UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended June 30, 2009
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to _____________
COMMISSION FILE 0-18911
GLACIER BANCORP, INC.
(Exact name of registrant as specified in its charter)
MONTANA 81-0519541
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
49 Commons Loop, Kalispell, Montana 59901
(Address of principal executive offices) (Zip Code)
(406) 756-4200
Registrant's telephone number, including area code
Not Applicable
(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section
232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes [ ]
No [ ]
Indicate by checkmark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer", "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [X] Accelerated Filer [ ]
Non-Accelerated Filer [ ] Smaller reporting Company [ ]
(Do not check if a smaller reporting company)
Indicate by checkmark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares of Registrant's common stock outstanding on July 22, 2009
was 61,519,808. No preferred shares are issued or outstanding.
GLACIER BANCORP, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Statements of Financial Condition - Unaudited
June 30, 2009, June 30, 2008 and audited December 31, 2008 ...... 3
Condensed Consolidated Statements of Operations -
Unaudited three and six months ended June 30, 2009 and 2008 ..... 4
Condensed Consolidated Statements of Stockholders' Equity and
Comprehensive Income - audited year ended December 31, 2008
and unaudited six months ended June 30, 2009 .................... 5
Condensed Consolidated Statements of Cash Flows -
Unaudited six months ended June 30, 2009 and 2008 ............... 6
Notes to Condensed Consolidated Financial Statements - Unaudited ... 7
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations ................... 28
Item 3 - Quantitative and Qualitative Disclosure about Market Risk .... 45
Item 4 - Controls and Procedures ...................................... 45
PART II. OTHER INFORMATION ............................................... 46
Item 1 - Legal Proceedings ............................................ 46
Item 1A - Risk Factors ................................................ 46
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds .. 50
Item 3 - Defaults Upon Senior Securities .............................. 50
Item 4 - Submission of Matters to a Vote of Security Holders .......... 50
Item 5 - Other Information ............................................ 52
Item 6 - Exhibits ..................................................... 52
Signatures ............................................................ 52
GLACIER BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, December 31, June 30,
(Dollars in thousands, except per share data) 2009 2008 2008
--------------------------------------------- ----------- ------------ -----------
(unaudited) (audited) (unaudited)
ASSETS:
Cash on hand and in banks ............................................. $ 100,773 125,123 123,545
Federal funds sold .................................................... 62,405 6,480 135
Interest bearing cash deposits ........................................ 24,608 3,652 26,654
----------- ---------- -----------
Cash and cash equivalents .......................................... 187,786 135,255 150,334
Investment securities ................................................. 994,147 990,092 773,417
Loans receivable, net ................................................. 3,939,219 3,998,478 3,717,373
Loans held for sale ................................................... 92,166 54,976 42,772
Premises and equipment, net ........................................... 135,902 133,949 125,398
Real estate and other assets owned, net ............................... 47,424 11,539 6,523
Accrued interest receivable ........................................... 30,346 28,777 28,128
Deferred tax asset .................................................... 14,890 14,292 3,624
Core deposit intangible, net .......................................... 11,477 13,013 12,416
Goodwill .............................................................. 146,259 146,752 140,301
Other assets .......................................................... 38,808 26,847 27,582
----------- ---------- -----------
Total assets ...................................................... $ 5,638,424 5,553,970 5,027,868
=========== ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Non-interest bearing deposits ......................................... $ 754,844 747,439 778,786
Interest bearing deposits ............................................. 2,631,599 2,515,036 2,347,137
Advances from Federal Home Loan Bank .................................. 613,478 338,456 658,211
Securities sold under agreements to repurchase ........................ 180,779 188,363 176,211
Federal Reserve Bank discount window .................................. 587,000 914,000 144,000
U.S. Treasury Tax & Loan .............................................. 5,120 6,067 209,298
Other borrowed funds .................................................. 12,072 2,301 2,139
Accrued interest payable .............................................. 8,421 9,751 11,922
Subordinated debentures ............................................... 120,157 121,037 118,559
Other liabilities ..................................................... 35,290 34,580 31,962
----------- ---------- -----------
Total liabilities .................................................. 4,948,760 4,877,030 4,478,225
----------- ---------- -----------
Preferred shares, $.01 par value per share. 1,000,000 shares authorized
None issued or outstanding ......................................... -- -- --
Common stock, $.01 par value per share. 117,187,500 shares
authorized ......................................................... 615 613 540
Paid-in capital ....................................................... 495,223 491,794 380,161
Retained earnings - substantially restricted .......................... 196,208 185,776 171,017
Accumulated other comprehensive loss .................................. (2,382) (1,243) (2,075)
----------- ---------- -----------
Total stockholders' equity ......................................... 689,664 676,940 549,643
----------- ---------- -----------
Total liabilities and stockholders' equity ......................... $ 5,638,424 5,553,970 5,027,868
=========== ========== ===========
Number of shares outstanding .......................................... 61,519,808 61,331,273 53,985,813
Book value per share .................................................. $ 11.21 11.04 10.18
See accompanying notes to condensed consolidated financial statements.
3
GLACIER BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
(UNAUDITED - dollars in thousands, except per share data) 2009 2008 2009 2008
--------------------------------------------------------- ----------- ------------- ---------- ------------
INTEREST INCOME:
Real estate loans ....................................... $ 13,871 12,399 28,212 24,991
Commercial loans ........................................ 37,597 41,100 75,563 83,633
Consumer and other loans ................................ 11,142 11,790 22,481 23,897
Investment securities and
other ................................................... 11,810 9,284 23,696 18,068
----------- ---------- ---------- ----------
Total interest income ................................ 74,420 74,573 149,952 150,589
----------- ---------- ---------- ----------
INTEREST EXPENSE:
Deposits ................................................ 9,433 13,474 19,567 30,343
Federal Home Loan Bank advances ......................... 1,852 4,821 3,671 10,539
Securities sold under agreements to repurchase .......... 409 808 1,003 2,149
Subordinated debentures ................................. 1,676 1,853 3,583 3,726
Other borrowed funds .................................... 569 1,317 1,269 2,903
----------- ---------- ---------- ----------
Total interest expense ............................... 13,939 22,273 29,093 49,660
----------- ---------- ---------- ----------
NET INTEREST INCOME ........................................ 60,481 52,300 120,859 100,929
Provision for loan losses ............................... 25,140 5,042 40,855 7,542
----------- ---------- ---------- ----------
Net interest income after provision for loan losses .. 35,341 47,258 80,004 93,387
----------- ---------- ---------- ----------
NON-INTEREST INCOME:
Service charges and other fees .......................... 10,215 10,599 19,234 20,070
Miscellaneous loan fees and charges ..................... 1,162 1,624 2,322 3,114
Gains on sale of loans .................................. 9,071 4,245 15,221 8,125
Gain on sale of investments ............................. -- -- -- 248
Other income ............................................ 870 913 1,918 2,086
----------- ---------- ---------- ----------
Total non-interest income ............................ 21,318 17,381 38,695 33,643
----------- ---------- ---------- ----------
NON-INTEREST EXPENSE:
Compensation, employee benefits and related expense ..... 20,710 20,967 42,654 42,064
Occupancy and equipment expense ......................... 5,611 5,116 11,506 10,249
Advertising and promotions expense ...................... 1,722 1,833 3,446 3,372
Outsourced data processing expense ...................... 680 647 1,351 1,314
Core deposit intangibles amortization ................... 762 767 1,536 1,546
Other expense ........................................... 13,478 7,113 22,096 13,511
----------- ---------- ---------- ----------
Total non-interest expense ........................... 42,963 36,443 82,589 72,056
----------- ---------- ---------- ----------
EARNINGS BEFORE INCOME TAXES ............................... 13,696 28,196 36,110 54,974
Federal and state income tax expense .................... 3,044 9,737 9,679 19,116
----------- ---------- ---------- ----------
NET EARNINGS ............................................... $ 10,652 18,459 26,431 35,858
=========== ========== ========== ==========
Basic earnings per share ................................... $ 0.17 0.35 0.43 0.67
Diluted earnings per share ................................. $ 0.17 0.34 0.43 0.66
Dividends declared per share ............................... $ 0.13 0.13 0.26 0.26
Return on average assets (annualized) ...................... 0.77% 1.51% 0.96% 1.48%
Return on average equity (annualized) ...................... 6.18% 13.51% 7.72% 13.25%
Average outstanding shares - basic ......................... 61,515,946 53,971,220 61,489,422 53,910,414
Average outstanding shares - diluted ....................... 61,518,289 54,151,290 61,493,266 54,084,193
See accompanying notes to condensed consolidated financial statements.
4
GLACIER BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31, 2008 AND UNAUDITED SIX MONTHS ENDED JUNE 30, 2009
Retained Accumulated Total
Common Stock earnings Other stock-
----------------- Paid-in substantially comprehensive holders'
(Dollars in thousands, except per share data) Shares capital restricted income (loss) equity
--------------------------------------------- ---------- -------------- ------------- ------------- --------
Balance at December 31, 2007 ........................ 53,646,480 $536 374,728 150,195 3,117 528,576
Comprehensive income:
Net earnings ..................................... -- -- -- 65,657 -- 65,657
Unrealized loss on securities, net of
reclassification adjustment and taxes ......... -- -- -- -- (4,360) (4,360)
-------
Total comprehensive income .......................... 61,297
-------
Cash dividends declared ($.52 per share) ............ -- -- -- (29,079) -- (29,079)
Stock options exercised ............................. 719,858 7 9,789 -- -- 9,796
Stock issued in connection with acquisition ......... 639,935 7 9,280 -- -- 9,287
Public offering of stock issued ..................... 6,325,000 63 93,890 -- -- 93,953
Cumulative effect of change in accounting
principle ........................................ -- -- -- (997) -- (997)
Stock based compensation and tax benefit ............ -- -- 4,107 -- -- 4,107
---------- ---- ------- ------- ------ -------
Balance at December 31, 2008 ........................ 61,331,273 $613 491,794 185,776 (1,243) 676,940
Comprehensive income:
Net earnings ..................................... -- -- -- 26,431 -- 26,431
Unrealized loss on securities, net of
reclassification adjustment and taxes ......... -- -- -- -- (1,139) (1,139)
-------
Total comprehensive income .......................... 25,292
-------
Cash dividends declared ($.26 per share) ............ -- -- -- (15,999) -- (15,999)
Stock options exercised ............................. 188,535 2 2,552 -- -- 2,554
Stock based compensation and tax benefit ............ -- -- 877 -- -- 877
---------- ---- ------- ------- ------ -------
Balance at June 30, 2009 (unaudited) ................ 61,519,808 $615 495,223 196,208 (2,382) 689,664
========== ==== ======= ======= ====== =======
See accompanying notes to condensed consolidated financial statements.
5
GLACIER BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30,
-------------------------
(UNAUDITED - Dollars in thousands) 2009 2008
---------------------------------- --------- -------------
OPERATING ACTIVITIES :
NET CASH PROVIDED BY OPERATING ACTIVITIES ........................... $ 25,726 42,907
--------- --------
INVESTING ACTIVITIES:
Proceeds from sales, maturities and prepayments of
investments available-for-sale ................................... 97,332 211,647
Purchases of investments available-for-sale ......................... (103,724) (293,751)
Principal collected on commercial and consumer loans ................ 483,879 558,506
Commercial and consumer loans originated or acquired ................ (529,042) (752,164)
Principal collections on real estate loans .......................... 97,507 175,149
Real estate loans originated or acquired ............................ (76,282) (194,494)
Net purchase of FHLB and FRB stock .................................. (61) (138)
Proceeds from sale of other real estate owned ....................... 5,257 659
Net addition of premises and equipment and other real estate owned .. (7,854) (6,239)
--------- --------
.. NET CASH USED IN INVESTING ACTIVITIES ........................... (32,988) (300,825)
--------- --------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits ................................. 123,881 (58,555)
Net increase in FHLB advances ....................................... 275,022 119,263
Net decrease in securities sold under repurchase agreements ......... (7,584) (1,830)
Net (decrease) increase in Federal Reserve Bank discount window ..... (327,000) 144,000
Net decrease in U.S. Treasury Tax and Loan funds .................... (947) (12,111)
Net increase (decrease) in other borrowed funds ..................... 9,791 (33)
Cash dividends paid ................................................. (15,999) (14,039)
Excess tax benefits from stock options .............................. 75 527
Proceeds from exercise of stock options and other stock issued ...... 2,554 3,421
--------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES .......................... 59,793 180,643
--------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............... 52,531 (77,275)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .................... 135,255 227,609
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .......................... $ 187,786 150,334
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest .............................................. $ 30,423 51,020
Cash paid for Income taxes .......................................... 23,407 22,265
Sale and refinancing of other real estate owned ..................... 2,243 827
Other real estate acquired in settlement of loans ................... 44,584 5,913
See accompanying notes to condensed consolidated financial statements.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1) Basis of Presentation
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of
normal recurring adjustments) necessary for a fair presentation of Glacier
Bancorp Inc.'s (the "Company") financial condition as of June 30, 2009 and
2008, stockholders' equity and comprehensive income for the six months
ended June 30, 2009, the results of operations for the three and six months
ended June 30, 2009 and 2008, and cash flows for the six months ended June
30, 2009 and 2008. The condensed consolidated statement of financial
condition and statement of stockholders' equity and comprehensive income of
the Company as of December 31, 2008 have been derived from the audited
consolidated statements of the Company as of that date.
The accompanying condensed consolidated financial statements do not include
all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. These condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes
thereto contained in the Company's Annual Report on Form 10-K for the year
ended December 31, 2008. Operating results for the six months ended June
30, 2009 are not necessarily indicative of the results anticipated for the
year ending December 31, 2009. Certain reclassifications have been made to
the 2008 financial statements to conform to the 2009 presentation.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan and lease losses
("ALLL" or "allowance") and the valuations related to investments, business
combinations and real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the ALLL and
other real estate valuation estimates management obtains independent
appraisals for significant items. Estimates relating to investments are
obtained from independent parties. Estimates relating to business
combinations are determined based on internal calculations using
significant independent party inputs and independent party valuations.
2) Organizational Structure
The Company, headquartered in Kalispell, Montana, is a Montana corporation
incorporated in 2004 as a successor corporation to the Delaware corporation
incorporated in 1990. The Company is a regional multi-bank holding company
that provides a full range of banking services to individual and corporate
customers in Montana, Idaho, Wyoming, Colorado, Utah and Washington through
its bank subsidiaries. The bank subsidiaries are subject to competition
from other financial service providers. The bank subsidiaries are also
subject to the regulations of certain government agencies and undergo
periodic examinations by those regulatory authorities.
As of June 30, 2009, the Company is the parent holding company for ten
wholly-owned, independent community bank subsidiaries: Glacier Bank
("Glacier"), First Security Bank of Missoula ("First Security"), Western
Security Bank ("Western"), Big Sky Western Bank ("Big Sky"), Valley Bank of
Helena ("Valley"), First Bank of Montana ("First Bank-MT"), all located in
Montana, Mountain West Bank ("Mountain West") which is located in Idaho,
Utah, and Washington, Citizens Community Bank ("Citizens") located in
Idaho, 1st Bank ("1st Bank") located in Wyoming and Utah, and Bank of the
San Juans ("San Juans") located in Colorado.
7
On February 9, 2009, the Company announced a definitive agreement (the
"agreement") to acquire First Company and its subsidiary First National
Bank & Trust, a community bank based in Powell, Wyoming. First National
Bank & Trust has three branch locations in Powell, Cody, and Lovell,
Wyoming. As of June 30, 2009, First National Bank & Trust had total assets
of $272 million. Upon completion of the transaction, which is subject to
regulatory approval and other customary conditions of closing, First
National Bank & Trust will become a wholly-owned subsidiary of the Company.
The agreement was recently extended to September 15, 2009. The transaction
is now targeted to close in the third quarter.
On February 1, 2009, First National Bank of Morgan ("Morgan") merged into
1st Bank resulting in operations being conducted under the 1st Bank
charter. Prior period activity of Morgan has been combined and included in
1st Bank's historical results. The merger has been accounted for as a
combination of two wholly-owned subsidiaries without acquisition
accounting.
On December 1, 2008, Bank of the San Juans Bancorporation and its
subsidiary, San Juans, were acquired by the Company. The results of
operations and financial condition are included from the acquisition date.
On April 30, 2008, Glacier Bank of Whitefish ("Whitefish") merged into
Glacier resulting in operations conducted under the Glacier charter. Prior
period activity of Whitefish was combined and included in Glacier's
historical results. The merger was accounted for as a combination of two
wholly-owned subsidiaries without acquisition accounting.
An entity is referred to as a variable interest entity ("VIE") if it meets
the criteria outlined in Financial Accounting Standards Board ("FASB")
Interpretation 46(R) ("FIN 46R"), Consolidation of Variable Interest
Entities. FIN 46R provides guidance as to when a company should include the
assets, liabilities, and activities of a VIE in its financial statements,
and when a company should disclose information about its relationship with
a VIE. A VIE is a legal structure used to conduct activities or hold
assets, and a VIE must be consolidated by a company if it is the primary
beneficiary because a primary beneficiary absorbs the majority of the
entity's expected losses, the majority of the expected residual returns, or
both. The Company has equity investments in Certified Development Entities
in the form of limited liability companies ("LLC") which have received
allocations of new market tax credits ("NMTC"). The Company also has equity
investments in low-income housing tax credit partnerships. The LLCs and the
partnerships are considered VIEs. The Company has evaluated the
relationships and has determined the Company to be the primary beneficiary
and accordingly consolidates its interest in the VIEs into the community
bank subsidiary which holds the investment in the VIE.
In June 2009, FASB issued Statement of Financial Accounting Standard
("SFAS") No. 167, Amendments to FASB Interpretation No. 46(R). This
Statement shall be effective as of the beginning of each reporting entity's
first annual reporting period that begins after November 15, 2009, for
interim periods within that first annual reporting period, and for interim
and annual reporting periods thereafter. The Company is currently
evaluating the impact of the adoption of this standard, but does not expect
it to have a material effect on the Company's financial position or results
of operations. For further information regarding the Statement see
discussion in Part I, Item 2 "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Impact of Recently Issued
Standards".
In addition, the Company owns five trust subsidiaries, Glacier Capital
Trust II ("Glacier Trust II"), Glacier Capital Trust III ("Glacier Trust
III"), Glacier Capital Trust IV ("Glacier Trust IV"), Citizens (ID)
Statutory Trust I ("Citizens Trust I") and Bank of the San Juans Trust I
("San Juans Trust I") for the purpose of issuing trust preferred securities
and, in accordance with FIN 46(R), the subsidiaries are not consolidated
into the Company's financial statements. The Company does not have any
other off-balance sheet entities.
8
See Note 12 - Segment Information for selected financial data including net
earnings and total assets for the parent company and each of the community
bank subsidiaries. Although the consolidated total assets of the Company
were $5.6 billion at June 30, 2009, eight of the ten community banks had
total assets of less than $1 billion. The smallest community bank
subsidiary had $176 million in total assets, while the largest community
bank subsidiary had $1.3 billion in total assets at June 30, 2009.
The following abbreviated organizational chart illustrates the various
relationships as of June 30, 2009:
|----------------------------|
| Glacier Bancorp, Inc. |
| (Parent Holding Company) |
|----------------------------|
|
|----------------------------|-|----------------------------|---|----------------------------|-|----------------------------|
| Glacier Bank | | Mountain West Bank | | | First Security Bank | | Western Security Bank |
| (MT Community Bank) | | (ID Community Bank) | | | of Missoula | | (MT Community Bank) |
| | | | | | (MT Community Bank) | | |
|----------------------------| |----------------------------| | |----------------------------| |----------------------------|
|
|----------------------------|-|----------------------------|-|-|----------------------------|-|----------------------------|
| 1st Bank | | Big Sky | | | Valley Bank | | Citizens Community Bank |
| (WY Community Bank) | | Western Bank | | | of Helena | | (ID Community Bank) |
| | | (MT Community Bank) | | | (MT Community Bank) | | |
|----------------------------| |----------------------------| | |----------------------------| |----------------------------|
|
|----------------------------|-|----------------------------|-|-|----------------------------|-|----------------------------|
| Bank of the | | First Bank of Montana | | | | | |
| San Juans | | (MT Community Bank) | | | Glacier Capital Trust II | | Glacier Capital Trust III |
| (CO Community Bank) | | | | | | | |
|----------------------------| |----------------------------| | |----------------------------| |----------------------------|
|
|----------------------------|-|---------------------------------|-|----------------------------|
| | | | | |
| Glacier Capital Trust IV | | Citizens (ID) Statutory Trust I | | San Juans Trust I |
| | | | | |
|----------------------------| |---------------------------------| |----------------------------|
9
3) Investments
A comparison of the amortized cost and estimated fair value of the
Company's investment securities, available-for-sale and other investments
is as follows:
INVESTMENTS AS OF JUNE 30, 2009
Gross Unrealized Estimated
Weighted Amortized ---------------- Fair
(Dollars in thousands) Yield Cost Gains Losses Value
---------------------- -------- --------- ------ ------- ---------
AVAILABLE-FOR-SALE:
U.S. GOVERNMENT AGENCIES:
maturing one year through five years ..... 1.62% $ 211 -- (4) 207
GOVERNMENT-SPONSORED ENTERPRISES:
maturing one year through five years ..... 3.07% 184 -- (1) 183
maturing five years through ten years .... 1.64% 42 -- -- 42
maturing after ten years ................. 2.05% 66 -- -- 66
-------- ------ ------- -------
2.63% 292 -- (1) 291
-------- ------ ------- -------
STATE AND LOCAL GOVERNMENTS AND OTHER ISSUES:
maturing within one year ................. 3.73% 757 2 -- 759
maturing one year through five years ..... 4.49% 3,754 128 (3) 3,879
maturing five years through ten years .... 4.61% 23,295 1,038 (68) 24,265
maturing after ten years ................. 4.96% 434,096 9,828 (6,445) 437,479
-------- ------ ------- -------
4.94% 461,902 10,996 (6,516) 466,382
-------- ------ ------- -------
COLLATERALIZED DEBT OBLIGATIONS:
maturing after ten years ................. 8.39% 15,066 -- (5,094) 9,972
RESIDENTIAL MORTGAGE-BACKED SECURITIES ...... 5.00% 459,118 9,215 (12,513) 455,820
-------- ------ ------- -------
TOTAL MARKETABLE SECURITIES .............. 5.02% 936,589 20,211 (24,128) 932,672
-------- ------ ------- -------
OTHER INVESTMENTS:
FHLB and FRB stock, at cost ................. 1.27% 61,011 -- -- 61,011
Other stock, at cost ........................ 3.72% 464 -- -- 464
-------- ------ ------- -------
TOTAL INVESTMENTS ........................ 4.79% $998,064 20,211 (24,128) 994,147
======== ====== ======= =======
10
INVESTMENTS AS OF DECEMBER 31, 2008
Gross Unrealized Estimated
(Dollars in thousands) Weighted Amortized ---------------- Fair
AVAILABLE-FOR-SALE: Yield Cost Gains Losses Value
---------------------- -------- --------- ------ ------- ---------
AVAILABLE-FOR-SALE:
U.S. GOVERNMENT AGENCIES:
maturing one year through five years ..... 1.62% $ 213 4 -- 217
GOVERNMENT-SPONSORED ENTERPRISES:
maturing five years through ten years .... 4.12% 246 -- (2) 244
maturing after ten years ................. 3.75% 68 -- -- 68
-------- ------ ------- -------
4.04% 314 -- (2) 312
-------- ------ ------- -------
STATE AND LOCAL GOVERNMENTS AND OTHER ISSUES:
maturing within one year ................. 3.76% 940 6 -- 946
maturing one year through five years ..... 4.61% 4,482 104 (9) 4,577
maturing five years through ten years .... 5.08% 20,219 1,030 (80) 21,169
maturing after ten years ................. 4.95% 393,377 7,807 (9,733) 391,451
-------- ------ ------- -------
4.95% 419,018 8,947 (9,822) 418,143
-------- ------ ------- -------
COLLATERALIZED DEBT OBLIGATIONS:
maturing after ten years ................. 8.39% 15,226 314 -- 15,540
RESIDENTIAL MORTGAGE-BACKED SECURITIES ...... 4.62% 495,961 4,956 (6,447) 494,470
-------- ------ ------- -------
TOTAL MARKETABLE SECURITIES .............. 4.83% 930,732 14,221 (16,271) 928,682
-------- ------ ------- -------
OTHER INVESTMENTS:
FHLB and FRB stock, at cost ................. 1.72% 60,945 -- -- 60,945
Other stock, at cost ........................ 3.10% 465 -- -- 465
-------- ------ ------- -------
TOTAL INVESTMENTS ........................ 4.64% $992,142 14,221 (16,271) 990,092
======== ====== ======= =======
Maturities of securities do not reflect repricing opportunities present in
adjustable rate securities, nor do they reflect expected shorter maturities
based upon early prepayment of principal. Weighted yields on tax-exempt
investment securities exclude the tax effect.
Interest income includes tax-exempt interest for the six months ended June
30, 2009 and 2008 of $11,070,000 and $6,348,000, respectively, and for the
three months ended June 30, 2009 and 2008 of $5,739,000 and $3,174,000,
respectively.
Gross proceeds from sale of marketable securities for the six months ended
June 30, 2009 and 2008 were $0 and $97,002,000, respectively, resulting in
gross gains of $0 and $0, respectively, and gross losses of $0 and $0,
respectively. The gross proceeds and gross gains from the sale of other
stock was $0 and $248,000 for the six months ended June 30, 2009 and 2008,
respectively. During the first quarter of 2008, the Company realized a gain
of $130,000 from extinguishment of the Company's share ownership in
Principal Financial Group and a gain of $118,000 from the mandatory
redemption of a portion of Visa, Inc. shares from its recent initial public
offering. The cost of any investment sold is determined by specific
identification.
At June 30, 2009, the Company had investment securities with carrying
values of approximately $674,072,000, pledged as collateral for FHLB
advances, Federal Reserve Bank ("FRB") discount window borrowings,
securities sold under agreements to repurchase, U.S. Treasury Tax and Loan
borrowings and deposits of several local government units.
11
The investments in the Federal Home Loan Bank ("FHLB") stock are required
investments related to the Company's borrowings from FHLB. FHLB obtains its
funding primarily through issuance of consolidated obligations of the FHLB
system. The U.S. Government does not guarantee these obligations, and each
of the 12 FHLBs are jointly and severally liable for repayment of each
other's debt.
Investments with an unrealized loss position at June 30, 2009:
Less than 12 months 12 months or more Total
--------------------- ------------------- --------------------
Fair Unrealized Fair Unrealized Fair Unrealized
(dollars in thousands) Value Loss Value Loss Value Loss
---------------------- -------- ---------- ------ ---------- ------- ----------
U.S. Government Agencies ...................... $ 207 4 -- -- 207 4
Government Sponsored Enterprises .............. -- -- 146 1 146 1
State and Local Governments and other issues .. 126,288 5,058 13,041 1,458 139,329 6,516
Collateralized Debt Obligations ............... 7,973 5,094 -- -- 7,973 5,094
Residential Mortgage-backed Securities ........ 5,126 171 49,865 12,342 54,991 12,513
-------- ------ ------ ------ ------- ------
Total temporarily impaired securities ......... $139,594 10,327 63,052 13,801 202,646 24,128
======== ====== ====== ====== ======= ======
Investments with an unrealized loss position at December 31, 2008:
Less than 12 months 12 months or more Total
--------------------- ------------------- --------------------
Fair Unrealized Fair Unrealized Fair Unrealized
(dollars in thousands) Value Loss Value Loss Value Loss
---------------------- -------- ---------- ------ ---------- ------- ----------
U.S. Government Agencies ...................... $ -- -- -- -- -- --
Government Sponsored Enterprises .............. 104 1 205 1 309 2
State and Local Governments and other issues .. 142,826 9,772 1,621 50 144,447 9,822
Collateralized Debt Obligations ............... -- -- -- -- -- --
Residential Mortgage-backed Securities ........ 116,004 5,758 12,403 689 128,407 6,447
-------- ------ ------ --- ------- ------
Total temporarily impaired securities ......... $258,934 15,531 14,229 740 273,163 16,271
======== ====== ====== === ======= ======
The Company assesses individual securities in its investment securities
portfolio for impairment at least on a quarterly basis, and more frequently
when economic or market conditions warrant. An investment is impaired if
the fair value of the security is less than its carrying value at the
financial statement date. If impairment is determined to be
other-than-temporary, an impairment loss is recognized by reducing the
amortized cost basis to fair value and as a charge to earnings.
For fair value estimates provided by third party vendors, management also
considered the models and methodology, for appropriate consideration of
both observable and unobservable inputs, including appropriately adjusted
discount rates and credit spreads for securities with limited or inactive
markets, and whether the quoted prices reflect orderly transactions, The
Company obtained independent estimates of inputs, including cash flows, in
supplement to third party vendor provided information. The Company also
reviewed financial statements of issuers, with follow up discussions with
issuers' management for clarification and verification of information
relevant to the Company's impairment analysis.
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
12
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 June 30, 2009,
management determined that it does not intend to sell and that there is no
expected requirement to sell any of its impaired debt securities.
As of June 30, 2009, there were 214 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, decreased from $67,365,000 at December 31, 2008 to $54,991,000
at June 30, 2009, and the unrealized loss increased from 9.0 percent of
fair value to 22.8 percent of fair value for those same periods. The fair
value of State and Local Government and other issued securities in an
unrealized loss position increased from $119,928,000 at December 31, 2008
to $139,329,000 at June 30, 2009, and the unrealized loss decreased from
7.5 percent of fair value to 4.7 percent of fair value for those same
years. The fair value of Collateralized Debt Obligation securities in an
unrealized loss position is $7,973,000 with unrealized losses of $5,094,000
or 63.9 percent of fair value at June 30, 2009; such investments had an
unrealized gain position at December 31, 2008.
The Company stratified the 214 debt securities for both severity and
duration of impairment. With respect to severity, 75 debt securities had
impairment that exceeded 5 percent of the respective book values, of which
18 had impairment that exceeded 15 percent of the respective book values at
June 30, 2009. 1 of the 214 debt securities had impairment that exceeded 40
percent of the respective book values at June 30, 2009. The remaining 139
debt securities had impairment that was 5 percent or less of the respective
book values as of June 30, 2009.
With respect to the duration of the impaired securities, the Company
identified 44 securities which have been continuously impaired for the 12
months ending June 30, 2009. The valuation history of such securities in
the prior year(s) was also reviewed to determine the number of months in
prior year(s) in which the identified securities was in an unrealized loss
position. 13 of these 44 securities are non-guaranteed, non-Agency CMOs
with an aggregate unrealized loss of $12,271,986, the most notable of which
had an unrealized loss of $2,085,002. 17 of the 44 securities are state and
local tax-exempt securities with an unrealized loss of $1,457,301, the most
notable of which had an unrealized loss of $409,446. 14 of the 44
securities are mortgage-backed securities issued by U.S. government
sponsored agencies, i.e., GNMA, FNMA, FHLMC and SBA, the aggregate
unrealized loss of which was $71,190.
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 June 30, 2009, the
Company determined that none of such securities had other-than-temporary
impairment.
13
4) Loans and Leases
The following table summarizes the Company's loan and lease portfolio:
At At At
6/30/09 12/31/2008 6/30/08
TYPE OF LOAN --------------------- -------------------- --------------------
(Dollars in thousands) Amount Percent Amount Percent Amount Percent
---------------------- ----------- ------- ---------- ------- ---------- -------
Real Estate Loans:
Residential real estate $ 747,931 18.6% $ 786,869 19.4% $ 706,815 18.8%
Loans held for sale 92,166 2.3% 54,976 1.4% 42,772 1.1%
---------- ----- ---------- ----- ---------- -----
Total 840,097 20.9% 841,845 20.8% 749,587 19.9%
Commercial Loans:
Real estate 1,944,784 48.2% 1,935,341 47.8% 1,736,784 46.2%
Other commercial 649,634 16.1% 645,033 15.9% 664,558 17.7%
---------- ----- ---------- ----- ---------- -----
Total 2,594,418 64.3% 2,580,374 63.7% 2,401,342 63.9%
Consumer and other Loans:
Consumer 198,454 4.9% 208,166 5.1% 207,595 5.6%
Home equity 502,288 12.5% 507,831 12.5% 471,398 12.5%
---------- ----- ---------- ----- ---------- -----
Total 700,742 17.4% 715,997 17.6% 678,993 18.1%
Net deferred loan fees, premiums
and discounts (6,498) -0.2% (8,023) -0.2% (8,970) -0.3%
Allowance for loan and lease losses (97,374) -2.4% (76,739) -1.9% (60,807) -1.6%
---------- ----- ---------- ----- ---------- -----
Loan receivable, net $4,031,385 100.0% $4,053,454 100.0% $3,760,145 100.0%
========== ===== ========== ===== ========== =====
The following table sets forth information regarding the Company's
non-performing assets at the dates indicated:
June 30, December 31, June 30,
(Dollars in thousands) 2009 2008 2008
---------------------- -------- ------------ --------
Real estate and other assets owned $ 47,424 11,539 6,523
Accruing Loans 90 days or more overdue 10,086 8,613 3,700
Non-accrual loans 116,362 64,301 19,674
-------- ------ ------
Total non-performing assets $173,872 84,453 29,897
======== ====== ======
Non-performing assets as a percentage of total bank assets 3.06% 1.46% 0.58%
Impaired loans, net of government guaranteed amounts, were $140,087,000,
$79,949,000, and $23,707,000 as of June 30, 2009, December 31, 2008 and June 30,
2008, respectively. The allowance for loan and lease loss includes valuation
allowances of $9,034,000, $7,999,000 and $3,030,000 specific to impaired loans
as of June 30, 2009, December 31, 2008 and June 30, 2008, respectively.
14
The following table illustrates the loan and lease loss experience:
June 30, December 31, June 30,
(Dollars in thousands) 2009 2008 2008
---------------------- --------- ------------ --------
Balance at the beginning of the period $ 76,739 54,413 54,413
Charge-offs (21,246) (9,839) (1,498)
Recoveries 1,026 1,060 350
-------- ------ ------
Net charge-offs $(20,220) (8,779) (1,148)
Acquisition (1) -- 2,625 --
Provision 40,855 28,480 7,542
-------- ------ ------
Balance at the end of the period $ 97,374 76,739 60,807
======== ====== ======
Net charge-offs as a percentage of total loans 0.490% 0.213% 0.030%
(1) Acquisition of Bank of the San Juans in 2008
5) Intangible Assets
The following table sets forth information regarding the Company's core
deposit intangible and mortgage servicing rights as of June 30, 2009:
Core Mortgage
Deposit Servicing
(Dollars in thousands) Intangible Rights (1) Total
---------------------- ---------- ---------- ------
Gross carrying value $ 27,807
Accumulated Amortization (16,330)
--------
Net carrying value $ 11,477 1,134 12,611
========
WEIGHTED-AVERAGE AMORTIZATION PERIOD
(Period in years) 10.0 9.5 10.0
AGGREGATE AMORTIZATION EXPENSE
For the three months ended June 30, 2009 $ 762 81 843
For the six months ended June 30, 2009 1,536 140 1,676
ESTIMATED AMORTIZATION EXPENSE
For the year ended December 31, 2009 $ 2,972 180 3,152
For the year ended December 31, 2010 2,603 78 2,681
For the year ended December 31, 2011 1,895 76 1,971
For the year ended December 31, 2012 1,534 74 1,608
For the year ended December 31, 2013 1,283 71 1,354
(1) The mortgage servicing rights are included in other assets and the gross
carrying value and accumulated amortization are immaterial and therefore
not presented.
Acquisitions were accounted for using the purchase accounting method as
prescribed by SFAS No. 141, Business Combinations, for acquisitions prior
to January 1, 2009 and acquisitions will subsequently be accounted for as
prescribed by SFAS No. 141(R), Business Combinations. Acquisition
accounting under both standards requires the total purchase price to be
allocated to the estimated fair values of assets acquired and liabilities
assumed, including certain intangible assets. Goodwill is recorded for the
residual amount in excess of the net fair value.
15
Adjustment of the allocated purchase price may be related to fair value
estimates for which all information has not been obtained of the acquired
entity known or discovered during the allocation period, the period of time
required to identify and measure the fair values of the assets and
liabilities acquired in the business combination. The allocation period is
generally limited to one year following consummation of a business
combination.
6) Deposits
The following table illustrates the amounts outstanding for deposits
$100,000 and greater at June 30, 2009 according to the time remaining to
maturity. Included in the Certificate of Deposits are brokered deposits of
$70,653,000 issued through the Certificate of Deposit Account Registry
System.
Certificates Non-Maturity
(Dollars in thousands) of Deposit Deposits Totals
---------------------- ------------ ------------ ---------
Within three months ..... $190,309 1,242,965 1,433,274
Three to six months ..... 125,255 -- 125,255
Seven to twelve months .. 116,690 -- 116,690
Over twelve months ...... 62,601 -- 62,601
-------- --------- ---------
Totals ............... $494,855 1,242,965 1,737,820
======== ========= =========
7) Advances and Other Borrowings
The following chart illustrates the average balances and the maximum
outstanding month-end balances of amounts borrowed through FHLB, repurchase
agreements, U.S. Treasury Tax and Loan and FRB discount window programs:
As of and As of and As of and
for the six for the for the six
months ended year ended months ended
(Dollars in thousands) June 30, 2009 December 31, 2008 June 30, 2008
---------------------- ------------- ----------------- -------------
FHLB advances:
Amount outstanding at end of period ... $ 613,478 338,456 658,211
Average balance ....................... $ 352,183 566,933 648,296
Maximum outstanding at any month-end .. $ 613,478 822,107 815,860
Weighted average interest rate ........ 2.10% 2.71% 3.26%
Repurchase agreements:
Amount outstanding at end of period ... $ 180,779 188,363 176,211
Average balance ....................... $ 191,388 188,952 184,892
Maximum outstanding at any month-end .. $ 199,669 196,461 192,216
Weighted average interest rate ........ 1.06% 2.02% 2.33%
U.S. Treasury Tax and Loan:
Amount outstanding at end of period ... $ 5,120 6,067 209,298
Average balance ....................... $ 3,667 165,690 173,434
Maximum outstanding at any month-end .. $ 5,120 385,246 299,477
Weighted average interest rate ........ 0.00% 2.28% 2.74%
Federal Reserve Bank discount window:
Amount outstanding at end of period ... $ 587,000 914,000 144,000
Average balance ....................... $ 891,558 277,611 33,429
Maximum outstanding at any month-end .. $1,005,000 928,000 144,000
Weighted average interest rate ........ 0.27% 1.76% 2.95%
16
8) Stockholders' Equity
The Federal Reserve Board has adopted capital adequacy guidelines that are
used to assess the adequacy of capital in supervising a bank holding
company. The following table illustrates the Federal Reserve Board's
capital adequacy guidelines and the Company's compliance with those
guidelines as of June 30, 2009.
CONSOLIDATED Tier 1 (Core) Tier 2 (Total) Leverage
(Dollars in thousands) Capital Capital Capital
---------------------- ------------- -------------- ----------
Total stockholder's equity.................... $ 689,664 689,664 689,664
Less: Goodwill and intangibles ............... (156,965) (156,965) (156,965)
Plus: Allowance for loan and lease losses..... -- 57,110 --
Accumulated other comprehensive
Unrealized loss on AFS securities ...... 2,382 2,382 2,382
Subordinated debentures....................... 117,500 117,500 117,500
---------- --------- ----------
Regulatory capital computed................... $ 652,581 709,691 652,581
========== ========= ==========
Risk weighted assets ......................... $4,528,177 4,528,177
========== =========
Total adjusted average assets ................ $5,418,999
==========
Capital as % of risk weighted assets.......... 14.41% 15.67% 12.04%
Regulatory "well capitalized" requirement .... 6.00% 10.00% 5.00%
---------- --------- ----------
Excess over "well capitalized" requirement.... 8.41% 5.67% 7.04%
========== ========= ==========
9) Computation of Earnings Per Share
Basic earnings per common share is computed by dividing net earnings by the
weighted average number of shares of common stock outstanding during the
period presented. Diluted earnings per share is computed by including the
net increase in shares as if dilutive outstanding stock options were
exercised, using the treasury stock method.
The following schedule contains the data used in the calculation of basic
and diluted earnings per share:
Three Three Six Six
months ended months ended months ended months ended
June 30, 2009 June 30, 2008 June 30, 2009 June 30, 2008
------------- ------------- ------------- -------------
Net earnings available to common
stockholders .............................. $10,652,000 18,459,000 26,431,000 35,858,000
Average outstanding shares - basic ........... 61,515,946 53,971,220 61,489,422 53,910,414
Add: Dilutive stock options .................. 2,343 180,070 3,844 173,779
----------- ---------- ---------- ----------
Average outstanding shares - diluted ......... 61,518,289 54,151,290 61,493,266 54,084,193
=========== ========== ========== ==========
Basic earnings per share ..................... $ 0.17 0.35 0.43 0.67
=========== ========== ========== ==========
Diluted earnings per share ................... $ 0.17 0.34 0.43 0.66
=========== ========== ========== ==========
17
There were approximately 2,399,487 and 1,567,573 average shares excluded
from the diluted average outstanding share calculation for the three months
ended June 30, 2009 and 2008, respectively, due to the option exercise
price exceeding the market price.
10) Comprehensive Income
The Company's only component of comprehensive income other than net
earnings is the unrealized gains and losses on available-for-sale
securities.
For the three months For the six months
ended June 30, ended June 30,
(Dollars in thousands) 2009 2008 2009 2008
---------------------- --------- -------- ------- --------
Net earnings ................................................. $ 10,652 18,459 26,431 35,858
Unrealized holding gain (loss) arising during the period ..... 7,687 (10,492) (1,866) (8,320)
Tax (expense) benefit ........................................ (3,012) 4,134 727 3,279
-------- ------ ------ ------
Net after tax ............................................. 4,675 (6,358) (1,139) (5,041)
Reclassification adjustment for gains
included in net earnings .................................. -- -- -- (248)
Tax expense .................................................. -- -- -- 97
-------- ------ ------ ------
Net after tax ............................................. -- -- -- (151)
Net unrealized gain (loss) on securities .................. 4,675 (6,358) (1,139) (5,192)
-------- ------ ------ ------
Total comprehensive income .......................... $ 15,327 12,101 25,292 30,666
======== ====== ====== ======
11) Federal and State Income Taxes
The Company and its financial institution subsidiaries join together in the
filing of consolidated income tax returns in the following jurisdictions:
federal, Montana, Idaho Colorado and Utah. Although 1st Bank has operations
in Wyoming and Mountain West has operations in Washington, neither Wyoming
nor Washington impose a corporate level income tax. All required income tax
returns have been timely filed. Income tax returns for the years ended
December 31, 2006, 2007 and 2008 remain subject to examination by the state
of Utah tax authorities, income tax returns for the years ended December
31, 2005, 2006, 2007, and 2008 remain subject to examination by the
federal, states of Montana, Colorado, Idaho tax authorities, income tax
returns for the year ended December 31, 2004 remain subject to examination
by the states of Colorado, Montana and Idaho and the income tax returns for
the year ended December 31, 2003 remain subject to examination by the
states of Montana and Idaho.
During the second quarter 2009, the Company made investments in Certified
Development Entities which received allocations of NMTC. Administered by
the Community Development Financial Institutions Fund of the U.S.
Department of the Treasury, the NMTC program is aimed at stimulating
economic and community development and job creation in low-income
communities. The federal tax credits received are claimed over a seven-year
credit allowance period. Following is a list of expected tax credits to be
received in the years indicated.
18
Years ended New
---------------------- Market
(Dollars in thousands) Tax Credits
---------------------- -----------
2009 $1,115
2010 1,115
2011 1,115
2012 1,338
2013 1,338
2014 1,338
2015 1,338
------
$8,697
======
In accordance with FASB Interpretation No. 48 ("FIN 48"), Accounting for
Uncertainty in Income Taxes, the Company determined its unrecognized tax
benefit to be $113,000 as of June 30, 2009. If the unrecognized tax benefit
amount was recognized, it would decrease the Company's effective tax rate
from 26.8 percent to 26.5 percent. Management believes that it is unlikely
that the balance of its unrecognized tax benefits will significantly
increase or decrease over the next twelve months.
In accordance with FIN 48, the Company recognizes interest related to
unrecognized income tax benefits in interest expense and penalties are
recognized in other expense. During the six months ended June 30, 2009 and
2008, the Company recognized $0 interest expense and recognized $0 penalty
with respect to income tax liabilities. The Company had approximately
$20,000 and $37,000 accrued for the payment of interest at June 30, 2009
and 2008, respectively. The Company had accrued liabilities of $0 for the
payment of penalties at June 30, 2009 and 2008.
12) Segment Information
SFAS No. 131, Financial Reporting for Segments of a Business Enterprise,
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. Operating segments are
defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. The Company defines operating segments and evaluates segment
performance internally based on individual bank charters. Centrally
provided services to the banks are allocated based on estimated usage of
those services. 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 was merged into 1st Bank resulting in
operations being conducted under the 1st Bank charter.
On December 1, 2008, Bank of the San Juans Bancorporation and its
subsidiary, San Juans, was acquired by the Company. The results of
operations and financial condition are included from the acquisition date.
19
The following schedule provides selected financial data for the Company's
operating segments:
Six months ended and as of June 30, 2009
--------------------------------------------------------------------------
Mountain First
(Dollars in thousands) Glacier West Security Western 1st Bank Big Sky Valley
-------------------------------- ---------- --------- -------- ------- -------- ------- -------
Revenues from external customers $ 41,022 45,239 26,644 17,994 16,781 11,168 11,474
Intersegment revenues 93 1 555 371 126 -- 85
Expenses (33,766) (43,043) (20,391) (14,811) (16,940) (9,284) (8,277)
---------- --------- -------- ------- -------- ------- -------
Net Earnings $ 7,349 2,197 6,808 3,554 (33) 1,884 3,282
---------- --------- -------- ------- -------- ------- -------
Total Assets $1,217,302 1,266,555 831,352 541,763 588,480 332,505 291,021
========== ========= ======== ======= ======== ======= =======
San First Bank Total
Citizens Juans of MT Parent Eliminations Consolidated
-------- ------- ---------- ------- ------------ ------------
Revenues from external customers $ 8,105 5,171 4,933 116 -- 188,647
Intersegment revenues 2 -- -- 35,242 (36,475) --
Expenses (6,910) (4,306) (3,611) (8,927) 8,050 (162,216)
-------- ------- ------- ------- -------- ---------
Net Earnings $ 1,197 865 1,322 26,431 (28,425) 26,431
-------- ------- ------- ------- -------- ---------
Total Assets $243,830 177,850 176,222 825,575 (854,031) 5,638,424
======== ======= ======= ======= ======== =========
Six months ended and as of June 30, 2008
--------------------------------------------------------------------------
Mountain First
(Dollars in thousands) Glacier West Security Western 1st Bank Big Sky Valley
-------------------------------- ---------- --------- -------- ------- -------- ------- -------
Revenues from external customers $ 42,359 43,550 27,897 18,534 16,698 12,460 10,950
Intersegment revenues 82 25 947 644 871 -- 212
Expenses (32,167) (37,647) (21,754) (15,124) (14,383) (9,424) (8,451)
---------- --------- -------- ------- -------- ------- -------
Net Earnings $ 10,274 5,928 7,090 4,054 3,186 3,036 2,711
---------- --------- -------- ------- -------- ------- -------
Total Assets $1,156,216 1,114,885 847,406 567,957 530,244 330,894 286,823
========== ========= ======== ======= ======== ======= =======
First Bank Total
Citizens of MT Parent Eliminations Consolidated
-------- ---------- ------- ------------ ------------
Revenues from external customers $ 7,007 4,548 229 -- 184,232
Intersegment revenues 165 124 44,798 (47,868) --
Expenses (6,230) (3,547) (9,169) 9,522 (148,374)
-------- ------- ------- -------- ---------
Net Earnings $ 942 1,125 35,858 (38,346) 35,858
-------- ------- ------- -------- ---------
Total Assets $203,816 153,124 680,379 (843,876) 5,027,868
======== ======= ======= ======== =========
20
Three months ended and as of June 30, 2009
--------------------------------------------------------------------------
Mountain First
(Dollars in thousands) Glacier West Security Western 1st Bank Big Sky Valley
-------------------------------- ---------- --------- -------- ------- -------- ------- -------
Revenues from external customers $ 20,283 23,859 13,327 9,062 8,470 5,522 5,807
Intersegment revenues 46 1 248 201 55 -- 36
Expenses (17,555) (22,853) (10,279) (7,757) (9,637) (4,746) (4,231)
---------- --------- ------- ------- ------- ------- -------
Net Earnings $ 2,774 1,007 3,296 1,506 (1,112) 776 1,612
---------- --------- ------- ------- ------- ------- -------
Total Assets $1,217,302 1,266,555 831,352 541,763 588,480 332,505 291,021
========== ========= ======= ======= ======= ======= =======
San First Bank Total
Citizens Juans of MT Parent Eliminations Consolidated
-------- ------- ---------- ------- ------------ ------------
Revenues from external customers $ 4,186 2,643 2,521 58 -- 95,738
Intersegment revenues 2 -- -- 14,990 (15,579) --
Expenses (3,591) (2,193) (1,844) (4,396) 3,996 (85,086)
-------- ------- ------- ------- -------- ---------
Net Earnings $ 597 450 677 10,652 (11,583) 10,652
-------- ------- ------- ------- -------- ---------
Total Assets $243,830 177,850 176,222 825,575 (854,031) 5,638,424
======== ======= ======= ======= ======== =========
Three months ended and as of June 30, 2008
--------------------------------------------------------------------------
Mountain First
(Dollars in thousands) Glacier West Security Western 1st Bank Big Sky Valley
-------------------------------- ---------- --------- -------- ------- -------- ------- -------
Revenues from external customers $ 21,121 21,846 13,675 9,284 8,277 6,184 5,562
Intersegment revenues 41 25 475 258 310 -- 123
Expenses (15,954) (18,809) (10,561) (7,446) (6,940) (4,646) (4,224)
---------- --------- ------- ------- ------- ------- -------
Net Earnings $ 5,208 3,062 3,589 2,096 1,647 1,538 1,461
---------- --------- ------- ------- ------- ------- -------
Total Assets $1,156,216 1,114,885 847,406 567,957 530,244 330,894 286,823
========== ========= ======= ======= ======= ======= =======
First Bank Total
Citizens of MT Parent Eliminations Consolidated
-------- ---------- ------- ------------ ------------
Revenues from external customers $ 3,580 2,334 91 -- 91,954
Intersegment revenues 33 23 22,910 (24,198) --
Expenses (3,088) (1,796) (4,542) 4,511 (73,495)
-------- ------- ------- -------- ---------
Net Earnings $ 525 561 18,459 (19,687) 18,459
-------- ------- ------- -------- ---------
Total Assets $203,816 153,124 680,379 (843,876) 5,027,868
======== ======= ======= ======== =========
13) Fair Value Measurement
On January 1, 2008, the Company adopted SFAS No. 157, Fair Value
Measurements. FASB issued FSP SFAS 157-2, Effective Date of SFAS No. 157,
which delayed the effective date of SFAS 157 for nonfinancial assets and
nonfinancial liabilities, except for items that are recognized or disclosed
at fair value in the financial statements on a recurring basis (at least
annually). On January 1, 2009, the delay from FSP SFAS 157-2 expired.
SFAS 157 defines fair value as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. SFAS 157 also establishes a
fair value hierarchy which requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when
measuring fair value. The standard describes three levels of inputs that
may be used to measure fair value:
21
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 June 30, 2009.
Carrying Assets/ Quoted prices Significant
value of Liabilities in active markets other Significant
Assets/ measured at for identical observable Unobservable
Liabilities at Fair Value assets inputs Inputs
(Dollars in thousands) 06/30/09 06/30/09 (Level 1) (Level 2) (Level 3)
---------------------- -------------- ----------- ----------------- ----------- ------------
Financial Assets:
U.S. Government Agencies ...................... $ 207 207 -- 207 --
Government Sponsored Enterprises .............. 291 291 -- 291 --
State and Local Governments and other issues .. 466,382 466,382 -- 465,845 537
Collateralized Debt Obligations ............... 9,972 9,972 -- -- 9,972
Residential Mortgage-backed securities ........ 455,820 455,820 -- 450,829 4,991
-------- ------- --- ------- ------
Total financial assets ..................... $932,672 932,672 -- 917,172 15,500
======== ======= === ======= ======
The following is a description of the inputs and valuation methodologies
used for financial assets measured at fair value on a recurring basis.
There have been no significant changes in the valuation techniques during
the period.
Investment securities - fair value for available-for-sale securities is
estimated by obtaining quoted market prices for identical assets, where
available. If such prices are not available, fair value is based on
independent asset pricing services and models, the inputs of which are
market-based or independently sourced market parameters, including, but not
limited to, yield curves, interest rates, volatilities, prepayments,
defaults, cumulative loss projections, and cash flows. For those securities
where greater reliance on unobservable inputs occurs, such securities are
classified as Level 3 within the hierarchy.
The following is a reconciliation of the beginning and ending balances for
assets measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) during the six month period ended June 30,
2009.
Significant
unobservable
inputs
(Dollars in thousands) (Level 3)
---------------------- ------------
Balance as of December 31, 2008 ................................. $23,421
Total unrealized loss included in other comprehensive income .... (7,295)
Purchases, issuances and settlements ............................ 261
Amortization, accretion and principal payments .................. (887)
-------
Balance as of June 30, 2009 ..................................... $15,500
=======
The change in unrealized losses related to available-for-sale securities is
reported in Accumulated Other Comprehensive Income (Loss).
22
Certain financial assets or liabilities are not measured at fair value on a
recurring basis, but are subject to fair value measurement in certain
circumstances, for example upon acquisition or when there is evidence of
impairment. The following are the assets measured at fair value on a
nonrecurring basis at June 30, 2009.
Carrying Assets/ Quoted prices Significant
value of Liabilities in active markets other Significant
Assets/ measured at for identical observable Unobservable
Liabilities at Fair Value assets inputs Inputs
(Dollars in thousands) 06/30/09 06/30/09 (Level 1) (Level 2) (Level 3)
---------------------- -------------- ----------- ----------------- ----------- ------------
Real estate and other assets
owned, net ......................... $ 47,424 47,424 -- -- 47,424
Impaired Loans, net of allowance for
loan and lease losses .............. 131,053 131,053 -- -- 131,053
-------- ------- --- --- -------
Total .............................. $178,477 178,477 -- -- 178,477
======== ======= === === =======
The following is a description of the inputs and valuation methodologies
used for financial assets measured at fair value on a nonrecurring basis.
There have been no significant changes in the valuation techniques during
the period.
Real estate and other assets owned, net - real estate and other assets
owned are carried at the lower of fair value at acquisition date or current
estimated fair value, less estimated cost to sell. Estimated fair value of
real estate and other assets owned is based on appraisals. Real estate and
other assets owned are classified within Level 3 of the fair value
hierarchy.
Impaired Loans, net of ALLL - loans included in the Company's financials
for which it is probable that the Company will not collect all principal
and interest due according to contractual terms are considered impaired in
accordance with SFAS 114, Accounting by Creditors for Impairment of a Loan.
Allowable methods for estimating fair value include using the fair value of
the collateral for collateral dependent loans or, where a loan is
determined not to be collateral dependent, using the discounted cash flow
method. Impaired loans are primarily collateral-dependent and the estimated
fair value is based on the fair value of the collateral. Impaired loans are
classified within Level 3 of the fair value hierarchy.
23
The following presents the estimated fair values as in accordance with SFAS
107, Disclosures about Fair Value of Financial Instruments, as of June 30,
2009.
June 30, 2009
-----------------------
(Dollars in thousands) Amount Fair Value
---------------------- ---------- ----------
Financial Assets:
Cash on hand and in banks ......................................... $ 100,773 100,773
Federal funds sold ................................................ 62,405 62,405
Interest bearing cash deposits .................................... 24,608 24,608
Investment securities ............................................. 477,316 477,316
Residential Mortgage-backed securities ............................ 455,820 455,820
FHLB and FRB stock ................................................ 61,011 61,011
Loans receivable, net of allowance for loan and lease losses ...... 4,031,385 4,036,828
Accrued interest receivable ....................................... 30,346 30,346
---------- ---------
Total financial assets ......................................... $5,243,664 5,249,107
========== =========
Financial Liabilities:
Deposits .......................................................... $3,386,443 3,397,205
Advances from the FHLB ............................................ 613,478 618,812
Federal Reserve Bank discount window .............................. 587,000 587,000
Repurchase agreements and other borrowed funds .................... 197,971 197,993
Subordinated debentures ........................................... 120,157 65,987
Accrued interest payable .......................................... 8,421 8,421
---------- ---------
Total financial liabilities .................................... $4,913,470 4,875,418
========== =========
The following is a description of the methods used to estimate the fair
value of all other financial instruments recognized at amounts other than
fair value.
Financial Assets
The estimated fair value of cash, federal funds sold, interest bearing cash
deposits, and accrued interest receivable is the book value of such
financial assets.
The estimated fair value of FHLB and FRB stock is book value due to the
restrictions that such stock may only be sold to another member institution
or the FHLB or FRB at par value.
Loans receivable, net of ALLL - fair value for unimpaired loans, net of
ALLL, is estimated by discounting the future cash flows using the rates at
which similar notes would be written for the same remaining maturities.
Impaired loans are primarily collateral-dependent and the estimated fair
value is based on the fair value of the collateral.
Financial Liabilities
The estimated fair value of accrued interest payable is the book value of
such financial liabilities.
Deposits - fair value of term deposits is estimated by discounting the
future cash flows using rates of similar deposits with similar maturities.
The estimated fair value of demand, NOW, savings, and money market deposits
is the book value since rates are regularly adjusted to market rates.
Advances from FHLB - fair value of advances is estimated based on borrowing
rates currently available to the Company for advances with similar terms
and maturities.
24
FRB discount window - fair value of FRB discount window borrowings is
estimated based on borrowing rates currently available to the Company for
FRB discount window borrowings with similar terms and maturities.
Repurchase agreements and other borrowed funds - fair value of term
repurchase agreements and other term borrowings are estimated based on
current repurchase rates and borrowing rates currently available to the
Company for repurchases and borrowings with similar terms and maturities.
The estimated fair value for overnight repurchase agreements and other
borrowings is book value.
Subordinated debentures - fair value of the subordinated debt is estimated
by discounting the estimated future cash flows using current estimated
market rates for subordinated debt issuances with similar characteristics.
Off-balance sheet financial instruments - Commitments to extend credit and
letters of credit represent the principal categories of off-balance sheet
financial instruments. Rates for these commitments are set at time of loan
closing, such that no adjustment is necessary to reflect these commitments
at market value.
14) Rate/Volume Analysis
Net interest income can be evaluated from the perspective of relative
dollars of change in each period. Interest income and interest expense,
which are the components of net interest income, are shown in the following
table on the basis of the amount of any increases (or decreases)
attributable to changes in the dollar levels of the Company's
interest-earning assets and interest-bearing liabilities ("Volume") and the
yields earned and rates paid on such assets and liabilities ("Rate"). The
change in interest income and interest expense attributable to changes in
both volume and rates has been allocated proportionately to the change due
to volume and the change due to rate.
Six Months Ended June 30,
2009 vs. 2008
Increase (Decrease) due to:
---------------------------
(Dollars in thousands) Volume Rate Net
---------------------- ------- ------- -------
INTEREST INCOME
Residential real estate loans $ 4,411 (1,190) 3,221
Commercial loans 10,536 (18,606) (8,070)
Consumer and other loans 2,013 (3,429) (1,416)
Investment securities and other 5,340 288 5,628
------- ------- -------
Total Interest Income 22,300 (22,937) (637)
INTEREST EXPENSE
NOW accounts 197 (783) (586)
Savings accounts 83 (553) (470)
Money market accounts (309) (5,060) (5,369)
Certificates of deposit 2,536 (6,887) (4,351)
FHLB advances (4,814) (2,054) (6,868)
Other borrowings and
repurchase agreements 11,954 (14,877) (2,923)
------- ------- -------
Total Interest Expense 9,647 (30,214) (20,567)
------- ------- -------
NET INTEREST INCOME $12,653 7,277 19,930
======= ======= =======
25
15) Average Balance Sheet
The following schedule provides (i) the total dollar amount of interest and
dividend income of the Company for earning assets and the resultant average
yield; (ii) the total dollar amount of interest expense on interest-bearing
liabilities and the resultant average rate; (iii) net interest and dividend
income; (iv) interest rate spread; and (v) net interest margin. Non-accrual
loans are included in the average balance of the loans.
AVERAGE BALANCE SHEET
For the Three months ended 6-30-09 For the Six months ended 6-30-09
---------------------------------- --------------------------------
Average Average
Average Interest Yield/ Average Interest Yield/
(Dollars in thousands) Balance Dividends Rate Balance Dividends Rate
---------------------- ---------- --------- ------- ---------- --------- -------
ASSETS
Residential real estate loans $ 846,969 13,871 6.55% $ 851,484 28,212 6.63%
Commercial loans 2,616,008 37,597 5.76% 2,604,811 75,563 5.85%
Consumer and other loans 701,320 11,142 6.37% 704,273 22,481 6.44%
---------- ------ ---------- --------
Total Loans 4,164,297 62,610 6.03% 4,160,568 126,256 6.12%
Tax - exempt investment securities (1) 452,801 5,739 5.07% 439,118 11,070 5.04%
Other investment securities 575,647 6,071 4.22% 581,338 12,626 4.34%
---------- ------ ---------- --------
Total Earning Assets 5,192,745 74,420 5.75% 5,181,024 149,952 5.84%
------ --------
Goodwill and core deposit intangible 158,163 158,749
Other non-earning assets 225,056 226,680
---------- ----------
TOTAL ASSETS $5,575,964 $5,566,453
---------- ----------
LIABILITIES
AND STOCKHOLDERS' EQUITY
NOW accounts $ 537,496 466 0.35% $ 522,805 1,024 0.39%
Savings accounts 297,648 251 0.34% 292,579 522 0.36%
Money market accounts 754,475 2,073 1.10% 757,151 4,485 1.19%
Certificates of deposit 1,010,597 6,643 2.64% 979,225 13,536 2.79%
FHLB advances 367,407 1,852 2.02% 352,183 3,671 2.10%
Repurchase agreements
and other borrowed funds 1,153,122 2,654 0.92% 1,210,902 5,855 0.98%
---------- ------ ---------- --------
Total Interest Bearing Liabilities 4,120,745 13,939 1.36% 4,114,845 29,093 1.43%
------ --------
Non-interest bearing deposits 727,798 723,070
Other liabilities 36,076 37,896
---------- ----------
Total Liabilities 4,884,619 4,875,811
---------- ----------
Common stock 615 615
Paid-in capital 495,084 494,344
Retained earnings 196,569 193,900
Accumulated other
comprehensive (loss) gain (923) 1,783
---------- ----------
Total Stockholders' Equity 691,345 690,642
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $5,575,964 $5,566,453
========== ==========
Net interest income $60,481 $120,859
======= ========
Net interest spread 4.39% 4.41%
Net Interest Margin 4.67% 4.70%
Net Interest Margin (Tax Equivalent) 4.87% 4.90%
Return on average assets (annualized) 0.77% 0.96%
Return on average equity (annualized) 6.18% 7.72%
(1) Excludes tax effect of $4,901,000 and $2,541,000 on non-taxable investment
security income for the three and six months ended June 30, 2009.
26
16) Subsequent Events
Subsequent events have been evaluated through August 7, 2009, which is the
date the financial statements were issued.
In July and August of 2009, the Company sold municipal securities and
received gross proceeds of $26,275,000, which resulted in gross gains of
$2,035,000. Had such securities been sold on June 30, 2009, the after-tax
effect of $1,237,000 would have increased net income for the quarter from
$10,652,000 to $11,889,000.
On February 6, 2009, the Company announced a Plan and Agreement of Merger
("Merger Agreement") with First Company, a Wyoming corporation and its
wholly owned subsidiary, First National Bank & Trust, whereby First Company
will merge with and into the Company, and the Bank will become a wholly
owned subsidiary of the Company. In July 2009, the parties have amended the
Merger Agreement to extend the Termination Date (as defined in the Merger
Agreement) from July 31, 2009 to September 15, 2009. The proposed
transaction is pending regulatory approval.
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS - THE THREE MONTHS ENDED JUNE 30, 2009 COMPARED TO
MARCH 31, 2009 AND JUNE 30, 2008
Performance Summary
The Company reported net earnings of $10.652 million for the second quarter, a
decrease of $7.807 million, or 42 percent, from the $18.459 million for the
second quarter of 2008. Diluted earnings per share of $.17 for the quarter
decreased 50 percent from the diluted earnings per share of $.34 for the same
quarter of 2008. Annualized return on average assets and return on average
equity for the second quarter were .77 percent and 6.18 percent, which compares
with prior year returns for the second quarter of 1.51 percent and 13.51
percent, respectively.
REVENUE SUMMARY
Three months ended
---------------------------------------
June 30, March 31, June 30,
2009 2009 2008
(UNAUDITED - DOLLARS IN THOUSANDS) (unaudited) (unaudited) (unaudited)
---------------------------------- ----------- ----------- -----------
Net interest income
Interest income $74,420 $75,532 $74,573
Interest expense 13,939 15,154 22,273
------- ------- -------
Net interest income 60,481 60,378 52,300
Non-interest income
Service charges, loan fees, and other fees 11,377 10,179 12,223
Gain on sale of loans 9,071 6,150 4,245
Other income 870 1,048 913
------- ------- -------
Total non-interest income 21,318 17,377 17,381
------- ------- -------
$81,799 $77,755 $69,681
======= ======= =======
Tax equivalent net interest margin 4.87% 4.92% 4.75%
======= ======= =======
$ change from $ change from % change from % change from
March 31, June 30, March 31, June 30,
(UNAUDITED - DOLLARS IN THOUSANDS) 2009 2008 2009 2008
---------------------------------- ------------- ------------- ------------- -------------
Net interest income
Interest income $(1,112) $ (153) -1% 0%
Interest expense $(1,215) $(8,334) -8% -37%
------- -------
Net interest income 103 8,181 0% 16%
Non-interest income
Service charges, loan fees, and other fees 1,198 (846) 12% -7%
Gain on sale of loans 2,921 4,826 47% 114%
Other income (178) (43) -17% -5%
------- -------
Total non-interest income 3,941 3,937 23% 23%
------- -------
$ 4,044 $12,118 5% 17%
======= =======
Net Interest Income
Net interest income for the quarter increased $8 million, or 16 percent, with
interest expense decreasing $8 million, or 37 percent, over the same period in
2008. Interest income for the current quarter decreased $1 million, or 1
percent, with interest expense also decreasing $1 million, or 8 percent,
compared to the prior quarter. The decrease in total interest expense is
primarily attributable to rate decreases in interest bearing
28
deposits and lower cost borrowings. The net interest margin as a percentage of
earning assets, on a tax equivalent basis, was 4.87 percent which is 5 basis
points lower than the 4.92 percent achieved for the prior quarter and 12 basis
points higher than the 4.75 percent result for the second quarter of 2008.
Non-interest Income
Non-interest income for the quarter increased $4 million, or 23 percent, from
the prior quarter, and increased $4 million, or 23 percent, over the same period
in 2008. Gain on sale of loans increased $3 million, or 47 percent, for the
quarter and increased $5 million, or 114 percent, over the same period last
year, primarily the result of increased refinancing of residential loans
originated and sold in the secondary market. Fee income increased $1 million, or
12 percent, during the quarter, compared to the decrease of $846 thousand, or 7
percent, over the same period last year.
NON-INTEREST EXPENSE SUMMARY
Three months ended
---------------------------------------
June 30, March 31, June 30,
2009 2009 2008
(UNAUDITED - DOLLARS IN THOUSANDS) (unaudited) (unaudited) (unaudited)
---------------------------------- ----------- ----------- -----------
Compensation and employee benefits $20,710 $21,944 $20,967
Occupancy and equipment expense 5,611 5,895 5,116
Advertising and promotion expense 1,722 1,724 1,833
Outsourced data processing 680 671 647
Core deposit intangibles amortization 762 774 767
Other expenses 13,478 8,618 7,113
------- ------- -------
Total non-interest expense $42,963 $39,626 $36,443
======= ======= =======
$ change from $ change from % change from % change from
March 31, June 30, March 31, June 30,
(UNAUDITED - DOLLARS IN THOUSANDS) 2009 2008 2009 2008
---------------------------------- ------------- ------------- ------------- -------------
Compensation and employee benefits $(1,234) $ (257) -6% -1%
Occupancy and equipment expense (284) 495 -5% 10%
Advertising and promotion expense (2) (111) 0% -6%
Outsourced data processing 9 33 1% 5%
Core deposit intangibles amortization (12) (5) -2% -1%
Other expenses 4,860 6,365 56% 89%
------- ------
Total non-interest expense $ 3,337 $6,520 8% 18%
======= ======
Non-interest Expense
Non-interest expense increased by $3 million, or 8 percent from the prior
quarter. Compensation and employee benefits decreased $1 million, or 6 percent,
from prior quarter and $257 thousand, or 1 percent from prior year's second
quarter. The current quarter compensation and employee benefits included
significant reductions in bonuses and employee benefits tied to Company
performance. The current quarter decrease in compensation and employee benefits
also reflects decreased staffing with the number of full-time equivalent
employees decreasing from 1,610 to 1,597 during the quarter, and increasing from
1,537 since the end of the 2008 second quarter. The increase of $5 million in
other expenses includes increases of $2.7 million in FDIC insurance premiums,
$362 thousand in outside legal, accounting, and audit firm expense, $1.5 million
of loss from sales of other real estate owned, and $288 thousand in expenses
associated with repossessed assets.
Non-interest expense increased by $7 million, or 18 percent from the same
quarter of 2008, including a $6 million, or 89 percent increase in other
expenses. The increase in other expenses includes $3.5 million in Federal
Deposit Insurance Corporation ("FDIC") insurance premiums, $749 thousand in
outside legal, accounting, and audit firm
29
expense, $1.8 million of loss from sales of other real estate owned, and $451
thousand of expense associated with repossessed assets. Occupancy and equipment
expense has increased $495 thousand, or 10 percent, since June 30, 2008,
reflecting the cost of additional branch locations and facility upgrades.
Advertising and promotion expense decreased $111 thousand, or 6 percent, from
the same quarter of 2008.
In the second quarter of 2009, the FDIC increased the deposit insurance premiums
for all financial institutions and also imposed a special premium insurance
assessment based on financial institutions' total assets as of June 30, 2009. Of
the increase in FDIC insurance premiums, $2.5 million is attributable to the
second quarter asset-based special assessment. The Company expects the
heightened FDIC deposit insurance premiums to continue, and the FDIC has
indicated that another special assessment is probable in the fourth quarter of
the current year.
Excluding the $2.5 million special FDIC insurance assessment, the efficiency
ratio (non-interest expense / net interest income plus non-interest income) was
49 percent for the quarter, compared to 52 percent for the 2008 second quarter,
a three percentage point improvement.
Allowance for Loan and Lease Losses
The current quarter provision for loan loss expense was $25 million, an increase
of $20 million from the same quarter in 2008. Charged-off loans for the current
quarter exceeded recoveries of previously charged-off loans by $12 million.
The determination of the allowance for loan and lease losses ("ALLL" or
"Allowance") and the related provision for loan losses is a critical accounting
estimate that involves management's judgments about current environmental
factors which affect loan losses, such factors including economic conditions,
changes in collateral values, net charge-offs, and other factors discussed in
"Financial Condition Analysis" - Allowance for Loan and Lease Losses.
30
RESULTS OF OPERATIONS - THE SIX MONTHS ENDED JUNE 30, 2009 COMPARED TO
THE SIX MONTHS ENDED JUNE 30, 2008
Performance Summary
Net earnings for the six months ended June 30, 2009 were $26.431 million, which
is a decrease of $9.427 million, or 26 percent, over the prior year. Diluted
earnings per share of $.43, is a decrease of 35 percent from the $.66 earned in
2008.
REVENUE SUMMARY
Six months ended
-------------------------
June 30, June 30,
2009 2008
(UNAUDITED - DOLLARS IN THOUSANDS) (unaudited) (unaudited) $ change % change
---------------------------------- ----------- ----------- -------- --------
Interest income $149,952 $150,589 $ (637) 0%
Interest expense 29,093 49,660 (20,567) -41%
-------- -------- --------
Net interest income 120,859 100,929 19,930 20%
Non-interest income
Service charges, loan fees, and other fees 21,556 23,184 (1,628) -7%
Gain on sale of loans 15,221 8,125 7,096 87%
Gain on investments -- 248 (248) -100%
Other income 1,918 2,086 (168) -8%
-------- -------- --------
Total non-interest income 38,695 33,643 5,052 15%
-------- -------- --------
$159,554 $134,572 $ 24,982 19%
======== ======== ========
Tax equivalent net interest margin 4.90% 4.65%
======== ========
Net Interest Income
Net interest income for the six months increased $20 million, or 20 percent,
over the same period in 2008. Total interest income decreased $637 thousand, or
42 basis points, while total interest expense decreased $21 million, or 41
percent. The decrease in interest expense is primarily attributable to the rate
decreases on interest bearing deposits and lower cost borrowings. The net
interest margin as a percentage of earning assets, on a tax equivalent basis,
was 4.90 percent, an increase of 25 basis points from the 4.65 percent for the
same period in 2008.
Non-interest Income
Total non-interest income increased $5 million, or 15 percent in 2009. Fee
income for the first half of 2009 decreased $2 million, or 7 percent, over the
first half of 2008. Gain on sale of loans increased $7 million, or 87 percent,
from the first six months of last year, primarily the result of increased
refinancing of residential loans originated and sold in the secondary market.
Gain from the sale of investments during the first half of 2008 included a first
quarter mandatory redemption of a portion of Visa, Inc. shares from its initial
public offering, and the sale of shares in Principal Financial Group.
31
NON-INTEREST EXPENSE SUMMARY
Six months ended
-------------------------
June 30, June 30,
2009 2008
(UNAUDITED - DOLLARS IN THOUSANDS) (unaudited) (unaudited) $ change % change
---------------------------------- ----------- ----------- -------- --------
Compensation and employee benefits $42,654 $42,064 $ 590 1%
Occupancy and equipment expense 11,506 10,249 1,257 12%
Advertising and promotion expense 3,446 3,372 74 2%
Outsourced data processing 1,351 1,314 37 3%
Core deposit intangibles amortization 1,536 1,546 (10) -1%
Other expenses 22,096 13,511 8,585 64%
------- ------- -------
Total non-interest expense $82,589 $72,056 $10,533 15%
======= ======= =======
Non-interest Expense
Non-interest expense increased by $11 million, or 15 percent, from the first six
months of 2008. Compensation and employee benefit expense increased $590
thousand, or 1 percent, from the first half of 2008, due to the increased number
of employees added since June 30, 2008, which was partially offset by the
reductions in bonuses and employee benefits. Occupancy and equipment expense
increased $1 million, or 12 percent, reflecting the cost of additional locations
and facility upgrades. Advertising and promotion expense increased $74 thousand,
or 2 percent, from the first half of 2008. Other expenses increased $9 million,
or 64 percent, since June 30, 2008. The increase in other expenses includes $4.4
million in FDIC insurance premiums, $1.1 million in outside legal, accounting,
and audit firm expense, $2 million loss from sales of other real estate owned,
and $641 thousand expense associated with repossessed assets. Of the increase in
FDIC insurance premiums year-to-date, $2.5 million is attributable to the second
quarter asset-based special assessment.
The efficiency ratio (non-interest expense/net interest income plus non-interest
income) was 52 percent for the first half of 2009 compared favorably to 54
percent for the first six months of 2008.
Allowance for Loan and Lease Losses
The provision for loan loss expense was $41 million for the first six months of
2009, an increase of $33 million, or 442 percent, from the same period in 2008.
Net charged-off loans during the six months ended June 30, 2009 was $20 million,
an increase of $19 million from the same period in 2008.
32
FINANCIAL CONDITION ANALYSIS
As reflected in the following table, total assets at June 30, 2009 were $5.638
billion, which is $84 million, or 2 percent, greater than the total assets of
$5.554 billion at December 31, 2008 and an increase of $611 million, or 12
percent, over the total assets of $5.028 billion at June 30, 2008.
June 30, December 31, June 30, $ change from $ change from
2009 2008 2008 December 31, June 30,
ASSETS (DOLLARS IN THOUSANDS) (unaudited) (audited) (unaudited) 2008 2008
------------------------------ ----------- ------------ ----------- ------------- -------------
Cash on hand and in banks $ 100,773 125,123 123,545 (24,350) (22,772)
Investment securities, interest bearing
deposits, FHLB stock, FRB stock, and
fed funds 1,081,160 1,000,224 800,206 80,936 280,954
Loans:
Real estate 836,917 838,375 746,193 (1,458) 90,724
Commercial 2,591,149 2,575,828 2,396,098 15,321 195,051
Consumer and other 700,693 715,990 678,661 (15,297) 22,032
---------- ---------- ---------- ------- --------
Total loans 4,128,759 4,130,193 3,820,952 (1,434) 307,807
Allowance for loan and lease losses (97,374) (76,739) (60,807) (20,635) (36,567)
---------- ---------- ---------- ------- --------
Total loans, net of allowance for
loan and lease losses 4,031,385 4,053,454 3,760,145 (22,069) 271,240
---------- ---------- ---------- ------- --------
Other assets 425,106 375,169 343,972 49,937 81,134
---------- ---------- ---------- ------- --------
Total Assets $5,638,424 5,553,970 5,027,868 84,454 610,556
========== ========== ========== ======= ========
At June 30, 2009, total loans were $4.129 billion, a decrease of $1 million,
over total loans of $4.130 billion at December 31, 2008. Commercial loans
increased $15 million, or 59 basis points, during the first six months of 2009.
Consumer loans, which are primarily comprised of home equity loans, decreased by
$15 million, or 2 percent, while real estate loans decreased $1 million, or 17
basis points, from the fourth quarter of 2008. Total loans increased $308
million, or 8 percent from June 30, 2008. Since June 30, 2008, commercial loans
increased $195 million, or 8 percent, real estate loans grew by $91 million, or
12 percent, and consumer loans increased $22 million, or 3 percent.
Investment securities, including interest bearing deposits in other financial
institutions and federal funds sold, have increased $281 million, or 35 percent,
from June 30, 2008, and have increased $81 million, or 8 percent, from December
31, 2008. Investment securities represented 19 percent of total assets at June
30, 2009 versus 16 percent of total assets at June 30, 2008.
The Company typically sells a majority of long-term mortgage loans originated,
retaining servicing only on loans sold to certain lenders. The sale of loans in
the secondary mortgage market reduces the Company's risk of holding long-term
fixed rate loans in the loan portfolio. Mortgage loans sold with servicing
released for the six months ended June 30, 2009 and 2008 were $706 million and
$356 million, respectively, and for the three months ended June 30, 2009 and
2008 were $393 million and $180 million, respectively. The Company has also been
active in originating commercial SBA loans, some of which are sold to investors.
The amount of loans sold and serviced for others at June 30, 2009 was
approximately $171 million.
Allowance for Loan and Lease Losses
Determining the adequacy of the ALLL involves a high degree of judgment and is
inevitably imprecise as the risk of loss is difficult to quantify. The ALLL
methodology is designed to reasonably estimate the probable loan and lease
losses within each bank subsidiary's loan and lease portfolios. Accordingly, the
ALLL is maintained within a range of estimated losses. The determination of the
ALLL and the related provision for credit losses is a critical 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,
33
economic conditions nationally and in the local markets in which the community
bank subsidiaries operate, changes in collateral values, delinquencies,
non-performing assets and net charge-offs. Although the Company and the banks
continue to actively monitor economic trends, a softening of economic conditions
combined with declines in the values of real estate that collateralize most of
the Company's loan and lease portfolios may adversely affect the credit risk and
potential for loss to the Company.
The ALLL evaluation is well documented and approved by each bank subsidiary's
Board of Directors and reviewed by the Parent's Board of Directors. In addition,
the policy and procedures for determining the balance of the ALLL are reviewed
annually by each bank subsidiary's Board of Directors, the Parent's Board of
Directors, independent credit reviewer and state and federal bank regulatory
agencies. Each of the Bank's ALLL is generally available to absorb losses from
any segment of its loan and lease portfolio.
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.
The Company is committed to a conservative management of the credit risk within
the loan and lease portfolios, including the early recognition of problem loans.
The Company's credit risk management includes stringent credit policies,
individual loan approval limits, limits on concentrations of credit, and
committee approval of larger loan requests. Management practices also include
regular internal and external credit examinations, identification and review of
individual loans and leases experiencing deterioration of credit quality,
procedures for the collection of non-performing assets, quarterly monitoring of
the loan and lease portfolios, semi-annual review of loans by industry, and
periodic stress testing of the loans secured by real estate.
The Company's model of ten wholly-owned, independent community banks, each with
its own loan committee, chief credit officer and Board of Directors, provides
substantial local oversight to the lending and credit management function.
Unlike a traditional, single-bank holding company, the Company's decentralized
business model affords multiple reviews of larger loans before credit is
extended, a significant benefit in mitigating and managing the Company's credit
risk. The geographic dispersion of the market areas in which the Company and the
community bank subsidiaries operate further mitigates the risk of credit loss.
While this process is intended to limit credit exposure, there can be no
assurance that problem credits will not arise and loan losses incurred,
particularly in periods of rapid economic downturns.
The primary responsibility for credit risk assessment and identification of
problem loans rests with the loan officer of the account. This continuous
process, utilizing each of the Bank's internal credit risk rating process, is
necessary to support management's evaluation of the ALLL adequacy. An
independent loan review function verifying credit risk ratings evaluates the
loan officer and management's evaluation of the loan portfolio credit quality.
The loan review function also assesses the evaluation process and provides an
independent analysis of the adequacy of the ALLL.
The Company considers the ALLL balance of $97.4 million adequate to cover
inherent losses in the loan and lease portfolios as of June 30, 2009. However,
no assurance can be given that the Company will not, in any particular period,
sustain losses that are significant relative to the amount reserved, or that
subsequent evaluations of the loan and lease portfolios applying management's
judgment about then current factors, including economic and regulatory
developments, will not require significant changes in the ALLL. Under such
circumstances, this could result in enhanced provisions for credit losses. See
additional risk factors in Part II - Other information, Item 1A - Risk Factors.
34
The following table summarizes the allocation of the ALLL:
June 30, 2009 December 31, 2008 June 30, 2008
-------------------------- -------------------------- --------------------------
Allowance Allowance Allowance
for loan and Percent for loan and Percent for loan and Percent
lease losses of loans in lease losses of loans in lease losses of loans in
(Dollars in thousands) (unaudited) category (audited) category (unaudited) category
---------------------- ------------ ----------- ------------ ----------- ------------ -----------
Real estate loans $ 8,790 20.3% 7,233 20.3% 5,391 19.6%
Commercial real estate loans 45,632 47.0% 35,305 46.8% 26,310 45.3%
Other commercial loans 26,871 15.7% 21,590 15.6% 19,063 17.4%
Consumer and other loans 16,081 17.0% 12,611 17.3% 10,043 17.7%
------- ----- ------ ----- ------ -----
Totals $97,374 100.0% 76,739 100.0% 60,807 100.0%
======= ===== ====== ===== ====== =====
The following table summarizes ALLL experience:
Six months ended Year ended Six months ended
June 30, December 31, June 30,
2009 2008 2008
(Dollars in thousands) (unaudited) (audited) (unaudited)
---------------- ------------ ----------------
Balance at beginning of period $ 76,739 54,413 54,413
Charge-offs:
Real estate loans (4,881) (3,233) (580)
Commercial loans (14,002) (4,957) (570)
Consumer and other loans (2,363) (1,649) (348)
-------- ------ ------
Total charge-offs $(21,246) (9,839) (1,498)
-------- ------ ------
Recoveries:
Real estate loans 287 23 44
Commercial loans 504 716 178
Consumer and other loans 235 321 128
-------- ------ ------
Total recoveries $ 1,026 1,060 350
======== ====== ======
Net (charge-offs) recoveries (20,220) (8,779) (1,148)
Acquisition (1) -- 2,625 --
Provision 40,855 28,480 7,542
-------- ------ ------
Balance at end of period $ 97,374 76,739 60,807
======== ====== ======
Allowance for loan and lease losses as a
percentage of total loan and leases 2.36% 1.86% 1.59%
Net charge-offs as a percentage of total loans 0.490% 0.213% 0.030%
(1) Acquisition of Bank of the San Juans in 2008
The increase in the ALLL was primarily due to the increase in non-performing
assets since December 31, 2008 and a downturn in global, national and local
economies.
At June 30, 2009, the ALLL was $97.374 million, an increase of $37 million, or
60 percent, from a year ago. The allowance was 2.36 percent of total loans
outstanding at June 30, 2009, up from 1.59 percent at the prior year quarter
end, and up from 1.86 percent at December 31, 2008. Loan portfolio growth,
composition, average loan
35
size, credit quality considerations, and other environmental factors will
determine the level of additional provision expense.
Each of the bank subsidiaries' charge-off policy is consistent with bank
regulatory standards. Consumer loans generally are charged off when the loan
becomes over 120 days delinquent. Real estate acquired as a result of
foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned
until such time as it is sold. When such property is acquired, it is recorded at
estimated fair value, less estimated cost to sell. Any write-down at the time of
recording real estate owned is charged to the ALLL. Any subsequent write-downs
are charged to current expense.
Non-performing Assets
At At At
6/30/2009 12/31/2008 6/30/2008
(Dollars in thousands) (unaudited) (audited) (unaudited)
---------------------- ----------- ---------- -----------
Non-accrual loans:
Real estate loans $ 17,019 3,575 1,293
Commercial loans 93,305 58,454 17,788
Consumer and other loans 6,038 2,272 593
-------- ------ ------
Total $116,362 64,301 19,674
Accruing Loans 90 days or more overdue:
Real estate loans 3,060 4,103 467
Commercial loans 6,219 2,897 3,006
Consumer and other loans 807 1,613 227
-------- ------ ------
Total $ 10,086 8,613 3,700
Real estate and other assets owned, net 47,424 11,539 6,523
-------- ------ ------
Total non-performing loans and real estate
and other assets owned, net $173,872 84,453 29,897
======== ====== ======
Allowance for loan and lease losses as a
percentage of non-performing assets 56% 91% 203%
Non-performing assets as a percentage of
total bank assets 3.06% 1.46% 0.58%
Accruing Loans 30-89 days or more overdue $ 62,637 54,787 35,017
Interest Income (1) $ 3,459 4,434 707
(1) Amounts represent estimated interest income that would have been recognized
on loans accounted for on a non-accrual basis for the six months ended June
30, 2009, year ended December 31, 2008
The allowance was 56 percent of non-performing assets at June 30, 2009, down
from 91 percent for the prior year end and down from 203 percent a year ago.
Non-performing assets as a percentage of total bank assets at June 30, 2009 were
at 3.06 percent, up from 1.46 percent as of December 31, 2008, and up from .58
percent at June 30, 2008. Each bank subsidiary evaluates the level of its
non-performing assets, the values of the underlying real estate and other
collateral, and related trends in net charge-offs. Through pro-active credit
administration, the Banks work closely with borrowers to seek favorable
resolution to the extent possible, thereby attempting to minimize net
charge-offs or losses to the Company.
Most of the Company's non-performing assets are secured by real estate. Based on
the most current information available to management, including updated
appraisals where appropriate, the Company believes the value of the 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.
36
Loans are reviewed on a regular basis and are placed on a non-accrual status
when the collection of the contractual principal or interest is unlikely. The
Company typically places loans on non-accrual when principal or interest is due
and has remained unpaid for 90 days or more unless the loan is in process of
collection and well-secured by collateral the fair value of which is sufficient
to discharge the debt in full. When a loan is placed on non-accrual status,
interest previously accrued but not collected is generally reversed against
current period interest income. Subsequent payments are either applied to the
outstanding principal balance or recorded as interest income, depending on the
assessment of the ultimate repayment of the loan. Interest accruals are resumed
on such loans only when they are brought fully current with respect to interest
and principal and when, in the judgment of management, the loans are estimated
to be fully collectible as to both principal and interest.
A loan is considered impaired when, based upon current information and events,
it is probable that the Company will be unable to collect the scheduled payments
of principal or interest when due according to the contractual terms of the loan
agreement. The amount of the impairment is measured using cash flows discounted
at the loan's effective interest rate, except when it is determined that
repayment of the loan is expected to be provided solely by the underlying
collateral. For collateral dependent loans, impairment is measured by the fair
value of the collateral less the cost to sell. When the ultimate collectability
of the total principal of an impaired loan is in doubt, all payments are applied
to principal under the cost recovery method. When the ultimate collectability of
the total principal on an impaired loan is not in doubt, contractual interest is
generally credited to interest income when received under the cash basis method.
Total interest income recognized for impaired loans under the cash basis for the
three months ended June 30, 2009 and 2008 was not significant. Impaired loans,
net of government guaranteed amounts, were $140.1 million and $23.7 million as
of June 30, 2009 and 2008, respectively. The ALLL includes valuation allowances
of $9.0 million and $3.0 million specific to impaired loans as of June 30, 2009
and 2008, respectively.
June 30, December 31, June 30, $ change from $ change from
2009 2008 2008 December 31, June 30,
LIABILITIES (DOLLARS IN THOUSANDS) (unaudited) (audited) (unaudited) 2008 2008
---------------------------------- ----------- ------------ ----------- ------------- -------------
Non-interest bearing deposits $ 754,844 747,439 778,786 7,405 (23,942)
Interest bearing deposits 2,631,599 2,515,036 2,347,137 116,563 284,462
Advances from Federal Home Loan Bank 613,478 338,456 658,211 275,022 (44,733)
Federal Reserve Bank discount window 587,000 914,000 144,000 (327,000) 443,000
Securities sold under agreements to
repurchase and other borrowed funds 197,971 196,731 387,648 1,240 (189,677)
Other liabilities 43,711 44,331 43,884 (620) (173)
Subordinated debentures 120,157 121,037 118,559 (880) 1,598
---------- --------- --------- -------- --------
Total liabilities $4,948,760 4,877,030 4,478,225 71,730 470,535
========== ========= ========= ======== ========
As of June 30, 2009, non-interest bearing deposits decreased $24 million, or 3
percent, since June 30, 2008, and increased $7 million, or 1 percent, since
December 31, 2008. Interest bearing deposits increased $117 million, or 5
percent from December 31, 2008. Since June 30, 2008, interest bearing deposits
increased $284 million, or 12 percent, resulting from the banks' continued focus
on attracting and retaining low cost deposits. Federal Home Loan Bank ("FHLB")
advances at June 30, 2009 decreased $45 million, or 7 percent, from June 30,
2008, and increased $275 million, or 81 percent, from December 31, 2008. Federal
Reserve Bank ("FRB") Discount Window borrowings decreased $327 million and
increased $443 million from December 31, 2008 and June 30, 2008, respectively.
Repurchase agreements and other borrowed funds were $198 million at June 30,
2009, a decrease of $190 million, or 49 percent, from June 30, 2008, and an
increase of $1 million from December 31, 2008. Included in this latter category
are U.S. Treasury Tax and Loan funds of $5 million at June 30, 2009, a decrease
of $204 million from June 30, 2008, and a decrease of $947 thousand from
December 31, 2008.
37
STOCKHOLDERS' EQUITY
June 30, December 31, June 30, $ change from $ change from
2009 2008 2008 December 31, June 30,
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) (unaudited) (audited) (unaudited) 2008 2008
-------------------------------------------- ----------- ------------ ----------- ------------- -------------
Common equity $ 692,046 678,183 551,718 13,863 140,328
Accumulated other comprehensive loss (2,382) (1,243) (2,075) (1,139) (307)
--------- -------- -------- ------ -------
Total stockholders' equity 689,664 676,940 549,643 12,724 140,021
Core deposit intangible, net, and goodwill (157,736) (159,765) (152,717) 2,029 (5,019)
--------- -------- -------- ------ -------
$ 531,928 517,175 396,926 14,753 135,002
========= ======== ======== ====== =======
Stockholders' equity to total assets 12.23% 12.19% 10.93%
Tangible stockholders' equity to total tangible assets 9.71% 9.59% 8.14%
Book value per common share $ 11.21 11.04 10.18 0.17 1.03
Tangible book value per common share $ 8.65 8.43 7.35 0.22 1.30
Market price per share at end of quarter $ 14.77 19.02 15.99 (4.25) (1.22)
Total stockholders' equity and book value per share amounts have increased $140
million and $1.03 per share, respectively, from June 30, 2008, the result of
earnings retention and exercised stock options, stock issued in connection with
the Bank of the San Juans acquisition, and $94 million in net proceeds from the
Company's November 2008 equity offering of 6,325,000 shares of common stock at a
price of $15.50 per share. Tangible stockholders' equity has increased $135
million, or 34 percent since June 30, 2008, with tangible stockholders' equity
at 9.71 percent of total tangible assets at June 30, 2009, up from 8.14 percent
at June 30, 2008. Accumulated other comprehensive income (loss), representing
net unrealized gains or losses (net of tax) on investment securities designated
as available for sale, decreased $307 thousand from June 30, 2008.
On June 24, 2009, the Board of Directors declared a cash dividend of $.13 per
share, payable July 16, 2009 to shareholders of record on July 7, 2009.
Pending Acquisition
On February 9, 2009, the Company announced a definitive agreement to acquire
First Company and its subsidiary First National Bank & Trust, a community bank
based in Powell, Wyoming. First National Bank & Trust has three branch locations
in Powell, Cody, and Lovell, Wyoming. As of June 30, 2009, First National Bank &
Trust had total assets of $272 million. Upon completion of the transaction,
which is subject to regulatory approval and other customary conditions of
closing, First National Bank & Trust will become a wholly-owned subsidiary of
the Company. The agreement was recently extended to September 15, 2009. The
transaction is now targeted to close in the third quarter. For additional
information on the agreement see Part I, Item 2 "Financial Statements - Note 16,
Subsequent Events."
Effect of inflation and changing prices
Generally accepted accounting principles often require the measurement of
financial position and operating results in terms of historical dollars, without
consideration for change in relative purchasing power over time due to
inflation. Virtually all assets of the Company and each subsidiary bank are
monetary in nature; therefore, interest rates generally have a more significant
impact on a company's performance than does the effect of inflation.
38
Lending Commitments
In the normal course of business, there are various outstanding commitments to
extend credit, such as letters of credit and un-advanced loan commitments, which
are not reflected in the accompanying condensed consolidated financial
statements. Management does not anticipate any material losses as a result of
these transactions.
Liquidity Risk
Liquidity risk is the possibility that the Company will not be able to fund
present and future obligations. The objective of liquidity management is to
maintain cash flows adequate to meet current and future needs for credit demand,
deposit withdrawals, maturing liabilities and corporate operating expenses. The
principal source of the Company's cash revenues are dividends received from the
Company's bank subsidiaries. The payment of dividends is subject to government
regulation, in that regulatory authorities may prohibit banks and bank holding
companies from paying dividends which would constitute an unsafe or unsound
banking practice. The bank subsidiaries' source of funds is generated by
deposits, principal and interest payments on loans, sale of loans and
securities, short and long-term borrowings, and net earnings. In addition, all
of the bank subsidiaries are members of the FHLB. As of June 30, 2009, the bank
subsidiaries had $761 million of available FHLB credit of which $613 million was
utilized. The bank subsidiaries may also borrow funds from the FRB discount
window or from the U.S. Treasury Tax and Loan program of which the banks have
remaining borrowing availability of $708 million and $10 million, respectively.
Management of the Company has a wide range of versatility in managing the
liquidity and asset/liability mix for each bank subsidiary as well as the
Company as a whole.
Capital Resources and Adequacy
Maintaining capital strength has been a long term objective. Ample capital is
necessary to sustain growth, provide protection against unanticipated declines
in asset values, and to safeguard the funds of depositors. Capital also is a
source of funds for loan demand and enables the Company to effectively manage
its assets and liabilities. Shareholders' equity increased $140 million since
prior year, or 25 percent, the net result of earnings, a public offering of
stock of $94 million, common stock issued for the acquisition of San Juans,
stock options exercised, less cash dividend payments and a decrease of $307
thousand resulting from the net unrealized losses on available-for-sale
investment securities. The FRB has adopted capital adequacy guidelines pursuant
to which it assesses the adequacy of capital in supervising a bank holding
company.
Other-Than-Temporary Loss on Securities Accounting Policy and Analysis
The Company views the determination of whether an investment security is
temporarily or other-than-temporarily impaired as a critical accounting policy,
as the estimate is susceptible to significant change from period to period
because it requires management to make significant judgments, assumptions and
estimates in the preparation of its consolidated financial statements. The
Company assesses individual securities in its investment securities portfolio
for impairment at least on a quarterly basis, and more frequently when economic
or market conditions warrant. An investment is impaired if the fair value of the
security is less than its carrying value at the financial statement date. If
impairment is determined to be other-than-temporary, an impairment loss is
recognized by reducing the amortized cost only for the credit loss associated
with an other-than-temporary loss with a corresponding charge to earnings for a
like amount.
Management considers whether an investment security is other-than-temporarily
impaired under the guidance promulgated in SFAS 115, Accounting for Certain
Investments in Debt and Equity Securities, FSP SFAS 115-1 and SFAS 124-1, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments, FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments, and the guidance from the Securities and
Exchange Commission found in Staff Accounting Bulletin Topic 5M. The Company
adopted FSP FAS 115-2 and FAS 124-2 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
39
information regarding the FSPs, 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 2008 and the
first half of 2009 have unfavorably impacted the fair value of certain debt
securities in its investment portfolio. For debt securities with limited or
inactive markets, the impact of these macroeconomic conditions upon fair value
estimates includes higher risk-adjusted discount rates and downgrades in credit
ratings provided by nationally recognized credit rating agencies, (e.g.,
Moody's, S&P, and Fitch).
In evaluating equity securities for other-than-temporary impairment losses,
management assesses the Company's ability and intent to retain the equity
securities for a period of time sufficient to allow for anticipated recovery in
fair value. Equity securities owned at June 30, 2009 consisted of stock issued
by the Federal Home Loan Bank and the Federal Reserve Bank, such shares measured
at cost for fair value purposes in recognition of the transferability
restrictions imposed by the issuers. In addition, the Company owns 150,000
shares of Series O preferred stock issued by Federal Home Loan Mortgage
Corporation ("Freddie Mac") and 1,200 shares of common stock issued by the
Federal National Mortgage Association ("Fannie Mae"). The Freddie Mac and Fannie
Mae stock had a cost basis of $0 at year end due to the recognition of an
other-than-temporary impairment charge against earnings at September 30, 2008
for the entire amount of the Company's investment therein. Hence, none of the
equity securities were impaired as of June 30, 2009.
In evaluating debt securities for other-than-temporary impairment losses,
management assesses whether the Company intends to sell or if it is more
likely-than-not that it will be required to sell impaired debt securities. In so
doing, management considers contractual constraints, liquidity, capital, asset /
liability management and securities portfolio objectives. With respect to its
impaired debt securities at June 30, 2009, management determined that it does
not intend to sell and that there is no expected requirement to sell any of its
impaired debt securities.
For fair value estimates provided by third party vendors, management also
considered the models and methodology, for appropriate consideration of both
observable and unobservable inputs, including appropriately adjusted discount
rates and credit spreads for securities with limited or inactive markets, and
whether the quoted prices reflect orderly transactions, The Company obtained
independent estimates of inputs, including cash flows, in supplement to third
party vendor provided information. The Company also reviewed financial
statements of issuers, with follow up discussions with issuers' management for
clarification and verification of information relevant to the Company's
impairment analysis.
In analyzing the investment securities at June 30, 2009, a total of 214
investment (debt) securities were identified the fair values of which had
declined below amortized cost by $24,128,124, or 10.64%, of the book value of
impaired investment 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,
decreased from $67,365,000 at December 31, 2008 to $54,991,000 at June 30, 2009,
and the unrealized loss increased from 9.0 percent of fair value to 22.8 percent
of fair value for those same years. The fair value of State and Local Government
and other issued securities in an unrealized loss position increased from
$119,928,000 at December 31, 2008 to $139,329,000 at June 30, 2009, and the
unrealized loss decreased from 7.5 percent of fair value to 4.7 percent of fair
value for those same years. The fair value of Collateralized Debt Obligation
securities in an unrealized loss position is $7,973,000 with unrealized losses
of $5,094,000 or 63.9 percent of fair value at June 30, 2009; such investments
had an unrealized gain position at December 31, 2008.
The Company stratified the 214 debt securities for both severity and duration of
impairment. With respect to severity, 75 debt securities had impairment that
exceeded 5 percent of the respective book values, of which 18 had impairment
that exceeded 15 percent of the respective book values at June 30, 2009. 1 of
the 214 debt
40
securities had impairment that exceeded 40 percent of the respective book values
at June 30, 2009. The remaining 139 debt securities had impairment that was 5
percent or less of the respective book values as of June 30, 2009.
With respect to the duration of the impaired securities, the Company identified
44 securities which have been continuously impaired for the 12 months ending
June 30, 2009. The valuation history of such securities in the prior year(s) was
also reviewed to determine the number of months in prior year(s) in which the
identified securities was in an unrealized loss position. 13 of these 44
securities are non-guaranteed, non-Agency CMOs with an aggregate unrealized loss
of $12,271,986, the most notable of which had an unrealized loss of $2,085,002.
17 of the 44 securities are state and local tax-exempt securities with an
unrealized loss of $1,457,301, the most notable of which had an unrealized loss
of $409,446. 14 of the 44 securities are mortgage-backed securities issued by
U.S. government sponsored agencies, i.e., GNMA, FNMA, FHLMC and SBA, the
aggregate unrealized loss of which was $71,190.
Included in the 214 debt securities with impairment at June 30, 2009 are 15 of
the 18 non-guaranteed, non-Agency issued CMOs tranches owned at such date. 8 of
the 15 CMOs tranches are collateralized by 30 year fixed residential mortgages
considered to be "Prime," and 7 are collateralized by 30 year fixed residential
mortgages considered to be "ALT - A." Moreover, none of the underlying mortgage
collateral is considered "subprime".
For impaired debt securities for which there was no intent or expected
requirement to sell, management considers available evidence to assess whether
it is more likely-than-not that all amounts due would not be collected In such
assessment, management considers the severity and duration of the impairment,
the credit ratings of the security, the overall deal and payment structure,
including the Company's position within the structure, underlying obligors,
financial condition and near term prospects of the issuer, delinquencies,
defaults, loss severities, recoveries, prepayments, cumulative loss projections,
discounted cash flows and fair value estimates. Based on the analysis of its
impaired securities as of June 30, 2009, the Company determined that none of
such securities had other-than-temporary impairment.
Fair Value Measurements
On January 1, 2008, the Company adopted SFAS 157, Fair Value Measurements, which
defines fair value as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at
the measurement date. SFAS 157 also establishes a fair value hierarchy which
requires an entity to maximize the use of observable inputs and minimize the use
of unobservable inputs when measuring fair value. The standard describes three
levels of inputs that may be used to measure fair value:
Level 1 Quoted prices in active markets for identical assets or liabilities
Level 2 Observable inputs other than Level 1 prices, such as quoted prices for
similar assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the assets or
liabilities
Level 3 Unobservable inputs that are supported by little or no market activity
and that are significant to the fair value of the assets or liabilities
In April 2009, FASB issued FSP FAS 157-4, Determining Fair Value When the Volume
and Level of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly. The Company adopted the FSP
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 FSP, see discussion in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Impact of Recently Issued Standards."
41
On a recurring basis, the Company measures investment securities in accordance
with SFAS 157. The fair value of such investments is estimated by obtaining
quoted market prices for identical assets, where available. If such prices are
not available, fair value is based on independent asset pricing services and
models, the inputs of which are market-based or independently sourced market
parameters, including, but not limited to, yield curves, interest rates,
volatilities, prepayments, defaults, cumulative loss projections, and cash
flows. For those securities where greater reliance on unobservable inputs
occurs, such securities are classified as Level 3 within the hierarchy.
In performing due diligence reviews of the independent asset pricing services
and models for investment securities, the Company reviewed the vendors' inputs
for fair value estimates and the recommended assignments of levels within the
fair value hierarchy. The Company's review included the extent to which markets
for investment securities were determined to have limited or no activity, or was
judged to be an active market. The Company reviewed the extent to which
observable and unobservable inputs were used as well as the appropriateness of
the underlying assumptions about risk that a market participant would use in
active markets, with adjustments for limited or inactive markets. In considering
the inputs to the fair value estimates, the Company placed less reliance on
quotes that were judged to not reflect orderly transactions, or were non-binding
indications. The Company made independent inquires of other knowledgeable
parties in testing the reliability of the inputs, including consideration for
illiquidity, credit risk, and cash flow estimates. In assessing credit risk, the
Company reviewed payment performance, collateral adequacy, credit rating
histories, and issuers' financial statements with follow-up discussion with
issuers. For those markets determined to be inactive, the valuation techniques
used were models for which management verified that discount rates were
appropriately adjusted to reflect illiquidity and credit risk. The Company
independently obtained cash flow estimates that were stressed at levels that
exceeded those used by independent third party pricing vendors. Based on the
Company's due diligence review, investment securities are placed in the
appropriate hierarchy levels with adjustment to vendors' recommendations made as
necessary. Most notably, the Company determined that its collateralized debt
obligation securities, i.e., trust preferred securities, were illiquid due to
inactive markets (i.e., due to the absence of trade volume during 2008 and the
first half of 2009), the fair values of which had significant reliance on
unobservable inputs, and therefore were classified as Level 3 within the
hierarchy.
On a non-recurring basis, the Company measures real estate and other assets
owned and impaired loans in accordance with SFAS 157. Real estate and other
assets owned is carried at the lower of cost or estimated fair value, less
estimated cost to sell. Estimated fair value of real estate and other assets
owned is based on appraisals. The Company reviews the appraisals, giving
consideration to the highest and best use of the collateral. The appraised
values are reduced by discounts to consider lack of marketability and estimated
cost to sell. Real estate and other assets owned are classified within Level 3
of the fair value hierarchy. Allowable methods for estimating fair value of
impaired loans include using the fair value of the collateral for collateral
dependent loans or, where a loan is determined not to be collateral dependent,
using the discounted cash flow method. Impaired loans are primarily
collateral-dependent and the estimated fair value is based on the appraised fair
value of the collateral. The Company reviews the appraisals, giving
consideration to the highest and best use of the collateral. The appraised
values are reduced by discounts to consider lack of marketability and estimated
cost to sell. Impaired loans are classified within Level 3 of the fair value
hierarchy.
In addition to measuring certain financial assets and liabilities on a recurring
or non-recurring basis, the Company discloses estimated fair value on financial
assets and liabilities. The following is a description of the methods and inputs
used to estimate the fair value of other financial instruments recognized at
amounts other than fair value.
The fair value for unimpaired loans, net of ALLL, is estimated by discounting
the future cash flows using the rates at which similar notes would be originated
for the same remaining maturities. The market rates used are based on current
rates the bank subsidiaries would impose for similar loans and reflect a market
participant assumption about risks associated with non-performance, illiquidity,
and the structure and term of the loans along with local economic and market
conditions.
42
The fair value of term deposits is estimated by discounting the future cash
flows using rates of similar deposits with similar maturities. The market rates
used were obtained from a knowledgeable independent third party and reviewed by
the Company. The rates were the average of current rates offered by local
competitors of the bank subsidiaries. The estimated fair value of demand, NOW,
savings, and money market deposits is the book value since rates are regularly
adjusted to market rates.
The fair value of the non-callable FHLB advances is estimated by discounting the
future cash flows using rates of similar advances with similar maturities. These
rates were obtained from current rates offered by FHLB. The estimated fair value
of callable FHLB advances was obtained from FHLB and the model was reviewed by
the Company through discussions with FHLB.
The fair value of FRB discount window borrowings is estimated based on borrowing
rates currently available to the Company for FRB discount window borrowings with
similar terms and maturities. The current outstanding borrowings are short term
and current rates offered by FRB equal the rates on the outstanding borrowings,
resulting in the estimated fair value being the same as the book value.
The fair value of term repurchase agreements is estimated based on current
repurchase rates currently available to the Company for repurchases agreements
with similar terms and maturities. The market rates used are based on current
rates the bank subsidiaries would incur for similar borrowings. The estimated
fair value for overnight repurchase agreements and other borrowings is book
value.
The fair value of the subordinated debentures is estimated by discounting the
estimated future cash flows using current estimated market rates for
subordinated debt issuances with similar characteristics. The market rates used
were based on an independent third party's judgment and include inputs such as
implied yield curves and interest rate spreads.
For additional information on fair value measurements see Part I, Item 2
"Financial Statements - Note 13, Fair Value Measurements."
Impact of Recently Issued Accounting Standards
In June 2009, FASB issued SFAS No. 168, The FASB Accounting Standards
Codification(TM) and Hierarchy of Generally Accepted Accounting Principals. The
objective of this Statement is to replace Statement 162 and to establish the
FASB Accounting Standards Codification(TM) as the source of authoritative
accounting principles recognized by the FASB to be applied by nongovernmental
entities in the preparation of financial statements in conformity with GAAP.
Rules and interpretive releases of the Securities and Exchange Commission
("SEC") under authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants. This Statement shall be effective for
the Company's financial statements issued for interim and annual periods ending
after September 15, 2009. The Company is currently evaluating the impact of the
adoption of this standard, but does not expect it to have a material effect on
the Company's financial position or results of operations.
In June 2009, FASB issued SFAS No. 167, Amendments to FASB Interpretation No.
46(R). The objective of this Statement is to amend certain requirements of FASB
No. 46 (revised December 2003), Consolidation of Variable Interest Entities, 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 Statement shall be effective as of the beginning of
each reporting entity's first annual reporting period that begins after November
15, 2009, for interim periods within that first annual reporting period, and for
interim and annual reporting periods thereafter. The Company is currently
evaluating the impact of the adoption of this standard, but does not expect it
to have a material effect on the Company's financial position or results of
operations.
In June 2009, FASB issued SFAS No. 166, Accounting for Transfers of Financial
Assets - an amendment of FASB Statement No. 140). The objective of this
Statement is to improve the relevance, representational faithfulness, and
comparability of the information that a reporting entity provides in its
financial reports about a 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
Statement shall be effective as of the beginning of each reporting entity's
first annual reporting period that begins after November 15, 2009, for interim
periods within that first annual reporting period, and for interim and annual
reporting periods thereafter. The Company is currently evaluating the impact of
the adoption of this standard, but does not expect it to have a material effect
on the Company's financial position or results of operations.
In April 2009, FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments. The objective of an
other-than-temporary impairment analysis under existing U.S.
43
generally accepted accounting principles ("GAAP") is to determine whether the
holder of an investment in a debt or equity security for which changes in fair
value are not regularly recognized in earnings (such as securities classified as
held-to-maturity or available-for-sale) should recognize a loss in earnings when
the investment is impaired. An investment is impaired if the fair value of the
investment is less than its amortized cost basis. This FSP amends the
other-than-temporary impairment guidance in U.S. GAAP for debt securities to
make the guidance more operational and to improve the presentation and
disclosure of other-than-temporary impairments on debt and equity securities in
the financial statements. This FSP does not amend existing recognition and
measurement guidance related to other-than-temporary impairments of equity
securities. The FSP 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 adopted the FSP effective for the interim period
ending June 30, 2009 and determined there was not a material effect on the
Company's financial position or results of operations.
In April 2009, FASB issued FSP FAS 157-4, Determining Fair Value When the Volume
and Level of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly. This FSP provides additional
guidance for estimating fair value in accordance with SFAS No. 157, Fair Value
Measurements, when the volume and level of activity for the asset or liability
have significantly decreased. This FSP also includes guidance on identifying
circumstances that indicate a transaction is not orderly. This FSP emphasizes
that even if there has been a significant decrease in the volume and level of
activity for the asset or liability and regardless of the valuation technique(s)
used, the objective of a fair value measurement remains the same. Fair value is
the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction (that is, not a forced liquidation or
distressed sale) between market participants at the measurement date under
current market conditions. This FSP is effective for interim and annual
reporting periods ending after June 15, 2009, and shall be applied
prospectively. Early adoption was permitted for periods ending after March 15,
2009. The Company adopted the FSP effective for the interim period ending June
30, 2009 and determined there was not a material effect on the Company's
financial position or results of operations.
In April 2009, FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about
Fair Value of Financial Instruments. This FSP amends SFAS No. 107, Disclosures
about Fair Value of Financial Instruments, to require disclosures about fair
value of financial instruments for interim reporting periods of publicly traded
companies as well as in annual financial statements. This FSP also amends APB
Opinion No. 28, Interim Financial Reporting, to require those disclosures in
summarized financial information at interim reporting periods. An entity shall
disclose in the body or in the accompanying notes of its summarized financial
information for interim reporting periods and in its financial statements for
annual reporting periods the fair value of all financial instruments for which
it is practicable to estimate that value, whether recognized or not recognized
in the statement of financial position, as required by SFAS No. 107. Fair value
information disclosed in the notes shall be presented together with the related
carrying amount in a form that makes it clear whether the fair value and
carrying amount represent assets or liabilities and how the carrying amount
relates to what is reported in the statement of financial position. An entity
also shall disclose the method(s) and significant assumptions used to estimate
the fair value of financial instruments and shall describe changes in method(s)
and significant assumptions, if any, during the period. This FSP shall be
effective for interim reporting periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009. The Company adopted
the FSP effective for the interim period ending June 30, 2009 and determined
there was not a material effect on the Company's financial position or results
of operations. For additional information on disclosures about fair value of
financial instruments see Part I, Item 2 "Financial Statements - Note 13, Fair
Value Measurements".
In December 2007, FASB issued SFAS No. 141(R), Business Combinations. The
objective of this Statement is to improve the relevance, representational
faithfulness, and comparability of the information that a reporting entity
provides in its financial reports about a business combination and its effects.
The Statement establishes principles and requirements for how the acquirer: a)
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree, b) recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase, and c) determines what
44
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. This Statement
applies prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. An entity may not apply it before that date. The
Company is currently evaluating the impact of the adoption of this standard, but
does not expect it to have a material effect on the Company's financial position
or results of operations with any future business combinations.
Forward Looking Statements
This Form 10-Q may contain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements include, but are not limited to, statements about management's plans,
objectives, expectations and intentions that are not historical facts, and other
statements identified by words such as "expects," "anticipates," "intends,"
"plans," "believes," "should," "projects," "seeks," "estimates" or words of
similar meaning. These forward-looking statements are based on current beliefs
and expectations of management and are inherently subject to significant
business, economic and competitive uncertainties and contingencies, many of
which are beyond the Company's control. In addition, these forward-looking
statements are subject to assumptions with respect to future business strategies
and decisions that are subject to change. The following factors, among others,
could cause actual results to differ materially from the anticipated results or
other expectations in the forward-looking statements, including those set forth
in this Form 10-Q:
- the risks associated with lending and potential adverse changes in
credit quality;
- increased loan delinquency rates;
- the risks presented by a continued economic slowdown, which could
adversely affect credit quality, loan collateral values, investment
values, liquidity levels, and loan originations;
- changes in market interest rates, which could adversely affect our net
interest income and profitability;
- legislative or regulatory changes that adversely affect our business
or our ability to complete pending or prospective future acquisitions;
- costs or difficulties related to the integration of acquisitions;
- reduced demand for banking products and services;
- the risks presented by public stock market volatility, which could
adversely affect the Company's stock value and the ability to raise
capital in the future;
- competition from other financial services companies in our markets;
- loss of services from the senior management team; and
- the Company's success in managing risks involved in the foregoing.
Additional factors that could cause actual results to differ materially from
those expressed in the forward-looking statements are discussed in Risk Factors
in Item 1A. Please take into account that forward-looking statements speak only
as of the date of this 10Q. The Company does not undertake any obligation to
publicly correct or update any forward-looking statement if it later becomes
aware that it is not likely to be achieved.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company believes that there have not been any material changes in
information about the Company's market risk than was provided in the Form 10-K
report for the year ended December 31, 2008.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer have reviewed
and evaluated the effectiveness of our disclosure controls and procedures (as
required by Exchange Act Rules 240.13a-15(b) and 15d-14(c)) as of the date of
this quarterly report. Based on that evaluation, the Chief Executive Officer and
45
Chief Financial Officer have concluded that the Company's current disclosure
controls and procedures are effective and timely, providing them with material
information relating to the Company required to be disclosed in the reports the
Company files or submits under the Exchange Act.
Changes in Internal Controls
There have not been any changes in the Company's internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the second quarter 2009, to which this report relates that
have materially affected, or are reasonably likely to materially affect the
Company's internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no pending material legal proceedings to which the registrant or its
subsidiaries are a party.
ITEM 1A. RISK FACTORS
The Company and its ten wholly-owned, independent community bank subsidiaries
are exposed to certain risks. The following is a discussion of the most
significant risks and uncertainties that may affect the Company's business,
financial condition and future results.
The effect of the national economic situation on the Company's future results of
operations or stock trading price.
The national economy and the financial services sector in particular are
currently facing challenges of a scope unprecedented in recent history. No one
can predict the severity or duration of this downturn. The Company cannot
accurately predict the severity or duration of the current economic downturn,
which has adversely impacted the markets we serve. Any further deterioration in
the economies of the nation as a whole or in our markets would have an adverse
effect, which could be material, on our business, financial condition, results
of operations and prospects, and could also cause the market price of our stock
to decline. While it is impossible to predict how long these conditions may
exist, the economic downturn could continue to present risks for some time for
the industry and our company.
A further economic downturn in the market areas the Company serves may cause the
Company to have lower earnings and could increase credit risk associated with
the loan portfolio. The inability of borrowers to repay loans can erode
earnings. 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;
- collateral for loans made may decline further in value, in turn
reducing customers' borrowing power, reducing the value of assets and
collateral associated with existing loans;
- demand for banking products and services may decline; and
- low cost or non-interest bearing deposits may decrease.
The allowance for loan and lease losses may not be adequate to cover actual loan
losses, which could adversely affect earnings.
The Company maintains an ALLL in an amount that it believes is adequate to
provide for losses inherent in the portfolio. While the Company strives to
carefully manage and monitor credit quality and to identify loans that may
become nonperforming, at any time there are loans included in the portfolio that
will result in losses, but
46
that have not been identified as nonperforming or potential problem loans. By
managing credit quality, the Company attempts to identify deteriorating loans
before they become nonperforming assets and adjust the ALLL accordingly.
However, because future events are uncertain, and if the economy continues to
deteriorate, there may be loans that deteriorate to a nonperforming status in an
accelerated time frame. As a result, future additions to the ALLL may be
necessary. Because the loan portfolio contains a number of loans with relatively
large balances, the deterioration of one or a few of these loans may cause a
significant increase in nonperforming loans, requiring an increase to the ALLL.
Additionally, future significant additions to the ALLL may be required based on
changes in the mix of loans comprising the portfolio, changes in the financial
condition of borrowers, such as may result from changes in economic conditions,
or as a result of incorrect assumptions by management in determining the ALLL.
Additionally, federal banking regulators, as an integral part of their
supervisory function, periodically review the Company's loan portfolio and the
adequacy of the ALLL. These regulatory agencies may require the Company to
recognize further loan loss provisions or charge-offs based upon their
judgments, which may be different from the Company's judgments. Any increase in
the ALLL could have a negative effect on the financial condition and results of
operation.
The Company has a high concentration of loans secured by real estate.
The Company has a concentration of loans secured by real estate. While the
Pacific Northwest economy typically lags the national economy, the effects of
the economic downturn are now significantly impacting the Company's market area.
Further downturn in the market areas the Company serves may cause the Company to
have lower earnings and could increase credit risk associated with the loan
portfolio, as the collateral securing those loans may decrease in value. A
continued downturn in the local economy could have a material adverse effect
both on the borrowers' ability to repay these loans, as well as the value of the
real property held as collateral. The Company's ability to recover on defaulted
loans by foreclosing and selling the real estate collateral would then be
diminished and the Company would be more likely to suffer losses on defaulted
loans.
A continued tightening of the credit markets may make it difficult to obtain
adequate funding for loan growth, which could adversely affect earnings.
A continued tightening of the credit market and the inability to obtain or
retain adequate money to fund continued loan growth may negatively affect the
Company's asset growth and liquidity position and, therefore, earnings
capability. In addition to core deposit growth, maturity of investment
securities and loan payments, the Company also relies on alternative funding
sources through correspondent banking, and borrowing lines with the FRB and FHLB
to fund loans. In the event the current economic downturn continues,
particularly in the housing market, these resources could be negatively
affected, both as to price and availability, which would limit and or raise the
cost of the funds available to the Company.
The FDIC has increased insurance premiums to rebuild and maintain the federal
deposit insurance fund.
The FDIC recently 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 will add to our cost
of operations and could have a significant impact on the Company. Depending on
any future losses that the FDIC insurance fund may suffer due to failed
institutions, there can be no assurance that there will not be additional
significant premium increases in order to replenish the fund.
The FDIC has imposed a special Deposit Insurance assessment of 5 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. The FDIC has announced that an additional special assessment in 2009 of up
to 5 basis points is probable.
47
The Company's loan portfolio mix could result in increased credit risk in an
economic downturn.
The loan portfolio contains a high percentage of commercial, commercial real
estate, real estate acquisition and development loans in relation to the total
loans and total assets. These types of loans have historically been viewed as
having more risk of default than residential real estate loans or certain other
types of loans or investments. In fact, the FDIC has issued pronouncements
alerting banks of its concern about banks with a heavy concentration of
commercial real estate loans. These types of loans also typically are larger
than residential real estate loans and other commercial loans. Because the
Company's loan portfolio contains a significant number of commercial and
commercial real estate loans with relatively large balances, the deterioration
of one or more of these loans may cause a significant increase in non-performing
loans. An increase in non-performing loans could result in a loss of earnings
from these loans, an increase in the provision for loan losses, or an increase
in loan charge-offs, which could have an adverse impact on results of operations
and financial condition.
Nonperforming assets take significant time to resolve and adversely affect our
results of operations and financial condition.
Nonperforming assets (which include foreclosed real estate) adversely affect the
Company's net income in various ways. Until economic and market conditions
improve, the Company expects to continue to incur additional losses relating to
an increase in nonperforming loans. The Company does not record interest income
on non-accrual loans or other real estate owned, thereby adversely affecting its
income, and increasing loan administration costs. When the Company takes
collateral in foreclosures and similar proceedings, it is required to mark the
related asset to the then fair market value of the collateral, which may result
in a loss. An increase in the level of nonperforming assets also increases the
Company's risk profile and may impact the capital levels its regulators believe
is appropriate in light of such risks. While the Company has reduced its problem
assets through, workouts, restructurings and otherwise, decreases in the value
of these assets, or the underlying collateral, or in these borrowers'
performance or financial conditions, whether or not due to economic and market
conditions beyond the Company's control, could adversely affect the Company's
business, results of operations and financial condition. In addition, the
resolution of nonperforming assets requires significant commitments of time from
management and the Company's directors, which can be detrimental to performance
of their other responsibilities. There can be no assurance that the Company will
not experience further increases in nonperforming assets in the future.
The Company's ability to access markets for funding and acquire and retain
customers could be adversely affected to the extent the financial service
industry's reputation is damaged.
Reputation risk is the risk to liquidity, earnings and capital arising from
negative publicity regarding the financial services industry. The financial
services industry continues to be featured in negative headlines about the
global and national credit crisis and the resulting stabilization legislation
enacted by the U.S. federal government. These reports can be damaging to the
industry's image and potentially erode consumer confidence in insured financial
institutions, such as the Company's bank subsidiaries.
Decline in the fair value of the Company's investment portfolio could adversely
affect earnings
Investment securities fair value could decline as a result of factors including
changes in market interest rate, credit quality and ratings, liquidity and other
economic conditions. Investment securities are impaired if the fair value of the
security is less than the carrying value. When a security is impaired, the
Company determines whether an impairment is temporary or other-than-temporary.
The Company adopted FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments, effective for the interim period ending June
30, 2009, 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 FSP see discussion in "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Impact of Recently Issued
Standards".
48
Fluctuating interest rates can adversely affect profitability.
The Company's profitability is dependent to a large extent upon net interest
income, which is the difference (or "spread") between the interest earned on
loans, securities and other interest-earning assets and interest paid on
deposits, borrowings, and other interest-bearing liabilities. Because of the
differences in maturities and repricing characteristics of interest-earning
assets and interest-bearing liabilities, changes in interest rates do not
produce equivalent changes in interest income earned on interest-earning assets
and interest paid on interest-bearing liabilities. Accordingly, fluctuations in
interest rates could adversely affect the Company's interest rate spread, and,
in turn, profitability. The Company seeks to manage its interest rate risk
within well established guidelines. Generally, the Company seeks an asset and
liability structure that insulates net interest income from large deviations
attributable to changes in market rates.
If the goodwill recorded in connection with acquisitions becomes impaired, it
could have an adverse impact on earnings and capital.
Accounting standards require that the Company account for acquisitions using the
purchase method of accounting. Under 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.
The effect of recently enacted federal legislation.
In October 2008, Congress enacted the Emergency Economic Stabilization Act of
2008 ("EESA"), which provides the United States Treasury Department ("Treasury")
with broad authority to implement action intended to help restore stability and
liquidity to the US financial markets. Pursuant to the EESA, the Treasury has
the ability to purchase or insure up to $700 billion in troubled assets held by
financial institutions under the Trouble Asset Relief Program "(TARP"). In
October 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 EESA
also increases the amount of deposit account insurance from $100,000 to $250,000
effective until December 31, 2013.
In early 2009, the Treasury also announced the Financial Stability Plan which,
among other things, provides a new capital program called the Capital Assistance
Program, establishing a public-private investment fund for the purchase of
troubled assets, and expands the Term Asset-Backed Securities Loan Facility. The
Treasury also recently announced plans to create a federal Consumer Financial
Protection Agency. This legislation is in the early stages and it is not
possible to predict whether such legislation will be enacted. Due to the
condition of the national economy, it is possible that additional legislation
affecting the banking industry may be enacted in the near future. The full
effect of legislation recently enacted and broad legislation that may be enacted
in the near future on the national economy and financial institutions,
particularly on mid-sized institutions like the Company, cannot now be
predicted.
Growth through future acquisitions, which could, in some circumstances,
adversely affect profitability measures.
The Company has in recent years acquired other financial institutions. The
Company may in the future engage in selected acquisitions of additional
financial institutions, including transactions that may receive assistance from
the FDIC. There are risks associated with any such acquisitions that could
adversely affect profitability. These risks include, among other things,
incorrectly assessing the asset quality of a financial institution being
acquired, encountering greater than anticipated cost of incorporating acquired
businesses into the Company's operations, and being unable to profitably deploy
funds acquired in an acquisition.
49
The Company anticipates that it might issue capital stock in connection with
future acquisitions. Acquisitions and related issuances of stock may have a
dilutive effect on earnings per share and the percentage ownership of current
shareholders. The Company currently does not have any definitive understandings
or agreements for any acquisitions other than the agreement to acquire First
Company and its subsidiary First National Bank & Trust, a community bank based
in Powell, Wyoming.
Business would be harmed if the Company lost the services of any of the senior
management team.
The Company believes its success to date has been substantially dependent on its
Chief Executive Officer and other members of the executive management team, and
on the Presidents of its bank subsidiaries. The loss of any of these persons
could have an adverse affect on the Company's business and future growth
prospects.
Competition in the Company's market areas may limit future success.
Commercial banking is a highly competitive business. The Company competes with
other commercial banks, savings and loan associations, credit unions, finance,
insurance and other non-depository companies operating in its market areas. The
Company is subject to substantial competition for loans and deposits from other
financial institutions. Some of its competitors are not subject to the same
degree of regulation and restriction as the Company is. Some of the Company's
competitors have greater financial resources than the Company does. If the
Company is unable to effectively compete in its market areas, the Company's
business, results of operations and prospects could be adversely affected.
The Company operates in a highly regulated environment and may be adversely
affected by changes in federal state and local laws and regulations.
The Company is subject to extensive regulation, supervision and examination by
federal and state banking authorities. Any change in applicable regulations or
federal, state or local legislation could have a substantial impact on the
Company and its operations. Additional legislation and regulations that could
significantly affect the Company's powers, authority and operations may be
enacted or adopted in the future, which could have a material adverse effect on
the Company's financial condition and results of operations. Further, regulators
have significant discretion and authority to prevent or remedy unsafe or unsound
practices or violations of laws or regulations by financial institutions and
holding companies in the performance of their supervisory and enforcement
duties. These powers recently have been utilized more frequently due to the
serious national, regional and local economic conditions the Company is facing.
The exercise of regulatory authority may have a negative impact on the Company's
financial condition and results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) Not Applicable
(b) Not Applicable
(c) Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) Not Applicable
(b) Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
(a) The Company's Annual Shareholders' Meeting was held April 29, 2009
50
(b) Not Applicable
(c) A brief description of each matter voted upon at the Annual Meeting
and the number of votes cast for or withheld, including a separate
tabulation with respect to each nominee to serve on the Board is
presented below:
(1) Election of Directors for one-year terms expiring in 2010 and
until their successors have been elected and have qualified.
Michael J. Blodnick
Votes Cast For: 51,344,044
Votes Cast Withheld: 648,537
James M. English
Votes Cast For: 42,957,480
Votes Cast Withheld: 9,035,101
Allen J. Fetscher
Votes Cast For: 43,516,699
Votes Cast Withheld: 8,475,882
Dallas I. Herron
Votes Cast For: 42,967,536
Votes Cast Withheld: 9,025,045
Jon W. Hippler
Votes Cast For: 51,285,872
Votes Cast Withheld: 706,709
Craig A. Langel
Votes Cast For: 42,960,976
Votes Cast Withheld: 9,031,605
L. Peter Larson
Votes Cast For: 42,950,085
Votes Cast Withheld: 9,042,496
Douglas McBride
Votes Cast For: 42,961,809
Votes Cast Withheld: 9,030,772
John W. Murdoch
Votes Cast For: 42,961,088
Votes Cast Withheld: 9,031,493
Everit A. Sliter
Votes Cast For: 41,083,135
Votes Cast Withheld: 10,909,446
(d) None
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ITEM 5. OTHER INFORMATION
(a) Not Applicable
(b) Not Applicable
ITEM 6. EXHIBITS
Exhibit 31.1 - Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes - Oxley Act of 2002
Exhibit 31.2 - Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes - Oxley Act of 2002
Exhibit 32 - Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes - Oxley Act of 2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GLACIER BANCORP, INC.
August 7, 2009 /s/ Michael J. Blodnick
-----------------------------------------
Michael J. Blodnick
President/CEO
August 7, 2009 /s/ Ron J. Copher
-----------------------------------------
Ron J. Copher
Senior Vice President/CFO
52