rates to rate floors and rate ceilings that may be
in place on the loans, the loan rate may not change.
GAP ANALYSIS
The following table gives a description of our GAP position for various time
periods. As of December 31, 2009, the Company had a negative GAP position at six
months and a negative GAP position at twelve months. The cumulative GAP as a
percentage of total assets for six months is a negative 14.05 percent which
compares to a negative 14.07 percent at December 31, 2008 and a negative 8.67
percent at December 31, 2007. The table also shows the GAP earnings sensitivity,
and earnings sensitivity ratio, along with a brief description as to how they
are calculated. The methodology used to compile this GAP information is based on
the Company's mix of assets and liabilities and the historical experience
accumulated regarding their rate sensitivity.
Projected Maturity or Repricing
---------------------------------------------------------
0-6 6-12 1 - 5 More than
(Dollars in thousands) Months Months Years 5 Years Total
--------------------------------------------------- ---------- -------- --------- --------- ---------
ASSETS:
Interest bearing deposits and
federal funds sold .......................... $ 89,844 -- -- -- 89,844
Investment securities .......................... 36,205 17,125 186,836 248,609 488,775
Residential mortgage-backed securities ......... 200,555 135,221 551,861 67,405 955,042
FHLB stock and FRB stock ....................... -- -- 49,048 13,529 62,577
Variable rate loans ............................ 1,217,707 218,991 1,006,279 128,070 2,571,047
Fixed rate loans ............................... 426,542 261,915 652,169 229,032 1,569,658
---------- -------- --------- --------- ---------
TOTAL INTEREST BEARING ASSETS ..................... $1,970,853 633,252 2,446,193 686,645 5,736,943
========== ======== ========= ========= =========
LIABILITIES:
Interest bearing deposits ...................... 1,744,861 305,073 223,549 1,016,119 3,289,602
FHLB advances .................................. 585,420 874 82,615 121,458 790,367
FRB discount window ............................ 225,000 -- -- -- 225,000
Repurchase agreements and other
borrowed funds .............................. 221,731 2,468 221 1,831 226,251
Subordinated debentures ........................ -- -- -- 124,988 124,988
---------- -------- --------- --------- ---------
TOTAL INTEREST BEARING LIABILITIES ................ $2,777,012 308,415 306,385 1,264,396 4,656,208
========== ======== ========= ========= =========
Repricing gap ..................................... $ (806,159) 324,837 2,139,808 (577,751) 1,080,735
Cumulative repricing gap .......................... $ (806,159) (481,322) 1,658,486 1,080,735
Cumulative gap as a % of interest bearing assets .. -14.05% -8.39% 28.91% 18.84%
Gap earnings sensitivity (1) ...................... (2,927)
Gap earnings sensitivity ratio (2) ................ -8.52%
(1) Gap Earnings Sensitivity is the estimated effect on earnings, after taxes
of 39.19 percent, of a 1 percent increase or decrease in interest rates (1
percent of ($481,322 - $188,630))
(2) Gap Earnings Sensitivity Ratio is Gap Earnings Sensitivity divided by the
2009 net earnings of $34,374. A 1 percent increase in interest rates has
this estimated percentage decrease on annual net earnings.
48
This table estimates the repricing and maturities of the contractual
characteristics of the assets and liabilities, based upon the Company's
assessment of the repricing characteristics of the various instruments.
Interest-bearing checking and regular savings are included in the categories
that reflect the interest rate sensitivity of the individual programs and if the
deposits are not clearly rate sensitive, the deposits are included in the more
than 5 years category. Money market balances are included in the less than 3
months category. Residential mortgage-backed securities are categorized based on
the anticipated payments.
NET INTEREST INCOME SIMULATION
The traditional one-dimensional view of GAP is not sufficient to show a bank's
ability to withstand interest rate changes. Because of limitations in GAP
modeling the ALCO of the Company uses a detailed and dynamic simulation model to
quantify the estimated exposure of net interest income ("NII") to sustained
interest rate changes. While ALCO routinely monitors simulated NII sensitivity
over a rolling two-year horizon, it also utilizes additional tools to monitor
potential longer-term interest rate risk. The simulation model captures the
impact of changing interest rates on the interest income received and interest
expense paid on all assets and liabilities reflected on the Company's statement
of financial condition. This sensitivity analysis is compared to ALCO policy
limits which specify a maximum tolerance level for NII exposure over a one year
horizon, assuming no balance sheet growth, given a 200 basis point (bp) upward
and 100bp downward shift in interest rates. A parallel and pro rata shift in
rates over a 12-month period is assumed as a benchmark. Other non-parallel rate
movement scenarios are also modeled to determine the potential impact on net
interest income. The following reflects the Company's NII sensitivity analysis
as of December 31, 2009 and 2008 as compared to the 10 percent policy limit
approved by the Company's and Banks' Board of Directors.
(Dollars in thousands) 2009 2008
---------------------- ------- ------
+200 bp
Estimated sensitivity........................ -3.0% -4.6%
Estimated decrease in net interest income ... $(7,433) (9,950)
-100 bp
Estimated sensitivity........................ 0.3% 1.1%
Estimated increase in net interest income ... $ 613 2,381
The preceding sensitivity analysis does not represent a forecast and should not
be relied upon as being indicative of expected operating results. These
hypothetical estimates are based upon numerous assumptions including: the nature
and timing of interest rate levels including yield curve shape, prepayments on
loans and securities, deposit decay rates, pricing decisions on loans and
deposits, reinvestment/replacement of assets and liability cash flows, and
others. While assumptions are developed based upon current economic and local
market conditions, the Company cannot make any assurances as to the predictive
nature of these assumptions including how customer preferences or competitor
influences might change. Also, as market conditions vary from those assumed in
the sensitivity analysis, actual results will also differ due to
prepayment/refinancing levels likely deviating from those assumed, the varying
impact of interest rate change caps or floors on adjustable rate assets, the
potential effect of changing debt service levels on customers with adjustable
rate loans, depositor early withdrawals and product preference changes, and
other internal/external variables. Furthermore, the sensitivity analysis does
not reflect actions that ALCO might take in responding to or anticipating
changes in interest rates.
LIQUIDITY RISK
Liquidity risk is the possibility that the Company will not be able to fund
present and future obligations. The objective of liquidity management is to
maintain cash flows adequate to meet current and future needs for credit demand,
deposit withdrawals, maturing liabilities and corporate operating expenses. The
Banks' source of funds is generated by deposits, principal and interest payments
on loans, sale of loans and securities, short and long-term borrowings, and net
earnings. In addition, all of the Banks are members of FHLB. As of December 31,
2009, the Banks had $1.135 billion of available FHLB credit of which $790
million was utilized. The Banks may also borrow funds through the FRB and from
the U.S. Treasury Tax and Loan program of which the Banks have remaining
borrowing availability of $564 million and $9 million, respectively. Management
of the Company has a wide range of versatility in managing the liquidity and
asset/liability mix for each bank subsidiary as well as the Company as a whole.
49
CAPITAL RESOURCES AND ADEQUACY
Maintaining capital strength continues to be a long term objective. Abundant
capital is necessary to sustain growth, provide protection against unanticipated
declines in asset values, and to safeguard the funds of depositors. Capital also
is a source of funds for loan demand and enables the Company to effectively
manage its assets and liabilities. Stockholders' equity increased $9 million
during 2009, or 1 percent, the net result of earnings of $34 million, common
stock issued for the acquisition of First National, stock options exercised,
less cash dividend payments and a decrease in 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.
The following table illustrates the FRB capital adequacy guidelines and the
Company's compliance with those guidelines as of December 31, 2009.
Tier 1
CONSOLIDATED (Core) Total Leverage
(Dollars in thousands) Capital Capital Capital
--------------------------------------------- ---------- --------- ---------
Total stockholder's equity .................. $ 685,890 685,890 685,890
Less: Goodwill and intangibles .............. (153,858) (153,858) (153,858)
Plus: Allowance for loan and lease losses ... -- 59,618 --
Accumulated other comprehensive
unrealized loss on AFS securities ..... 348 348 348
Subordinated debentures .................. 124,500 124,500 124,500
---------- --------- ---------
Regulatory capital .......................... $ 656,880 716,498 656,880
========== ========= =========
Risk weighted assets ........................ $4,685,967 4,685,967
========== =========
Total adjusted average assets ............... $5,862,954
=========
Regulatory capital as a % of assets ......... 14.02% 15.29% 11.20%
=========
Regulatory "well capitalized" requirement ... 6.00% 10.00%
---------- ---------
Excess over "well capitalized" requirement .. 8.02% 5.29%
========== =========
For additional information, see Note 11 to the Consolidated Financial Statements
in "Item 8 - Financial Statements and Supplementary Data." Dividend payments
were $0.52 per share for 2009 and 2008. The payment of dividends is subject to
government regulation in that regulatory authorities may prohibit banks and bank
holding companies from paying dividends that would constitute an unsafe or
unsound banking practice. Additionally, current guidance from the Federal
Reserve provides, among other things, that dividends per share on the Company's
common stock generally should not exceed earnings per share, measured over the
previous four fiscal quarters.
CRITICAL ACCOUNTING POLICIES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America often
requires management to use significant judgments as well as subjective and/or
complex measurements in making estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses. The Company
considers its accounting policy for the ALLL and determination of whether an
investment security is temporarily or other-than-temporarily impaired to be
critical accounting policies.
ALLOWANCE FOR LOAN AND LEASE LOSSES ACCOUNTING POLICY AND ANALYSIS
The Banks' charge-off policy is consistent with bank regulatory standards.
Consumer loans generally are charged off when the loan becomes over 120 days
delinquent. Real estate acquired as a result of foreclosure or by deed-in-lieu
of foreclosure is classified as real estate owned until such time as it is sold.
When such property is acquired, it is recorded at estimated fair value, less
estimated cost to sell. Any write-down at the time of recording real estate
owned is charged to the ALLL. Subsequent write-downs, if any, are charged to
current expense.
The balance of the ALLL is an estimate of probable credit losses that have
occurred in the loan and lease portfolio as of the date of the consolidated
financial statements before losses have been confirmed. The balance of the ALLL
is highly dependent upon management's internal risk classifications, evaluations
of borrowers' current and prospective performance, appraisals and other
variables affecting the quality of the loan and lease portfolio. Changes in
management's estimates and assumptions are reasonably possible and may have a
material impact upon the Company's consolidated financial statements, results of
operations or liquidity.
50
It is the Company's policy to provide an ALLL for estimated losses on loans and
leases based upon past loss experience, adjusted for changes in trends and
conditions of certain items, including:
- Adverse situations that may affect specific borrowers' ability to
repay;
- Current collateral values, where appropriate;
- Delinquencies and non-performing loans;
- Amount and timing of future cash flows expected on impaired loans;
- Criticized and classified loans;
- Credit concentrations by credit type, industry, geography;
- Recoveries and dispositions of balances previously charge-off;
- Volume and terms of loans;
- Loan size and complexity;
- Competition and bank size;
- Local market areas and national economic conditions;
- Effects of changes in lending policies and procedures;
- Experience, ability, and depth of lending management and credit
administration staff; and
- Effects of legal and regulatory developments.
Individually significant loans and major lending areas are reviewed periodically
to determine potential problems at an early date. The ALLL is increased by
charges to earnings and decreased by charge-offs (net of recoveries). For
additional information regarding the ALLL, its relation to the provision for
loan losses and risk related to asset quality, see Note 4 to the Consolidated
Financial Statements in "Item 8 - Financial Statements and Supplementary Data."
OTHER-THAN-TEMPORARY IMPAIRMENT ON SECURITIES ACCOUNTING POLICY AND ANALYSIS
The Company views the determination of whether an investment security is
temporarily or other-than-temporarily impaired as a critical accounting policy,
as the estimate is susceptible to significant change from period to period
because it requires management to make significant judgments, assumptions and
estimates in the preparation of its consolidated financial statements. The
Company assesses individual securities in its investment securities portfolio
for impairment at least on a quarterly basis, and more frequently when economic
or market conditions warrant. An investment is impaired if the fair value of the
security is less than its carrying value at the financial statement date. If
impairment is determined to be other-than-temporary, an impairment loss is
recognized by reducing the amortized cost for the credit loss portion of the
impairment with a corresponding charge to earnings.
Management considers whether an investment security is other-than-temporarily
impaired under the guidance promulgated in FASB ASC Topic 320, Investments -
Debt and Equity Securities. The Company adopted the amendment relating to the
recognition and presentation of other-than-temporary impairments effective for
the interim period ending June 30, 2009 and determined there was not a material
effect on the Company's financial position or results of operations. For further
information regarding the new standards, see discussion in "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Impact of Recently Issued Standards".
The Company believes that macroeconomic conditions occurring in 2009 and 2008
have unfavorably impacted the fair value of certain debt securities in its
investment portfolio. For debt securities with limited or inactive markets, the
impact of these macroeconomic conditions upon fair value estimates includes
higher risk-adjusted discount rates and downgrades in credit ratings provided by
nationally recognized credit rating agencies, (e.g., Moody's, S&P, Fitch, and
DBRS).
51
In evaluating equity securities for other-than-temporary impairment losses,
management assesses the Company's ability and intent to retain the equity
securities for a period of time sufficient to allow for anticipated recovery in
fair value. Equity securities owned at December 31, 2009 primarily 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 December 31, 2009.
In evaluating debt securities for other-than-temporary impairment, management
assesses whether the Company intends to sell or if it is more likely-than-not
that it will be required to sell impaired debt securities. In so doing,
management considers contractual constraints, liquidity, capital, asset /
liability management and securities portfolio objectives. During the first half
of 2009, the Company sold no investment securities as the Company 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." Such sales were executed with the proceeds used to buy
additional investment securities such that the investment portfolio performs
well across varying interest rate environments. During the second half of 2009,
the Company sold 59 securities of which 53 were tax-exempt state and local
obligations, 7 of which were each sold at a gross realized loss of $1,118,000
and 46 of which were each sold at a gross realized gain of $3,921,000, a net
realized gain of $2,804,000. Of the 59 securities sold in the second half of
2009, 6 were residential mortgage-backed securities, with such securities sold
at a gross realized gain aggregating $3,191,000. Of the securities sold at a
realized loss, none had previously been subject to an other-than-temporary
impairment charge, and none were subject to an expectation or requirement to
sell. 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. With respect to its impaired debt securities at
December 31, 2009, management determined that it does not intend to sell and
that there is no expected requirement to sell any of its impaired debt
securities.
For fair value estimates provided by third party vendors, management also
considered the models and methodology, for appropriate consideration of both
observable and unobservable inputs, including appropriately adjusted discount
rates and credit spreads for securities with limited or inactive markets, and
whether the quoted prices reflect orderly transactions. For certain securities,
the Company obtained independent estimates of inputs, including cash flows, in
supplement to third party vendor provided information. The Company also reviewed
financial statements of select issuers, with follow up discussions with issuers'
management for clarification and verification of information relevant to the
Company's impairment analysis.
As of December 31, 2009, there were 273 investments in an unrealized loss
position and were considered to be temporarily impaired and therefore an
impairment charge has not been recorded. All of such temporarily impaired
investments are debt securities. Residential mortgage-backed securities have the
largest unrealized loss. The fair value of these securities, which have
underlying collateral consisting of U.S. government sponsored enterprise
guaranteed mortgages and non-guaranteed private label whole loan mortgages, were
$505,976,000 at December 31, 2009 of which $454,516,000 was purchased during
2009, the remainder of which had a fair market value of $73,624,000 at December
31, 2008. For the securities purchased in 2009 there has been an unrealized loss
of $3,607,000 since purchase. Of the remaining residential mortgage-backed
securities in a loss position the unrealized loss increased from 8.3 percent of
fair value at December 31, 2008 to 24.4 percent of fair value at December 31,
2009. The fair value of Collateralized Debt Obligation securities in an
unrealized loss position is $6,789,000 with unrealized losses of $7,899,000 or
116 percent of fair value at December 31, 2009; such investments had an
unrealized gain position at December 31, 2008. The fair value of State and Local
Government securities were $92,139,000 at December 31, 2009 of which $42,703,000
was purchased during 2009, the remainder of which had a fair market value of
$47,907,000 at December 31, 2008. For the securities purchased in 2009 there has
been an unrealized loss of $1,212,000 since purchase. Of the remaining State and
Local Government securities in a loss position the unrealized loss decreased
from 10.1 percent of fair value at December 31, 2008 to 3.3 percent of fair
value at December 31, 2009.
52
With respect to the CDO securities, the fair value decline is primarily
attributable to a single CDO structure that is a pooled trust preferred security
of which the Company owns a portion of only the Senior Notes tranche. All of the
assets underlying such CDO structure are capital securities issued by trust
subsidiaries of holding companies of banks and thrifts. As of December 31, 2009,
the Senior Notes are rated "A3" by Moody's and is rated "A" by Fitch, and 6 of
the 26 trust subsidiaries have elected to defer the interest on their respective
obligations underlying the CDO structure. As of the end of the prior three
quarters of 2009, only 3 of the 26 trust subsidiaries were deferring interest on
their respective obligations. In accordance with the prospectus for the CDO
structure, the priority of payments favors holders of the Senior Notes over
holders of the Mezzanine Notes and Income Notes. Though the maturity of the CDO
structure is June 15, 2031, 15.22% of the outstanding principle of the Senior
Notes has been prepaid through year end 2009. More specifically, at any time the
Senior Notes are outstanding, if either the Senior Principle or Senior Interest
Coverage Tests (the "Senior Coverage Tests") are not satisfied as of a
calculation date, then funds that would have otherwise been used to make
payments on the Mezzanine Notes or Income Notes shall instead be applied as
principle prepayments on the Senior Notes. As of December 31, 2009, the Senior
Principle Coverage Test was below its threshold level, while the Senior Interest
Coverage Test exceeded its threshold level. The Senior Coverage Tests exceeded
the threshold levels for each of the prior quarters of 2009 and 2008. In its
assessment of the Senior Note for potential other-than-temporary impairment, the
Company evaluated the underlying issuers and engaged a third party vendor to
stress test the performance of the underlying capital securities and related
obligors. Such stress testing has been performed as of December 31, 2009 and as
of the end of each of the prior four quarters, i.e., September 30, June 30 and
March 31, 2009 and December 31, 2008. In each instance of stress testing, the
results reflect no credit loss for the Senior Notes. In evaluating such results,
the Company reviewed with the third party vendor the stress test assumptions and
concurred with the analyses in concluding that the impairment at December 31,
2009 and prior quarters of 2009 was temporary, and not other-than-temporary.
The Company stratified the 273 debt securities for both severity and duration of
impairment. With respect to severity, the following table provides the number of
securities and amount of unrealized loss in the various ranges of unrealized
loss as a percent of book value.
(Dollars in Unrealized Number of
thousands) Loss Bonds
------------------ ---------- ---------
Greater than 40.0% $ 7,859 6
30.1% to 40.0% 1,370 1
20.1% to 30.0% 7,160 5
15.1% to 20.0% 4,180 10
10.1% to 15.0% 125 3
5.1% to 10.0% 705 14
0.1% to 5.0% 5,479 234
------- ---
Total $26,878 273
======= ===
With respect to the duration of the impaired securities, the Company identified
39 securities which have been continuously impaired for the 12 months ending
December 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 was in an unrealized loss position. 13 of these 39
securities are non-guaranteed, non-Agency CMOs with an aggregate unrealized loss
of $12,291,000, the most notable of which had an unrealized loss of $1,536,000.
17 of the 39 securities are state and local tax-exempt securities with an
unrealized loss of $985,000, the most notable of which had an unrealized loss of
$233,000. 8 of the 39 securities are residential mortgage-backed securities
issued by U.S. government sponsored agencies, i.e., GNMA, FNMA, FHLMC and SBA,
the aggregate unrealized loss of which was $6,000.
Included in the 273 debt securities with impairment at December 31, 2009 are 13
non-guaranteed, non-Agency issued CMOs tranches. 6 of the 13 CMOs tranches are
collateralized by 30 year fixed residential mortgages considered to be "Prime,"
and 7 are collateralized by 30 year fixed residential mortgages considered to be
"ALT - A." Moreover, none of the underlying mortgage collateral is considered
"subprime".
53
For impaired debt securities for which there was no intent or expected
requirement to sell, management considers available evidence to assess whether
it is more likely-than-not that all amounts due would not be collected. In such
assessment, management considers the severity and duration of the impairment,
the credit ratings of the security, the overall deal and payment structure,
including the Company's position within the structure, underlying obligors,
financial condition and near term prospects of the issuer, delinquencies,
defaults, loss severities, recoveries, prepayments, cumulative loss projections,
discounted cash flows and fair value estimates. Based on the analysis of its
impaired securities as of December 31, 2009, the Company determined that none of
such securities had other-than-temporary impairment.
GOODWILL IMPAIRMENT
As required by FASB ASC Topic 350, Intangibles - Goodwill and Other, the Company
tests goodwill and other intangible assets for impairment at the reporting unit
level annually during the third quarter. The reporting unit level at which
goodwill exists is at ten of the eleven bank subsidiaries. In addition, goodwill
and other intangible assets of a subsidiary are tested for impairment between
annual tests if an event occurs or circumstances change that would
more-likely-than not reduce the fair value of a reporting units below its
carrying amount. Examples of events and circumstances that could trigger the
need for interim impairment testing include:
- A significant change in legal factors or in the business climate;
- An adverse action or assessment by a regulator;
- Unanticipated competition;
- A loss of key personnel;
- A more-likely-than-not expectation that a reporting unit or a
significant portion of a reporting unit will be sold or otherwise
disposed of; and
- The testing for recoverability of a significant asset group within a
reporting unit.
The goodwill impairment test is a two-step process which requires the Company to
make assumptions and judgments regarding fair value. In the first step for
evaluating for possible impairment, the Company compares the estimated fair
value of its reporting units to the carrying value, which includes goodwill. If
the estimated fair value is less than the carrying value, the second step is
completed to compute the impairment amount by determining the "implied fair
value" of goodwill. This determination requires the allocation of the estimated
fair value of the reporting units to the assets and liabilities of the reporting
units. Any remaining unallocated fair value represents the "implied fair value"
of goodwill, which is compared to the corresponding carrying value of goodwill
to compute impairment amount, if any.
As a result of the economic downturn and the decline in the Company's stock
price during 2009, the Company has tested for possible goodwill impairment on a
quarterly basis. For the first step in evaluating goodwill for possible
impairment, the Company performs two analyses. The first analysis estimates fair
value based on market multiples of deal price to equity, deal price to tangible
equity, and deal price to last twelve months earnings. The deal price multiples
are obtained from an independent third party for acquisitions of financial
institutions completed within the prior twelve months preceding each testing
date, such acquisitions excluding financial institutions whose size and
operations are not comparable to the Company and its bank subsidiaries. As an
additional analysis, the Company also tests for goodwill impairment based on the
Company's market capitalization adjusted for control value. In evaluating the
range of appropriate control values, the control values have ranged from twenty
percent to thirty-five percent, such values taking into account recent trends in
market capitalization in advance of the date at which the Company is testing for
potential goodwill impairment. Based on the interim and annual testing results,
the Company has determined that the fair value of each reporting unit exceeded
its carrying value, such that the Company's goodwill was not considered impaired
during 2009. However, further adverse changes in the economic environment,
operations of the reporting units, or other factors could result in a decline in
the fair value of the reporting units which could result in goodwill impairment.
For additional information on goodwill see Note 6 to the Consolidated Financial
Statements in "Item 8 - Financial Statements and Supplementary Data."
FAIR VALUE MEASUREMENTS
FASB ASC Topic 820, Fair Value Measurements and Disclosures, requires the
Company to disclose information relating to fair value. Fair value is defined as
the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date. FASB established a fair value hierarchy which requires an
entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. The standard describes three
levels of inputs that may be used to measure fair value:
54
Level 1 Quoted prices in active markets for identical assets or liabilities
Level 2 Observable inputs other than Level 1 prices, such as quoted prices for
similar assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the assets
or liabilities
Level 3 Unobservable inputs that are supported by little or no market activity
and that are significant to the fair value of the assets or
liabilities
In April 2009, FASB issued an amendment to ASC Topic 820, Fair Value
Measurements and Disclosures, relating to determining fair value when the volume
and level of activity for the asset or liability have significantly decreased
and identifying transactions that are not orderly. The Company adopted the
amendment effective for the interim period ending June 30, 2009 and determined
there was not a material effect on the Company's financial position or results
of operations. For further information regarding the new standard, see
discussion in "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Impact of Recently Issued Standards."
On a recurring basis, the Company measures investment securities at fair value.
The fair value of such investments is estimated by obtaining quoted market
prices for identical assets, where available. If such prices are not available,
fair value is based on independent asset pricing services and models, the inputs
of which are market-based or independently sourced market parameters, including,
but not limited to, yield curves, interest rates, volatilities, prepayments,
defaults, cumulative loss projections, and cash flows. For those securities
where greater reliance on unobservable inputs occurs, such securities are
classified as Level 3 within the hierarchy.
In performing due diligence reviews of the independent asset pricing services
and models for investment securities, the Company reviewed the vendors' inputs
for fair value estimates and the recommended assignments of levels within the
fair value hierarchy. The Company's review included the extent to which markets
for investment securities were determined to have limited or no activity, or was
judged to be an active market. The Company reviewed the extent to which
observable and unobservable inputs were used as well as the appropriateness of
the underlying assumptions about risk that a market participant would use in
active markets, with adjustments for limited or inactive markets. In considering
the inputs to the fair value estimates, the Company placed less reliance on
quotes that were judged to not reflect orderly transactions, or were non-binding
indications. The Company made independent inquires of other knowledgeable
parties in testing the reliability of the inputs, including consideration for
illiquidity, credit risk, and cash flow estimates. In assessing credit risk, the
Company reviewed payment performance, collateral adequacy, credit rating
histories, and issuers' financial statements with follow-up discussion with
issuers. For those markets determined to be inactive, the valuation techniques
used were models for which management verified that discount rates were
appropriately adjusted to reflect illiquidity and credit risk. The Company
independently obtained cash flow estimates that were stressed at levels that
exceeded those used by independent third party pricing vendors. Based on the
Company's due diligence review, investment securities are placed in the
appropriate hierarchy levels with adjustment to vendors' recommendations made as
necessary. Most notably, the Company determined that its collateralized debt
obligation securities, i.e., trust preferred securities, were illiquid due to
inactive markets (i.e., due to the absence of trade volume during 2008 and
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 at fair value. Real estate and other assets owned is
carried at the lower of cost or estimated fair value, less estimated cost to
sell. Estimated fair value of real estate and other assets owned is based on
appraisals. The Company reviews the appraisals, giving consideration to the
highest and best use of the collateral. The appraised values are reduced by
discounts to consider lack of marketability and estimated cost to sell. Real
estate and other assets owned are classified within Level 3 of the fair value
hierarchy. Allowable methods for estimating fair value of impaired loans include
using the fair value of the collateral for collateral dependent loans or, where
a loan is determined not to be collateral dependent, using the discounted cash
flow method. Impaired loans are primarily collateral-dependent and the estimated
fair value is based on the appraised fair value of the collateral, less
estimated cost to sell. The Company reviews the appraisals, giving consideration
to the highest and best use of the collateral. The appraised values are reduced
by discounts to consider lack of marketability and estimated cost to sell.
Impaired loans are classified within Level 3 of the fair value hierarchy.
In addition to measuring certain financial assets and liabilities on a recurring
or non-recurring basis, the Company discloses estimated fair value on financial
assets and liabilities. The following is a description of the methods and inputs
used to estimate the fair value of other financial instruments recognized at
amounts other than fair value.
55
The fair value for unimpaired loans, net of ALLL, is estimated by discounting
the future cash flows using the rates at which similar notes would be originated
for the same remaining maturities. The market rates used are based on current
rates the Banks would impose for similar loans and reflect a market participant
assumption about risks associated with non-performance, illiquidity, and the
structure and term of the loans along with local economic and market conditions.
The fair value of term deposits is estimated by discounting the future cash
flows using rates of similar deposits with similar maturities. The market rates
used were obtained from a knowledgeable independent third party and reviewed by
the Company. The rates were the average of current rates offered by local
competitors of the Banks. The estimated fair value of demand, NOW, savings, and
money market deposits is the book value since rates are regularly adjusted to
market rates.
The fair value of the non-callable FHLB advances is estimated by discounting the
future cash flows using rates of similar advances with similar maturities. These
rates were obtained from current rates offered by FHLB. The estimated fair value
of callable FHLB advances was obtained from FHLB and the model was reviewed by
the Company through discussions with FHLB.
The fair value of FRB borrowings is estimated based on borrowing rates currently
available to the Company for FRB borrowings with similar terms and maturities.
The current outstanding borrowings are short term and current rates offered by
FRB equal the rates on the outstanding borrowings, resulting in the estimated
fair value being the same as the book value.
The fair value of term repurchase agreements is estimated based on current
repurchase rates currently available to the Company for repurchases agreements
with similar terms and maturities. The market rates used are based on current
rates the Banks would incur for similar borrowings. The estimated fair value for
overnight repurchase agreements and other borrowings is book value.
The fair value of the subordinated debentures is estimated by discounting the
estimated future cash flows using current estimated market rates for
subordinated debt issuances with similar characteristics. The market rates used
were based on an independent third party's judgment and include inputs such as
implied yield curves and interest rate spreads.
For additional information on fair value measurements see Note 18 and 22 to the
Consolidated Financial Statements in "Item 8 - Financial Statements and
Supplementary Data."
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
New authoritative accounting guidance that has either been issued during 2009 or
is effective during 2009 or 2010 and may possibly have a material impact on the
Company includes amendments to: FASB ASC Topic 320, Investments - Debt and
Equity Securities, FASB ASC Topic 350, Intangibles - Goodwill and Other, FASB
ASC Topic 805, Business Combinations, FASB ASC Topic 810, Consolidation, FASB
ASC Topic 815, Derivatives and Hedging, FASB ASC Topic 820, Fair Value
Measurements and Disclosures, FASB ASC Topic 825, Financial Instruments, and
FASB ASC Topic 860, Transfers and Servicing. For additional information on the
topics and the impact on the Company see Note 22 to the Consolidated Financial
Statements in "Item 8 - Financial Statements and Supplementary Data."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information regarding "Quantitative and Qualitative Disclosures about Market
Risk" is set fourth under "Item 7 - Management's Discussion and Analysis".
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
56
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Audit Committee, Board of Directors and Stockholders
Glacier Bancorp, Inc.
Kalispell, Montana
We have audited the accompanying consolidated statements of financial condition
of Glacier Bancorp, Inc. as of December 31, 2009 and 2008, and the related
consolidated statements of operations, stockholders' equity and comprehensive
income and cash flows for each of the years in the three-year period ended
December 31, 2009. The Company's management is responsible for these financial
statements. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. Our audits included
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Glacier Bancorp,
Inc. as December 31, 2009 and 2008, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
2009, in conformity with accounting principles generally accepted in the Unites
States of America.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), Glacier Bancorp, Inc.'s internal
control over financial reporting as of December 31, 2009, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) and our report dated
March 1, 2010, expressed an unqualified opinion on the effectiveness of the
Company's internal control over financial reporting.
/s/ BKD, LLP
Denver, Colorado
March 1, 2010
57
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Audit Committee, Board of Directors and Stockholders
Glacier Bancorp, Inc.
Kalispell, Montana
We have audited Glacier Bancorp, Inc.'s internal control over financial
reporting as of December 31, 2009, based on criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Report of Management. Our responsibility
is to express an opinion on the Company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of reliable financial statements in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America, and that receipts
and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention, or timely detection and correction of
unauthorized acquisition, use, or disposition of the company's assets that could
have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions or that the degree of compliance
with the policies or procedures may deteriorate.
58
In our opinion, Glacier Bancorp, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2009,
based on criteria established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements of Glacier Bancorp, Inc. and our report dated March 1, 2010,
expressed an unqualified opinion thereon.
/s/ BKD, LLP
Denver, Colorado
March 1, 2010
59
GLACIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
----------------------
(Dollars in thousands, except per share data) 2009 2008
--------------------------------------------- ---------- ---------
ASSETS:
Cash on hand and in banks ................................................. $ 120,731 125,123
Federal funds sold ........................................................ 87,155 6,480
Interest bearing cash deposits ............................................ 2,689 3,652
---------- ---------
Cash and cash equivalents .............................................. 210,575 135,255
Investment securities, available-for-sale ................................. 1,506,394 990,092
Loans receivable, net of allowance for loan and lease losses of $142,927
and $76,739 at December 31, 2009 and 2008, respectively ................ 3,920,988 3,998,478
Loans held for sale ....................................................... 66,330 54,976
Premises and equipment, net ............................................... 140,921 133,949
Real estate and other assets owned, net ................................... 57,320 11,539
Accrued interest receivable ............................................... 29,729 28,777
Deferred tax asset ........................................................ 41,082 14,292
Core deposit intangible, net of accumulated amortization of $17,910
and $14,794 at December 31, 2009 and 2008, respectively ................ 13,937 13,013
Goodwill .................................................................. 146,259 146,752
Other assets .............................................................. 58,260 26,847
---------- ---------
Total assets ........................................................... $6,191,795 5,553,970
========== =========
LIABILITIES:
Non interest bearing deposits ............................................. $ 810,550 747,439
Interest bearing deposits ................................................. 3,289,602 2,515,036
Advances from Federal Home Loan Bank ...................................... 790,367 338,456
Securities sold under agreements to repurchase ............................ 212,506 188,363
Federal Reserve Bank discount window ...................................... 225,000 914,000
Other borrowed funds ...................................................... 13,745 8,368
Accrued interest payable .................................................. 7,928 9,751
Subordinated debentures ................................................... 124,988 121,037
Other liabilities ......................................................... 31,219 34,580
---------- ---------
Total liabilities ...................................................... 5,505,905 4,877,030
---------- ---------
STOCKHOLDERS' EQUITY:
Preferred shares, $0.01 par value per share. 1,000,000 shares authorized,
none issued or outstanding at December 31, 2009 and 2008................ -- --
Common stock, $0.01 par value per share. 117,187,500 and 117,187,500
shares authorized, 61,619,803 and 61,331,273 issued and outstanding
at December 31, 2009 and 2008, respectively ............................ 616 613
Paid in capital ........................................................... 497,493 491,794
Retained earnings - substantially restricted .............................. 188,129 185,776
Accumulated other comprehensive loss ...................................... (348) (1,243)
---------- ---------
Total stockholders' equity ............................................. 685,890 676,940
---------- ---------
Total liabilities and stockholders' equity ............................. $6,191,795 5,553,970
========== =========
See accompanying notes to consolidated financial statements.
60
GLACIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
----------------------------
(Dollars in thousands, except per share data) 2009 2008 2007
--------------------------------------------- -------- ------- -------
INTEREST INCOME:
Residential real estate loans ............................ $ 54,498 51,166 59,664
Commercial loans ......................................... 151,580 165,119 157,644
Consumer and other loans ................................. 44,844 47,725 48,105
Investment securities and other .......................... 51,572 38,975 39,347
-------- ------- -------
Total interest income ................................. 302,494 302,985 304,760
-------- ------- -------
INTEREST EXPENSE:
Deposits ................................................. 38,429 55,012 81,459
Federal Home Loan Bank advances .......................... 7,952 15,355 18,897
Securities sold under agreements to repurchase ........... 2,007 3,823 7,445
Subordinated debentures .................................. 6,818 7,430 7,537
Other borrowed funds ..................................... 1,961 8,752 5,953
-------- ------- -------
Total interest expense ................................ 57,167 90,372 121,291
-------- ------- -------
NET INTEREST INCOME ................................... 245,327 212,613 183,469
Provision for loan losses ................................ 124,618 28,480 6,680
-------- ------- -------
Net interest income after provision for loan losses ... 120,709 184,133 176,789
NON INTEREST INCOME:
Service charges and other fees ........................... 40,465 41,550 37,931
Miscellaneous loan fees and charges ...................... 5,406 5,956 7,555
Gain on sale of loans .................................... 26,923 14,849 13,283
Gain (loss) on investments ............................... 5,995 (7,345) (8)
Other income ............................................. 7,685 6,024 6,057
-------- ------- -------
Total non interest income ............................. 86,474 61,034 64,818
-------- ------- -------
NON INTEREST EXPENSE:
Compensation, employee benefits and related expense ...... 84,965 82,027 79,070
Occupancy and equipment expense .......................... 23,471 21,674 19,152
Advertising and promotions ............................... 6,477 6,989 6,306
Outsourced data processing expense ....................... 3,031 2,508 2,755
Core deposit intangibles amortization .................... 3,116 3,051 3,202
Foreclosed asset expenses, losses and write-downs ........ 9,092 1,176 193
Federal Deposit Insurance Corporation premiums ........... 8,639 1,377 755
Other expense ............................................ 30,027 27,107 26,484
-------- ------- -------
Total non interest expense ............................ 168,818 145,909 137,917
-------- ------- -------
EARNINGS BEFORE INCOME TAXES ................................... 38,365 99,258 103,690
Federal and state income tax expense ........................ 3,991 33,601 35,087
-------- ------- -------
NET EARNINGS ................................................... $ 34,374 65,657 68,603
======== ======= =======
BASIC EARNINGS PER SHARE ................................. $ 0.56 1.20 1.29
DILUTED EARNINGS PER SHARE ............................... $ 0.56 1.19 1.28
See accompanying notes to consolidated financial statements.
61
GLACIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007
Accumulated
Other
Retained Comp- Total
Common Stock Earnings rehensive Stock-
------------------- Paid-in Substantially Income holders'
(Dollars in thousands, except per share data) Shares Amount Capital Restricted (Loss) Equity
--------------------------------------------- ---------- ------ ------- ------------- ----------- -------
Balance at December 31, 2006 ........................ 52,302,820 $523 344,265 108,286 3,069 456,143
Comprehensive income:
Net earnings ..................................... -- -- -- 68,603 -- 68,603
Unrealized gain on securities, net of
reclassification adjustment and taxes ......... -- -- -- -- 48 48
-------
Total comprehensive income .......................... 68,651
-------
Cash dividends declared ($0.50 per share) ........... -- -- -- (26,694) -- (26,694)
Stock options exercised ............................. 550,080 6 6,148 -- -- 6,154
Stock issued in connection with acquisitions ........ 793,580 7 18,993 -- -- 19,000
Stock-based compensation and tax benefit ............ -- -- 5,322 -- -- 5,322
---------- ---- ------- ------- ------ -------
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 ($0.52 per share) ........... -- -- -- (29,079) -- (29,079)
Stock options exercised ............................. 719,858 7 9,789 -- -- 9,796
Stock issued in connection with acquisition ......... 639,935 7 9,280 -- -- 9,287
Public offering of stock issued ..................... 6,325,000 63 93,890 -- -- 93,953
Cumulative effect of a change in accounting principle -- -- -- (997) -- (997)
Stock-based compensation and tax benefit ............ -- -- 4,107 -- -- 4,107
---------- ---- ------- ------- ------ -------
Balance at December 31, 2008 ........................ 61,331,273 $613 491,794 185,776 (1,243) 676,940
Comprehensive income:
Net earnings ..................................... -- -- -- 34,374 -- 34,374
Unrealized gain on securities, net of
reclassification adjustment and taxes ......... -- -- -- -- 895 895
-------
Total comprehensive income .......................... 35,269
-------
Cash dividends declared ($0.52 per share) ........... -- -- -- (32,021) -- (32,021)
Stock options exercised ............................. 188,535 2 2,552 -- -- 2,554
Stock issued in connection with acquisition ......... 99,995 1 1,419 -- -- 1,420
Stock-based compensation and tax benefit ............ -- -- 1,728 -- -- 1,728
---------- ---- ------- ------- ------ -------
Balance at December 31, 2009 ........................ 61,619,803 $616 497,493 188,129 (348) 685,890
========== ==== ======= ======= ====== =======
Year ended December 31,
------------------------
2009 2008 2007
------- ------- ----
Disclosure of reclassification amount:
Unrealized and realized holding gain (loss)
arising during the year ....................... $ 7,474 (14,540) 70
Tax (expense) benefit ............................ (2,933) 5,699 (27)
------- ------- ---
Net after tax ................................. 4,541 (8,841) 43
------- ------- ---
Reclassification adjustment for net (gain) loss
included in net income ........................ (5,995) 7,345 8
Tax expense (benefit) ............................ 2,349 (2,864) (3)
------- ------- ---
Net after tax ................................. (3,646) 4,481 5
------- ------- ---
Net change in unrealized gain (loss) on
available-for-sale securities ........... $ 895 (4,360) 48
======= ======= ===
See accompanying notes to consolidated financial statements.
62
GLACIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
-------------------------------------
(Dollars in thousands) 2009 2008 2007
---------------------- ----------- ---------- ----------
OPERATING ACTIVITIES:
Net earnings .......................................................... $ 34,374 65,657 68,603
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Mortgage loans held for sale originated or acquired ................ (1,239,862) (675,280) (618,523)
Proceeds from sales of mortgage loans held for sale ................ 1,255,432 675,276 626,818
Provision for loan losses .......................................... 124,618 28,480 6,680
Depreciation of premises and equipment ............................. 10,450 9,814 8,508
Amortization of core deposit intangible ............................ 3,116 3,051 3,202
(Gain) loss on sale of investments ................................. (5,995) 7,345 8
Gain on sale of loans .............................................. (26,923) (14,849) (13,283)
Loss (gain) on OREO and writedown .................................. 5,676 149 (182)
Bargain purchase gain .............................................. (3,482) -- --
Amortization of investment securities premiums and discounts, net .. (73) 1,400 2,737
FHLB stock dividends ............................................... (16) -- --
Gain on sale of Western's Lewistown branch ......................... -- -- (1,575)
Deferred (benefit) tax expense ..................................... (29,755) (11,032) 1,569
Stock compensation expense, net of tax benefits .................... 1,863 1,686 2,187
Excess tax benefits related to the exercise of stock options ....... (75) (1,325) (1,745)
Net decrease (increase) in accrued interest receivable ............. 1,312 (2,135) 44
Net (decrease) increase in accrued interest payable ................ (2,241) (3,656) 2,162
Net (decrease) increase in current income taxes payable ............ (2,913) 2,636 970
Net increase in other assets ....................................... (26,982) (519) (1,332)
Net (decrease) increase in other liabilities ....................... (1,787) 517 1,988
----------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES ....................... 96,737 87,215 88,836
----------- ---------- ----------
INVESTING ACTIVITIES:
Proceeds from sales, maturities and prepayments of investment
securities available-for-sale ...................................... 310,809 280,051 273,323
Purchases of investment securities available-for-sale ................. (768,045) (584,058) (88,715)
Principal collected on installment and commercial loans ............... 1,002,856 1,088,871 1,125,275
Installment and commercial loans originated or acquired ............... (1,006,751) (1,420,609) (1,598,253)
Principal collections on mortgage loans ............................... 237,883 305,353 455,337
Mortgage loans originated or acquired ................................. (184,354) (357,951) (359,484)
Proceeds from sale of OREO ............................................ 14,763 4,294 --
Net purchase of FHLB and FRB stock .................................... (701) (640) (3,854)
Net cash received (paid) for acquisition of banks ..................... 41,716 (7,133) 8,953
Net cash paid for sale of Western's Lewistown branch .................. -- -- (6,846)
Net addition of premises and equipment ................................ (11,859) (15,336) (18,033)
----------- ---------- ----------
NET CASH USED IN INVESTING ACTIVITIES ........................... (363,683) (707,158) (212,297)
----------- ---------- ----------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits ................................... 601,062 (40,936) (97,214)
Net increase (decrease) in FHLB advances .............................. 451,910 (209,829) 231,427
Net increase in securities sold under repurchase agreements ........... 8,251 10,322 7,825
Net (decrease) increase in Federal Reserve Bank discount window ....... (689,000) 914,000 --
Net (decrease) increase in U.S. Treasury Tax and Loan funds ........... (930) (215,342) 54,865
Net increase (decrease) in other borrowed funds ....................... 365 (6,621) (55)
Cash dividends paid ................................................... (32,021) (29,079) (26,694)
Excess tax benefits related to the exercise of stock options .......... 75 1,325 1,745
Proceeds from exercise of stock options and other stock issued ........ 2,554 103,749 6,154
----------- ---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES ....................... 342,266 527,589 178,053
----------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .................. 75,320 (92,354) 54,592
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ........................ 135,255 227,609 173,017
----------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR .............................. $ 210,575 135,255 227,609
=========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest ................................ $ 59,408 94,028 118,840
Cash paid during the year for income taxes ............................ 36,778 43,114 34,798
Sale and refinancing of other real estate owned ....................... 8,150 2,909 --
Other real estate acquired in settlement of loans ..................... 71,967 16,661 558
The following schedule summarizes the Company's acquisitions in 2009, 2008 and
2007:
FIRST NATIONAL BANK OF THE NORTH SIDE
BANK & TRUST SAN JUANS STATE BANK
-------------- ------------ --------------
Date acquired Oct. 2, 2009 Dec. 1, 2008 April 30, 2007
Fair Value of assets acquired $272,280 $157,648 $128,252
Cash paid for the capital stock 621 7,133 8,953
Capital stock issued 9,995 9,287 19,000
Liabilities assumed 266,758 139,016 100,348
See accompanying notes to consolidated financial statements.
63
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) GENERAL
Glacier Bancorp, Inc. ("Company") 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.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan and lease losses ("ALLL"
or "allowance") and the valuations related to investments, business
combinations, goodwill, deferred tax assets 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.
(B) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its eleven wholly-owned operating subsidiaries as of December 31, 2009; Glacier
Bank ("Glacier"), First Security Bank of Missoula ("First Security"), Western
Security Bank ("Western"), Big Sky Western Bank ("Big Sky"), Valley Bank of
Helena ("Valley"), and First Bank of Montana ("First Bank-MT"), all located in
Montana, Mountain West Bank ("Mountain West") and Citizens Community Bank
("Citizens") located in Idaho, 1st Bank ("1st Bank") and First National Bank &
Trust ("First National") located in Wyoming, and Bank of the San Juans ("San
Juans") located in Colorado. All significant inter-company transactions have
been eliminated in consolidation.
In addition, the Company owns seven trust subsidiaries, Glacier Capital Trust II
("Glacier Trust II"), Glacier Capital Trust III ("Glacier Trust III"), Glacier
Capital Trust IV ("Glacier Trust IV"), Citizens (ID) Statutory Trust I
("Citizens Trust I"), Bank of the San Juans Bancorporation Trust I ("San Juans
Trust I"), First Company Statutory Trust 2001 ("First Co Trust 01") and First
Company Statutory Trust 2003 ("First Co Trust 03") for the purpose of issuing
trust preferred securities and, in accordance with Financial Accounting
Standards Board ("FASB") Accounting Standards Codification(TM) ("ASC") Topic
810, Consolidation, the trust subsidiaries are not consolidated into the
Company's financial statements. The Company does not have any other off-balance
sheet entities.
On October 2, 2009, First Company and its subsidiary, First National, was
acquired by the Company. On December 1, 2008, Bank of the San Juans
Bancorporation and its subsidiary, San Juans, was acquired by the Company. The
acquired banks became wholly-owned subsidiaries 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. On April 30, 2008, Glacier Bank of Whitefish ("Whitefish")
merged into Glacier with operations conducted under the Glacier charter. The
mergers were accounted for as a combination of two wholly-owned subsidiaries
without acquisition accounting and prior period activity of the merged banks has
been combined and included in the acquiring bank subsidiaries' historical
results.
(C) VARIABLE INTEREST ENTITIES
FASB ASC Topic 810, Consolidation, provides guidance as to when a company should
consolidate the assets, liabilities, and activities of a variable interest
entity ("VIE") in its financial statements, and when a company should disclose
information about its relationship with a VIE. A VIE is a legal structure used
to conduct activities or hold assets, and a VIE must be consolidated by a
company if it is the primary beneficiary that absorbs the majority of the
entity's expected losses, receives a majority of the entity's expected residual
returns, or both. For additional information relating to 2009 amendments to this
topic, see Note 22.
64
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES...CONTINUED
The Company has equity investments in Certified Development Entities ("CDE")
which have received allocations of new market tax credits ("NMTC"). The Company
also has equity investments in low-income housing tax credit ("LIHTC")
partnerships. The CDE's and the LIHTC partnerships are VIE's. The underlying
activities of the VIE's are community development projects designed primarily to
promote community welfare, such as economic rehabilitation and development of
low-income areas by providing housing, services, or jobs for residents. The
maximum exposure to loss in the VIE's is the amount of equity invested or credit
extended by the Company; however, the Company has credit protection in the form
of indemnification agreements, guarantees, and collateral arrangements. The
Company has evaluated the variable interests held by the Company and others and
where the Company is the primary beneficiary of a VIE, the VIE has been
consolidated into the bank subsidiary which holds the direct investment in the
VIE. Currently, only CDE (NMTC) investments are consolidated into the Company's
financial statements. For the CDE (NMTC) investments, the creditors and other
beneficial interest holders have no recourse to the general credit of the bank
subsidiaries. As of December 31, 2009, the Company had investments in VIE's of
$30,513,000 and $2,331,000 for the CDE (NMTC) and LIHTC partnerships,
respectively. The consolidated VIE's as well as the unconsolidated VIE's are
regularly monitored by the Company to determine if any reconsideration events
have occurred that could cause its primary beneficiary status to change.
(D) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, cash held as demand deposits at
various banks and regulatory agencies, interest bearing deposits, federal funds
sold and liquid investments with original maturities of three months or less.
(E) INVESTMENT SECURITIES
Debt securities for which the Company has the positive intent and ability to
hold to maturity are classified as held-to-maturity and are stated at amortized
cost. Debt and equity securities held primarily for the purpose of selling in
the near term are classified as trading securities and are reported at fair
market value, with unrealized gains and losses included in income. Debt and
equity securities not classified as held-to-maturity or trading are classified
as available-for-sale and are reported at fair value with unrealized gains and
losses, net of income taxes, shown as a separate component of stockholders'
equity. As of December 31, 2009 and 2008, the Company only has
available-for-sale securities.
Premiums and discounts on investment securities are amortized or accreted into
income using a method that approximates the level-yield interest method. The
cost of any investment, if sold, is determined by specific identification. If
impairment of securities is determined to be other-than-temporary, an impairment
loss is recognized by reducing the amortized cost for the credit loss portion of
the impairment with a corresponding charge to earnings for a like amount.
The Company holds stock in the Federal Home Loan Bank ("FHLB") and the Federal
Reserve Bank ("FRB"). FHLB stock and FRB stock is restricted because such stock
may only be sold to the FHLB or FRB at its par value. Due to restrictive terms,
and the lack of a readily determinable market value, FHLB and FRB stocks are
carried at cost.
For additional information relating to investment securities, see Note 3.
(F) LOANS RECEIVABLE
Loans that are intended to be held to maturity are reported at their unpaid
principal balance less charge-offs, specific valuation accounts, and any
deferred fees or costs on originated loans. Acquired loans are reported net of
unamortized premiums or discounts. Interest income is reported on the interest
method and includes discounts and premiums on acquired loans and net loan fees
on originated loans which are amortized over the expected life of loans using
methods that approximate the effective interest method. For additional
information relating to loans, see Note 4.
Loans are designated non-accrual and the accrual of interest is discontinued
when the collection of the contractual principal or interest is unlikely. A loan
is typically placed on non-accrual when principal or interest is due and has
remained unpaid for ninety days or more unless the loan is in process of
collection and well-secured by collateral the fair value of which is sufficient
to pay off the debt in full. When a loan is placed on non-accrual status,
interest previously accrued but not collected is reversed against current period
interest income. Subsequent payments are applied to the outstanding principal
balance if doubt remains as to the ultimate collectability of the loan. Interest
accruals are resumed on such loans only when they are brought fully current with
respect to interest and principal and when, in the judgment of management, the
loans are estimated to be fully collectible as to both principal and interest.
65
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES...CONTINUED
Loans are designated impaired when, based upon current information and events,
it is probable that the Company will be unable to collect the scheduled payments
of principal or interest when due according to the contractual terms of the loan
agreement. 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 and designated is
non-accrual, all payments are applied to principal under the cost recovery
method. When the ultimate collectability of the total principal on an impaired
loan is not in doubt, contractual interest is generally credited to interest
income when received under the cash basis method.
A restructured loan is considered a troubled debt restructuring if the creditor,
for economic or legal reasons related to the debtor's financial difficulties,
grants a concession to the debtor that it would not otherwise consider. The
Company's troubled debt restructuring loans are considered impaired loans.
(G) LOANS HELD FOR SALE
Mortgage and commercial loans originated and intended for sale in the secondary
market are carried at the lower of cost or estimated market value in the
aggregate. Net unrealized losses are recognized by charges to income. A sale is
recognized when the Company surrenders control of the loan and consideration,
other than beneficial interests in the loan, is received in exchange. A gain is
recognized to the extent the selling price exceeds the carrying value.
(H) ALLOWANCE FOR LOAN AND LEASE LOSSES
Based upon management's analysis of the Company's loan and lease portfolio, the
balance of the ALLL is an estimate of probable credit losses known and inherent
in the loan and lease portfolio as of the date of the consolidated financial
statements. The ALLL is increased by provisions for loan losses which are
charged to expense. The portions of loan balances determined by management to be
uncollectible are charged off in reduction of the allowance. Recoveries of
amounts previously charged off are credited as an increase to the allowance.
The allowance for estimated losses on loans and leases is determined by each
bank subsidiary based upon past loss experience, adjusted for changes in trends
and conditions of certain items, including:
- Adverse situations that may affect specific borrowers' ability to
repay;
- Current collateral values, where appropriate;
- Delinquencies and non-performing loans;
- Amount and timing of future cash flows expected on impaired loans;
- Criticized and classified loans;
- Credit concentrations by credit type, industry, geography;
- Recoveries and dispositions of balances previously charge-off;
- Volume and terms of loans;
- Loan size and complexity;
- Competition and bank size;
- Local market areas and national economic conditions;
- Effects of changes in lending policies and procedures;
- Experience, ability, and depth of lending management and credit
administration staff; and
- Effects of legal and regulatory developments.
66
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES...CONTINUED
Individually significant loans and major lending areas are reviewed periodically
to determine potential problems at an early date. 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. The Company considers its investment in one-to-four family
residential loans, consumer and home equity loans to be homogeneous and
therefore evaluates such loans for impairment on a pooled basis.
(I) TEMPORARY VERSUS OTHER-THAN-TEMPORARY IMPAIRMENT
The Company views the determination of whether an investment security is
temporarily or other-than-temporarily impaired as a critical accounting policy,
as the estimate is susceptible to significant change from period to period
because it requires management to make significant judgments, assumptions and
estimates in the preparation of its consolidated financial statements. The
Company assesses individual securities in its investment securities portfolio
for impairment at least on a quarterly basis, and more frequently when economic
or market conditions warrant. An investment is impaired if the fair value of the
security is less than its carrying value at the financial statement date. If
impairment is determined to be other-than-temporary, an impairment loss is
recognized by reducing the amortized cost for the credit loss portion of the
impairment with a corresponding charge to earnings.
Management considers whether an investment security is other-than-temporarily
impaired under the guidance promulgated in FASB ASC Topic 320, Investments -
Debt and Equity Securities.
For additional information relating to investment securities, see Note 3.
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.
(J) PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less depreciation. Depreciation is
computed on a straight-line method over the estimated useful lives or the term
of the related lease. The estimated useful life for office buildings is 15 - 40
years and the estimated useful life for furniture, fixtures, and equipment is 3
- 10 years. Interest is capitalized for any significant building projects. For
additional information relating to premises and equipment, see Note 5.
(K) REAL ESTATE OWNED
Property acquired by foreclosure or deed-in-lieu of foreclosure is carried at
the lower of fair value at acquisition date or current estimated fair value,
less selling costs. Costs, excluding interest, relating to the improvement of
property are capitalized, whereas those relating to holding the property are
charged to expense. Fair value is determined as the amount that could be
reasonably expected in a current sale (other than a forced or liquidation sale)
between a willing buyer and a willing seller. If the fair value of the asset
minus the estimated cost to sell is less than the cost of the property, a loss
is recognized in other expenses and the asset carrying value is reduced. Any
gain or loss on disposition of real estate owned is recorded in other income or
other expense.
(L) BUSINESS COMBINATIONS AND INTANGIBLE ASSETS
Acquisitions are accounted for as prescribed by FASB ASC Topic 805, Business
Combinations. This Topic was amended January 1, 2009; for additional information
relating to the amendment, see Note 22. Acquisition accounting requires the
total purchase price to be allocated to the estimated fair values of assets
acquired and liabilities assumed, including certain intangible assets. Goodwill
is recorded if the purchase price exceeds the net fair value of assets acquired
and a bargain purchase gain is recorded in other income if the net fair value of
assets acquired exceeds the purchase price.
67
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES...CONTINUED
Adjustment of the allocated purchase price may be related to fair value
estimates for which all information has not been obtained on the acquired entity
known or discovered during the allocation period, the period of time required to
identify and measure the fair values of the assets and liabilities acquired in
the business combination.
Core deposit intangible represents the intangible value of depositor
relationships resulting from deposit liabilities assumed in acquisitions and are
amortized using an accelerated method based on an estimated runoff of the
related deposits, not exceeding 10 years. The useful life of the core deposit
intangible is reevaluated on an annual basis, with any changes in estimated
useful life accounted for prospectively over the revised remaining life. For
additional information relating to core deposit intangibles, see Note 6.
On an annual basis, as required by FASB ASC Topic 350, Intangibles - Goodwill
and Other, the Company tests goodwill and other intangible assets for impairment
at the subsidiary level annually during the third quarter. In addition, goodwill
and other intangible assets of a subsidiary are tested for impairment between
annual tests if an event occurs or circumstances change that would
more-likely-than not reduce the fair value of a reporting unit below its
carrying amount. For additional information relating to goodwill, see Note 6.
(M) INCOME TAXES
Deferred tax assets and liabilities are recognized for estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of assets and liabilities and their respective tax bases. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Deferred tax assets are reduced by a valuation allowance, if based on the weight
of available evidence, it is more-likely-than-not that some portion or all of
the deferred tax assets will not be realized. The term more-likely-than not
means a likelihood of more than 50 percent. The recognition threshold considers
the facts, circumstances, and information available at the reporting date and is
subject to the Company's judgment. In assessing the need for a valuation
allowance, the Company considers both positive and negative evidence. For
additional information relating to income taxes, see Note 12.
(N) ADVERTISING AND PROMOTION
Advertising and promotion costs are recognized in the period incurred.
(O) STOCK-BASED COMPENSATION
Compensation cost related to the share-based payment transactions is recognized
in the financial statements over the requisite service period, which is the
vesting period. Compensation cost is measured using the fair value of an award
on the grant date by using the Black Scholes option-pricing model. For
additional information relating to stock-based compensation, see Note 15.
(P) LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. An asset is deemed impaired if the sum of the expected future cash
flows is less than the carrying amount of the asset. If impaired, an impairment
loss is recognized to reduce the carrying value of the asset to fair value. At
December 31, 2009 and 2008, no assets were considered impaired.
68
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES...CONTINUED
(Q) MORTGAGE SERVICING RIGHTS
The Company recognizes the rights to service mortgage loans for others, whether
acquired or internally originated. Loan servicing rights are initially recorded
at fair value based on comparable market quotes and are amortized as other
expense in proportion to and over the period of estimated net servicing income.
Loan servicing rights are evaluated quarterly for impairment by discounting the
expected future cash flows, taking into consideration the estimated level of
prepayments based on current industry expectations and the predominant risk
characteristics of the underlying loans including loan type, note rate and loan
term. Impairment adjustments, if any, are recorded through a valuation
allowance. For additional information relating to mortgage servicing rights, see
Note 6.
As of December 31, 2009 and 2008, the carrying value of mortgage servicing
rights was approximately $1,041,000 and $1,262,000, respectively. Amortization
expense of $250,000, $176,000, and $188,000 was recognized in the years ended
December 31, 2009, 2008, and 2007, respectively. The servicing rights are
included in other assets on the balance sheet and are amortized over the period
of estimated net servicing income. There was no impairment of carrying value at
December 31, 2009 or 2008. At December 31, 2009, the fair value of mortgage
servicing rights was approximately $1,708,000.
(R) EARNINGS PER SHARE
Basic earnings per share represents income available to common stockholders
divided by the weighted-average number of shares of common stock outstanding
during the year. Diluted earnings per share reflects additional common shares
that would have been outstanding if dilutive potential shares had been issued,
as well as any adjustment to income that would result from the issuance.
Potential common shares that may be issued by the Company relate to outstanding
stock options, and are determined using the treasury stock method. For
additional information relating earnings per share, see Note 14.
(S) LEASES
The Company leases certain land, premises and equipment from third parties under
operating and capital leases. The lease payments for operating lease agreements
are recognized on a straight-line basis. The present value of the future minimum
rental payments for capital leases is recognized as an asset when the lease is
formed. Lease improvements incurred at the inception of the lease are recorded
as an asset and depreciated over the initial term of the lease and lease
improvements incurred subsequently are depreciated over the remaining term of
the lease. For additional information relating to leases, see Note 19.
(T) COMPREHENSIVE INCOME
Comprehensive income includes net income, as well as other changes in
stockholders' equity that result from transactions and economic events other
than those with stockholders. The Company's only significant element of other
comprehensive income is unrealized gains and losses, net of tax expense
(benefit), on available-for-sale securities.
(U) RECLASSIFICATIONS
Certain reclassifications have been made to the 2008 and 2007 financial
statements to conform to the 2009 presentation.
2. CASH ON HAND AND IN BANKS
At December 31, 2009 and 2008, cash and cash equivalents primarily consisted of
Federal funds sold, cash on hand, and cash items in process. The bank
subsidiaries are required to maintain an average reserve balance with either the
Federal Reserve or in the form of cash on hand. The amount of this required
reserve balance at December 31, 2009 was $12,412,000.
The financial institutions holding the Company's cash accounts are participating
in the Federal Deposit Insurance Corporation's ("FDIC") Transaction Account
Guarantee Program. Under that program, through June 30, 2010, all
noninterest-bearing transaction accounts are fully guaranteed by the FDIC for
the entire amount in the account.
At December 31, 2009, the Company had overnight Federal funds sold of
$87,155,000, which are not guaranteed by the FDIC. The Company performs a
quarterly review of the institutions at which balances are maintained. The
review encompasses the financial condition of each institution including capital
level, credit quality, earnings level, and other factors including trends
affecting the financial condition of the institution.
69
3. INVESTMENT SECURITIES, AVAILABLE-FOR-SALE
A comparison of the amortized cost and estimated fair value of the Company's
investment securities designated as available-for-sale is presented below.
YEAR ENDED DECEMBER 31, 2009
------------------------------------------------------
GROSS UNREALIZED ESTIMATED
WEIGHTED AMORTIZED ----------------- FAIR
(Dollars in thousands) YIELD COST GAINS LOSSES VALUE
---------------------- -------- ---------- ------- ------- ---------
U.S. Government and federal agency:
Maturing within one year ..................... 1.62% $ 210 -- (1) 209
Government sponsored enterprises:
Maturing within one year ..................... 0.00% -- -- -- --
Maturing after one year through five years ... 3.21% 74 -- -- 74
Maturing after five years through ten years .. 1.64% 40 -- -- 40
Maturing after ten years ..................... 2.05% 63 -- -- 63
---------- ------ ------- ---------
2.43% 177 -- -- 177
---------- ------ ------- ---------
State and local governments and other issues:
Maturing within one year ..................... 2.48% 2,040 6 -- 2,046
Maturing after one year through five years ... 3.30% 9,326 208 (12) 9,522
Maturing after five years through ten years .. 3.84% 27,125 786 (168) 27,743
Maturing after ten years ..................... 4.92% 448,853 10,140 (10,539) 448,454
---------- ------ ------- ---------
4.82% 487,344 11,140 (10,719) 487,765
---------- ------ ------- ---------
Residential mortgage-backed securities .......... 3.42% 956,033 15,167 (16,158) 955,042
---------- ------ ------- ---------
Total marketable securities ............... 3.89% 1,443,764 26,307 (26,878) 1,443,193
---------- ------ ------- ---------
Other investments:
FHLB and FRB stock, at cost .................. 1.30% 62,577 -- -- 62,577
Other stock, at cost ......................... 0.05% 624 -- -- 624
---------- ------ ------- ---------
Total investments ......................... 3.78% $1,506,965 26,307 (26,878) 1,506,394
========== ====== ======= =========
70
3. INVESTMENT SECURITIES, AVAILABLE-FOR-SALE . . . CONTINUED
Year ended December 31, 2008
------------------------------------------------------
GROSS UNREALIZED ESTIMATED
WEIGHTED AMORTIZED ----------------- FAIR
(Dollars in thousands) YIELD COST GAINS LOSSES VALUE
---------------------- -------- ---------- ------- ------- ---------
U.S. Government and federal agency:
Maturing within one year ..................... 1.62% $ 213 4 -- 217
Government sponsored enterprises:
Maturing within one year ..................... 0.00% -- -- -- --
Maturing after one year through five years ... 0.00% -- -- -- --
Maturing after 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 after one year through five years ... 4.61% 4,482 104 (9) 4,577
Maturing after 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
-------- ------ ------- -------
Residential mortgage-backed securities .......... 4.62% 495,961 4,956 (6,447) 494,470
-------- ------ ------- -------
Total marketable securities ............... 4.83% 930,732 14,221 (16,271) 928,682
-------- ------ ------- -------
Other investments:
FHLB and FRB stock, at cost .................. 1.72% 60,945 -- -- 60,945
Other stock, at cost ......................... 3.10% 465 -- -- 465
-------- ------ ------- -------
Total investments ......................... 4.64% $992,142 14,221 (16,271) 990,092
======== ====== ======= =======
Maturities of securities do not reflect repricing opportunities present in
adjustable rate securities, nor do they reflect expected shorter maturities
based upon early prepayment of principal. Weighted yields on tax-exempt
investment securities exclude the tax effect.
The amortized cost of securities at December 31, 2007 was as follows:
December 31,
(Dollars in thousands) 2007
---------------------- ------------
U.S. Government and federal agency .................. $ 2,550
Government sponsored enterprises .................... 1,314
State and local governments and other issues ........ 277,212
Residential mortgage-backed securities .............. 346,085
FHLMC and FNMA stock ................................ 7,593
Certificates of deposit with over 90 day maturity ... 199
FHLB and FRB stock .................................. 59,815
Other stock ......................................... 413
--------
$695,181
========
71
3. INVESTMENT SECURITIES, AVAILABLE-FOR-SALE...CONTINUED
Interest income includes tax-exempt interest for the years ended December 31,
2009, 2008, and 2007 of $22,196,000, $13,901,000, and $13,427,000, respectively.
Gross proceeds from sales of investment securities for the years ended December
31, 2009, 2008, and 2007 were approximately $85,224,000, $97,002,000 and
$55,501,000, respectively, resulting in gross gains of approximately $7,113,000,
$0 and $1,000 and gross losses of approximately $1,118,000, $0 and $9,000
respectively. During the first quarter of 2008, the Company realized a gain of
$130,000 from extinguishment of the Company's share ownership in Principal
Financial Group and a gain of $118,000 from the mandatory redemption of a
portion of Visa, Inc. shares from its recent initial public offering. During the
third quarter of 2008, the Company incurred a $7,593,000 other-than-temporary
impairment ("OTTI") charge with respect to its investments in Federal Home Loan
Mortgage Corporation ("Freddie Mac") preferred stock and Federal National
Mortgage Association ("Fannie Mae") common stock. The Fannie Mae and Freddie Mac
stock was written down to a $0 value, however, the shares were still owned by
the Company at December 31, 2009. The cost of any investment sold is determined
by specific identification.
At December 31, 2009, the Company had investment securities with carrying values
of approximately $1,114,749,000, pledged as collateral for FHLB advances, FRB
borrowings, securities sold under agreements to repurchase, U.S. Treasury Tax
and Loan borrowings and deposits of several local government units.
The investments in 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.
The following is a summary of investments with unrealized loss positions at
December 31, 2009:
LESS THAN 12 MONTHS 12 MONTHS OR MORE TOTAL
--------------------- ------------------- --------------------
FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
(Dollars in thousands) VALUE LOSS VALUE LOSS VALUE LOSS
---------------------- -------- ---------- ------ ---------- ------- ----------
U.S. Government and federal agency ............. $ 208 1 -- -- 208 1
State and local governments and other issues ... 74,045 1,835 18,094 985 92,139 2,820
Collateralized debt obligations ................ 6,789 7,899 -- -- 6,789 7,899
Residential mortgage-backed securities ......... 466,196 3,861 39,780 12,297 505,976 16,158
-------- ------ ------ ------ ------- ------
Total temporarily impaired securities ....... $547,238 13,596 57,874 13,282 605,112 26,878
======== ====== ====== ====== ======= ======
The following is a summary of investments with unrealized loss positions 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
Residential mortgage-backed securities ......... 116,004 5,758 12,403 689 128,407 6,447
-------- ------ ------ --- ------- ------
Total temporarily impaired securities ....... $258,934 15,531 14,229 740 273,163 16,271
======== ====== ====== === ======= ======
72
3. INVESTMENT SECURITIES, AVAILABLE-FOR-SALE...CONTINUED
The Company assesses individual securities in its investment securities
portfolio for impairment at least on a quarterly basis, and more frequently when
economic or market conditions warrant. An investment is impaired if the fair
value of the security is less than its carrying value at the financial statement
date. If impairment is determined to be other-than-temporary, an impairment loss
is recognized by reducing the amortized cost for the credit loss portion of the
impairment with a corresponding charge to earnings.
For fair value estimates provided by third party vendors, management also
considered the models and methodology, for appropriate consideration of both
observable and unobservable inputs, including appropriately adjusted discount
rates and credit spreads for securities with limited or inactive markets, and
whether the quoted prices reflect orderly transactions, For certain securities,
the Company obtained independent estimates of inputs, including cash flows, in
supplement to third party vendor provided information. The Company also reviewed
financial statements of select issuers, with follow up discussions with issuers'
management for clarification and verification of information relevant to the
Company's impairment analysis.
In evaluating debt securities for other-than-temporary impairment losses,
management assesses whether the Company intends to sell or if it is more
likely-than-not that it will be required to sell impaired debt securities. In so
doing, management considers contractual constraints, liquidity, capital, asset /
liability management and securities portfolio objectives. With respect to its
impaired debt securities at December 31, 2009, management determined that it
does not intend to sell and that there is no expected requirement to sell any of
its impaired debt securities.
As of December 31, 2009, there were 273 investments in an unrealized loss
position and were considered to be temporarily impaired and therefore an
impairment charge has not been recorded. All of such temporarily impaired
investments are debt securities. Residential mortgage-backed securities have the
largest unrealized loss. The fair value of these securities, which have
underlying collateral consisting of U.S. government sponsored enterprise
guaranteed mortgages and non-guaranteed private label whole loan mortgages, were
$505,976,000 at December 31, 2009 of which $454,516,000 was purchased during
2009, the remainder of which had a fair market value of $73,624,000 at December
31, 2008. For the securities purchased in 2009 there has been an unrealized loss
of $3,607,000 since purchase. Of the remaining residential mortgage-backed
securities in a loss position the unrealized loss increased from 8.3 percent of
fair value at December 31, 2008 to 24.4 percent of fair value at December 31,
2009. The fair value of Collateralized Debt Obligation securities in an
unrealized loss position is $6,789,000 with unrealized losses of $7,899,000 or
116 percent of fair value at December 31, 2009; such investments had an
unrealized gain position at December 31, 2008. The fair value of State and Local
Government were $92,139,000 at December 31, 2009 of which $42,703,000 was
purchased during 2009, the remainder of which had a fair market value of
$47,907,000 at December 31, 2008. For the securities purchased in 2009 there has
been an unrealized loss of $1,212,000 since purchase. Of the remaining State and
Local Government securities in a loss position the unrealized loss decreased
from 10.1 percent of fair value at December 31, 2008 to 3.3 percent of fair
value at December 31, 2009.
The Company stratified the 273 debt securities for both severity and duration of
impairment. With respect to severity, the following table provides the number of
securities and amount of unrealized loss in the various ranges of unrealized
loss as a percent of book value.
Unrealized Number of
(Dollars in thousands) Loss Bonds
---------------------- ---------- ---------
Greater than 40.0% $ 7,859 6
30.1% to 40.0% 1,370 1
20.1% to 30.0% 7,160 5
15.1% to 20.0% 4,180 10
10.1% to 15.0% 125 3
5.1% to 10.0% 705 14
0.1% to 5.0% 5,479 234
------- ---
Total $26,878 273
======= ===
73
3. INVESTMENT SECURITIES, AVAILABLE-FOR-SALE...CONTINUED
With respect to the duration of the impaired securities, the Company identified
39 securities which have been continuously impaired for the 12 months ending
December 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 was in an unrealized loss position. 13 of these 39
securities are non-guaranteed, non-Agency CMOs with an aggregate unrealized loss
of $12,291,000, the most notable of which had an unrealized loss of $1,536,000.
17 of the 39 securities are state and local tax-exempt securities with an
unrealized loss of $985,000, the most notable of which had an unrealized loss of
$233,000. 8 of the 39 securities are residential mortgage-backed securities
issued by U.S. government sponsored agencies, i.e., GNMA, FNMA, FHLMC and SBA,
the aggregate unrealized loss of which was $6,000.
For impaired debt securities for which there was no intent or expected
requirement to sell, management considers available evidence to assess whether
it is more likely-than-not that all amounts due would not be collected In such
assessment, management considers the severity and duration of the impairment,
the credit ratings of the security, the overall deal and payment structure,
including the Company's position within the structure, underlying obligors,
financial condition and near term prospects of the issuer, delinquencies,
defaults, loss severities, recoveries, prepayments, cumulative loss projections,
discounted cash flows and fair value estimates.
Based on an analysis of its impaired securities as of December 31, 2009, the
Company determined that none of such securities had other-than-temporary
impairment.
4. LOANS RECEIVABLE, NET AND LOANS HELD FOR SALE
The following is a summary of loans receivable, net and loans held for sale at:
December 31,
----------------------
(Dollars in thousands) 2009 2008
---------------------- ---------- ---------
Residential real estate ......................... $ 746,050 786,869
Loans held for sale ............................. 66,330 54,976
Commercial real estate .......................... 1,900,438 1,935,341
Other commercial ................................ 724,966 645,033
Consumer ........................................ 201,001 208,166
Home equity ..................................... 501,920 507,831
---------- ---------
4,140,705 4,138,216
Net deferred loan fees, premiums and discounts .. (10,460) (8,023)
---------- ---------
4,130,245 4,130,193
Allowance for loan and lease losses ............. (142,927) (76,739)
---------- ---------
$3,987,318 4,053,454
========== =========
Substantially all of the loans held for sale at December 31, 2009 and 2008 were
committed to be sold. At December 31, 2009, the Company had $2,571,047,000 in
variable rate loans and $1,569,658,000 in fixed rate loans. The weighted average
interest rate on loans was 6.06 percent and 6.93 percent at December 31, 2009
and 2008, respectively. At December 31, 2009, 2008 and 2007, loans sold and
serviced for others were $176,231,000, $181,351,000, and $177,173,000,
respectively. At December 31, 2009, the Company had loans of approximately
$2,502,684,000 pledged as collateral for FHLB advances, FRB and U.S. Treasury
Tax and Loan borrowings.
Substantially all of the Company's loan receivables are with customers within
the Company's market areas. Although the Company has a diversified loan
portfolio, a substantial portion of its customers' ability to honor their
contracts is dependent upon the economic performance in the Company's market
areas. The bank subsidiaries are subject to regulatory limits for the amount of
loans to any individual borrower and all bank subsidiaries are in compliance as
of December 31, 2009. No borrower had outstanding loans or commitments exceeding
10 percent of the Company's consolidated stockholders' equity as of December 31,
2009.
The Company has entered into transactions with its executive officers,
directors, significant shareholders, and their affiliates. The aggregate amount
of loans to such related parties at December 31, 2009 and 2008 was approximately
$86,037,000 and $92,107,000, respectively. During 2009, new loans to such
related parties were approximately $18,882,000 and repayments were approximately
$24,952,000.
74
4. LOANS RECEIVABLE, NET AND LOANS HELD FOR SALE . . . CONTINUED
The following is a summary of activity in the ALLL:
Years ended December 31,
--------------------------
(Dollars in thousands) 2009 2008 2007
--------------------- -------- ------ ------
Balance at beginning of period ... $ 76,739 54,413 49,259
Acquisitions ..................... -- 2,625 639
Net charge offs .................. (58,430) (8,779) (2,165)
Provision ........................ 124,618 28,480 6,680
-------- ------ ------
Balance at end of period ......... $142,927 76,739 54,413
======== ====== ======
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.
Following is the allocation of the ALLL and the percent of loans in each
category at:
DECEMBER 31, 2009 December 31, 2008
---------------------- ---------------------
PERCENT OF Percent of
OF LOANS IN of Loans in
(Dollars in thousands) AMOUNT CATEGORY Amount Category
---------------------- -------- ----------- ------- -----------
Residential real estate and loans held for sale .. $ 13,496 19.6% $ 7,233 20.3%
Commercial real estate ........................... 66,791 45.9% 35,305 46.8%
Other commercial ................................. 39,558 17.5% 21,590 15.6%
Consumer ......................................... 9,663 4.9% 5,636 5.0%
Home equity ...................................... 13,419 12.1% 6,975 12.3%
-------- ----- ------- -----
$142,927 100.0% $76,739 100.0%
======== ===== ======= =====
The following is a summary of the non-performing loans:
Years ended December 31,
--------------------------
(Dollars in thousands) 2009 2008 2007
---------------------- -------- ------ ------
Impaired loans ................................. $218,742 79,949 12,152
Average recorded investment in impaired loans .. 145,230 40,985 7,311
Impairment allowance ........................... 19,760 7,999 2,827
Non-accrual loans .............................. 198,281 64,301 8,560
Accruing loans 90 days or more overdue ......... 5,537 8,613 2,685
As of December 31, 2009, the Company had impaired loans without a valuation
allowance of $141,613,000 and impaired loans with a valuation allowance of
$77,129,000. Interest income that would have been recorded on non-accrual loans
if such loans had been current for the entire period would have been
approximately $11,730,000, $4,434,000, and $683,000 for the years ended December
31, 2009, 2008, and 2007. Interest income recognized on non-accruing loans for
the years ended December 31, 2009, 2008, and 2007 was not significant.
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and letters of
credit, and involve, to varying degrees, elements of credit risk. The Company's
exposure to credit loss in the event of nonperformance by the other party to the
financial instrument for commitments to extend credit is represented by the
contractual amount of those instruments. The Company uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
75
4. LOANS RECEIVABLE, NET AND LOANS HELD FOR SALE . . . CONTINUED
The Company's troubled debt restructuring loans are included in the amount of
impaired loans. As of December 31, 2009, the Company had troubled debt
restructuring loans of $64,618,000, of which there were $1,245,000 of additional
outstanding commitments. The amount of charge-offs on troubled debt
restructuring loans during 2009 was $7,776,000.
The Company had outstanding commitments as follows:
December 31,
------------------
(Dollars in thousands) 2009 2008
---------------------- -------- -------
Loans and loans in process ....... $457,754 648,788
Unused consumer lines of credit .. 286,621 272,181
Letters of credit ................ 28,691 36,934
-------- -------
$773,066 957,903
======== =======
5. PREMISES AND EQUIPMENT, NET
Premises and equipment, net of accumulated depreciation, consist of the
following at:
December 31,
------------------
(Dollars in thousands) 2009 2008
---------------------- -------- -------
Land ........................................... $ 23,315 20,633
Office buildings and construction in progress .. 119,420 113,742
Furniture, fixtures and equipment .............. 58,013 53,593
Leasehold improvements ......................... 8,969 7,528
Accumulated depreciation ....................... (68,796) (61,547)
-------- -------
$140,921 133,949
======== =======
Depreciation expense for the years ended December 31, 2009, 2008, and 2007 was
$10,450,000, $9,814,000, and $8,508,000, respectively. Interest expense
capitalized for various construction projects for the years ended December 31,
2009, 2008 and 2007 was $33,000, $71,000 and $264,000, respectively.
76
6. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table sets forth information regarding the Company's core deposit
intangibles and mortgage servicing rights:
Mortgage
Core Deposit Servicing
(Dollars in thousands) Intangible Rights (1) Total
---------------------- ------------ ---------- ------
AS OF DECEMBER 31, 2009
Gross carrying value $ 31,847
Accumulated amortization (17,910)
--------
Net carrying value $ 13,937 1,041 14,978
========
AS OF DECEMBER 31, 2008
Gross carrying value $ 27,807
Accumulated amortization (14,794)
--------
Net carrying value $ 13,013 1,262 14,275
========
WEIGHTED-AVERAGE AMORTIZATION PERIOD
(Period in years) 9.1 9.4 9.1
AGGREGATE AMORTIZATION EXPENSE
For the year ended December 31, 2009 $ 3,116 250 3,366
For the year ended December 31, 2008 3,051 176 3,227
For the year ended December 31, 2007 3,202 188 3,390
ESTIMATED AMORTIZATION EXPENSE
For the year ended December 31, 2010 $ 2,603 74 2,677
For the year ended December 31, 2011 1,895 72 1,967
For the year ended December 31, 2012 1,534 70 1,604
For the year ended December 31, 2013 1,283 68 1,351
For the year ended December 31, 2014 1,034 65 1,099
1 Gross carrying value and accumulated amortization are not readily available
The following is a summary of activity in goodwill for the years ended December
31, 2009 and 2008:
Years ended December 31,
------------------------
(Dollars in thousands) 2009 2008
---------------------- --------- ------------
Balance at beginning of period $ 146,752 140,301
Acquisition of San Juans (493) 6,451
--------- -------
Balance at end of period $ 146,259 146,752
========= =======
77
7. DEPOSITS
Deposits consist of the following at:
December 31,
--------------------------------------
(Dollars in thousands) 2009 2008
---------------------- ------------------ -----------------
Demand accounts ............................... $ 810,550 19.8% 747,439 22.9%
---------- ---- --------- -----
NOW accounts .................................. 749,535 18.3% 515,211 15.8%
Savings accounts .............................. 324,234 7.9% 280,895 8.6%
Money market demand accounts .................. 907,949 22.1% 779,154 23.9%
Certificates of deposit ....................... 1,307,884 31.9% 939,776 28.8%
---------- ----- --------- -----
Total interest bearing deposits ............ 3,289,602 80.2% 2,515,036 77.1%
---------- ----- --------- -----
Total deposits ............................. $4,100,152 100.0% 3,262,475 100.0%
========== ===== ========= =====
Deposits with a balance $100,000 and greater .. $2,315,750 1,621,430
========== =========
At December 31, 2009, scheduled maturities of certificates of deposit are as
follows:
Years ending December 31,
--------------------------------------------------
(Dollars in thousands) TOTAL 2010 2011 2012 2013 Thereafter
---------------------- ---------- --------- ------- ------ ------ ----------
1.00% and lower ...... $ 170,133 169,896 36 194 7 --
1.01% to 2.00% ....... 590,288 553,632 33,922 1,844 356 534
2.01% to 3.00% ....... 379,977 280,048 64,292 29,374 1,724 4,539
3.01% to 4.00% ....... 93,894 48,593 23,189 4,807 5,806 11,499
4.01% to 5.00% ....... 43,226 26,662 8,863 4,445 3,069 187
5.01% to 6.00% ....... 30,098 12,429 10,849 6,598 101 121
6.01% to 7.00% ....... 246 120 126 -- -- --
7.01% to 8.00% ....... 22 -- -- 22 -- --
---------- --------- ------- ------ ------ ------
$1,307,884 1,091,380 141,277 47,284 11,063 16,880
========== ========= ======= ====== ====== ======
Interest expense on deposits is summarized as follows:
Years ended December 31,
-------------------------
(Dollars in thousands) 2009 2008 2007
---------------------- ------- ------ ------
NOW accounts .................. $ 2,280 3,014 4,708
Savings accounts .............. 947 1,865 2,679
Money market demand accounts .. 8,564 17,234 27,248
Certificates of deposit ....... 26,638 32,899 46,824
------- ------ ------
$38,429 55,012 81,459
======= ====== ======
The Company reclassified approximately $2,894,000 and $3,199,000 of overdraft
demand deposits to loans as of December 31, 2009 and 2008, respectively. NOW,
money market demand and certificates of deposit totals include wholesale
deposits of $350,760,000 as of December 31, 2009. The Company has entered into
deposit transactions with its executive officers, directors, significant
shareholders, and their affiliates. The aggregate amount of deposits with such
related parties at December 31, 2009, and 2008 was approximately $53,082,000 and
$59,343,000, respectively.
78
8. BORROWINGS
Advances from the FHLB consist of the following:
Totals as of
Maturing in Years ending December 31, December 31,
--------------------------------------------------- -----------------
(Dollars in thousands) 2010 2011 2012 2013 2014 Thereafter 2009 2008
---------------------- -------- ---- ------ ---- ---- ---------- ------- -------
0.00% to 1.00% ....... $585,282 -- -- -- -- -- 585,282 175,900
1.01% to 2.00% ....... -- -- -- -- -- -- -- --
2.01% to 3.00% ....... -- -- -- -- -- 20,000 20,000 --
3.01% to 4.00% ....... -- -- 40,000 -- -- 100,000 140,000 116,000
4.01% to 5.00% ....... 750 207 42,000 -- -- 779 43,736 45,142
5.01% to 6.00% ....... -- -- -- -- -- 1,074 1,074 1,091
6.01% to 7.00% ....... 25 -- -- -- -- 250 275 323
-------- --- ------ --- --- ------- ------- -------
$586,057 207 82,000 -- -- 122,103 790,367 338,456
======== === ====== === === ======= ======= =======
In addition to specifically pledged loans and investment securities, the FHLB
advances are collateralized by FHLB stock owned by the Company and a blanket
assignment of the unpledged qualifying loans and investments. The total amount
of advances available as of December 31, 2009 was approximately $309,476,000.
The weighted average fixed interest rate on these advances was 1.14 percent and
2.10 percent at December 31, 2009 and 2008, respectively.
With respect to $202,000,000 of advances at December 31, 2009, the FHLB holds
put options that will be exercised on the quarterly measurement date, after the
initial call date, if three month LIBOR is greater than 8%. The FHLB put options
as of December 31, 2009 are summarized as follows:
(Dollars in thousands)
---------------------------------------------
Interest Earliest
Amount Rate Maturity Call
-------- ------------ -------- --------
$ 82,000 3.49% - 4.83% 2012 2010
75,000 3.16% - 4.64% 2015 2010
45,000 2.93% - 3.05% 2016 2010
--------
$202,000
========
The Company had borrowings through the FRB of $225,000,000 and $914,000,000 as
of December 31, 2009 and 2008, respectively. The borrowings have a weighted
average fixed interest rate of 0.26 percent, mature in 2010 and are
collateralized by loans and investments with an available balance of
$564,414,000 as of December 31, 2009.
The Company had U.S. Treasury Tax and Loan borrowings of $5,136,000 and
$6,067,000 as of December 31, 2009 and 2008, respectively. The borrowings as of
December 31, 2009 are short term and have an interest rate of fed funds less 25
basis points and are collateralized with loans and investments with an available
balance of $9,060,000.
79
9. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase consist of the following at:
BOOK MARKET
WEIGHTED VALUE OF VALUE OF
December 31, 2009 REPURCHASE AVERAGE UNDERLYING UNDERLYING
(Dollars in thousands) AMOUNT FIXED RATE ASSETS ASSETS
---------------------- ---------- ---------- ---------- ----------
Securities sold under agreements
to repurchase within:
Overnight ................... $210,132 0.92% $210,449 206,450
Term up to 30 days .......... 410 2.75% 476 487
Term over 90 days ........... 1,964 2.34% 2,284 2,339
-------- -------- -------
$212,506 0.94% $213,209 209,276
======== ======== =======
December 31, 2008
(Dollars in thousands)
----------------------
Securities sold under agreements
to repurchase within:
Overnight ................... $186,217 1.22% $201,185 191,985
Term 30 - 90 days ........... 2,146 2.74% -- --
-------- -------- -------
$188,363 1.23% $201,185 191,985
======== ======== =======
The securities, consisting of U.S. Agency and U.S. Government Sponsored
Enterprises issued or guaranteed residential mortgage-backed securities, subject
to agreements to repurchase are for the same securities originally sold, and are
held in a custody account by a third party. For the years ended December 31,
2009 and 2008, securities sold under agreements to repurchase averaged
approximately $204,503,000 and $188,952,000, respectively, and the maximum
outstanding at any month end during the year was approximately $234,914,000 and
$196,461,000, respectively.
80
10. SUBORDINATED DEBENTURES
Trust Preferred Securities were issued by the Company's seven trust
subsidiaries, the common stock of which is wholly-owned by the Company, in
conjunction with the Company issuing Subordinated Debentures to the trust
subsidiaries. The terms of the Subordinated Debentures are the same as the terms
of the Trust Preferred Securities. The Company guaranteed the payment of
distributions and payments for redemption or liquidation of the Trust Preferred
Securities to the extent of funds held by the trust subsidiaries. The
obligations of the Company under the Subordinated Debentures together with the
guarantee and other back-up obligations, in the aggregate, constitute a full and
unconditional guarantee by the Company of the obligations of all trusts under
the Trust Preferred Securities.
The Trust Preferred Securities are subject to mandatory redemption upon
repayment of the Subordinated Debentures at their stated maturity date or the
earlier redemption in an amount equal to their liquidation amount plus
accumulated and unpaid distributions to the date of redemption. Interest
distributions are payable quarterly. The Company may defer the payment of
interest at any time from time to time for a period not exceeding 20 consecutive
quarters provided that the deferral period does not extend past the stated
maturity. During any such deferral period, distributions on the Trust Preferred
Securities will also be deferred and the Company's ability to pay dividends on
its common shares will be restricted.
Subject to approval by the FRB, the Trust Preferred Securities may be redeemed
at par prior to maturity at the Company's option on or after the redemption
date. The Trust Preferred Securities may also be redeemed at any time in whole
(but not in part) for the Trusts in the event of unfavorable changes in laws or
regulations that result in (1) subsidiary trusts becoming subject to federal
income tax on income received on the Subordinated Debentures, (2) interest
payable by the Company on the Subordinated Debentures becoming non-deductible
for federal tax purposes, (3) the requirement for the trusts to register under
the Investment Company Act of 1940, as amended, or (4) loss of the ability to
treat the Trust Preferred Securities as "Tier 1 Capital" under the FRB capital
adequacy guidelines.
The terms of the Subordinated Debentures, arranged by maturity date, are
reflected in the table below. The amounts include fair value adjustments from
acquisitions.
Rate at
December 31, Fixed/ Variable Rate Maturity Redemption
(Dollars in thousands) Amount 2009 Variable Structure (1) Date Date
---------------------- -------- ------------ ------------- -------------------- -------- ----------
First Co Trust 01 .......... $ 2,766 3.581% Variable 3 mo LIBOR plus 3.30% 07/31/31 07/31/11
First Co Trust 03 .......... 2,047 3.501% Variable 3 mo LIBOR plus 3.25% 03/26/33 03/26/08
Glacier Capital Trust II ... 46,393 3.034% Variable 3 mo LIBOR plus 2.75% 04/07/34 04/07/09
Citizens Capital Trust I ... 5,155 2.903% Variable 3 mo LIBOR plus 2.65% 06/17/34 06/17/09
Glacier Capital Trust III .. 36,083 6.078% Fixed 5 years 3 mo LIBOR plus 1.29% 04/07/36 04/07/11
Glacier Capital Trust IV ... 30,928 7.235% Fixed 5 years 3 mo LIBOR plus 1.57% 09/15/36 09/15/11
San Juan Trust I ........... 1,616 6.681% Fixed 5 years 3 mo LIBOR plus 1.82% 03/01/37 03/01/12
--------
$124,988
========
(1) For fixed rate debentures, this will be the rate structure upon conversion
to variable rate.
81
11. REGULATORY CAPITAL
The FRB has adopted capital adequacy guidelines pursuant to which it assesses
the adequacy of capital in supervising a bank holding company. The following
table illustrates the FRB's adequacy guidelines and the Company's and bank
subsidiaries' compliance with those guidelines as of December 31, 2009.
Minimum Capital Well Capitalized
Actual Requirement Requirement
--------------- --------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------- ------
Tier 1 capital (to risk weighted assets)
Consolidated ........................ 656,880 14.02% 187,439 4.00% 281,158 6.00%
Glacier ............................. 128,765 12.33% 41,781 4.00% 62,672 6.00%
Mountain West ....................... 129,649 13.39% 38,728 4.00% 58,092 6.00%
First Security ...................... 99,762 14.91% 26,756 4.00% 40,135 6.00%
1st Bank ............................ 58,119 14.99% 15,504 4.00% 23,256 6.00%
Western ............................. 61,594 14.67% 16,794 4.00% 25,191 6.00%
Big Sky ............................. 49,766 16.06% 12,393 4.00% 18,589 6.00%
Valley .............................. 28,495 13.11% 8,694 4.00% 13,041 6.00%
First National ...................... 29,517 15.98% 7,390 4.00% 11,084 6.00%
Citizens ............................ 22,201 11.32% 7,844 4.00% 11,766 6.00%
First Bank-MT ....................... 18,437 12.73% 5,794 4.00% 8,691 6.00%
San Juans ........................... 17,942 11.11% 6,462 4.00% 9,693 6.00%
Total capital (to risk weighted assets)
Consolidated ........................ 716,498 15.29% 374,877 8.00% 468,597 10.00%
Glacier ............................. 142,142 13.61% 83,562 8.00% 104,453 10.00%
Mountain West ....................... 142,066 14.67% 77,456 8.00% 96,820 10.00%
First Security ...................... 108,246 16.18% 53,513 8.00% 66,891 10.00%
1st Bank ............................ 63,039 16.26% 31,009 8.00% 38,761 10.00%
Western ............................. 66,886 15.93% 33,588 8.00% 41,985 10.00%
Big Sky ............................. 53,721 17.34% 24,786 8.00% 30,982 10.00%
Valley .............................. 31,232 14.37% 17,388 8.00% 21,734 10.00%
First National ...................... 31,196 16.89% 14,779 8.00% 18,474 10.00%
Citizens ............................ 24,682 12.59% 15,688 8.00% 19,610 10.00%
First Bank-MT ....................... 20,261 13.99% 11,588 8.00% 14,485 10.00%
San Juans ........................... 19,988 12.37% 12,924 8.00% 16,155 10.00%
Leverage capital (to average assets)
Consolidated ........................ 656,880 11.20% 234,518 4.00% N/A N/A
Glacier ............................. 128,765 10.09% 51,043 4.00% 63,803 5.00%
Mountain West ....................... 129,649 10.98% 47,217 4.00% 59,021 5.00%
First Security ...................... 99,762 11.32% 35,237 4.00% 44,046 5.00%
1st Bank ............................ 58,119 9.74% 23,865 4.00% 29,832 5.00%
Western ............................. 61,594 10.19% 24,185 4.00% 30,231 5.00%
Big Sky ............................. 49,766 13.67% 14,561 4.00% 18,201 5.00%
Valley .............................. 28,495 8.57% 13,297 4.00% 16,621 5.00%
First National ...................... 29,517 10.38% 11,376 4.00% 14,220 5.00%
Citizens ............................ 22,201 9.62% 9,227 4.00% 11,534 5.00%
First Bank-MT ....................... 18,437 9.19% 8,020 4.00% 10,026 5.00%
San Juans ........................... 17,942 10.33% 6,948 4.00% 8,685 5.00%
82
11. REGULATORY CAPITAL. . . CONTINUED
The following table illustrates the FRB's adequacy guidelines and the Company's
and bank subsidiaries' compliance with those guidelines as of December 31, 2008:
Minimum capital Well capitalized
Actual requirement requirement
--------------- --------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------- -----
Tier 1 capital (to risk weighted assets)
Consolidated ........................ 640,275 14.30% 179,117 4.00% 268,676 6.00%
Glacier ............................. 119,748 11.31% 42,341 4.00% 63,512 6.00%
Mountain West ....................... 101,315 10.62% 38,151 4.00% 57,226 6.00%
First Security ...................... 96,800 14.29% 27,088 4.00% 40,632 6.00%
1st Bank ............................ 38,527 12.58% 12,252 4.00% 18,378 6.00%
Western ............................. 59,825 13.26% 18,043 4.00% 27,065 6.00%
Big Sky ............................. 38,561 11.89% 12,974 4.00% 19,462 6.00%
Valley .............................. 29,269 13.65% 8,574 4.00% 12,861 6.00%
Citizens ............................ 19,564 10.84% 7,217 4.00% 10,826 6.00%
First Bank-MT ....................... 15,149 11.70% 5,179 4.00% 7,769 6.00%
San Juans ........................... 13,490 9.26% 5,830 4.00% 8,745 6.00%
Total capital (to risk weighted assets)
Consolidated ........................ 696,505 15.55% 358,234 8.00% 447,793 10.00%
Glacier ............................. 133,051 12.57% 84,682 8.00% 105,853 10.00%
Mountain West ....................... 113,287 11.88% 76,302 8.00% 95,377 10.00%
First Security ...................... 105,303 15.55% 54,176 8.00% 67,719 10.00%
1st Bank ............................ 42,370 13.83% 24,504 8.00% 30,630 10.00%
Western ............................. 65,481 14.52% 36,087 8.00% 45,108 10.00%
Big Sky ............................. 42,642 13.15% 25,949 8.00% 32,436 10.00%
Valley .............................. 31,959 14.91% 17,148 8.00% 21,435 10.00%
Citizens ............................ 21,825 12.10% 14,434 8.00% 18,043 10.00%
First Bank-MT ....................... 16,772 12.95% 10,358 8.00% 12,948 10.00%
San Juans ........................... 15,322 10.51% 11,660 8.00% 14,575 10.00%
Leverage capital (to average assets)
Consolidated ........................ 640,275 12.38% 206,812 4.00% N/A N/A
Glacier ............................. 119,748 9.79% 48,929 4.00% 61,161 5.00%
Mountain West ....................... 101,315 8.68% 46,707 4.00% 58,383 5.00%
First Security ...................... 96,800 11.31% 34,229 4.00% 42,786 5.00%
1st Bank ............................ 38,527 8.08% 19,077 4.00% 23,847 5.00%
Western ............................. 59,825 10.71% 22,335 4.00% 27,919 5.00%
Big Sky ............................. 38,561 11.62% 13,272 4.00% 16,589 5.00%
Valley .............................. 29,269 9.11% 12,846 4.00% 16,058 5.00%
Citizens ............................ 19,564 9.46% 8,274 4.00% 10,343 5.00%
First Bank-MT ....................... 15,149 10.17% 5,961 4.00% 7,451 5.00%
San Juans ........................... 13,490 9.66% 5,586 4.00% 6,982 5.00%
N/A - not applicable
The Federal Deposit Insurance Corporation Improvement Act generally restricts a
depository institution from making any capital distribution (including payment
of a dividend) or paying any management fee to its bank holding company if the
institution would thereafter be capitalized at less than 8 percent total capital
(to risk weighted assets), 4 percent tier 1 capital (to risk weighted assets),
or a 4 percent tier 1 capital (to average assets). At December 31, 2009 and
2008, each of the bank subsidiaries' capital measures exceed the highest
supervisory threshold, which requires total capital (to risk weighted assets) of
at least 10 percent, tier 1 capital (to risk weighted assets) of at least 6
percent, and a leverage capital (to average assets) of at least 5 percent.
83
11. REGULATORY CAPITAL. . . CONTINUED
Each of the bank subsidiaries was considered well capitalized by the respective
regulator as of December 31, 2009 and 2008. There are no conditions or events
since year end that management believes have changed the Company's or
subsidiaries' risk-based capital category. In addition to the minimum regulatory
capital requirements, certain bank subsidiaries have added regulatory capital
requirements of which they are in compliance as of December 31, 2009.
Current guidance from the Federal Reserve provides, among other things, that
dividends per share on the Company's common stock generally should not exceed
earnings per share, measured over the previous four fiscal quarters. The bank
subsidiaries are subject to certain restrictions on the amount of dividends that
they may declare without prior regulatory approval. At December 31, 2009,
$71,537,000 of retained earnings at the bank subsidiaries is available to the
parent company without regulatory approval.
12. FEDERAL AND STATE INCOME TAXES
The following is a summary of consolidated income tax expense for:
Years ended December 31,
---------------------------
(Dollars in thousands) 2009 2008 2007
---------------------- -------- ------- ------
Current:
Federal .......................... $ 26,557 37,373 29,016
State ............................ 7,189 8,271 6,491
-------- ------- ------
Total current tax expense ..... 33,746 45,644 35,507
======== ======= ======
Deferred:
Federal .......................... (24,656) (9,979) (348)
State ............................ (5,099) (2,064) (72)
-------- ------- ------
Total deferred tax benefit .... (29,755) (12,043) (420)
-------- ------- ------
Total income tax expense ... $ 3,991 33,601 35,087
======== ======= ======
Combined federal and state income tax expense differs from that computed at the
federal statutory corporate tax rate as follows for:
Years ended December 31,
------------------------
2009 2008 2007
------- ---- ----
Federal statutory rate ........................... 35.0% 35.0% 35.0%
State taxes, net of federal income tax benefit ... 3.8% 4.1% 4.0%
Tax-exempt interest income ....................... -21.0% -4.9% -4.4%
Tax credits ...................................... -3.3% -0.1% 0.0%
Bargain purchase gain ............................ -3.2% 0.0% 0.0%
Other, net ....................................... -0.9% -0.2% -0.8%
---- ---- ----
10.4% 33.9% 33.8%
==== ==== ====
84
12. FEDERAL AND STATE INCOME TAXES . . . CONTINUED
The tax effect of temporary differences which give rise to a significant portion
of deferred tax assets and deferred tax liabilities are as follows:
December 31,
------------------
(Dollars in thousands) 2009 2008
---------------------- -------- -------
Deferred tax assets:
Allowance for loan and lease losses .................. $ 56,067 30,061
Non-accrual interest ................................. 4,524 1,652
Stock based compensation ............................. 3,612 3,100
Impairment of equity securities (FHLMC & FNMA) ....... 2,976 2,976
Deferred compensation ................................ 2,877 2,896
Employee benefits .................................... 2,046 1,617
Available-for-sale securities ........................ 224 803
Other ................................................ 1,539 671
-------- -------
Total gross deferred tax assets .................. 73,865 43,776
-------- -------
Deferred tax liabilities:
Federal Home Loan Bank stock dividends ............... (10,234) (10,012)
Intangibles .......................................... (8,352) (7,897)
Fixed assets, due to differences in depreciation ..... (7,704) (6,393)
Deferred loan costs .................................. (4,338) (3,768)
Other ................................................ (2,155) (1,414)
-------- -------
Total gross deferred tax liabilities ............. (32,783) (29,484)
-------- -------
Net deferred tax asset ......................... $ 41,082 14,292
======== ======
The Company and its bank subsidiaries join together in the filing of
consolidated income tax returns in the following jurisdictions: federal,
Montana, Idaho, Colorado and Utah. Although 1st Bank and First National have
operations in Wyoming and Mountain has operations in Washington, neither Wyoming
nor Washington imposes a corporate-level income tax. All required income tax
returns have been timely filed. The following schedule summarizes the years that
remain subject to examination:
Years ended December 31,
-------------------------------------
Federal 2006, 2007 and 2008
Montana 2003, 2004, 2005, 2006, 2007 and 2008
Idaho 2003, 2004, 2005, 2006, 2007 and 2008
Colorado 2005, 2006, 2007 and 2008
Utah 2006, 2007 and 2008
During 2009, the Company made investments in CDE's which received NMTC
allocations. Administered by the Community Development Financial Institutions
Fund of the U.S. Department of the Treasury, the NMTC program is aimed at
stimulating economic and community development and job creation in low-income
communities. The federal income tax credits received are claimed over a
seven-year credit allowance period. In addition to previous LIHTC investments,
during the third quarter 2009, the Company made another investment in a LIHTC.
The LIHTC is an indirect Federal subsidy used to finance the development of
affordable rental housing for low-income households. The federal income tax
credits received are claimed over a ten-year credit allowance period. During the
year, the Company invested in Qualified Zone Academy and Qualified School
Construction bonds whereby the Company receives quarterly federal income tax
credits until the bonds mature. The federal income tax credits on the bonds are
subject to federal and state income tax.
85
12. FEDERAL AND STATE INCOME TAXES . . . CONTINUED
Following is a list of expected federal income tax credits to be received in the
years indicated.
New Low-Income Investment
Years ended Market Housing Securities
(Dollars in thousands) Tax Credits Tax Credits Tax Credits
--------------------- ----------- ----------- -----------
2010 1,530 337 536
2011 1,530 785 541
2012 1,836 785 541
2013 1,836 785 541
2014 1,836 785 541
Thereafter 1,836 3,324 3,834
------- ----- -----
$10,404 6,801 6,534
======= ===== =====
In accordance with FASB ASC Topic 740, Income Taxes, the Company determined its
unrecognized tax benefit to be $0 and $152,000 as of December 31, 2009 and 2008,
respectively. A reconciliation of the beginning and ending amounts of
unrecognized tax benefits is as follows:
(Dollars in thousands) 2009 2008
---------------------- ----- ----
Balance at beginning of period .............................. $ 152 210
Reduction of unrecognized tax benefits for expired periods .. (152) (58)
----- ----
Balance at end of period .................................... $ -- 152
===== ====
The Company recognizes interest related to unrecognized income tax benefits in
interest expense and penalties are recognized in other expense. During the years
ended December 31, 2009 and 2008, the Company recognized $0 interest expense and
recognized $0 penalty with respect to income tax liabilities. The Company had
approximately $0 and $37,000 accrued for the payment of interest at December 31,
2009 and 2008, respectively. The Company had accrued $0 for the payment of
penalties at December 31, 2009 and 2008.
Deferred tax assets are reduced by a valuation allowance, if based on the weight
of available evidence, it is more-likely-than not that some portion or all of
the deferred tax assets will not be realized. The term more-likely-than not
means a likelihood of more than 50 percent. The Company has assessed the need
for a valuation allowance and determined that a valuation allowance is not
necessary at December 31, 2009 and 2008. The Company believes that it is more
likely than not that the Company's deferred tax assets will be realized by
offsetting taxable income in carryback years, and by offsetting future taxable
income from reversing taxable temporary differences and anticipated future
taxable income (exclusive of reversing temporary differences). In its
assessment, the Company considered its strong earnings history, no history of
tax credit carryforwards expiring unused, and no future net operating losses
(for tax purposes) expected for any bank subsidiary.
Retained earnings at December 31, 2009 includes approximately $3,600,000 for
which no provision for federal income tax has been made. This amount represents
the base year federal reserve for bad debt, which is essentially an allocation
of earnings to pre-1988 bad debt deductions for income tax purposes only. This
amount is treated as a permanent difference and deferred taxes are not
recognized unless it appears that this bad debt reserve will be reduced and
thereby result in taxable income in the foreseeable future. The Company is not
currently contemplating any changes in its business or operations which would
result in a recapture of this federal reserve for bad debt into taxable income.
86
13. EMPLOYEE BENEFIT PLANS
The Company has a profit sharing plan that is subject to a "safe harbor"
provision requiring an annual 3 percent non-elective contribution by the
Company. The Company amended the plan during 2009, retaining the same safe
harbor contribution and modifying the 401(k) match to be discretionary. To be
considered eligible for the plan, an employee must be 21 year of age and have
been employed for a full calendar quarter. In addition, elective contributions,
depending on the Company's profitability, may be made to the plan. To be
considered eligible for the elective contributions, an employee must be 21 years
of age, worked 501 hours in the plan year and be employed as of the last day of
the plan year. Entry dates for the profit sharing plan are the first day of the
plan year and first day of the fourth, seventh, and tenth months. Participants
are at all times fully vested in all contributions. The total profit sharing
plan expense for the years ended December 31, 2009, 2008, and 2007 was
approximately $2,149,000, $3,034,000 and $3,964,000 respectively.
The Company also has an employees' savings plan. The plan allows eligible
employees to contribute up to 60 percent of their eligible annual compensation.
Currently, the Company matches an amount equal to 50 percent of the employee's
contribution, up to 6 percent of the employee's eligible compensation. Entry
dates for the employees' savings plan are the first day of the plan year and
first day of the fourth, seventh, and tenth months. Participants are at all
times fully vested in all contributions. The Company's contribution to the
savings plan for the years ended December 31, 2009, 2008 and 2007 was
approximately $1,538,000, $1,445,000, and $1,333,000, respectively.
The Company has a non-funded deferred compensation plan for directors and senior
officers. The plan provides for the deferral of cash payments of up to 50
percent of a participants' salary, and for 100 percent of bonuses and directors
fees, at the election of the participant. The total amount deferred was
approximately $408,000, $461,000, and $543,000, for the years ending December
31, 2009, 2008, and 2007, respectively. The participant receives an earnings
credit at a rate equal to 50 percent of the Company's return on equity. The
total earnings for the years ended 2009, 2008, and 2007 for this plan were
approximately $124,000, $261,000, and $259,000, respectively. In connection with
several acquisitions, the Company assumed the obligations of deferred
compensation plans for certain key employees. As of December 31, 2009, the
liability related to the obligations was approximately $1,500,000 and was
included in other liabilities of the Consolidated Statements of Financial
Condition. The amount expensed related to the obligations during 2009 was
insignificant.
The Company has a Supplemental Executive Retirement Plan ("SERP") which is
intended to supplement payments due to participants upon retirement under the
Company's other qualified plans. The Company credits the participant's account
on annual basis for an amount equal to employer contributions that would have
otherwise been allocated to the participant's account under the tax-qualified
plans were it not for limitations imposed by the Internal Revenue Service
("IRS"), or the participation in the non-funded deferred compensation plan.
Eligible employees include participants of the non-funded deferred compensation
plan and employees whose benefits were limited as a result of IRS regulations.
The Company's required contribution to the SERP for the years ended December 31,
2009, 2008 and 2007 was approximately $20,000, $31,000, and $70,000,
respectively. The participant receives an earnings credit at a rate equal to 50
percent of the Company's return on equity. The total earnings for the years
ended 2009, 2008, and 2007 for this plan were approximately $24,000, $50,000,
and $52,000, respectively.
The Company has elected to self-insure certain costs related to employee health
and dental benefit programs. Costs resulting from noninsured losses are expensed
as incurred. The Company has purchased insurance that limits its exposure on an
aggregate and individual claims basis for the employee health and dental benefit
programs.
The Company has entered into employment contracts with 16 senior officers that
provide benefits under certain conditions following a change in control of the
Company.
87
14. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
Years Ended December 31,
-------------------------------------
2009 2008 2007
----------- ---------- ----------
Net earnings available to common
stockholders, basic and diluted .... $34,374,000 65,657,000 68,603,000
Average outstanding shares - basic .... 61,529,944 54,851,145 53,236,489
Add: Dilutive stock options ........... 1,696 152,669 511,909
----------- ---------- ----------
Average outstanding shares - diluted .. 61,531,640 55,003,814 53,748,398
=========== ========== ==========
Basic earnings per share .............. $ 0.56 1.20 1.29
=========== ========== ==========
Diluted earnings per share ............ $ 0.56 1.19 1.28
=========== ========== ==========
There were approximately 2,717,000, 1,421,000, and 701,000 options excluded from
the diluted share calculation for December 31, 2009, 2008, and 2007,
respectively, due to the option exercise price exceeding the market price of the
Company's common stock.
15. STOCK OPTION PLANS
The Company has stock-based compensation plans outstanding. The Directors 1994
Stock Option Plan was approved to provide for the grant of stock options to
outside Directors of the Company. The Directors 1994 Stock Option Plan expired
in March of 2009 and has granted but unexpired stock options outstanding. The
Employees 1995 Stock Option Plan was approved to provide the grant of stock
options to certain full-time employees of the Company. The Employees 1995 Stock
Option Plan expired in April 2005 and has granted but unexpired stock options
outstanding. The 2005 Stock Incentive Plan provides awards to certain full-time
employees and directors of the Company. The 2005 Stock Incentive Plan permits
the granting of stock options, share appreciation rights, restricted shares,
restricted share units, and unrestricted shares, deferred share units, and
performance awards. Upon exercise of the stock options, the shares are obtained
from the authorized and unissued stock.
The 1994, 1995, and 2005 plans also contain provisions authorizing the grant of
limited stock rights, which permit the optionee, upon a change in control of the
Company, to surrender his or her stock options for cancellation and receive cash
or common stock equal to the difference between the exercise price and the fair
market value of the shares on the date of the grant. The option price at which
the Company's common stock may be purchased upon exercise of stock options
granted under the plans must be at least equal to the per share market value of
such stock at the date the option is granted. All stock option shares are
adjusted for stock splits and stock dividends. The term of the stock options may
not exceed five years from the date the options are granted. The employee stock
options generally vest over a period of two years and the director options vest
over a period of six months.
Compensation cost is based on the fair value of the stock options at the grant
date. Additionally, the compensation cost for the portion of awards outstanding
for which the requisite service has not been rendered that are outstanding as of
the required effective date are recognized as the requisite service is rendered
on or after the required effective date. For the twelve months ended December
31, 2009, the compensation cost for the stock option plans was $1,842,000, with
a corresponding income tax benefit of $726,000, resulting in a net earnings and
cash flow from operations reduction of $1,116,000, or a decrease of $.02 per
share for both basic and diluted earnings per share. Additionally, in the
Consolidated Statement of Cash Flows, the excess tax benefit from stock options
decreased the net cash provided from operating activities and increased the net
cash provided by financing activities by $75,000 for the twelve months ended
December 31, 2009. Total unrecognized compensation cost, net of income tax
benefit, related to non-vested awards which are expected to be recognized over
the next weighted period of 1 year was $958,000 as of December 31, 2009. The
total fair value of shares vested for the year ended December 31, 2009 and 2008
was $3,334,000 and $3,596,000, respectively.
88
15. STOCK OPTION PLANS . . . CONTINUED
The per share weighted-average fair value of stock options on the date of grant
was based on the Black Scholes option-pricing model. The Company uses historical
data to estimate option exercise and termination within the valuation model.
Employee and director awards, which have dissimilar historical exercise
behavior, are considered separately for valuation purposes. The risk-free
interest rate for periods within the contractual life of the stock option is
based on the U.S. Treasury yield in effect at the time of the grant. The stock
option awards generally vest upon six months or two years of service for
directors and employees, respectively, and generally expire in five years.
Expected volatilities are based on historical volatility and other factors. The
following lists the various assumptions and fair value of the grants awarded
during the year.
Options Granted
During
---------------------
2009 2008 2007
----- ----- -----
Fair value of stock options - Black Scholes .... $4.26 $3.56 $5.05
Expected volatility ............................ 44% 29% 26%
Expected dividends ............................. 2.74% 2.30% 2.12%
Risk free interest rate ........................ 1.40% 2.49% 4.80%
Expected life .................................. 3.47 3.46 3.47
At December 31, 2009, total shares available for stock option grants to
employees and directors are 2,716,109. Changes in shares granted for stock
options for the year ended December 31, 2009 are summarized as follows:
Weighted
Average
Exercise
Options Price
--------- --------
Outstanding at December 31, 2008 ..... 2,628,609 $19.73
Canceled ............................. (185,144) 18.41
Granted .............................. 440,715 15.37
Exercised ............................ (188,535) 13.55
---------
Outstanding at December 31, 2009 ..... 2,695,645 19.52
=========
Excercisable at December 31, 2009 .... 1,862,865 20.67
=========
The range of exercise prices on options outstanding and exercisable at December
31, 2009 is as follows:
Options Exercisable
----------------------------
Weighted Weighted Weighted
Options Average Average Options Average
Price Range Outstanding Exercise Price Life of Options Exercisable Exercise Price
----------- ----------- -------------- --------------- ----------- --------------
$13.91 -$18.19 1,346,245 $16.65 3.2 years 514,465 $16.73
$18.74 - $24.73 1,349,400 22.47 1.7 years 1,348,400 22.47
--------- ---------
2,695,645 19.52 2.6 years 1,862,865 20.67
========= =========
89
16. PARENT COMPANY INFORMATION (CONDENSED)
The following condensed financial information is the unconsolidated (parent
company only) information for the Company:
STATEMENTS OF FINANCIAL CONDITION
December 31,
-------------------
(Dollars in thousands) 2009 2008
---------------------- --------- -------
Assets:
Cash ......................................... $ 565 1,036
Interest bearing cash deposits ............... 17,764 97,221
--------- -------
Cash and cash equivalents ................. 18,329 98,257
========= =======
Investment securities, available-for-sale .... 1,111 --
Other assets ................................. 15,319 14,443
Investment in subsidiaries ................... 797,180 702,183
--------- -------
$ 831,939 814,883
========= =======
Liabilities and Stockholders' Equity:
Dividends payable ............................ $ 8,011 7,973
Subordinated debentures ...................... 124,988 121,037
Other liabilities ............................ 13,050 8,933
--------- -------
Total liabilities ........................ 146,049 137,943
Common stock ................................. 616 613
Paid-in capital .............................. 497,493 491,794
Retained earnings ............................ 188,129 185,776
Accumulated other comprehensive loss ......... (348) (1,243)
--------- -------
Total stockholders' equity ................ 685,890 676,940
--------- -------
$ 831,939 814,883
========= =======
STATEMENT OF OPERATIONS
Years ended December 31,
-------------------------
(Dollars in thousands) 2009 2008 2007
---------------------- ------- ------ ------
Revenues:
Dividends from subsidiaries ....................................... $24,300 20,500 40,550
Other income ...................................................... 2,775 747 889
Intercompany charges for services ................................. 13,108 12,656 11,345
------- ------ ------
Total revenues ................................................. 40,183 33,903 52,784
Expenses:
Employee compensation and benefits ................................ 7,793 7,769 7,564
Other operating expenses .......................................... 12,845 13,044 12,969
------- ------ ------
Total expenses ................................................. 20,638 20,813 20,533
Earnings before income tax benefit and equity in undistributed
earnings of subsidiaries ....................................... 19,545 13,090 32,251
Income tax benefit ................................................ 1,942 1,952 4,444
------- ------ ------
Income before equity in undistributed earnings of subsidiaries .... 21,487 15,042 36,695
Subsidiary earnings in excess of dividends distributed ............ 12,887 50,615 31,908
------- ------ ------
Net earnings ......................................................... $34,374 65,657 68,603
======= ====== ======
90
16. PARENT COMPANY INFORMATION (CONDENSED)...CONTINUED
STATEMENTS OF CASH FLOWS
Years ended December 31,
-----------------------------
(Dollars in thousands) 2009 2008 2007
---------------------- -------- -------- -------
Operating activities:
Net earnings ...................................................... $ 34,374 65,657 68,603
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Subsidiary earnings in excess of dividends distributed ............ (12,887) (50,615) (31,908)
Gain on sale of investments ....................................... (2,147) -- --
Excess tax benefits related to the exercise of stock options ...... (75) (1,325) (1,745)
Net increase in other assets and other liabilities ................ 1,356 3,411 5,316
-------- ------- -------
Net cash provided by operating activities ............................ 20,621 17,128 40,266
-------- ------- -------
Investing activities:
Proceeds from sales, maturities and prepayments of
securities available-for-sale .................................. 2,267 1,270 --
Purchases of investment securities available-for-sale ............. (285) -- --
Equity contribution to subsidiary banks ........................... (68,753) (15,455) (10,416)
Net addition of premises and equipment ............................ (4,451) (2,741) (3,401)
-------- ------- -------
Net cash used by investing activities ................................ (71,222) (16,926) (13,817)
-------- ------- -------
Financing activities:
Net increase in other borrowed funds .............................. 65 -- --
Cash dividends paid ............................................... (32,021) (29,079) (26,694)
Excess tax benefits from stock options ............................ 75 1,325 1,745
Proceeds from exercise of stock options and other stock issued .... 2,554 103,749 6,154
-------- ------- -------
Net cash provided by (used in) financing activities .................. (29,327) 75,995 (18,795)
-------- ------- -------
Net increase in cash and cash equivalents ............................ (79,928) 76,197 7,654
Cash and cash equivalents at beginning of year ....................... 98,257 22,060 14,406
-------- ------- -------
Cash and cash equivalents at end of year ............................. $ 18,329 98,257 22,060
======== ======= =======
17. UNAUDITED QUARTERLY FINANCIAL DATA
Summarized unaudited quarterly financial data is as follows:
QUARTERS ENDED, 2009
-------------------------------------------------------------
(Dollars in thousands, except per share data) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------------------------------------------- ------------- ------------- ------------- -------------
Interest income .............................. $ 75,532 74,420 74,430 78,112
Interest expense ............................. 15,154 13,939 13,801 14,273
------------- ------------- ------------- -------------
Net interest income .......................... 60,378 60,481 60,629 63,839
Gain on investments .......................... -- -- 2,667 3,328
Provision for loan losses .................... 15,715 25,140 47,050 36,713
Earnings (loss) before income taxes .......... 22,414 13,696 (6,617) 8,872
Net earnings (loss) .......................... 15,779 10,652 (1,531) 9,474
Basic earnings (loss) per share .............. 0.26 0.17 (0.02 0.15
Diluted earnings (loss) per share ............ 0.26 0.17 (0.02 0.15
Dividends per share .......................... 0.13 0.13 0.13 0.13
Market range high-low ........................ $19.36-$12.15 $18.97-$14.67 $16.80-$12.92 $14.62-$11.92
91
17. UNAUDITED QUARTERLY FINANCIAL DATA...CONTINUED
Quarters ended, 2008
-------------------------------------------------------------
(Dollars in thousands, except per share data) March 31 June 30 September 30 December 31
--------------------------------------------- ------------- ------------- ------------- -------------
Interest income .............................. $ 76,016 74,573 75,689 76,707
Interest expense ............................. 27,387 22,273 22,113 18,599
------------- ------------- ------------- -------------
Net interest income .......................... 48,629 52,300 53,576 58,108
Gain (loss) on investments ................... 248 -- (7,593) --
Provision for loan losses .................... 2,500 5,042 8,715 12,223
Earnings before income taxes ................. 26,778 28,196 18,854 25,430
Net earnings ................................. 17,399 18,459 12,785 17,014
Basic earnings per share ..................... 0.32 0.35 0.23 0.30
Diluted earnings per share ................... 0.32 0.34 0.24 0.29
Dividends per share .......................... 0.13 0.13 0.13 0.13
Market range high-low ........................ $20.48-$15.54 $21.78-$15.99 $27.72-$14.46 $25.36-$14.12
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB ASC Topic 820, Fair Value Measurements and Disclosures, requires the
Company to disclose information relating to fair value. Fair value is defined as
the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date. The Standard establishes a fair value hierarchy which requires
an entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. The standard describes three
levels of inputs that may be used to measure fair value:
Level 1 Quoted prices in active markets for identical assets or liabilities
Level 2 Observable inputs other than Level 1 prices, such as quoted prices for
similar assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the assets
or liabilities
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 December 31, 2009 and 2008:
ASSETS/ QUOTED PRICES SIGNIFICANT
LIABILITIES IN ACTIVE MARKETS OTHER SIGNIFICANT
MEASURED AT FOR IDENTICAL OBSERVABLE UNOBSERVABLE
FAIR VALUE ASSETS INPUTS INPUTS
(Dollars in thousands) 12/31/2009 (LEVEL 1) (LEVEL 2) (LEVEL 3)
---------------------- ----------- ----------------- ----------- ------------
Financial assets:
U.S. government agencies ...................... $ 209 -- 209 --
Government sponsored enterprises .............. 177 -- 177 --
State and local governments and other issues .. 480,976 -- 478,888 2,088
Collateralized debt obligations ............... 6,789 -- -- 6,789
Residential mortgage-backed securities ........ 955,042 -- 953,931 1,111
---------- --- --------- -----
Total financial assets .................... $1,443,193 -- 1,433,205 9,988
========== === ========= =====
92
18. FAIR VALUE OF FINANCIAL INSTRUMENTS...CONTINUED
Assets/ Quoted Prices Significant
Liabilities in Active Markets Other Significant
Measured at for Identical Observable Unobservable
Fair Value Assets Inputs Inputs
(Dollars in thousands) 12/31/2008 (Level 1) (Level 2) (Level 3)
---------------------- ----------- ----------------- ----------- ------------
Financial assets:
U.S. government agencies ......................... $ 217 -- 217 --
Government sponsored enterprises ................. 312 -- 312 --
State and local governments and other issues ..... 418,143 -- 417,859 284
Collateralized debt obligations .................. 15,540 -- -- 15,540
Residential mortgage-backed securities ........... 494,470 -- 486,873 7,597
-------- --- ------- ------
Total financial assets ....................... $928,682 -- 905,261 23,421
======== === ======= ======
The following is a description of the valuation methodologies used for financial
assets measured at fair value on a recurring basis. There have been no
significant changes in the valuation techniques during the period.
Investment securities - fair value for available-for-sale securities is
estimated by obtaining quoted market prices for identical assets, where
available. If such prices are not available, fair value is based on independent
asset pricing services and models, the inputs of which are market-based or
independently sourced market parameters, including, but not limited to, yield
curves, interest rates, volatilities, prepayments, defaults, cumulative loss
projections, and cash flows. For those securities where greater reliance on
unobservable inputs occurs, such securities are classified as Level 3 within the
hierarchy.
The following is a reconciliation of the beginning and ending balances for
assets measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) during the periods ended December 31, 2009 and
2008.
December 31,
----------------
(Dollars in thousands) 2009 2008
---------------------- ------- ------
Balance at beginning of year ..................................... $23,421 16,948
Total unrealized gains included in other comprehensive income .... (7,264) (747)
Amortization, accretion or principal payments .................... (539) (377)
Purchases ........................................................ 2,251 --
Transfers into level 3 ........................................... -- 7,597
Transfers out of level 3 ......................................... (7,881) --
------- ------
Balance at end of year ........................................... $ 9,988 23,421
======= ======
The change in unrealized gains (losses) related to available-for-sale securities
is reported in the accumulated other comprehensive income (loss).
93
18. FAIR VALUE OF FINANCIAL INSTRUMENTS...CONTINUED
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 December 31, 2009 and 2008:
QUOTED
PRICES
IN ACTIVE
ASSETS/ MARKETS SIGNIFICANT
LIABILITIES FOR OTHER SIGNIFICANT
MEASURED AT IDENTICAL OBSERVABLE UNOBSERVABLE
FAIR VALUE ASSETS INPUTS INPUTS
(Dollars in thousands) 12/31/2009 (LEVEL 1) (LEVEL 2) (LEVEL 3)
----------------------- ----------- --------- ----------- ------------
Financial assets:
Real estate and other assets owned, net .... $ 57,320 -- -- 57,320
Impaired loans, net of allowance
for loan and lease ...................... 198,982 -- -- 198,982
-------- --- --- -------
Total financial assets .................. $256,302 -- -- 256,302
======== === === =======
Assets/ Quoted Prices Significant
Liabilities in Active Markets Other Significant
Measured at for Identical Observable Unobservable
Fair Value Assets Inputs Inputs
(Dollars in thousands) 12/31/2008 (Level 1) (Level 2) (Level 3)
---------------------- ----------- ----------------- ----------- ------------
Financial assets:
Real estate and other assets owned, net .... $11,539 -- -- 11,539
Impaired loans, net of allowance
for loan and lease ...................... 71,950 -- -- 71,950
------- --- --- ------
Total financial assets .................. $83,489 -- -- 83,489
======= === === ======
The following is a description of the valuation methodologies used for financial
assets measured at fair value on a nonrecurring basis. There have been no
significant changes in the valuation techniques during the period.
Real estate and other assets owned, net - real estate and other assets owned are
carried at the lower of fair value at acquisition date or current estimated fair
value, less estimated cost to sell. Estimated fair value of real estate and
other assets owned is based on appraisals. Real estate and other assets owned
are classified within Level 3 of the fair value hierarchy.
Impaired loans, net of ALLL - loans included in the Company's financials for
which it is probable that the Company will not collect all principal and
interest due according to contractual terms are considered impaired in
accordance with FASB ASC Topic 310, Receivables. Allowable methods for
estimating fair value include using the fair value of the collateral for
collateral dependent loans or, where a loan is determined not to be collateral
dependent, using the discounted cash flow method. Impaired loans are primarily
collateral-dependent and the estimated fair value is based on the fair value of
the collateral. Impaired loans are classified within Level 3 of the fair value
hierarchy.
94
18. FAIR VALUE OF FINANCIAL INSTRUMENTS...CONTINUED
The following presents the carrying amounts and estimated fair values in
accordance with FASB ASC Topic 825, Financial Instruments, as of December 31,
2009 and 2008.
DECEMBER 31, 2009 December 31, 2008
----------------------- ----------------------
(Dollars in thousands) AMOUNT FAIR VALUE Amount Fair Value
---------------------- ---------- ---------- --------- ----------
Financial assets:
Cash on hand and in banks ..................................... $ 120,731 120,731 125,123 125,123
Federal funds sold ............................................ 87,155 87,155 6,480 6,480
Interest bearing cash deposits ................................ 2,689 2,689 3,652 3,652
Investment securities ......................................... 488,775 488,775 434,677 434,677
Residential mortgage-backed securities ........................ 955,042 955,042 494,470 494,470
FHLB and FRB stock ............................................ 62,577 62,577 60,945 60,945
Loans receivable, net of allowance for loan and lease losses .. 3,987,318 3,989,168 4,053,454 4,064,215
Accrued interest receivable ................................... 29,729 29,729 28,777 28,777
---------- --------- --------- ---------
Total financial assets ..................................... $5,734,016 5,735,866 5,207,578 5,218,339
========== ========= ========= =========
Financial liabilities:
Deposits ...................................................... $4,100,152 4,111,909 3,262,475 3,273,076
Advances from Federal Home Loan Bank .......................... 790,367 798,509 338,456 344,597
Federal Reserve Bank discount window .......................... 225,000 225,000 914,000 914,000
Repurchase agreements and other borrowed funds ................ 226,251 226,271 196,731 196,749
Subordinated debentures ....................................... 124,988 80,473 121,037 63,840
Accrued interest payable ...................................... 7,928 7,928 9,751 9,751
---------- --------- --------- ---------
Total financial liabilities ................................ $5,474,686 5,450,090 4,842,450 4,802,013
========== ========= ========= =========
The following is a description of the methods used to estimate the fair value of
all other financial instruments recognized at amounts other than fair value.
Financial Assets
The estimated fair value of cash, federal funds sold, interest bearing cash
deposits, and accrued interest receivable is the book value of such financial
assets.
The estimated fair value of FHLB and FRB stock is book value due to the
restrictions that such stock may only be sold to another member institution or
the FHLB or FRB at par value.
Loans receivable, net of ALLL - fair value for unimpaired loans, net of ALLL, is
estimated by discounting the future cash flows using the rates at which similar
notes would be written for the same remaining maturities. Impaired loans are
primarily collateral-dependent and the estimated fair value is based on the fair
value of the collateral.
Financial Liabilities
The estimated fair value of accrued interest payable is the book value of such
financial liabilities.
Deposits - fair value of term deposits is estimated by discounting the future
cash flows using rates of similar deposits with similar maturities. The
estimated fair value of demand, NOW, savings, and money market deposits is the
book value since rates are regularly adjusted to market rates.
95
18. FAIR VALUE OF FINANCIAL INSTRUMENTS...CONTINUED
Advances from FHLB - fair value of advances is estimated based on borrowing
rates currently available to the Company for advances with similar terms and
maturities.
FRB borrowings - fair value of borrowings through the FRB is estimated based on
borrowing rates currently available to the Company through FRB discount window
programs with similar terms and maturities.
Repurchase agreements and other borrowed funds - fair value of term repurchase
agreements and other term borrowings is estimated based on current repurchase
rates and borrowing rates currently available to the Company for repurchases and
borrowings with similar terms and maturities. The estimated fair value for
overnight repurchase agreements and other borrowings is book value.
Subordinated debentures - fair value of the subordinated debt is estimated by
discounting the estimated future cash flows using current estimated market rates
for subordinated debt issuances with similar characteristics.
Off-balance sheet financial instruments - commitments to extend credit and
letters of credit represent the principal categories of off-balance sheet
financial instruments. Rates for these commitments are set at time of loan
closing, such that no adjustment is necessary to reflect these commitments at
market value. See Note 4 to consolidated financial statements.
19. CONTINGENCIES AND COMMITMENTS
The Company leases certain land, premises and equipment from third parties under
operating and capital leases. Total rent expense for the years ended December
31, 2009, 2008, and 2007 was approximately $3,306,000, $2,561,000, and
$2,099,000, respectively. Amortization of building capital lease assets is
included in depreciation. One of the Company's subsidiaries has entered into
lease transactions with two of its directors and the related party rent expense
for the years ended December 31, 2009, 2008, and 2007 was approximately
$703,000, $476,000, and $346,000. The total future minimum rental commitments
required under operating and capital leases that have initial or remaining
noncancelable lease terms in excess of one year at December 31, 2009 are as
follows:
Capital Operating
(Dollars in thousands) Leases Leases Total
---------------------- ------- --------- ------
Years ended December 31,
2010 $ 231 2,912 3,143
2011 233 2,621 2,854
2012 235 2,130 2,365
2013 238 1,902 2,140
2014 838 1,739 2,577
Thereafter 1,341 9,533 10,874
------ ------ ------
Total minimum lease payments 3,116 20,837 23,953
====== ======
Less: Amount representing interest 1,079
------
Present value of minimum lease payments 2,037
Less: Current portion of
obligations under capital leases 74
Long-term portion of
obligations under capital leases $1,963
======
The Company is a defendant in legal proceedings arising in the normal course of
business. In the opinion of management, the disposition of pending litigation
will not have a material effect on the Company's consolidated financial
position, results of operations or liquidity.
96
20. ACQUISITIONS
On October 2, 2009, the Company acquired First Company and its bank subsidiary,
First National, with total assets of $272,280,000, loans of $160,538,000 and
deposits of $236,529,000. The purchase price included core deposit intangible of
$4,040,000. The acquisition resulted in a $3,482,000 one-time bargain purchase
gain recorded in other income which was based on the estimated fair value of the
assets acquired and liabilities assumed.
On December 1, 2008, the Company acquired Bank of the San Juans Bancorporation
and its bank subsidiary, San Juans, with total assets of $157,155,000, loans of
$139,376,000 and deposits of $119,019,000. The purchase price included core
deposit intangible of $2,101,000 and goodwill of $5,958,000.
Adjustment of the allocated acquisition price may be related to fair value
estimates for which all information has not been obtained on the acquired entity
known or discovered during the allocation period, the period of time required to
identify and measure the fair values of the assets and liabilities acquired in
the business combination.
21. OPERATING SEGMENT INFORMATION
FASB ASC Topic 280, Segment Reporting, requires that a public business
enterprise report financial and descriptive information about its reportable
operating segments. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision makers in deciding how to
allocate resources and in assessing performance. The Company defines operating
segments and evaluates segment performance internally based on individual bank
charters. If required, VIEs are consolidated into the operating segment which
invested into such entities.
On February 1, 2009, Morgan merged into 1st Bank resulting in operations being
conducted under the 1st Bank charter. On April 30, 2008, Whitefish merged into
Glacier with operations conducted under the Glacier charter. The five bank
subsidiaries acquired as a result of the acquisition of CDC included Citizens
State Bank, First Citizens Bank of Billings, First National Bank of Lewistown,
Western Bank of Chinook, and First Citizens Bank, N.A. On January 26, 2007,
Citizens State Bank, First Citizens Bank of Billings, and First Citizens Bank,
N.A. were merged into First Security, Western, and Glacier, respectively. On
June 21, 2007, Western Bank of Chinook merged into First National Bank of
Lewistown and renamed First Bank of Montana. Prior period activity of the merged
banks has been combined and included in the acquiring bank subsidiaries'
historical results.
The accounting policies of the individual operating segments are the same as
those of the Company described in Note 1. Transactions between operating
segments are conducted at fair value, resulting in profits that are eliminated
for reporting consolidated results of operations. Intersegment revenues
primarily represents interest income on intercompany borrowings, management
fees, and data processing fees received by individual banks or the parent
company. Intersegment revenues, expenses and assets are eliminated in order to
report results in accordance with accounting principles generally accepted in
the United States of America. Expenses for centrally provided services are
allocated based on the estimated usage of those services.
97
21. OPERATING SEGMENT INFORMATION . . . CONTINUED
The following is a summary of selected operating segment information for the
years ended and as of December 31, 2009, 2008, and 2007.
2009 Mountain First 1st
(Dollars in thousands) Glacier West Security Bank Western Big Sky Valley
---------------------- ---------- --------- -------- -------- ------- ------- -------
Net interest income ..................... $ 57,139 53,302 35,788 24,057 21,233 15,700 14,051
Provision for loan losses ............... (32,000) (50,500) (10,450) (10,800) (3,200) (9,200) (1,200)
---------- --------- ------- ------- ------- ------- -------
Net interest income after
provision for loan and lease losses .. 25,139 2,802 25,338 13,257 18,033 6,500 12,851
Non-interest income ..................... 15,387 27,882 8,103 4,628 8,631 3,564 5,717
Core deposit amortization ............... (330) (184) (468) (652) (571) (23) (42)
Other non-interest expense .............. (27,325) (51,525) (18,897) (14,943) (16,342) (8,441) (9,229)
---------- --------- ------- ------- ------- ------- -------
Earnings before income taxes ............ 12,871 (21,025) 14,076 2,290 9,751 1,600 9,297
Income tax (expense) benefit ............ (2,803) 9,764 (3,372) (309) (2,813) (121) (2,740)
---------- --------- ------- ------- ------- ------- -------
Net income (loss) ....................... $ 10,068 (11,261) 10,704 1,981 6,938 1,479 6,557
========== ========= ======= ======= ======= ======= =======
Assets .................................. $1,325,039 1,172,331 890,672 650,072 624,077 368,571 351,228
Loans, net of ALLL ...................... 903,276 919,901 548,471 286,019 314,613 260,433 182,916
Goodwill ................................ 8,900 23,159 18,582 41,718 22,311 1,752 1,770
Deposits ................................ 726,403 793,006 588,858 421,271 504,619 184,278 211,935
Stockholders' equity .................... 139,799 146,720 120,044 101,789 85,259 51,614 30,585
First
First Bank- San
National Citizens MT Juans Parent Eliminations Consolidated
-------- -------- ------- ------- ------- ------------ ------------
Net interest income ..................... $ 3,964 10,437 7,900 245,327 8,021 (6,265) --
Provision for loan losses ............... (1,683) (2,800) (985) (1,800) -- -- (124,618)
-------- ------- ------- ------- ------- -------- ---------
Net interest income after
provision for loan and lease losses .. 2,281 7,637 6,915 6,221 (6,265) -- 120,709
Non-interest income ..................... 4,187 4,235 929 1,329 52,466 (50,584) 86,474
Core deposit amortization ............... (144) (111) (358) (233) -- -- (3,116)
Other non-interest expense .............. (2,011) (7,992) (3,189) (5,435) (13,769) 13,396 (165,702)
-------- ------- ------- ------- ------- -------- ---------
Earnings before income taxes ............ 4,313 3,769 4,297 1,882 32,432 (37,188) 38,365
Income tax (expense) benefit ............ (230) (1,332) (1,426) (551) 1,942 -- (3,991)
-------- ------- ------- ------- ------- -------- ---------
Net income .............................. $ 4,083 2,437 2,871 34,374 (37,188) 34,374 1,331
======== ======= ======= ======= ======= ======== =========
Assets .................................. $295,953 241,807 217,379 184,528 832,916 (962,778) 6,191,795
Loans, net of ALLL ...................... 151,379 161,182 114,113 145,015 -- -- 3,987,318
Goodwill ................................ -- 9,553 12,556 5,958 -- -- 146,259
Deposits ................................ 247,256 159,763 143,552 148,474 -- (29,263) 4,100,152
Stockholders' equity .................... 31,364 31,969 32,627 25,410 685,890 (797,180) 685,890
98
21. OPERATING SEGMENT INFORMATION . . . CONTINUED
2008 Mountain First 1st
(Dollars in thousands) Glacier West Security Bank Western Big Sky Valley
---------------------- ---------- --------- -------- ------- ------- ------- -------
Net interest income ..................... $ 52,900 45,614 34,212 22,695 20,713 15,595 12,719
Provision for loan losses ............... (8,825) (11,150) (1,750) (2,012) (540) (2,200) (810)
---------- --------- ------- ------- ------- ------- -------
Net interest income after
provision for loan and lease losses .. 44,075 34,464 32,462 20,683 20,173 13,395 11,909
Non-interest income ..................... 13,926 20,353 6,987 4,728 3,306 3,608 4,673
Core deposit amortization ............... (392) (196) (511) (712) (623) (23) (42)
Other non-interest expense .............. (27,074) (41,922) (17,128) (14,143) (16,151) (7,390) (8,770)
---------- --------- ------- ------- ------- ------- -------
Earnings before income taxes ............ 30,535 12,699 21,810 10,556 6,705 9,590 7,770
Income tax (expense) benefit ............ (10,910) (3,628) (7,282) (3,631) (1,818) (3,587) (2,251)
---------- --------- ------- ------- ------- ------- -------
Net income .............................. $ 19,625 9,071 14,528 6,925 4,887 6,003 5,519
========== ========= ======= ======= ======= ======= =======
Assets .................................. $1,250,774 1,226,869 954,218 566,869 609,868 332,325 298,392
Loans, net of ALLL ...................... 963,107 955,486 561,691 320,370 354,199 287,394 195,504
Goodwill ................................ 8,900 23,159 18,582 41,718 22,311 1,752 1,770
Deposits ................................ 609,473 680,404 545,199 418,231 357,729 179,834 185,505
Stockholders' equity .................... 129,890 124,881 116,856 95,200 83,843 40,384 31,483
First
Bank- San
Citizens MT Juans Parent Eliminations Consolidated
-------- ------- ------- ------- ------------ ------------
Net interest income ..................... $ 7,676 6,676 575 (6,762) -- 212,613
Provision for loan losses ............... (750) (390) (53) -- -- (28,480)
-------- ------- ------- ------- ---------- ---------
Net interest income after
provision for loan and lease losses .. 6,926 6,286 522 (6,762) -- 184,133
Non-interest income ..................... 2,855 768 85 83,891 (84,146) 61,034
Core deposit amortization ............... (128) (405) (19) -- -- (3,051)
Other non-interest expense .............. (6,407) (3,083) (397) (13,424) 13,031 (142,858)
-------- ------- ------- ------- ---------- ---------
Earnings before income taxes ............ 3,246 3,566 191 63,705 (71,115) 99,258
Income tax (expense) benefit ............ (1,092) (1,279) (75) 1,952 -- (33,601)
-------- ------- ------- ------- ---------- ---------
Net income .............................. $ 2,154 2,287 116 65,657 (71,115) 65,657
======== ======= ======= ======= ========== =========
Assets .................................. $217,697 154,645 165,784 814,883 (1,038,354) 5,553,970
Loans, net of ALLL ...................... 159,412 114,177 142,114 -- -- 4,053,454
Goodwill ................................ 9,553 12,556 6,451 -- -- 146,752
Deposits ................................ 135,970 113,531 143,056 -- (106,457) 3,262,475
Stockholders' equity .................... 29,110 29,329 21,207 676,940 (702,183) 676,940
99
21. OPERATING SEGMENT INFORMATION . . . CONTINUED
2007 Mountain First 1st
(Dollars in thousands) Glacier West Security Bank Western Big Sky Valley
---------------------- ---------- --------- -------- ------- ------- ------- -------
Net interest income ..................... $ 40,270 41,115 32,674 20,135 19,043 12,610 10,641
Provision for loan losses ............... (1,580) (2,225) (1,100) (630) -- (645) (405)
---------- --------- ------- ------- ------- ------- -------
Net interest income after
provision for loan and lease losses .. 38,690 38,890 31,574 19,505 19,043 11,965 10,236
Non-interest income ..................... 13,473 19,861 6,844 4,212 8,896 3,583 4,807
Core deposit amortization ............... (415) (208) (554) (688) (675) (23) (42)
Other non-interest expense .............. (25,231) (36,745) (17,295) (13,015) (16,050) (7,220) (8,335)
---------- --------- ------- ------- ------- ------- -------
Earnings before income taxes ............ 26,517 21,798 20,569 10,014 11,214 8,305 6,666
Income tax (expense) benefit ............ (9,294) (7,701) (7,027) (3,482) (4,129) (3,144) (1,955)
---------- --------- ------- ------- ------- ------- -------
Net income .............................. $ 17,223 14,097 13,542 6,532 7,085 5,161 4,711
========== ========= ======= ======= ======= ======= =======
Assets .................................. $1,101,112 1,038,294 792,882 551,327 508,915 315,885 283,155
Loans, net of ALLL ...................... 863,253 836,426 548,379 298,800 321,533 262,934 194,912
Goodwill ................................ 8,900 23,159 18,582 41,718 22,311 1,752 1,770
Deposits ................................ 579,190 666,330 533,260 439,281 345,273 215,771 187,657
Stockholders' equity .................... 115,247 114,538 109,320 87,523 83,226 35,406 27,323
First
Bank-
Citizens MT Parent Eliminations Consolidated
-------- ------- ------- ------------ ------------
Net interest income ..................... $ 7,532 6,308 (6,859) -- 183,469
Provision for loan losses ............... (75) (20) -- -- (6,680)
-------- ------- ------- -------- ---------
Net interest income after
provision for loan and lease losses .. 7,457 6,288 (6,859) -- 176,789
Non-interest income ..................... 2,550 736 84,025 (84,169) 64,818
Core deposit amortization ............... (146) (451) -- -- (3,202)
Other non-interest expense .............. (6,102) (3,426) (13,006) 11,710 (134,715)
-------- ------- ------- -------- ---------
Earnings before income taxes ............ 3,759 3,147 64,160 (72,459) 103,690
Income tax (expense) benefit ............ (1,403) (1,395) 4,443 -- (35,087)
-------- ------- ------- -------- ---------
Net income .............................. $ 2,356 1,752 68,603 (72,459) 68,603
======== ======= ======= ======== =========
Assets .................................. $182,769 149,483 660,892 (767,384) 4,817,330
Loans, net of ALLL ...................... 131,988 98,897 -- -- 3,557,122
Goodwill ................................ 9,553 12,556 -- -- 140,301
Deposits ................................ 139,228 113,692 -- (35,204) 3,184,478
Stockholders' equity .................... 27,808 26,941 528,576 (627,332) 528,576
22. IMPACT OF RECENT AUTHORITATIVE ACCOUNTING GUIDANCE
The Accounting Standards Codification became FASB's officially recognized source
of authoritative U.S. generally accepted accounting principles ("GAAP")
applicable to all public and non-public non-governmental entities. Rules and
interpretive releases of the Securities and Exchange Commission ("SEC") under
the authority of the federal securities laws are also sources of authoritative
GAAP for SEC registrants. All other accounting literature is considered
non-authoritative. The Company adopted the topic effective for the period ending
September 30, 2009 and determined there was not a material effect on the
Company's financial position or results of operations.
100
22. IMPACT OF RECENT AUTHORITATIVE ACCOUNTING GUIDANCE...CONTINUED
In January 2010, FASB issued an amendment to FASB ASC Topic 820, Fair Value
Measurements and Disclosures, that will provide more robust disclosures about 1)
the different classes of assets and liabilities measured at fair value, 2) the
valuation techniques and inputs used, 3) the activity in Level 3 fair value
measurements, and 4) the transfers between Levels 1, 2, and 3. The new
disclosures are effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about the activity in Level
3 fair value measurements. Those disclosures are effective for fiscal years
beginning after December 15, 2010. The Company is currently evaluating the
impact of the adoption of this amendment, but does not expect it to have a
material effect on the Company's financial position or results of operations.
In August 2009, FASB issued an amendment to FASB ASC Subtopic 820-10, Fair Value
Measurements and Disclosures - Overall, for the fair value measurement of
liabilities. The Update provides clarification that in circumstances in which a
quoted price in an active market for the identical liability is not available, a
reporting unit is required to measure fair value using one or more of the
following techniques: 1) A valuation technique that uses a) the quoted price of
the identical liability when trades as an asset b) quoted prices for similar
liabilities or similar liabilities when traded as assets 2) Another valuation
technique that is consistent with the principals FASB ASC Topic 820, Fair Value
Measurements and Disclosures. The Update is effective for the first reporting
period (including interim periods) beginning after issuance. The Company adopted
the standard effective for the period ending September 30, 2009 and determined
there was not a material effect on the Company's financial position or results
of operations.
In June 2009, FASB issued an amendment to FASB ASC Topic 810, Consolidation. The
objective of this standard is to amend certain requirements to improve financial
reporting by enterprises involved with variable interest entities and to provide
more relevant and reliable information to users of financial statements. This
standard shall be effective as of the beginning of each reporting entity's first
annual reporting period that begins after November 15, 2009, for interim periods
within that first annual reporting period, and for interim and annual reporting
periods thereafter. The Company is currently evaluating the impact of the
adoption of this amendment, but does not expect it to have a material effect on
the Company's financial position or results of operations.
In June 2009, FASB issued an amendment to FASB ASC Topic 860, Transfers and
Servicing. The objective of this standard is to improve the relevance,
representational faithfulness, and comparability of the information that a
reporting entity provides in its financial reports about a transfer of financial
assets; the effects of a transfer on its financial position, financial
performance, and cash flows; and a transferor's continuing involvement in
transferred financial assets. This standard shall be effective as of the
beginning of each reporting entity's first annual reporting period that begins
after November 15, 2009, for interim periods within that first annual reporting
period, and for interim and annual reporting periods thereafter. The Company is
currently evaluating the impact of the adoption of this amendment, but does not
expect it to have a material effect on the Company's financial position or
results of operations.
In April 2009, FASB issued an amendment to FASB ASC Topic 320, Investments -
Debt and Equity Securities, relating to the recognition and presentation of
other-than-temporary impairments. The objective of an other-than-temporary
impairment analysis under existing GAAP is to determine whether the holder of an
investment in a debt or equity security for which changes in fair value are not
regularly recognized in earnings (such as securities classified as
held-to-maturity or available-for-sale) should recognize a loss in earnings when
the investment is impaired. An investment is impaired if the fair value of the
investment is less than its amortized cost basis. This standard amends the
other-than-temporary impairment guidance in U.S. GAAP for debt securities to
make the guidance more operational and to improve the presentation and
disclosure of other-than-temporary impairments on debt and equity securities in
the financial statements. This standard does not amend existing recognition and
measurement guidance related to other-than-temporary impairments of equity
securities. The standard is effective for interim and annual reporting periods
ending after June 15, 2009, with early adoption permitted for periods ending
after March 15, 2009. The Company has evaluated the impact of the adoption of
this standard and determined there was not a material effect on the Company's
financial position or results of operations.
In April 2009, FASB issued an amendment to FASB ASC Topic 820, Fair Value
Measurements and Disclosures, which provides additional guidance for estimating
fair value when the volume and level of activity for the asset or liability have
significantly decreased. This standard also includes guidance on identifying
circumstances that indicate a transaction is not orderly. This standard
emphasizes that even if there has been a significant decrease in the volume and
level of activity for the asset or liability and regardless of the valuation
technique(s) used, the objective of a fair value measurement remains the same.
Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction (that is, not a forced
liquidation or distressed sale) between market participants at the measurement
date under current market conditions. This standard is effective for interim and
annual reporting periods ending after June 15, 2009, and shall be applied
prospectively. Early adoption was permitted for periods ending after March 15,
2009. The Company has evaluated the impact of the adoption of this standard and
determined there was not a material effect on the Company's financial position
or results of operations..
101
22. IMPACT OF RECENT AUTHORITATIVE ACCOUNTING GUIDANCE...CONTINUED
In April 2009, FASB issued an amendment to FASB ASC Topic 825, Financial
Instruments, which requires disclosures about fair value of financial
instruments for interim reporting periods of publicly traded companies as well
as in annual financial statements. An entity shall disclose in the body or in
the accompanying notes of its summarized financial information for interim
reporting periods and in its financial statements for annual reporting periods
the fair value of all financial instruments for which it is practicable to
estimate that value, whether recognized or not recognized in the statement of
financial position. Fair value information disclosed in the notes shall be
presented together with the related carrying amount in a form that makes it
clear whether the fair value and carrying amount represent assets or liabilities
and how the carrying amount relates to what is reported in the statement of
financial position. An entity also shall disclose the method(s) and significant
assumptions used to estimate the fair value of financial instruments and shall
describe changes in method(s) and significant assumptions, if any, during the
period. This standard shall be effective for interim reporting periods ending
after June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009. The Company has evaluated the impact of the adoption of this
standard and determined there was not a material effect on the Company's
financial position or results of operations. For additional information on
disclosures about fair value of financial instruments see Part I, Item 2
"Financial Statements - Note 13, Fair Value Measurements".
In December 2008, the FASB issued ASC Topic 820, Fair Value Measurements and
Disclosures. The standard requires public entities to provide additional
disclosures about transfers of financial assets and their involvement with
variable interest entities. Additionally, this standard requires certain
disclosures to be provided by a public enterprise that is (a) a sponsor of a
qualifying special purpose entity (SPE) that holds a variable interest in the
qualifying SPE but was not the transferor (nontransferor) of financial assets to
the qualifying SPE and (b) a servicer of a qualifying SPE that holds a
significant variable interest in the qualifying SPE but was not the transferor
(nontransferor) of financial assets to the qualifying SPE. The disclosures
required by this standard are intended to provide greater transparency to
financial statement users about a transferor's continuing involvement with
transferred financial assets and an enterprise's involvement with variable
interest entities and qualifying SPEs. The issue is effective for the first
reporting period (interim or annual) ending after December 15, 2008. The Company
has evaluated the impact of the adoption of this standard and determined there
was not a material effect on the Company's financial position or results of
operations.
In April 2008, the FASB issued ASC Topic 350, Intangibles - Goodwill and Other.
This standard amends the factors that should be considered in developing renewal
or extension assumptions used to determine the useful life of a recognized
intangible asset. The intent of this standard is to improve the consistency
between the useful life of a recognized intangible asset and the period of
expected cash flows used to measure the fair value of the asset. This standard
is effective for financial statements issued for fiscal years beginning after
December 15, 2008. The Company has evaluated the impact of the adoption of this
standard and determined there was not a material effect on the Company's
financial position or results of operations.
In March 2008, the FASB issued ASC Topic 815, Derivatives and Hedging. This
topic changes the disclosure requirements for derivative instruments and hedging
activities. Entities are required to provide enhanced disclosures about (a) how
and why an entity uses derivative instruments, (b) how derivative instruments
and related hedged items are accounted for, and (c) how derivative instruments
and related hedged items affect an entity's financial position, financial
performance, and cash flows. This Statement is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008. The Company has evaluated the impact of the adoption of this standard
and determined there was not a material effect on the Company's financial
position or results of operations.
In December 2007, FASB issued new standards relating to business combinations
which are included in FASB ASC Topic 805, Business Combinations. The objective
of this standard is to improve the relevance, representational faithfulness, and
comparability of the information that a reporting entity provides in its
financial reports about a business combination and its effects. The Statement
establishes principles and requirements for how the acquirer: a) recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree, b)
recognizes and measures the goodwill acquired in the business combination or a
gain from a bargain purchase, and c) determines what information to disclose to
enable users of the financial statements to evaluate the nature and financial
effects of the business combination. This Statement applies prospectively to
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008. The Company has evaluated the impact of the adoption of this standard
and determined there was not a material effect on the Company's financial
position or results of operations.
102
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes or disagreements with accountants on accounting and
financial disclosure.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. An evaluation was carried out
under the supervision and with the participation of the Company's management,
including the Chief Executive Officer ("CEO") and Chief Financial Officer
("CFO"), of the effectiveness of the disclosure controls and procedures. Based
on that evaluation, the CEO and CFO have concluded that as of the end of the
period covered by this report, the disclosure controls and procedures are
effective to provide reasonable assurance that information required to be
disclosed by the Company in reports that are filed or submitted under the
Securities Exchange Act of 1934 are recorded, processed, summarized and timely
reported as provided in the SEC's rules and forms. As a result of this
evaluation, there were no significant changes in the internal control over
financial reporting during the three months ended December 31, 2009 that have
materially affected, or are reasonable likely to materially affect, the internal
control over financial reporting.
Management's Report on Internal Control Over Financial Reporting Management is
responsible for establishing and maintaining effective internal control over
financial reporting as it relates to its financial statements presented in
conformity with U.S. generally accepted accounting principles. The Company's
internal control system was designed to provide reasonable assurance to the
Company's management and Board of Directors regarding the preparation and fair
presentation of published financial statements in accordance with U.S. generally
accepted accounting principles. Internal control over financial reporting
includes self monitoring mechanisms and actions are taken to correct
deficiencies as they are identified.
There are inherent limitations in any internal control, no matter how well
designed, misstatements due to error or fraud may occur and not be detected,
including the possibility of circumvention or overriding of controls.
Accordingly, even an effective internal control system can provide only
reasonable assurance with respect to financial statement preparation. Further,
because of changes in conditions, the effectiveness of an internal control
system may vary over time.
Management assessed its internal control structure over financial reporting as
of December 31, 2009. This assessment was based on criteria for effective
internal control over financial reporting described in "Internal Control -
Integrated Framework" issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this assessment, management asserts that the
Company and subsidiaries maintained effective internal control over financial
reporting as it relates to its financial statements presented in conformity with
accounting principles generally accepted in the Unites States of America.
BKD LLP, the independent registered public accounting firm that audited the
financial statements for the year ended December 31, 2009, has issued an
attestation report on the Company's internal control over financial reporting.
Such attestation report expresses an unqualified opinion on the effectiveness of
the Company's internal control over financial reporting as of December 31, 2009.
ITEM 9B. OTHER INFORMATION
None
103
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information regarding "Directors and Executive Officers" is set forth under the
headings "Election of Directors" and "Management" of the Company's 2010 Annual
Meeting Proxy Statement ("Proxy Statement") and is incorporated herein by
reference.
Information regarding "Compliance with Section 16(a) of the Exchange Act" is set
forth under the section "Compliance with Section 16(a) Filing Requirements" of
the Company's Proxy Statement and is incorporated herein by reference.
Information regarding the Company's audit committee financial expert is set
forth under the heading "Meetings and Committees of the Board of Directors -
Committee Membership" in the Company's Proxy Statement and is incorporated by
reference.
Consistent with the requirements of the Sarbanes-Oxley Act, the Company has a
Code of Ethics applicable to senior financial officers including the principal
executive officer. The Code of Ethics can be accessed electronically by visiting
the Company's website at www.glacierbancorp.com. The Code of Ethics is also
listed as Exhibit 14 to this report, and is incorporated by reference to the
Company's 2003 annual report Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding "Executive Compensation" is set forth under the headings
"Compensation of Directors" and "Executive Compensation" of the Company's Proxy
Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information regarding "Security Ownership of Certain Beneficial Owners and
Management" is set forth under the headings "Security Ownership of Certain
Beneficial Owners and Management" of the Company's Proxy Statement and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
Information regarding "Certain Relationships and Related Transactions and
Director Independence" is set forth under the heading "Transactions with
Management" and "Corporate Governance - Director Independence" of the Company's
Proxy Statement and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information regarding "Principal Accounting Fees and Services" is set forth
under the heading "Compliance with Section 16(a) Filing Requirements - Fees Paid
to Independent Registered Public Accounting Firm" of the Company's Proxy
Statement and is incorporated herein by reference.
104
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as a part of this report:
(1) Financial Statements and
(2) Financial Statement schedules required to be filed by Item 8 of this
report.
(3) The following exhibits are required by Item 601 of Regulation S-K and
are included as part of this Form 10-K:
EXHIBIT NO. EXHIBIT
----------- --------
3(a) Amended and Restated Articles of Incorporation (1)
3(b) Amended and Restated Bylaws (1)
10(a) (7) Amended and Restated 1995 Employee Stock Option Plan and related agreements (2)
10(b) (7) Amended and Restated 1994 Director Stock Option Plan and related agreements (2)
10(c) (7) Amended and Restated Deferred Compensation Plan effective January 1, 2008 (3)
10(d) (7) Amended and Restated Supplemental Executive Retirement Agreement effective January 1, 2008 (3)
10(e) (7) 2005 Stock Incentive Plan and related agreements (4)
10(f) (7) Employment Agreement dated January 1, 2010 between the Company and Michael J. Blodnick (5)
10(g) (7) Employment Agreement dated January 1, 2010 between the Company and Ron J. Copher (5)
10(h) (7) Employment Agreement date January 1, 2010 between the Company and Don Chery (5)
14 Code of Ethics (6)
21 Subsidiaries of the Company (See item 1, "Subsidiaries")
23 Consent of BKD LLP
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002
(1) Incorporated by reference to Exhibits 3.i. and 3.ii included in the
Company's Quarterly Report on form 10-Q for the quarter ended June 30,
2008.
(2) Incorporated by reference to Exhibits 99.1 - 99.4 of the Company's S-8
Registration Statement (No. 333-105995).
(3) Incorporated by reference to Exhibits 10(c) and 10(d) of the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2008.
(4) Incorporated by reference to Exhibits 99.1 through 99.3 of the Company's
S-8 Registration Statement (No. 333-125024).
(5) Incorporated by reference to Exhibits 10.1 through 10.3 included in the
Company's Form 8-K filed by the Company on December 29, 2009.
(6) Incorporated by reference to Exhibit 14, included in the Company's Form
10-K for the year ended December 31, 2003.
(7) Compensatory Plan or Arrangement
All other financial statement schedules required by Regulation S-X are omitted
because they are not applicable, not material or because the information is
included in the consolidated financial statements or related notes.
105
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on March 1, 2010.
GLACIER BANCORP, INC.
By: /s/ Michael J. Blodnick
------------------------------------
Michael J. Blodnick
President/CEO/Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on March 1, 2010, by the following persons in the
capacities indicated.
/s/ Michael J. Blodnick President, CEO, and Director
--------------------------------- (Principal Executive Officer)
Michael J. Blodnick
/s/ Ron J. Copher Senior Vice President and CFO
--------------------------------- (Principal Financial Accounting Officer)
Ron J. Copher
Board of Directors
/s/ Everit A. Sliter Chairman
---------------------------------
Everit A. Sliter
/s/ James M. English Director
---------------------------------
James M. English
/s/ Allen Fetscher Director
---------------------------------
Allen J. Fetscher
/s/ Dallas I. Herron Director
---------------------------------
Dallas I. Herron
/s/ Jon W. Hippler Director
---------------------------------
Jon W. Hippler
/s/ Craig A. Langel Director
---------------------------------
Craig A. Langel
/s/ L. Peter Larson Director
---------------------------------
L. Peter Larson
/s/ Douglas J. McBride Director
---------------------------------
Douglas J. McBride
/s/ John W. Murdoch Director
---------------------------------
John W. Murdoch
106