GLACIER BANCORP INC – 10-K – Management’s Discussion and Analysis of Financial Condition and Results of Operations
Edgar Online, Inc. |
The following discussion is intended to provide a more comprehensive review of the Company's operating results and financial condition than can be obtained from reading the Consolidated Financial Statements alone. The discussion should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in "Item 8. Financial Statements and Supplementary Data." FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about management's plans, objectives, expectations and intentions that are not historical facts, and other statements identified by words such as "expects," "anticipates," "intends," "plans," "believes," "should," "projects," "seeks," "estimates" or words of similar meaning. These forward-looking statements are based on current beliefs and expectations of management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company's control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations in the forward-looking statements, including those set forth in this Annual Report on Form 10-K, or the documents incorporated by reference:
• the risks associated with lending and potential adverse changes of the
credit quality of loans in the Company's portfolio, including as a result
of declines in the housing and real estate markets in its geographic
areas; • increased loan delinquency rates; • the risks presented by a continued economic downturn, which could
adversely affect credit quality, loan collateral values, other real estate
owned values, investment values, liquidity and capital levels, dividends
and loan originations; • changes in market interest rates, which could adversely affect the Company's net interest income and profitability;
• legislative or regulatory changes that adversely affect the Company's
business, ability to complete pending or prospective future acquisitions,
limit certain sources of revenue, or increase cost of operations; • costs or difficulties related to the integration of acquisitions;
• the goodwill we have recorded in connection with acquisitions could become
impaired, which may have an adverse impact on our earnings and capital;
• reduced demand for banking products and services; • the risks presented by public stock market volatility, which could
adversely affect the market price of our common stock and our ability to
raise additional capital in the future; • competition from other financial services companies in our markets; • loss of services from the senior management team; and • the Company's success in managing risks involved in the foregoing. Additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed in Risk Factors in Item 1A. Please take into account that forward-looking statements speak only as of the date of this Annual Report on Form 10-K (or documents incorporated by reference, if applicable). The Company does not undertake any obligation to publicly correct or update any forward-looking statement if it later becomes aware that actual results are likely to differ materially from those expressed in such forward-looking statement. 26
--------------------------------------------------------------------------------
Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS YEAR ENDEDDECEMBER 31, 2011 COMPARED TODECEMBER 31, 2010
Highlights and Overview
Net income for 2011 was$17.5 million , a decrease of$24.9 million from the prior year, and diluted earnings per share for 2011 was$0.24 , a decrease of$0.37 per share from the prior year. The decrease in net income during 2011 compared to 2010 resulted from a goodwill impairment charge of$32.6 million ($40.2 million pre-tax) during 2011. For additional information regarding the goodwill impairment charge, see the section captioned "Critical Accounting Polices" included in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." Excluding the goodwill impairment charge, operating income for 2011 was$50.1 million , an increase of$7.8 million , or 18 percent, over the prior year. Diluted operating earnings per share was$0.70 , an increase of 15 percent from the$0.61 earned in 2010. The foremost reason for the increase in operating income was a reduction in the provision for loan losses of$20.2 million . During the year, there was increased pressure on the net interest margin as a percentage of earning assets, on a tax-equivalent basis, which was attributable to a lower yield and volume of loans coupled with an increase in lower yielding investment securities. The net interest margin decreased 32 basis points from 4.21 percent in 2010 to 3.89 percent in 2011. However, the Company worked diligently to maintain net interest income through the purchase of investment securities and the decrease in interest rates on deposits. Net interest income increased$847 thousand , or less than 1 percent, from the prior year. The Company's loan portfolio decreased from the prior year as a result of continued slowing loan demand, net charged-off loans, and repossession of foreclosed assets. The loan portfolio decreased by$283 million , or 8 percent, from the prior year end. During the year, there was improvement in the credit quality of the loan portfolio from the historically high levels in 2010. Non-performing assets were$213 million at year end, a decrease of$57.1 million , or 21 percent, from the prior year end and primarily the result of a decrease in the non-performing loans which decreased 31 percent from the prior year end. Consistent with the prior year, the Company purchased investment securities throughout the year to offset the decrease in the loan portfolio. Investment securities, interest bearing deposits and federal funds sold, increased$721 million , or 30 percent, from the prior year end. Non-interest bearing deposits increased$155 million , or 18 percent, during the year and interest bearing deposits increased by$144 million , or 4 percent, during the year. As a result of the increase in deposits, the Company required less borrowings to fund the investment growth and only increased FHLB advances by$104 million during the year. Tangible stockholders' equity increased$54.7 million , or$0.76 per share, during the year and the Company and each of the bank subsidiaries have remained above the well capitalized levels required by regulators. Looking forward, the Company's future performance will depend on many factors including economic conditions in the markets the Company serves, interest rate changes, increasing competition for deposits and loans, loan quality, and regulatory burden. The Company's goal of its asset and liability management practices is to maintain or increase the level of net interest income within an acceptable level of interest rate risk. 27
--------------------------------------------------------------------------------
Table of Contents Financial Condition Analysis Assets
The following table summarizes the asset balances as of the dates indicated, and the amount and percentage changes from
December 31, December 31, (Dollars in thousands) 2011 2010
$ Change % Change
Cash on hand and in banks $ 104,674 71,465 33,209 46 % Investment securities and interest bearing cash deposits 3,150,101 2,429,473 720,628 30 % Loans receivable Residential real estate 516,807 632,877 (116,070 ) -18 % Commercial 2,295,927 2,451,091 (155,164 ) -6 % Consumer and other 653,401 665,321 (11,920 ) -2 % Loans receivable 3,466,135 3,749,289 (283,154 ) -8 % Allowance for loan and lease losses (137,516 ) (137,107 ) (409 ) 0 % Loans receivable, net 3,328,619 3,612,182 (283,563 ) -8 % Other assets 604,512 646,167 (41,655 ) -6 % Total assets $ 7,187,906 6,759,287 428,619 6 % Investment securities and interest bearing deposits, increased$721 million , or 30 percent, fromDecember 31, 2010 . During the year, the Company purchased investment securities to primarily offset the lack of loan growth and to maintain interest income. The investment securities purchased during the current year were predominately U.S. Agency Collateralized Mortgage Obligations ("CMO") with short weighted-average-lives and tax-exempt state and local government obligations. Investment securities represent 44 percent of total assets atDecember 31, 2011 versus 36 percent atDecember 31, 2010 . AtDecember 31, 2011 , the loan portfolio was$3.466 billion , a decrease of$283 million , or 8 percent, from total loans of$3.749 billion atDecember 31, 2010 . Excluding net charge-offs of$64.1 million and loans transferred to OREO of$79.3 million , loans decreased$140 million , or 4 percent, fromDecember 31, 2010 . During the year, the largest decrease in dollars was in commercial loans which decreased$155 million , or 6 percent, fromDecember 31, 2010 . The largest percentage decrease was in real estate loans which decreased$116 million , or 18 percent, fromDecember 31, 2010 . The Company continues to reduce its exposure to land, lot and other construction loans which totaled$381 million as ofDecember 31, 2011 and have decreased$168 million , or 31 percent, since the prior year end. The continued downturn in the economy and resulting lack of loan demand were the primary reasons for the decrease in the loan portfolio.
As a result of the third quarter 2011 goodwill impairment charge (net of tax) of
28
--------------------------------------------------------------------------------
Table of Contents
Liabilities
The following table summarizes the liability balances as of the dates indicated, and the amount and percentage changes from
December 31, December 31, (Dollars in thousands) 2011 2010
$ Change % Change
Non-interest bearing deposits $ 1,010,899 855,829 155,070 18 % Interest bearing deposits 3,810,314 3,666,073 144,241 4 % Repurchase agreements 258,643 249,403 9,240 4 % FHLB advances 1,069,046 965,141 103,905 11 % Other borrowed funds 9,995 20,005 (10,010 ) -50 % Subordinated debentures 125,275 125,132 143 0 % Other liabilities 53,507 39,500 14,007 35 % Total liabilities $ 6,337,679 5,921,083 416,596 7 % AtDecember 31, 2011 , non-interest bearing deposits of$1.011 billion increased$155 million , or 18 percent, sinceDecember 31, 2010 . The increase in non-interest bearing deposits during the year was driven by the continued growth in the number of personal and business customers, as well as existing customers retaining cash deposits for liquidity purposes due to the uncertainty in the current economic environment. Interest bearing deposits of$3.810 billion atDecember 31, 2011 included$170 million of reciprocal deposits (e.g., Certificate of Deposit Account Registry System deposits). Interest bearing deposits increased$144 million , or 4 percent, from the prior year end and included an increase of$31.1 million in wholesale deposits, including reciprocal deposits. These deposit increases have been beneficial to the Company in funding the investment securities portfolio growth at low costs over the prior twelve months. To fund growth in the investment securities portfolio, the Company's level of borrowings has increased as needed to supplement deposit growth. FHLB advances increased$104 million sinceDecember 31, 2010 .
Stockholders' Equity
The following table summarizes the stockholders' equity balances as of the dates indicated, and the amount and percentage changes from
December 31, December 31, Dollars in thousands, except per share data) 2011 2010 $ Change % Change Common equity $ 816,740 837,676 (20,936 ) -2 % Accumulated other comprehensive income 33,487 528 32,959 6242 % Total stockholders' equity 850,227 838,204 12,023 1 % Goodwill and core deposit intangible, net (114,384 ) (157,016 ) 42,632 -27 % Tangible stockholders' equity $ 735,843 681,188 54,655 8 % Stockholders' equity to total assets 11.83 % 12.40 % -0.57 % -5 % Tangible stockholders' equity to total tangible assets 10.40 % 10.32 % 0.08 % 1 % Book value per common share $ 11.82 11.66 0.16 1 % Tangible book value per common share $ 10.23 9.47 0.76 8 % Market price per share at end of period $ 12.03 15.11 (3.08 ) -20 % Total stockholders' equity and book value per share increased$12.0 million and$0.16 per share from the prior year end. The increase came primarily from accumulated other comprehensive income representing net unrealized gains or losses (net of tax) on the investment securities portfolio which was largely offset by the third quarter 2011 goodwill impairment charge (net of tax) of$32.6 million . Tangible stockholders' equity increased$54.7 million , or$0.76 per share sinceDecember 31, 2010 resulting in tangible stockholders' equity to tangible assets of 10.40 percent and tangible book value per share of$10.23 as ofDecember 31, 2011 . 29
--------------------------------------------------------------------------------
Table of Contents Results of Operations Performance Summary Net income was$17.5 million or$0.24 per share for the year endedDecember 31, 2011 . Excluding the goodwill impairment charge, net operating income for 2011 was$50.1 million versus$42.3 million for the prior year. Diluted operating income per share for 2011 was$0.70 per share, an increase of 15 percent from the prior year earnings per share of$0.61 . Net operating income is considered a non-GAAP financial measure and additional information regarding this measurement and reconciliation is provided in "Item 6. Selected Financial Data."
Income Summary
The following table summarizes income for the periods indicated, including the amount and percentage changes from
Years ended December 31, (Dollars in thousands) 2011 2010 $ Change % Change Net interest income Interest income $ 280,109 $ 288,402 $ (8,293 ) -3 % Interest expense 44,494 53,634 (9,140 ) -17 % Total net interest income 235,615 234,768 847 0 % Non-interest income Service charges, loan fees, and other fees 48,113 47,946 167 0 % Gain on sale of loans 21,132 27,233 (6,101 ) -22 % Gain on sale of investments 346 4,822 (4,476 ) -93 % Other income 8,608 7,545 1,063 14 % Total non-interest income 78,199 87,546 (9,347 ) -11 % $ 313,814 $ 322,314 $ (8,500 ) -3 % Net interest margin (tax-equivalent) 3.89 % 4.21 % Net Interest Income Net interest income for 2011 remained stable compared to 2010. During 2011, interest income decreased$8.3 million , or 3 percent, while interest expense decreased$9.1 million , or 17 percent from 2010. The decrease in interest income from the prior year resulted from the increase in premium amortization coupled with the reduction in loan balances, the combination of which put further pressure on earning asset yields. Interest income also continues to reflect the Company's purchase of a significant amount of investment securities over the course of several quarters at lower yields than the loans they replaced. Interest income included$35.8 million in premium amortization (net of discount accretion) on CMOs which was an increase of$18.1 million from the prior year. This increase was the result of both the increased purchases of CMOs combined with the continued refinance activity. The decrease in interest expense in 2011 was primarily attributable to the rate decreases on interest bearing deposits. The funding cost for 2011 was 87 basis points compared to 116 basis points for 2010. The net interest margin decreased 32 basis points from 4.21 percent for 2010 to 3.89 for 2011. The reduction was attributable to a lower yield and volume of loans coupled with an increase in lower yielding investment securities and higher CMO premium amortization. The premium amortization in 2011 accounted for a 56 basis point reduction in the net interest margin compared to a 30 basis point reduction in the net interest margin for the same period last year.
Non-interest Income
Non-interest income of$78.2 million for 2011 decreased$9.3 million , or 11 percent, over non-interest income of$87.5 million for 2010. Gain on sale of loans for 2011 decreased$6.1 million , or 22 percent, from 2010 due to a significant reduction in refinance activity. Excluding the prior year$2.0 million gain on the sale of merchant card servicing portfolio, other income for 2011 increased$3.1 million , or 56 percent, over 2010 of which$1.7 million was from debit card income and$1.3 million was from the combination of operating income from OREO and gain on sale of OREO. 30
--------------------------------------------------------------------------------
Table of Contents
Non-interest Expense
The following table summarizes non-interest expense for the periods indicated, including the amount and percentage changes from
Years ended December 31, (Dollars in thousands) 2011 2010 $ Change % Change Compensation, employee benefits and related expense $ 85,691 $ 87,728 $ (2,037 ) -2 % Occupancy and equipment expense 23,599 24,261 (662 ) -3 % Advertising and promotions 6,469 6,831 (362 ) -5 % Outsourced data processing expense 3,153 3,057 96 3 % Other real estate owned expense 27,255 22,193 5,062 23 %Federal Deposit Insurance Corporation premiums 8,169 9,121 (952 ) -10 % Core deposit intangibles amortization 2,473 3,180 (707 ) -22 % Other expense 35,156 31,577 3,579 11 % Total non-interest expense before goodwill impairment charge 191,965 187,948 4,017 2 % Goodwill impairment charge 40,159 - 40,159 n/m Total non-interest expense $ 232,124 $ 187,948 $ 44,176 24 % Excluding the goodwill impairment charge, non-interest expense for 2011 increased by$4.0 million , or 2 percent, from 2010. Compensation and employee benefits for 2011 decreased$2.0 million , or 2 percent, and was the result of the reduction in full time equivalent employees. Occupancy and equipment expense decreased$662 thousand , or 3 percent, from the prior year. OREO expense of$27.3 million increased$5.1 million , or 23 percent, from the prior year. The OREO expense for 2011 included$5.8 million of operating expenses,$16.3 million of fair value write-downs, and$5.2 million of loss on sale of OREO.FDIC premium expense decreased$952 thousand , or 10 percent, from the prior year as a result of a change in theFDIC assessment calculation. Other expense increased$3.6 million , or 11 percent, from the prior year and was primarily driven by increases in debit card expenses and expenses associated with New Markets Tax Credits investments. Efficiency Ratio The Company calculates the efficiency ratio as non-interest expense before other real estate owned expenses, core deposit intangibles amortization, goodwill impairment charges, and non-recurring expense items as a percentage of fully taxable equivalent net interest income and non-interest income, excluding gains or losses on sale of investments, other real estate owned income, and non-recurring income items. The efficiency ratio was 50 percent for both 2011 and 2010. There was a notable decrease in gain on sale of loans for 2011 compared to 2010 as refinance activity slowed during 2011. The decrease in gain on sale of loans was offset by increases in investment security income. Provision for Loan Losses Accruing Loans 30-89 Non-Performing Provision ALLL Days Past Due Assets to for Loan Net as a Percent as a Percent of Total Subsidiary (Dollars in thousands) Losses Charge-Offs of Loans Loans Assets Q4 2011 $ 8,675 9,252 3.97 % 1.42 % 2.92 % Q3 2011 17,175 18,877 3.92 % 0.60 % 3.49 % Q2 2011 19,150 20,184 3.88 % 1.14 % 3.68 % Q1 2011 19,500 15,778 3.86 % 1.44 % 3.78 % Q4 2010 27,375 24,525 3.66 % 1.21 % 3.91 % Q3 2010 19,162 26,570 3.47 % 1.06 % 4.03 % Q2 2010 17,246 19,181 3.58 % 0.92 % 4.01 % Q1 2010 20,910 20,237 3.58 % 1.53 % 4.19 % 31
--------------------------------------------------------------------------------
Table of Contents
The Company provisioned slightly more than the amount of net charged-off loans during 2011. The provision for loan losses was$64.5 million for 2011, a decrease of$20.2 million , or 24 percent, from the prior year. Net charged-off loans during 2011 was$64.1 million , a decrease of$26.4 million from 2010. The largest category of net charge-offs was in land, lot and other construction loans which had net charge-offs of$31.3 million , or 49 percent of total net charged-off loans. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS YEAR ENDEDDECEMBER 31, 2010 COMPARED TODECEMBER 31, 2009
Income Summary
The following table summarizes income for the periods indicated, including the amount and percentage changes from
Years ended December 31, (Dollars in thousands) 2010 2009 $ Change % Change Net interest income Interest income $ 288,402 $ 302,494 $ (14,092 ) -5 % Interest expense 53,634 57,167 (3,533 ) -6 % Total net interest income 234,768 245,327 (10,559 ) -4 % Non-interest income Service charges, loan fees, and other fees 47,946 45,871 2,075 5 % Gain on sale of loans 27,233 26,923 310 1 % Gain on sale of investments 4,822 5,995 (1,173 ) -20 % Other income 7,545 7,685 (140 ) -2 % Total non-interest income 87,546 86,474 1,072 1 % $ 322,314 $ 331,801 $ (9,487 ) -3 % Net interest margin (tax-equivalent) 4.21 % 4.82 % Net Interest Income Net interest income for 2010 decreased$10.6 million , or 4 percent, over 2009. Total interest income decreased$14 million , or 5 percent, while total interest expense decreased$3.5 million , or 6 percent. The net interest margin as a percentage of earning assets, on a tax-equivalent basis, decreased 61 basis points from 4.82 percent for 2009 to 4.21 percent for 2010, such decrease including a 6 basis points reduction from the reversal of interest on non-accrual loans. The decrease in lower yield and lower volume of loans coupled with an increase in lower yielding investment securities put pressure on both interest income and the net interest margin.
Non-interest Income
Non-interest income increased$1.0 million in 2010 over the same period in 2009. Fee income for 2010 increased$2.1 million , or 5 percent, compared to 2009 primarily from an increase in debit card income. Gain on sale of loans remained at historical highs of$27.2 million for 2010, which was an increase of$310 thousand , or 1 percent, over 2009. Included in 2010 other income was$2.0 million in one-time gains on merchant card servicing portfolios and included in 2009 other income was$3.5 million in a one-time bargain purchase gain from the acquisition of First Bank-WY. Excluding one-time gains, other income increased$1.3 million over the same period in 2009. 32
--------------------------------------------------------------------------------
Table of Contents
Non-interest Expense
The following table summarizes non-interest expense for the periods indicated, including the amount and percentage changes from
Years ended December 31, (Dollars in thousands) 2010 2009 $ Change % Change Compensation, employee benefits and related expense $ 87,728 $ 84,965 $ 2,763 3 % Occupancy and equipment expense 24,261 23,471 790 3 % Advertising and promotions 6,831 6,477 354 5 % Outsourced data processing expense 3,057 3,031 26 1 % Other real estate owned expense 22,193 9,092 13,101 144 %Federal Deposit Insurance Corporation premiums 9,121 8,639 482 6 % Core deposit intangibles amortization 3,180 3,116 64 2 % Other expense 31,577 30,027 1,550 5 % Total non-interest expense $ 187,948 $ 168,818 $ 19,130 11 % Non-interest expense for 2010 increased by$19.1 million , or 11 percent, from 2009. Compensation and employee benefits increased$2.8 million , or 3 percent, from 2009 which relates to the increase in full-time equivalent employees including the addition of First Bank-WY employees inOctober 2009 . Occupancy and equipment expense increased$790 thousand , or 3 percent, from 2009. Advertising and promotion expense increased by$354 thousand , or 5 percent, from 2009. The primary category that saw much higher expense was OREO which increased$13.1 million , or 144 percent, from 2009. OREO expenses of$22.2 million for 2010 included$5.1 million of operating expenses,$10.4 million of fair value write-downs, and$6.7 million of loss on sale of OREO.FDIC premiums increased$482 thousand , or 6 percent, from 2009 which included a second quarter 2010 special assessment of$2.5 million .
Provision for Loan Losses
The provision for loan losses was$84.7 million for 2010, a decrease of$39.9 million , or 32 percent, from the same period in 2009. Net charged-off loans during the year endedDecember 31, 2010 was$90.5 million , an increase of$32.1 million from the same period in 2009. ADDITIONAL MANAGEMENT'S DISCUSSION AND ANALYSIS
Lending Activity and Practices
The Banks focus their lending activity primarily on the following types of loans: 1) first-mortgage, conventional loans secured by residential properties, particularly single-family, 2) commercial lending that concentrates on targeted businesses, and 3) installment lending for consumer purposes (e.g., auto, home equity, etc.). Note 4 to the Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data" provides more information about the loan portfolio. 33
--------------------------------------------------------------------------------
Table of Contents
The following table summarizes the Company's loan portfolio as of the dates indicated: December 31, 2011 December 31, 2010 December 31, 2009 December 31, 2008 December 31, 2007 (Dollars in thousands) Amount Percent Amount
Percent Amount Percent Amount Percent Amount Percent
Residential real estate loans
19.59 % $ 685,731 19.50 % Commercial loans Real estate 1,672,059 50.23 % 1,796,503 49.73 % 1,894,690 48.33 % 1,930,849 48.29 % 1,611,178 45.81 % Other commercial 623,868 18.74 %
654,588 18.12 % 724,579 18.48 % 644,980
16.13 % 636,125 18.09 %
Total 2,295,927 68.97 %
2,451,091 67.85 % 2,619,269 66.81 % 2,575,829
64.42 % 2,247,303 63.90 %
Consumer and other loans Home equity 440,569 13.24 % 483,137 13.38 % 501,866 12.80 % 507,839 12.70 % 432,002 12.28 % Other consumer 212,832 6.39 % 182,184 5.04 % 199,633 5.09 % 208,150 5.21 % 206,376 5.87 % Total 653,401 19.63 % 665,321 18.42 % 701,499 17.89 % 715,989 17.91 % 638,378 18.15 % Loans receivable 3,466,135 104.13 %
3,749,289 103.79 % 4,063,915 103.65 % 4,075,217
101.92 % 3,571,412 101.55 %
Allowance for loan and lease losses (137,516 ) -4.13 %
(137,107 ) -3.79 % (142,927 ) -3.65 % (76,739 ) -1.92 % (54,413 ) -1.55 %
Loans receivable, net $ 3,328,619 100.00 % $
3,612,182 100.00 %
100.00 %
The stated maturities or first repricing term (if applicable) for the loan portfolio at
Residential Consumer (Dollars in thousands) Real Estate Commercial and Other Totals Variable rate maturing or repricing in One year or less $ 189,798 779,936 271,402 1,241,136 One to five years 119,202 763,623 28,873 911,698 Thereafter 9,027 118,311 4,860 132,198 Fixed rate maturing in One year or less 104,202 236,993 124,005 465,200 One to five years 80,371 280,331 204,284 564,986 Thereafter 14,207 116,733 19,977 150,917 Totals $ 516,807 2,295,927 653,401 3,466,135 34
--------------------------------------------------------------------------------
Table of Contents
The following tables summarize selected information by regulatory classification of the Company's loan portfolio:
Loans Receivable by Bank Balance Balance (Dollars in thousands) 12/31/11 12/31/10 $ Change % Change Glacier $ 797,530 866,097 (68,567 ) -8 % Mountain West 707,442 821,135 (113,693 ) -14 % First Security 575,254 571,925 3,329 1 % Western 272,681 305,977 (33,296 ) -11 % 1st Bank 243,216 266,505 (23,289 ) -9 % Valley 195,395 183,003 12,392 7 % Big Sky 229,640 249,593 (19,953 ) -8 % First Bank-WY 130,766 143,224 (12,458 ) -9 % Citizens 166,777 168,972 (2,195 ) -1 % First Bank-MT 112,390 109,310 3,080 3 % San Juans 135,516 143,574 (8,058 ) -6 % Eliminations and other (5,015 ) (3,813 ) (1,202 ) 32 % Loans held for sale (95,457 ) (76,213 ) (19,244 ) 25 % Total $ 3,466,135 3,749,289 (283,154 ) -8 % Land, Lot and Other Construction Loans by Bank Balance Balance (Dollars in thousands) 12/31/11 12/31/10 $ Change % Change Glacier $ 101,429 148,319 (46,890 ) -32 % Mountain West 91,275 147,991 (56,716 ) -38 % First Security 46,899 72,409 (25,510 ) -35 % Western 20,216 29,535 (9,319 ) -32 % 1st Bank 20,422 29,714 (9,292 ) -31 % Valley 13,755 12,816 939 7 % Big Sky 43,548 53,648 (10,100 ) -19 % First Bank-WY 6,924 12,341 (5,417 ) -44 % Citizens 7,905 12,187 (4,282 ) -35 % First Bank-MT 731 830 (99 ) -12 % San Juans 24,114 30,187 (6,073 ) -20 % Other 4,280 - 4,280 n/m Total $ 381,498 549,977 (168,479 ) -31 % 35
--------------------------------------------------------------------------------
Table of Contents $000000000 $000000000 $000000000 $000000000 $000000000 $000000000 Land, Lot and Other
Construction Loans by Bank, by Type at
Consumer Developed Commercial Land Land or Unimproved Lots for Developed Other (Dollars in thousands) Development Lot Land Operative Builders Lot Construction Glacier $ 37,516 23,026 25,581 6,978 4,889 3,439 Mountain West 12,771 49,785 5,076 12,485 3,283 7,875 First Security 19,915 5,961 15,013 3,447 698 1,865 Western 9,710 4,241 3,157 534 1,649 925 1st Bank 5,060 7,063 2,655 199 1,273 4,172 Valley 1,984 4,495 1,383 - 3,582 2,311 Big Sky 12,275 13,671 7,960 955 2,748 5,939 First Bank-WY 1,758 3,336 784 582 80 384 Citizens 1,977 1,005 1,910 - 621 2,392 First Bank-MT - 56 618 - 57 - San Juans 915 12,757 1,937 - 7,741 764 Other - - - - - 4,280 Total $ 103,881 125,396 66,074 25,180 26,621 34,346 $000000000 $000000000 $000000000 $000000000 $000000000 $000000000 Custom and Residential Construction Loans by Bank, by Type Owner Pre-Sold Balance Balance Occupied and Spec
(Dollars in thousands)
% Change 12/31/11 12/31/11 Glacier $ 31,239 34,526 (3,287 ) -10 % $ 8,385 22,854 Mountain West 13,519 21,375 (7,856 ) -37 % 6,858 6,661 First Security 9,065 10,123 (1,058 ) -10 % 4,009 5,056 Western 819 1,350 (531 ) -39 % 302 517 1st Bank 3,295 6,611 (3,316 ) -50 % 1,628 1,667 Valley 3,696 4,950 (1,254 ) -25 % 3,361 335 Big Sky 10,494 11,004 (510 ) -5 % 971 9,523 First Bank-WY 2,827 1,958 869 44 % 2,827 - Citizens 7,010 9,441 (2,431 ) -26 % 3,280 3,730 First Bank-MT 199 502 (303 ) -60 % 156 43 San Juans 12,070 7,018 5,052 72 % 3,645 8,425 Total $ 94,233 108,858 (14,625 ) -13 % $ 35,422 58,811 $000000000 $000000000 $000000000 $000000000 $000000000 $000000000 Single Family Residential Loans by Bank, by Type 1st Junior Balance Balance Lien Lien
(Dollars in thousands)
% Change 12/31/11 12/31/11 Glacier $ 174,928 187,683 (12,755 ) -7 % $ 155,354 19,574 Mountain West 263,499 282,429 (18,930 ) -7 % 227,763 35,736 First Security 93,776 92,011 1,765 2 % 79,543 14,233 Western 42,124 42,070 54 0 % 40,216 1,908 1st Bank 53,385 59,337 (5,952 ) -10 % 48,953 4,432 Valley 57,068 60,085 (3,017 ) -5 % 47,820 9,248 Big Sky 31,275 32,496 (1,221 ) -4 % 28,253 3,022 First Bank-WY 12,195 13,948 (1,753 ) -13 % 8,592 3,603 Citizens 23,722 19,885 3,837 19 % 22,487 1,235 First Bank-MT 7,737 8,618 (881 ) -10 % 6,892 845 San Juans 24,254 29,124 (4,870 ) -17 % 22,582 1,672 Total $ 783,963 827,686 (43,723 ) -5 % $ 688,455 95,508 36
--------------------------------------------------------------------------------
Table of Contents Commercial Real Estate Loans by Bank, by Type Owner Non-Owner Balance Balance Occupied Occupied (Dollars in thousands) 12/31/11 12/31/10 $ Change % Change 12/31/11 12/31/11 Glacier $ 225,548 224,215 1,333 1 % $ 113,421 112,127 Mountain West 193,495 206,732 (13,237 ) -6 % 120,162 73,333 First Security 259,396 227,662 31,734 14 % 176,866 82,530 Western 99,900 103,443 (3,543 ) -3 % 59,752 40,148 1st Bank 57,445 58,353 (908 ) -2 % 42,347 15,098 Valley 58,392 50,325 8,067 16 % 36,127 22,265 Big Sky 84,048 88,135 (4,087 ) -5 % 55,399 28,649 First Bank-WY 23,986 27,609 (3,623 ) -13 % 18,360 5,626 Citizens 60,754 61,737 (983 ) -2 % 36,716 24,038 First Bank-MT 19,891 17,492 2,399 14 % 9,440 10,451 San Juans 50,297 50,066 231 0 % 28,541 21,756 Total $ 1,133,152 1,115,769 17,383 2 % $ 697,131 436,021 Consumer Loans by Bank, by Type Home Equity Other Balance Balance Line of Credit Consumer (Dollars in thousands) 12/31/11 12/31/10 $ Change % Change 12/31/11 12/31/11 Glacier $ 134,725 150,082 (15,357 ) -10 % $ 120,794 13,931 Mountain West 63,902 70,304 (6,402 ) -9 % 56,515 7,387 First Security 66,549 71,677 (5,128 ) -7 % 42,946 23,603 Western 37,657 43,081 (5,424 ) -13 % 26,695 10,962 1st Bank 35,567 40,021 (4,454 ) -11 % 14,006 21,561 Valley 24,634 23,745 889 4 % 14,663 9,971 Big Sky 26,229 27,733 (1,504 ) -5 % 22,515 3,714 First Bank-WY 22,504 24,217 (1,713 ) -7 % 13,372 9,132 Citizens 27,273 29,040 (1,767 ) -6 % 22,973 4,300 First Bank-MT 7,093 8,005 (912 ) -11 % 3,402 3,691 San Juans 13,331 14,848 (1,517 ) -10 % 12,348 983 Total $ 459,464 502,753 (43,289 ) -9 % $ 350,229 109,235 n/m - not measurable
Residential Real Estate Lending
The Company's lending activities consist of the origination of both construction and permanent loans on residential real estate. The Company actively solicits residential real estate loan applications from real estate brokers, contractors, existing customers, customer referrals, and on-line applications. The Company's lending policies generally limit the maximum loan-to-value ratio on residential mortgage loans to 80 percent of the lesser of the appraised value or purchase price or above 80 percent of the loan if insured by a private mortgage insurance company. The Company also provides interim construction financing for single-family dwellings. These loans are supported by a term take-out commitment. The Company has not participated in any of the U.S. Departments of the Treasury and Housing and Urban Developments' loan modification and refinancing programs.
Consumer Land or Lot Loans
The Company originates land and lot acquisition loans to borrowers who intend to construct their primary residence on the respective land or lot. These loans are generally for a term of three to five years and are secured by the developed land or lot with the loan to value limited to the lesser of 75 percent of cost or appraised value. 37
--------------------------------------------------------------------------------
Table of Contents
Unimproved Land and Land Development Loans
Although unimproved land and land development loans have not recently been originated, where real estate market conditions warrant, the Company may originate such loans on properties intended for residential and commercial use. These loans are generally made for a term of 18 months to two years and secured by the developed property with a loan-to-value not to exceed the lesser of 75 percent of cost or 65 percent of the appraised discounted bulk sale value upon completion of the improvements. The projects under development are inspected on a regular basis and advances are made on a percentage of completion basis. The loans are made to borrowers with real estate development experience and appropriate financial strength. Generally, it is required that a certain percentage of the development be pre-sold or that construction and term take-out commitments are in place prior to funding the loan. Loans made on unimproved land are generally made for a term of five to ten years with a loan-to-value not to exceed the lesser of 50 percent of cost or appraised value.
Residential Builder Guidance Lines
The Company provides Builder Guidance Lines that are comprised of pre-sold and spec-home construction and lot acquisition loans. The spec-home construction and lot acquisition loans are limited to a specific number and maximum amount. Generally the individual loans will not exceed a one year maturity. The homes under construction are inspected on a regular basis and advances made on a percentage of completion basis.
Commercial Real Estate Loans
Loans are made to purchase, construct and finance commercial real estate properties. These loans are generally made to borrowers who own and will occupy the property and generally have a loan-to-value up to the lesser of 75 percent of cost or appraised value and require a minimum 1.2 times debt service coverage margin. Loans to finance investment or income properties are made, but require additional equity and generally have a loan-to-value up to the lesser of 70 percent of cost or appraised value and require a higher debt service coverage margin commensurate with the specific property and projected income.
Consumer Lending
The majority of consumer loans are secured by real estate, automobiles, or other assets. The Banks intend to continue making such loans because of their short-term nature, generally between three months and five years. Moreover, interest rates on consumer loans are generally higher than on residential mortgage loans. The Banks also originate second mortgage and home equity loans, especially to existing customers in instances where the first and second mortgage loans are less than 80 percent of the current appraised value of the property. Credit Risk Management The Company's credit risk management includes stringent credit policies, concentration limits, individual loan approval limits and committee approval of larger loan requests. Management practices also include regular internal and external credit examinations and an independent stress testing of the commercial real estate portfolio, including construction loans. On a quarterly basis, both the Banks and Parent management review loans experiencing deterioration of credit quality. A review of loans by concentration limits is performed on a quarterly basis. Federal and state regulatory safety and soundness examinations are conducted annually at Glacier, Mountain West, First Security, Western and 1st Bank and every eighteen months for all other bank subsidiaries. The Company's loan policy and credit administration practices establish standards and limits for all extensions of credit that are secured by interests in or liens on real estate, or made for the purpose of financing the construction of real property or other improvements. Ongoing monitoring and review of the loan portfolio is based on current information, including: the borrowers' and guarantors' creditworthiness, value of the real estate and other collateral, the project's performance against projections, and monthly inspections by employees or external parties until the real estate project is complete. Loan Approval Limits Individual loan approval limits have been established for each lender based on the loan types and experience of the individual. Each bank subsidiary has an Officer Loan Committee consisting of senior lenders and members of senior management. The bank subsidiaries' OfficerLoan Committees have loan approval authority between$500,000 and $1,000,000 . The bank subsidiaries' Board of Directors' have loan approval authority up to$2,000,000 . Loans exceeding these limits and up to$10,000,000 are subject to approval by the Company's Executive Loan Committee consisting of the Banks' senior loan officers and the Company's Credit Administrator. Loans greater than$10,000,000 are subject to approval by the Company's Board of Directors. Under banking laws, loans to one borrower and related entities are limited to a prescribed percentage of the unimpaired capital and surplus of each bank subsidiary. 38
--------------------------------------------------------------------------------
Table of Contents
Interest Reserves
Interest reserves are used to periodically advance loan funds to pay interest charges on the outstanding balance of the related loan. As with any extension of credit, the decision to establish a loan-funded interest reserve upon origination of construction loans, including residential construction and land, lot and other construction loans, is based on prudent underwriting, including the feasibility of the project, expected cash flow, creditworthiness of the borrower and guarantors, and the protection provided by the real estate and other underlying collateral. Interest reserves provide an effective means for addressing the cash flow characteristics of construction loans. In response to the downturn in the housing market and potential impact upon construction lending, the Company discourages the creation or continued use of interest reserves. Interest reserves are advanced provided the related construction loan is performing as expected. Loans with interest reserves may be extended, renewed or restructured only when the related loan continues to perform as expected and meets the prudent underwriting standards identified above. Such renewals, extension or restructuring are not permitted in order to keep the related loan current. In monitoring the performance and credit quality of a construction loan, the Company assesses the adequacy of any remaining interest reserve, and whether the use of an interest reserve remains appropriate in the presence of emerging weakness and associated risks in the construction loan. The ongoing accrual and recognition of uncollected interest as income continues only when facts and circumstances continue to reasonably support the contractual payment of principal or interest. Loans are typically designated as non-accrual when the collection of the contractual principal or interest is unlikely and has remained unpaid for ninety days or more. For such loans, the accrual of interest and its capitalization into the loan balance will be discontinued. The Company had$75.7 million and$141 million in loans with interest reserves with remaining reserves of$568 thousand and$879 thousand as ofDecember 31, 2011 and 2010, respectively. During 2011, the Company extended, renewed, or restructured 31 loans with interest reserves, such loans having an aggregate outstanding principal balance of$37.3 million as ofDecember 31, 2011 . However, such actions were based on prudent underwriting standards and not to keep the loans current. As ofDecember 31, 2011 , the Company had 18 construction loans totaling$14.1 million with interest reserves that are currently non-performing or which are potential problem loans.
Loan Purchases and Sales
Fixed rate, long-term mortgage loans are generally sold in the secondary market. The Company is active in the secondary market, primarily through the origination of conventional, FHA and VA residential mortgages. The sale of loans in the secondary mortgage market reduces the Company's risk of holding long-term, fixed rate loans during periods of rising rates. In connection with conventional loan sales, the Company typically sells the majority of mortgage loans originated with servicing released. The Company has also been very active in generating commercial SBA loans, and other commercial loans, with a portion of those loans sold to investors. The Company has not originated any type of subprime mortgages, either for the loan portfolio or for sale to investors. In addition, the Company has not purchased securities that were collateralized with subprime mortgages. The Company has not purchased loans outside the Company or originated loans outside the Company's geographic market area.
Loan Origination and Other Fees
In addition to interest earned on loans, the Company receives fees for originating loans. Loan fees generally are a percentage of the principal amount of the loan and are charged to the borrower, and are normally deducted from the proceeds of the loan. Loan origination fees are generally 1.0 percent to 1.5 percent on residential mortgages and .5 percent to 1.5 percent on commercial loans. Consumer loans require a fixed fee amount as well as a minimum interest amount. The Company also receives other fees and charges relating to existing loans, which include charges and fees collected in connection with loan modifications.
Appraisal and Evaluation Process
The Company's Loan Policy and credit administration practices adopt and implement the applicable requirements of the Interagency Appraisal and Evaluation Guidelines (and the Interagency Guidelines for Real Estate Lending Policies in Appendix A to Part 365 of Title 12, CFR) (collectively, the "Guidelines") and the Uniform Standards of Professional Appraisal Practice ("USPAP") as established and amended by theAppraisal Standards Board . The Company's Loan Policy establishes criteria for obtaining appraisals or evaluations, including transactions that are otherwise exempt from the appraisal requirements set forth within the Guidelines. 39
--------------------------------------------------------------------------------
Table of Contents
Each of the Company's eleven bank subsidiaries monitor conditions, including supply and demand factors, in the real estate markets served so they can react quickly to changing market conditions to mitigate potential losses from specific credit exposures within the loan portfolio. Evidence of the following real estate market conditions and trends is obtained from lending personnel and third party sources: • demographic indicators, including employment and population trends; • foreclosures, vacancy, construction and absorption rates; • property sales prices, rental rates, and lease terms; • current tax assessments; • economic indicators, including trends within the lending areas; and • valuation trends, including discount and capitalization rates. Third party information sources include federal, state, and local governments and agencies thereof, private sector economic data vendors, real estate brokers, licensed agents, sales, rental and foreclosure data tracking services. The time between ordering an appraisal or evaluation and receipt from third party vendors is typically two to three weeks for residential property and four to six weeks for non-residential property. For real estate properties that are of highly specialized or limited use, significantly complex or large, additional time beyond the typical times may be required for new appraisals or evaluations. As part of the Company's credit administration and portfolio monitoring practices, the Company's regular internal and external credit examinations review a significant number of individual loan files. Appraisals and evaluations are reviewed to determine whether the timeliness, methods, assumptions, and findings are reasonable and in compliance with the Company's Loan Policy and credit administration practices, the Guidelines and USPAP standards. Such reviews include the adequacy of the steps taken by the Company to ensure that the individuals who perform appraisals and evaluations are appropriately qualified and are not subject to conflicts of interest. If there are any deficiencies noted in the reviews, they are reported to the Banks' Board of Directors and prompt corrective action is taken.
Non-performing Assets
The following table summarizes information regarding non-performing assets at the dates indicated: December 31, (Dollars in thousands) 2011 2010 2009 2008 2007 Other real estate owned $ 78,354 73,485 57,320 11,539 2,043 Accruing loans 90 days or more past due Residential real estate 59 506 1,965 4,103 840 Commercial 1,168 3,051 1,311 2,897 1,216 Consumer and other 186 974 2,261 1,613 629 Total 1,413 4,531 5,537 8,613 2,685 Non-accrual loans Residential real estate 11,882 23,095 20,093 3,575 934 Commercial 109,640 161,136 168,328 58,454 7,192 Consumer and other 12,167 8,274 9,860 2,272 434 Total 133,689 192,505 198,281 64,301 8,560 Total non-performing assets 1 $ 213,456 270,521
261,138 84,453 13,288
Non-performing assets as a percentage of subsidiary assets 2.92 % 3.91 %
4.13 % 1.46 % 0.27 %
Allowance for loan and lease losses as a percentage of non-performing loans 102 % 70 %
70 % 105 % 484 %
Accruing loans 30-89 days past due
Troubled debt restructurings not included in non-performing assets $ 98,859 26,475 13,829 n/m n/m Interest income 2 $ 7,441 10,987 11,730 4,434 683
1 As of
government guarantees of
2 Amounts represent estimated interest income that would have been recognized
on loans accounted for on a non-accrual basis as of the end of each period
had such loans performed pursuant to contractual terms.
n/m - not measurable 40
--------------------------------------------------------------------------------
Table of Contents
The following tables summarize selected information identified by regulatory classification on the Company's loan portfolio.
$0000000000 $0000000000 $0000000000 $0000000000 $0000000000 Non-Performing Assets, Non- Accruing Other by Loan Type Accruing Loans 90 Days Real Estate Balance Balance Loans or More Past Due Owned (Dollars in thousands) 12/31/11 12/31/10 12/31/11 12/31/11 12/31/11 Custom and owner occupied construction $ 1,531 2,575 783 - 748 Pre-sold and spec construction 5,506 16,071 1,098 - 4,408 Land development 56,152 83,989 31,184 - 24,968 Consumer land or lots 8,878 12,543 3,942 27 4,909 Unimproved land 35,771 44,116 19,194 713 15,864 Developed lots for operative builders 9,001 7,429 7,084 - 1,917 Commercial lots 2,032 3,110 297 - 1,735 Other construction 5,133 3,837 4,305 - 828 Commercial real estate 28,828 36,978 19,181 - 9,647 Commercial and industrial 12,855 13,127 12,213 342 300 Agriculture loans 7,010 5,253 6,391 - 619 1-4 family 33,589 34,791 21,602 292 11,695 Home equity lines of credit 6,361 4,805 5,749 37 575 Consumer 360 446 217 2 141 Other 449 1,451 449 - - Total $ 213,456 270,521 133,689 1,413 78,354 $0000000000 $0000000000 $0000000000 $0000000000 $0000000000 Accruing 30 - 89 Days Delinquent
Non-Accrual &
Loans and Non-Performing
Accruing Accruing Loans Other
Assets, by Bank 30-89 Days 90 Days or Real Estate Balance Balance Past Due More Past Due Owned (Dollars in thousands) 12/31/11 12/31/10 12/31/11 12/31/11 12/31/11 Glacier $ 69,324 75,869 10,176 49,042 10,106 Mountain West 60,593 83,872 16,402 25,117 19,074 First Security 59,713 59,770 13,648 28,339 17,726 Western 7,651 11,237 1,937 448 5,266 1st Bank 18,158 16,686 3,693 9,302 5,163 Valley 2,444 1,900 863 728 853 Big Sky 19,795 21,739 410 11,549 7,836 First Bank-WY 8,965 9,901 321 6,910 1,734 Citizens 5,992 8,000 1,175 3,126 1,691 First Bank-MT 397 553 119 278 - San Juans 3,180 6,549 342 263 2,575 GORE 6,330 19,942 - - 6,330 Total $ 262,542 316,018 49,086 135,102 78,354 41
--------------------------------------------------------------------------------
Table of Contents
There was a sizeable decrease in non-performing assets during the year due to a decrease in non-performing loans of$61.9 million , or 31 percent. Although there was a$4.9 million , or 7 percent, increase in OREO from the prior year end, there was a significant amount of additions to and sales of OREO as the Company continued to work through the foreclosed properties. The momentum of reducing non-performing assets continued throughout the year with each bank subsidiary actively managing the disposition of non-performing assets. The Company's early stage delinquencies (accruing loans 30-89 days past due) of$49.1 million atDecember 31, 2011 , remained stable from the prior year end early stage delinquencies of$45.5 million . The largest category of non-performing assets was land, lot and other construction which was$117 million , or 55 percent, of non-performing assets atDecember 31, 2011 . Included in this category was$56.2 million of land development assets and$35.8 million in unimproved land atDecember 31, 2011 . Although land, lot and other construction assets have historically put pressure on the Company's credit quality, the Company has diligently reduced this category of non-performing assets by$38.1 million , or 25 percent, since the prior year end. Other notable categories of non-performing assets atDecember 31, 2011 were commercial real estate of$28.9 million and 1-4 family of$33.6 million , both categories of which have decreased since the prior year end. Most of the Company's non-performing assets are secured by real estate, and based on the most current information available to management, including updated appraisals or evaluations, the Company believes the value of the underlying real estate collateral is adequate to minimize significant charge-offs or loss to the Company. 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 in determining the adequacy of the ALLL. 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. Throughout the year, the Company has maintained an adequate allowance for loan and lease losses while working to reduce non-performing assets. The improvement in the credit quality ratios during the year are a product of this effort. For non-performing construction loans involving residential structures, the percentage of completion exceeds 95 percent atDecember 31, 2011 . For construction loans involving commercial structures, the percentage of completion ranges from projects not started to projects completed atDecember 31, 2011 . During the construction loan term, all construction loan collateral properties are inspected at least monthly, or more frequently as needed, until completion. Draws on construction loans are predicated upon the results of the inspection and advanced based upon a percentage of completion basis versus original budget percentages. When construction loans become non-performing and the associated project is not complete, the Company on a case-by-case basis makes the decision to advance additional funds or to initiate collection/foreclosure proceedings. Such decision includes obtaining "as-is" and "at completion" appraisals for consideration of potential increases or decreases in the collateral's value. The Company also considers the increased costs of monitoring progress to completion, and the related collection/holding period costs should collateral ownership be transferred to the Company. With very limited exception, the Company does not disburse additional funds on non-performing loans. Instead, the Company has proceeded to collection and foreclosure actions in order to reduce the Company's exposure to loss on such loans. As identified below, the following four bank subsidiaries had non-accrual construction loans that aggregated 5 percent or more of the Company's$67.9 million of non-accrual construction loans atDecember 31, 2011 . Also identified below are the principal areas of the bank subsidiaries' operations in which the collateral properties of such non-accrual construction loans are located: Glacier 34 percent Western Montana First Security 26 percent Western Montana Mountain West 25 percent Northern Idaho and Boise and Sun Valley, Idaho Big Sky 10 percent Western Montana Residential non-accrual construction loans are 3 percent of the total construction loans on non-accrual status as of year end 2011, compared to 11 percent as of year end 2010. Unimproved land and land development loans collectively account for the bulk of the non-accrual commercial construction loans at the four bank subsidiaries. With locations and operations in the contiguous northernRocky Mountain states ofIdaho andMontana , the geography and economies of each of the four bank subsidiaries are predominantly tied to real estate development given the sprawling abundance of timbered valleys and mountainous terrain with significant lakes, streams and watershed areas. Consistent with the general economic downturn, the market for upscale primary, secondary and other housing as well as the associated construction and building industries have stalled after years of significant growth. As the housing market (rental and owner-occupied) and related industries continue to recover from the downturn, the Company continues to reduce its exposure to loss in the construction loan and other segments of the total loan portfolio. For additional information on accounting policies relating to non-performing assets and impaired loans, see Note 1 to the Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data." 42
--------------------------------------------------------------------------------
Table of Contents
Impaired Loans
Loans are designated impaired when, based upon current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement and therefore, the Company has serious doubts as to the ability of such borrowers to fulfill the contractual obligation. When the ultimate collectability of the total principal of an impaired loan is in doubt and designated as non-accrual, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the total principal on an impaired loan is not in doubt, contractual interest is generally credited to interest income when received under the cash basis method. Impaired loans were$259 million and$225 million as ofDecember 31, 2011 and 2010, respectively. The ALLL includes valuation allowances of$18.8 million and$16.9 million specific to impaired loans as ofDecember 31, 2011 and 2010, respectively. Of the total impaired loans atDecember 31, 2011 , there were 41 commercial real estate and other commercial loans that accounted for$121 million , or 47 percent, of the impaired loans. The 41 loans were collateralized by 147 percent of the loan value, the majority of which had appraisals (new or updated) in 2011, such appraisals reviewed at least quarterly taking into account current market conditions. Of the total impaired loans atDecember 31, 2011 , there were 269 loans aggregating to$165 million , or 64 percent, whereby the borrowers had more than one impaired loan. The amount of impaired loans that have had partial charge-offs during the year for which the Company continues to have concern about the collectability of the remaining loan balance was$34.9 million . Of these loans, there were charge-offs of$18.1 million during 2011. For collateral-dependent loans and real estate loans for which foreclosure or a deed-in-lieu of foreclosure is probable, impairment is measured by the fair value of the collateral, less estimated cost to sell. The fair value of the collateral is determined primarily based upon appraisal or evaluation (new or updated) of the underlying property value. The Company reviews appraisals or evaluations, giving consideration to the highest and best use of the collateral, with values reduced by discounts to consider lack of marketability and estimated cost to sell. Appraisals or evaluations (new or updated) are reviewed at least quarterly and more frequently based on current market conditions, including deterioration in a borrower's financial condition and when property values may be subject to significant volatility. After review and acceptance of the collateral appraisal or evaluation (new or updated), adjustments to an impaired loan's value may occur.
In deciding whether to obtain a new or updated appraisal or evaluation, the Company considers the impact of the following factors and environmental events:
• passage of time;
• improvements to, or lack of maintenance of, the collateral property;
• stressed and volatile economic conditions, including market values; • changes in the performance, risk profile, size and complexity of the credit exposure; • limited or specific use collateral property; • high loan-to-value credit exposures; • changes in the adequacy of the collateral protections, including loan covenants and financially responsible guarantors; • competing properties in the market area; • changes in zoning and environmental contamination;
• the nature of subsequent transactions (e.g., modification, restructuring,
refinancing); and • the availability of alternative financing sources. The Company also takes into account 1) the Company's experience with whether the appraised values of impaired collateral-dependent loans are actually realized, and 2) the timing of cash flows expected to be received from the underlying collateral to the extent such timing is significantly different than anticipated in the most recent appraisal. The Company generally obtains new or updated appraisals or evaluations annually for collateral underlying impaired loans. For collateral-dependent loans for which the appraisal of the underlying collateral is more than twelve months old, the Company updates collateral valuations through procedures that include obtaining current inspections of the collateral property, broker price opinions, comprehensive market analyses and current data for conditions and assumptions (e.g., discounts, comparable sales and trends) underlying the appraisals' valuation techniques. The Company's impairment/valuation procedures take into account new and updated appraisals on similar properties in the same area in order to capture current market valuation changes, unfavorable and favorable. 43
--------------------------------------------------------------------------------
Table of Contents
Restructured Loans
A restructured loan is considered a troubled debt restructuring ("TDR") if the creditor, for economic or legal reasons related to the debtor's financial difficulties, grants a concession to the debtor that it would not otherwise consider. The Company had TDR loans of$165 million as ofDecember 31, 2011 . The Company's TDR loans are considered impaired loans of which$65.6 million are designated as non-accrual. As a result of adopting theFinancial Accounting Standards Board's ("FASB") amendment relating to TDRs during the third quarter of 2011, the Company reassessed all restructurings that occurred during the first six months of 2011 for potential identification as TDRs and identified$74.6 million in newly identified TDRs. Of these newly identified TDRs,$53.3 million were not previously identified as impaired loans; such loans had a specific valuation allowance of$3.2 million as ofSeptember 30, 2011 . Each restructured debt is separately negotiated with the borrower and includes terms and conditions that reflect the borrower's prospective ability to service the debt as modified. The Company discourages the multiple loan strategy when restructuring loans regardless of whether or not the notes are TDR loans. The Company does not have any commercial TDR loans as ofDecember 31, 2011 that have repayment dates extended at or near the original maturity date for which the Company has not classified as impaired. The Company has TDR loans of$24.9 million that are in non-accrual status or that have had partial charge-offs during the year, the borrowers of which continue to have$38.7 million in other loans that are on accrual status.
Other Real Estate Owned
The loan book value prior to the acquisition and transfer of the loan into OREO during 2011 was$96.5 million of which$20.3 million was residential real estate,$67.4 million was commercial real estate, and$8.8 million was consumer loans. The loan collateral acquired in foreclosure during 2011 was$79.3 million of which$15.6 million was residential real estate,$58.3 million was commercial real estate, and$5.4 million was consumer loans. The following table sets forth the changes in OREO for the years endedDecember 31, 2011 and 2010: Years ended December 31, (Dollars in thousands) 2011 2010 Balance at beginning of period $ 73,485 57,320 Additions 79,295 72,572 Capital improvements 669 273 Write-downs (16,246 ) (10,429 ) Sales (58,849 ) (46,251 ) Balance at end of period $ 78,354 73,485 There was an increase in write-downs in 2011 compared to 2010, which was attributable to an increase in volume of OREO during 2011. Write-downs as a percentage of the beginning balance and additions to OREO was 10.6 percent for 2011 compared to 8.0 percent for 2010. The Company believes that the write-downs in 2011 are not indicative of a trend in that several of such properties have characteristics unique to the property, including special or limited use, and locations of such properties. The Company determined that the write-downs were not indicative of a trend continuing beyond 2011 which would likely affect the future operating results in light of the remaining holdings of real property and each particular bank subsidiary's experience in its particular markets. However, there can be no assurance that future significant write-downs will not occur. Although the Company utilized auctions during 2010 as an alternative strategy for disposing of certain properties, the Company only utilized this strategy on a limited basis during 2011. The Company does not intend to use auctions for disposition of OREO in the future unless it is determined to be beneficial to the Company for certain properties. Costs of the auctions, including property-specific marketing costs and service fees paid to the third-party auction firms, are aggregated with other directly-related selling costs in determining the loss realized from disposition of the OREO. In addition to auctions, the Company utilizes real estate companies (local and national franchises) as well as showcasing select properties through the websites of the bank subsidiaries. Strategies for disposition of other real estate and other assets owned by each subsidiary are developed specific to each property. 44
--------------------------------------------------------------------------------
Table of Contents
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 portfolios. Accordingly, the ALLL is maintained within a range of estimated losses. The determination of the ALLL, including the provision for loan losses and net charge-offs, is a critical accounting estimate that involves management's judgments about all known relevant internal and external environmental factors that affect loan losses, including the credit risk inherent in the loan portfolios, economic conditions nationally and in the local markets in which the community bank subsidiaries operate, changes in collateral values, delinquencies, non-performing assets and net charge-offs. Although the Company and Banks continue to actively monitor economic trends, soft economic conditions combined with potential declines in the values of real estate that collateralize most of the Company's loan 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, the internal audit department, independent credit reviewers and state and federal bank regulatory agencies. At the end of each quarter, each of the community bank subsidiaries analyzes its loan portfolio and maintain an ALLL at a level that is appropriate and determined in accordance with accounting principles generally accepted inthe United States of America . The allowance consists of a specific valuation allowance component and a general valuation allowance component. The specific valuation allowance component relates to loans that are determined to be impaired. A specific valuation allowance is established when the fair value of a collateral-dependent loan or the present value of the loan's expected future cash flows (discounted at the loan's effective interest rate) is lower than the carrying value of the impaired loan. The general valuation allowance component relates to probable credit losses inherent in the balance of the loan portfolio based on prior loss experience, adjusted for changes in trends and conditions of qualitative or environmental factors. Management of each bank subsidiary exercises significant judgment when evaluating the effect of applicable qualitative or environmental factors on each bank subsidiary's historical loss experience for loans not identified as impaired. Quantification of the impact upon each bank subsidiary's ALLL is inherently subjective as data for any factor may not be directly applicable, consistently relevant, or reasonably available for management to determine the precise impact of a factor on the collectability of the Bank's unimpaired loan portfolio as of each evaluation date. Bank management documents its conclusions and rationale for changes that occur in each applicable factor's weight (i.e., measurement) and ensures that such changes are directionally consistent based on the underlying current trends and conditions for the factor. The Company is committed to a conservative management of the credit risk within the loan 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 portfolios, semi-annual review of loans by industry, and periodic stress testing of the loans secured by real estate. The Company's model of eleven independent wholly-owned 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. 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 further problem credits will not arise and additional loan losses incurred, particularly in periods of rapid economic downturns. The primary responsibility for credit risk assessment and identification of problem loans rests with the loan officer of the account. This continuous process, utilizing each of the Banks' internal credit risk rating process, is necessary to support management's evaluation of the ALLL adequacy. An independent loan review function verifying credit risk ratings evaluates the loan officer and management's evaluation of the loan portfolio credit quality. The loan review function also assesses the evaluation process and provides an independent analysis of the adequacy of the ALLL. 45
--------------------------------------------------------------------------------
Table of Contents
The Company considers the ALLL balance of$138 million adequate to cover inherent losses in the loan portfolios as ofDecember 31, 2011 . However, no assurance can be given that the Company will not, in any particular period, sustain losses that are significant relative to the ALLL amount, or that subsequent evaluations of the loan portfolios applying management's judgment about then current factors, including economic and regulatory developments, will not require significant changes in the ALLL. Under such circumstances, this could result in enhanced provisions for loan losses. See additional risk factors in "Item 1A. Risk Factors." The following table summarizes the allocation of the ALLL as of the dates indicated: December 31, 2011 December 31, 2010 December 31, 2009 December 31, 2008 December 31, 2007 Allowance
Percent Allowance Percent Allowance Percent
Allowance Percent Allowance Percent
for Loan of
Loans for Loan of Loans for Loan of Loans for Loan of Loans for Loan of Loans
and Lease in and Lease in and Lease in and Lease in and Lease in (Dollars in thousands) Losses Category Losses Category Losses Category Losses Category Losses Category Residential real estate$ 17,227 14.9 % 20,957 16.9 % 13,496 18.3 % 7,233 19.2 % 4,755 19.2 % Commercial real estate 76,920 48.3 % 76,147 47.9 % 66,791 46.6 % 35,305 47.4 % 23,010 45.1 % Other commercial 20,833 18.0 % 19,932 17.4 % 39,558 17.8 % 21,590 15.8 % 17,453 17.8 % Home equity 13,616 12.7 % 13,334 12.9 % 13,419 12.4 % 6,975 12.5 % 4,680 12.1 % Other consumer 8,920 6.1 % 6,737 4.9 % 9,663 4.9 % 5,636 5.1 % 4,515 5.8 % Totals$ 137,516 100.0 % 137,107 100.0 % 142,927 100.0 % 76,739 100.0 % 54,413 100.0 % The following table summarizes the ALLL experience for the periods indicated: Years ended December 31, (Dollars in thousands) 2011 2010 2009 2008 2007 Balance at beginning of period $ 137,107 142,927 76,739 54,413 49,259 Provision for loan losses 64,500 84,693 124,618 28,480 6,680 Charge-offs Residential real estate (5,671 ) (16,575 ) (18,854 ) (3,233 ) (306 ) Commercial loans (52,428 ) (69,595 ) (35,077 ) (4,957 ) (2,367 ) Consumer and other loans (11,267 ) (7,780 ) (6,965 ) (1,649 ) (714 ) Total charge-offs (69,366 ) (93,950 ) (60,896 ) (9,839 ) (3,387 ) Recoveries Residential real estate 486 749 423 23 208 Commercial loans 3,830 2,203 1,636 716 656 Consumer and other loans 959 485 407 321 358 Total recoveries 5,275 3,437 2,466 1,060 1,222 Charge-offs, net of recoveries (64,091 ) (90,513 ) (58,430 ) (8,779 ) (2,165 ) Acquisitions 1 - - - 2,625 639 Balance at end of period $ 137,516 137,107 142,927 76,739 54,413 Allowance for loan and lease losses as a percentage of total loans 3.97 % 3.66 %
3.52 % 1.88 % 1.52 %
Ratio of net charge-offs to average loans outstanding during the period 1.77 % 2.26 % 1.41 % 0.23 % 0.06 %
1 Acquisition of San Juans in 2008 and
46
--------------------------------------------------------------------------------
Table of Contents
The following tables summarize the ALLL experience at the dates indicated, including identification by regulatory classification:
Provision Allowance for Loan Provision for Year ALLL and Lease Losses for Year Ended 12/31/11 as a Percent Balance Balance Ended Over Net of Loans (Dollars in thousands) 12/31/11 12/31/10 12/31/11 Charge-Offs 12/31/11 Glacier $ 35,336 34,701 16,800 1.0 4.51 % Mountain West 36,167 35,064 30,100 1.0 5.38 % First Security 22,457 19,046 9,950 1.5 3.96 % Western 7,320 7,606 550 0.7 2.87 % 1st Bank 8,572 10,467 1,950 0.5 3.55 % Valley 4,216 4,651 - - 2.23 % Big Sky 8,860 9,963 2,350 0.7 3.90 % First Bank-WY 2,180 2,527 700 0.7 1.67 % Citizens 5,325 5,502 1,300 0.9 3.43 % First Bank-MT 2,894 3,020 - - 2.58 % San Juans 4,189 4,560 800 0.7 3.09 % Total $ 137,516 137,107 64,500 1.0 3.97 % $0000000000 $0000000000 $0000000000 $0000000000 Net Charge-Offs, for Year Ended, By Bank Balance Balance Charge-Offs Recoveries (Dollars in thousands) 12/31/11 12/31/10 12/31/11 12/31/11 Glacier $ 16,165 24,327 17,579 1,414 Mountain West 28,997 47,487 31,535 2,538 First Security 6,539 7,296 6,971 432 Western 836 2,106 1,010 174 1st Bank 3,845 2,578 4,287 442 Valley 435 216 460 25 Big Sky 3,453 4,048 3,581 128 First Bank-WY 1,047 605 1,067 20 Citizens 1,477 1,363 1,562 85 First Bank-MT 126 149 141 15 San Juans 1,171 338 1,173 2 Total $ 64,091 90,513 69,366 5,275 $0000000000 $0000000000 $0000000000 $0000000000 Net Charge-Offs, for Year Ended, By Loan Type Balance Balance Charge-Offs Recoveries (Dollars in thousands) 12/31/11 12/31/10 12/31/11 12/31/11 Residential construction $ 4,275 7,147 5,168 893 Land, lot and other construction 31,306 51,580 33,162 1,856 Commercial real estate 7,676 10,181 8,278 602 Commercial and industrial 7,871 5,612 8,424 553 Agriculture loans 134 - 136 2 1-4 family 8,694 9,897 9,260 566 Home equity lines of credit 3,261 4,496 3,698 437 Consumer 615 951 914 299 Other 259 649 326 67 Total $ 64,091 90,513 69,366 5,275 47
--------------------------------------------------------------------------------
Table of Contents
The allowance determined by each of the eleven community bank subsidiaries is combined together into a single allowance for the Company. Each of the Bank's ALLL is considered adequate to absorb losses from any class of its loan portfolio. For the years endedDecember 31, 2011 and 2010, the Company believes the allowance is commensurate with the risk in the Company's loan portfolio and is directionally consistent with the change in the quality of the Company's loan portfolio as determined at each bank subsidiary. AtDecember 31, 2011 , the ALLL was$138 million and remained stable compared to the prior year end. The allowance was 3.97 percent of total loans outstanding atDecember 31, 2011 , compared to 3.66 percent atDecember 31, 2010 . The allowance was 102 percent of non-performing loans atDecember 31, 2011 , an increase from 70 percent from the prior year end.
As of
December 31, (Dollars in thousands) 2011 2010 Specific valuation allowance $ 18,828 16,871 General valuation allowance 118,688 120,236 Total ALLL $ 137,516 137,107 During 2011, the overall total of the ALLL increased by$409 thousand , the net result of a$1.9 million increase in the specific valuation allowance and a$1.5 million decrease in the general valuation allowance. The decrease in the general valuation since prior year end was due to a decrease in total loans of$283 million and an increase in TDR loans that were previously included in the general valuation allowance and were individually reviewed for impairment as ofDecember 31, 2011 . In addition, there was an increase in the bank subsidiaries' overall historical loss experience adjusted for environmental factors during the year endedDecember 31, 2011 , albeit total loans collectively evaluated for impairment decreased by$317 million during such period.
Presented below are select aggregated statistics that were also considered when determining the adequacy of the Company's ALLL at
Positive Trends
• The provision for loan losses in 2011 was
$20.2 million from 2010. • Non-accrual construction loans (i.e., residential construction and land,
lot and other construction) were
million of non-accrual loans at year end 2011, a decrease of
from the prior year end. Non-accrual construction loans at year end 2010
accounted for 61 percent of the$193 million of non-accrual loans.
• The
and commercial and industrial at year end 2011 decreased by
from year end 2010. • The$34.4 million total of non-accrual loans in the agriculture, 1-4
family, home equity lines of credit, consumer, and other loans at year end
2011 decreased by$2.9 million from year end 2010.
• Non-performing loans as a percent of total loans decreased to 3.90 percent
at year end 2011 as compared to 5.26 percent at year end 2010.
• The allowance as a percent of non-performing loans was 102 percent at
December 31, 2010 , compared to 89 percent atDecember 31, 2010 .
• Charge-offs, net of recoveries, in 2011 were
$26.4 million from 2010. • Net charge-offs of construction loans were$35.6 million , or 56 percent,
of the$64.1 million of net charge-offs in 2011 compared to net charge-offs of construction loans of$58.7 million , or 65 percent, of the$90.5 million of net charge-offs in 2010. Negative Trends
• Impaired loans as a percent of total loans increased to 7.46 percent at
year end 2011 as compared to 6.00 percent at year end 2010. • Early stage delinquencies (accruing loans 30-89 days past due) increased
to$49.1 million at year end 2011 from$45.5 million at the prior year end. When applied to each bank subsidiary's historical loss experience, the environmental factors result in the provision for loan losses being recorded in the period in which the loss has probably occurred. When the loss is confirmed at a later date, a charge-off is recorded. During 2011, the provision for loan losses exceeded loan charge-offs, net of recoveries, by$409 thousand . During 2010, loan charge-offs, net of recoveries, exceeded the provision for loan losses by$5.8 million . 48
--------------------------------------------------------------------------------
Table of Contents
The eleven bank subsidiaries provide commercial services to individuals, small to medium size businesses, community organizations and public entities from 106 locations, including 97 branches, acrossMontana ,Idaho ,Wyoming ,Colorado ,Utah , andWashington .The Rocky Mountain areas in which the bank subsidiaries operate have diverse economies and markets that are tied to commodities (crops, livestock, minerals, oil and natural gas), tourism, real estate and land development and an assortment of industries, both manufacturing and service-related. Thus, the changes in the global, national, and local economies are not uniform across each of the bank subsidiaries. Though stabilizing, the soft economic conditions during much of 2010 continued during 2011, including declining sales of existing real property (e.g., single family residential, multi-family, commercial buildings and land), an increase in existing inventory of real property, increase in real property delinquencies and foreclosures, and corresponding decrease in absorption rates, and lower values of real property that collateralize most of the Company's loan portfolios, among other factors. While the national unemployment rate increased steadily from 7.4 percent at the start of 2009 to 10.0 percent at year end 2009, dropping to 9.4 percent at year end 2010 and 8.5 percent at year end 2011, the unemployment rates for most states in which the community bank subsidiaries conduct operations were lower throughout this time period compared to the national unemployment rate. Agricultural price declines in livestock and grain in 2009 have recovered significantly and remain strong. While prices for oil have held strong, prices for natural gas currently remain weak (due to excess supply) especially when compared to the exceptionally high price levels of natural gas during 2008. Although the cost of living (as reflected in Consumer Price Index measures) has slowly increased in during 2011, the overall decline in the cost of living during 2010 and 2009 helped buffer the general softening of the economy nationally, regionally and locally, and the impact of lower real property values. The tourism industry and related lodging continues to be a source of strength for those banks whose market areas have national parks and similar recreational areas in the market areas served. Such changes affected the bank subsidiaries in distinctly different ways as each bank has its own geographic area and local economic influences over both a short-term and long-term horizon. In evaluating the need for a specific or general valuation allowance for impaired and unimpaired loans, respectively, within the Company's construction loan portfolio, including residential construction and land, lot and other construction loans, the credit risk related to such loans was considered in the ongoing monitoring of such loans, including assessments based on current information, including new or updated appraisals or evaluations of the underlying collateral, expected cash flows and the timing thereof, as well as the estimated cost to sell when such costs are expected to reduce the cash flows available to repay or otherwise satisfy the construction loan. Construction loans are 14 percent of the Company's total loan portfolio and account for 51 percent of the Company's non-accrual loans atDecember 31, 2011 . Collateral securing construction loans includes residential buildings (e.g., single/multi-family and condominiums), commercial buildings, and associated land (multi-acre parcels and individual lots, with and without shorelines). Outstanding balances are centered inWestern Montana andNorthern Idaho , as well asBoise andSun Valley, Idaho . None of the individual bank subsidiaries have a concentration of construction loans exceeding 5 percent of the Company's total loan portfolio. For additional information regarding the ALLL, its relation to the provision for loan losses and risk related to asset quality, see Note 4 to the Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data."
Investment Activity
It has generally been the Company's policy to maintain a liquid portfolio above policy limits. The Company's investment securities are generally classified as available-for-sale and are carried at estimated fair value with unrealized gains or losses, net of tax, reflected as an adjustment to stockholders' equity. The Company's investment portfolio is primarily comprised of residential mortgage-backed securities and state and local government securities which are largely exempt from federal income tax. The Company uses the federal statutory rate of 35 percent in calculating its tax-equivalent yield. The residential mortgage-backed securities are typically short-term and provide the Company with on-going liquidity as scheduled and pre-paid principal payments are made on the securities. The Company assesses individual securities in its investment securities portfolio for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market conditions warrant.
For additional investment activity information, see Note 3 to the Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data."
Other-Than-Temporary Impairment on Securities Analysis
Non-marketable equity securities owned atDecember 31, 2011 primarily consisted of stock issued by the FHLB ofSeattle and Topeka, such shares measured at cost in recognition of the transferability restrictions imposed by the issuers. Other non-marketable equity securities includeFederal Agriculture Mortgage Corporation and Bankers' Bank of the West Bancorporation, Inc. With respect to FHLB stock, the Company evaluates such stock for other-than-temporary impairment. Such evaluation takes into consideration 1) FHLB deficiency, if any, in meeting applicable regulatory capital targets, including risk-based capital requirements, 2) the significance of any decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the time period for any such decline, 3) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, 4) the impact of legislative and regulatory changes on the FHLB, and 5) the liquidity position of the FHLB. 49
--------------------------------------------------------------------------------
Table of Contents
Based on the analysis of its impaired non-marketable equity securities as of
In evaluating debt securities for other-than-temporary impairment losses, management assesses whether the Company intends to sell the security or if it is more-likely-than-not that the Company will be required to sell the debt security. In so doing, management considers contractual constraints, liquidity, capital, asset / liability management and securities portfolio objectives. The Company believes that macroeconomic conditions occurring during 2011 and 2010 have unfavorably impacted the fair value of certain debt securities in its investment portfolio. OnAugust 5, 2011 , Standard and Poor's downgradedthe United States long-term debt rating from its AAA rating to AA+. OnAugust 8, 2011 , Standard and Poor's downgraded from AAA to AA+ the credit ratings of certain long-term debt instruments issued by Fannie Mae and Freddie Mac and other U.S. government agencies linked to long-termUnited States debt. For debt securities with limited or inactive markets, the impact of these macroeconomic conditions upon fair value estimates includes higher risk-adjusted discount rates and downgrades in credit ratings provided by nationally recognized credit rating agencies, (e.g., Moody's, S&P, Fitch, and DBRS). The following table separates investments with an unrealized loss position atDecember 31, 2011 into two categories: investments purchased prior to 2011 and those purchased during 2011. Of those investments purchased prior to 2011, the fair value and unrealized loss atDecember 31, 2010 is also presented. December 31, 2011 December 31, 2010 Unrealized Unrealized Loss as a Loss as a Unrealized Percent of Unrealized Percent of (Dollars in thousands) Fair Value Loss
Fair Value Fair Value (Loss) Gain Fair Value
Temporarily impaired securities purchased prior to 2011 State and local governments $ 11,716 (489 ) -4.17 % 11,244 (968 ) -8.61 % Collateralized debt obligations 5,366 (282 ) -5.26 % 6,595 (4,583 ) -69.49 % Residential mortgage-backed securities 250,124 (2,151 ) -0.86 % 498,622 424 0.09 % Total $ 267,206 (2,922 ) -1.09 % 516,461 (5,127 ) -0.99 % Temporarily impaired securities purchased during 2011 State and local governments $ 24,666 (89 ) -0.36 % Corporate bonds 31,782 (1,264 ) -3.98 % Residential mortgage-backed securities 701,492 (5,032 ) -0.72 % Total $ 757,940 (6,385 ) -0.84 % Temporarily impaired securities State and local governments $ 36,382 (578 ) -1.59 % Corporate bonds 31,782 (1,264 ) -3.98 % Collateralized debt obligations 5,366 (282 ) -5.26 % Residential mortgage-backed securities 951,616 (7,183 ) -0.75 % Total $ 1,025,146 (9,307 ) -0.91 % 50
--------------------------------------------------------------------------------
Table of Contents
With respect to severity, the following table provides the number of securities and amount of unrealized loss in the various ranges of unrealized loss as a percent of book value.
Number of Unrealized Debt (Dollars in thousands) Loss Securities Greater than 20.0% $ - - 15.1% to 20.0% (400 ) 1 10.1% to 15.0% (661 ) 3 5.1% to 10.0% (1,103 ) 13 0.1% to 5.0% (7,143 ) 435 Total $ (9,307 ) 452 With respect to the duration of the impaired debt securities, the Company identified 23 which have been continuously impaired for the twelve months endingDecember 31, 2011 . 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. Of the 23 securities, 11 are state and local governments securities with an unrealized loss of$488 thousand , the most notable of which had an unrealized loss of$201 thousand . Of the 23 securities, 6 are identical collateralized debt obligation ("CDO") securities with an aggregate unrealized loss of$282 thousand , the most notable of which had an unrealized loss of$71 thousand . With respect to the CDO securities, each is in the form of a pooled trust preferred structure of which the Company owns a portion of the Senior Notes tranche. All of the assets underlying the pooled trust preferred structure are capital securities issued by trust subsidiaries of holding companies of banks and thrifts. SinceDecember 31, 2009 , the Senior Notes have been rated "A3" by Moody's. The Senior Notes have also been rated as ofJanuary 4, 2012 by Fitch as "BBB," such rating effectiveSeptember 21, 2010 . Prior to such downgrade, Fitch had rated the Senior Notes as "A." The Trustee may treat a trust subsidiary as in default either because of an actual default or due to elective deferral of interest payments on their respective obligations. The following tables indicate the number of trust subsidiaries treated by the Trustee as in default and the percentage of those to the total number of trust subsidiaries for 2011 and 2010. Quarters ended 2011 March 31 June 30 September 30 December 31 Total number of trust subsidiaries 26 26 26 23 Number of trust subsidiaries in default 9 9 10 9 Percentage of trust subsidiaries in default 35 % 35 % 38 % 39 % Quarters ended 2010 March 31 June 30 September 30 December 31 Total number of trust subsidiaries 26 26 26 26 Number of trust subsidiaries in default 6 8 8 9 Percentage of trust subsidiaries in default 23 % 31 % 31 % 35 % 51
--------------------------------------------------------------------------------
Table of Contents
In accordance with the prospectus for the CDO structure, the priority of payments favors holders of the Senior Notes over holders of the Mezzanine Notes and Income Notes. Though the maturity of the CDO structure isJune 15, 2031 , 62.4 percent of the outstanding principle of the Senior Notes has been prepaid throughDecember 15, 2011 . More specifically, at any time the Senior Notes are outstanding, if either the Senior Principle or Senior Interest Coverage Tests (the "Senior Coverage Tests") are not satisfied as of a calculation date, then funds that would have otherwise been used to make payments on the Mezzanine Notes or Income Notes shall instead be applied as principle prepayments on the Senior Notes. Both the Senior Principle Coverage Test and the Senior Interest Test exceeded their threshold levels. During the first three quarters of 2011 and the preceding five quarters, the Senior Principle Coverage Test was below its threshold level, while the Senior Interest Coverage Test exceeded its threshold level. The Senior Coverage Tests exceeded the threshold levels for each of the first three quarters of 2009. In its assessment of the Senior Notes for potential other-than-temporary impairment, the Company evaluated the underlying issuers and engaged a third party vendor to stress test the performance of the underlying capital securities and related obligors. Such stress testing has been performed at the end of each quarter of 2011, 2010 and 2009. In each instance of stress testing, the results reflect no credit loss for the Senior Notes. In evaluating such results, the Company reviewed with the third party vendor the stress test assumptions and concurred with the analyses in concluding that the impairment atDecember 31, 2011 and at the end of each of the prior quarters of 2011, 2010 and 2009 was temporary, and not other-than-temporary. Of the 23 securities temporarily impaired continuously for the twelve months endedDecember 31, 2011 , 6 are non-guaranteed private label whole loan mortgages with an aggregate unrealized loss of$333 thousand , the most notable of which had an unrealized loss of$308 thousand . Of the 6 non-guaranteed private label whole loan mortgages, 5 are collateralized by 30-year fixed rate residential mortgages considered to be "Prime" and 1 is collateralized by 30-year fixed rate residential mortgages considered to be "ALT - A." Moreover, none of the underlying mortgage collateral is considered "subprime." The Company engages a third-party to perform detailed analysis for other-than-temporary impairment of such securities. Such analysis takes into consideration original and current data for the tranche and CMO structure, the non-guaranteed classification of each CMO tranche, current and deal inception credit ratings, credit support (protection) afforded the tranche through the subordination of other tranches in the CMO structure, the nature of the collateral (e.g., Prime or Alt-A) underlying each CMO tranche, and realized cash flows since purchase. Based on the analysis of its impaired debt securities as ofDecember 31, 2011 , the Company determined that none of such securities had other-than-temporary impairment. Sources of Funds Deposits obtained through the Banks have traditionally been the principal source of funds for use in lending and other business purposes. The Banks have a number of different deposit programs designed to attract both short-term and long-term deposits from the general public by providing a wide selection of accounts and rates. These programs include non-interest bearing demand accounts, interest bearing checking, regular statement savings, money market deposit accounts, and fixed rate certificates of deposit with maturities ranging from three months to five years, negotiated-rate jumbo certificates, and individual retirement accounts. In addition, the Banks obtain wholesale deposits through various programs including reciprocal deposit programs (e,g, Certificate of Deposit Account Registry System ("CDARS")). The Banks also obtain funds from repayment of loans and investment securities, repurchase agreements, advances from the FHLB, other borrowings, and sale of loans and investment securities. Loan repayments are a relatively stable source of funds, while interest bearing deposit inflows and outflows are significantly influenced by general interest rate levels and market conditions. Borrowings and advances may be used on a short-term basis to compensate for reductions in normal sources of funds such as deposit inflows at less than projected levels. Borrowings also may be used on a long-term basis to support expanded activities and to match maturities of longer-term assets. 52
--------------------------------------------------------------------------------
Table of Contents
Deposits
Deposits are obtained primarily from individual and business residents of the Banks' market area. The Banks issue negotiated-rate certificate of deposits accounts and have paid a limited amount of fees to brokers to obtain deposits. The following table illustrates the amounts outstanding atDecember 31, 2011 for deposits of$100,000 and greater, according to the time remaining to maturity. Included in certificates of deposit are brokered certificates of deposit and deposits issued through the CDARS of$372 million . Included in Demand Deposits are brokered deposits of$227 million . Certificates Demand (Dollars in thousands) of Deposit Deposits
Totals
Within three months $ 424,350 1,986,757
2,411,107
Three months to six months 144,620 -
144,620
Seven months to twelve months 201,719 -
201,719 Over twelve months 162,494 - 162,494 Totals $ 933,183 1,986,757 2,919,940
For additional deposit information, see Note 7 to the Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data."
Repurchase Agreements, FHLB Advances and Other Borrowings
The Banks have borrowed money through repurchase agreements. This process involves the "selling" of one or more of the securities in the Banks' investment portfolio and by entering into an agreement to "repurchase" that same security at an agreed upon later date, typically overnight. A rate of interest is paid for the subject period of time. Through policies adopted by each of the Banks' Board of Directors, the Banks enter into repurchase agreements with local municipalities, and certain customers, and have adopted procedures designed to ensure proper transfer of title and safekeeping of the underlying securities. In addition to retail repurchase agreements, the Company has entered into wholesale repurchase agreements as additional funding sources which the Company utilizes from time to time. All bank subsidiaries, except San Juans, are members of the FHLB ofSeattle . San Juans is a member of the FHLB of Topeka. FHLB ofSeattle and Topeka are two of twelve banks that comprise the FHLB System. As members of the FHLB, the Banks may borrow from such entities on the security of FHLB stock, which the Banks are required to own as a member. The borrowings are collateralized by eligible categories of loans and investment securities (principally, securities which are obligations of, or guaranteed by,the United States and its agencies), provided certain standards related to credit-worthiness have been met. Advances are made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based either on a fixed percentage of an institution's total assets or on the FHLB's assessment of the institution's credit-worthiness. FHLB advances have been used from time to time to meet seasonal and other withdrawals of deposits and to expand lending by matching a portion of the estimated amortization and prepayments of retained fixed rate mortgages. During 2009 and 2010, the Banks periodically borrowed funds through the Term Auction Facility ("TAF") program of the FRB. The TAF program required pledging of certain loans or investment securities of the Banks. The TAF program ceased operations inApril 2010 . For additional information concerning the Company's borrowings and repurchase agreements, see Notes 8 and 9 to the Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data."
Short-term borrowings
A critical component of the Company's liquidity and capital resources is access to short-term borrowings to fund its operations. Short-term borrowings are accompanied by increased risks managed by asset liability committees ("ALCO") such as rate increases or unfavorable change in terms which would make it more costly to obtain future short-term borrowings. The Company's short-term borrowing sources include FHLB advances, discount window borrowings, federal funds purchased, wholesale deposits, and retail and wholesale repurchase agreements. FHLB advances and certain other short-term borrowings may be extended as long-term borrowings to decrease certain risks such as liquidity or interest rate risk; however, the reduction in risks are weighed against the increased cost of funds. 53
--------------------------------------------------------------------------------
Table of Contents
The following table provides information relating to short-term borrowings which consists of borrowings that mature within one year of period end:
At or for the Years ended December 31, (Dollars in thousands) 2011 2010 2009 Repurchase agreements Amount outstanding at end of period $ 258,643 249,403 212,506 Weighted interest rate on outstanding amount 0.42 % 0.63 % 0.94 % Maximum outstanding at any month-end $ 338,352 252,083 234,914 Average balance $ 267,058 227,202 204,503 Weighted average interest rate 0.51 % 0.71 % 0.98 % FHLB advances Amount outstanding at end of period $ 792,000 761,064 586,057 Weighted interest rate on outstanding amount 0.68 % 0.33 % 0.25 % Maximum outstanding at any month-end $ 877,017 773,076 586,057 Average balance $ 721,226 488,044 289,141 Weighted average interest rate 0.76 % 0.39 % 0.33 % FRB discount window Amount outstanding at end of period $ - - 225,000 Weighted interest rate on outstanding amount N/A 0.00 % 0.25 % Maximum outstanding at any month-end $ - 235,000 1,005,000 Average balance $ - 35,630 658,262 Weighted average interest rate N/A 0.25 % 0.26 %
Subordinated Debentures
In addition to funds obtained in the ordinary course of business, the Company formed or acquired financing subsidiaries for the purpose of issuing trust preferred securities that entitle the shareholder to receive cumulative cash distributions from payments thereon. The subordinated debentures outstanding as ofDecember 31, 2011 were$125,275,000 , including fair value adjustments from prior acquisitions. For additional information regarding the subordinated debentures, see Note 10 to the Consolidated Financial Statements "Item 8. Financial Statements and Supplementary Data."
Contractual Obligations and Off-Balance Sheet Arrangements
In the normal course of business, there are various outstanding commitments to extend credit, such as letters of credit and un-advanced loan commitments, which are not reflected in the accompanying condensed consolidated financial statements. Management does not anticipate any material losses as a result of these transactions. The Company has outstanding debt maturities, the largest aggregate amount of which were FHLB advances. For the schedules of outstanding commitments and future minimum lease payments see Note 21 to the Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data." The following table represents the Company's contractual obligations as ofDecember 31, 2011 : Payments Due by Period Indeterminate (Dollars in thousands) Total Maturity 1 2012 2013 2014 2015 2016 Thereafter Deposits $ 4,821,213
3,359,477 1,147,799 175,543 70,701 36,225
31,403 65 Repurchase agreements 258,643 - 258,643 - - - - - FHLB advances 1,069,046 - 792,000 - - 75,000 45,000 157,046 Other borrowed funds 8,123 - 188 - - - 4 7,931 Subordinated debentures 125,275 - - - - - - 125,275 Capital lease obligations 2,643 - 235 238 829 195 197 949 Operating lease obligations 13,778 - 2,235 1,860 1,708 1,533 1,318 5,124 $ 6,298,721 3,359,477 2,201,100 177,641 73,238 112,953 77,922 296,390
1 Represents non-interest bearing deposits and NOW, savings, and money market
accounts. 54
--------------------------------------------------------------------------------
Table of Contents
Liquidity Risk
Liquidity risk is the possibility that the Company will not be able to fund present and future obligations as they come due because of an inability to liquidate assets or obtain adequate funding at a reasonable cost. The objective of liquidity management is to maintain cash flows adequate to meet current and future needs for credit demand, deposit withdrawals, maturing liabilities and corporate operating expenses. Effective liquidity management entails three elements:
1. Assessing on an ongoing basis, the current and expected future needs for
funds, and ensuring that sufficient funds or access to funds exist to meet
those needs at the appropriate time.
2. Providing for an adequate cushion of liquidity to meet unanticipated cash
flow needs that may arise from potential adverse circumstances ranging
from high probability/low severity events to low probability/high severity. 3. Balancing the benefits between providing for adequate liquidity to mitigate potential adverse events and the cost of that liquidity.
The following table identifies certain liquidity sources and capacity available to the Company at
December 31, (Dollars in thousands) 2011 FHLB advances Borrowing capacity $ 1,102,899 Amount utilized (1,069,046 ) Amount available $ 33,853 FRB discount window Borrowing capacity $ 244,886 Amount utilized - Amount available $ 244,886 Unsecured lines of credit available $ 183,860 Unencumbered securities U.S. government and federal agency $ 208 U.S. government sponsored enterprises 3,487 State and local governments 941,226 Corporate bonds 62,237 Collateralized debt obligations 5,366 Residential mortgage-backed securities 960,388 Total unencumbered securities $ 1,972,912 The Company and each of the bank subsidiaries have a wide range of versatility in managing the liquidity and asset/liability mix across each of the bank subsidiaries as well as the Company as a whole. ALCO committees are maintained at the Parent and bank subsidiary levels with the ALCO committees meeting regularly to assess liquidity risk, among other matters. The Company monitors liquidity and contingency funding alternatives through management reports of liquid assets (e.g., investment securities), both unencumbered and pledged, as well as borrowing capacity, both secured and unsecured.
Capital Resources
Maintaining capital strength continues to be a long-term objective. Abundant capital is necessary to sustain growth, provide protection against unanticipated declines in asset values, and to safeguard the funds of depositors. Capital also is a source of funds for loan demand and enables the Company to effectively manage its assets and liabilities. Taking these considerations into account, the Company may, as it has done in the past, decide to utilize a portion of its strong capital position to repurchase shares of its outstanding common stock, from time to time, depending on market price and other relevant considerations. TheFederal Reserve Board has adopted capital adequacy guidelines that are used to assess the adequacy of capital in supervising a bank holding company. Each bank subsidiary was considered well capitalized by their respective regulator as ofDecember 31, 2011 and 2010. There are no conditions or events sinceDecember 31, 2011 that management believes have changed the Company's or bank subsidiaries' risk-based capital category. 55
--------------------------------------------------------------------------------
Table of Contents
The following table illustrates theFederal Reserve Board's capital adequacy guidelines and the Company's compliance with those guidelines as ofDecember 31, 2011 . Tier 1 (Core) Total Leverage (Dollars in thousands) Capital Capital Capital Total stockholders' equity $ 850,227 850,227 850,227 Less: Goodwill and intangibles (112,780 ) (112,780 ) (112,780 ) Net unrealized gain on AFS debt securities (33,487 ) (33,487 ) (33,487 ) Other adjustments (56 ) (56 ) (56 )
Plus:
Allowance for loan and lease losses - 55,550 - Subordinated debentures 124,500 124,500 124,500 Other adjustments - - - Regulatory capital $ 828,404 883,954 828,404 Risk-weighted assets $ 4,361,871 4,361,871 Total adjusted average assets $ 7,015,052 Capital as % of risk weighted assets 18.99 %
20.27 % 11.81 %
Regulatory "well capitalized" requirement 6.00 %
10.00 %
Excess over "well capitalized" requirement 12.99 %
10.27 %
Dividend payments were$0.52 per share for 2011 and 2010. The payment of dividends is subject to government regulation in that regulatory authorities may prohibit banks and bank holding companies from paying dividends that would constitute an unsafe or unsound banking practice. Additionally, current guidance from the Federal Reserve provides, among other things, that dividends per share on the Company's common stock generally should not exceed earnings per share measured over the previous four fiscal quarters. In addition to the primary and safeguard liquidity sources available, the Company has the capacity to issue 117,187,500 shares of common stock of which 71,915,073 has been issued as ofDecember 31, 2011 . The Company's capacity to issue additional shares has been demonstrated with the most recent stock issuances in 2010 and 2008, although no assurances can be made that future stock issuances would be as successful. The Company also has the capacity to issue 1,000,000 shares of preferred shares of which none are currently issued. For additional information, see Note 12 to the Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data."
Federal and State Income Taxes
The Company files a consolidated federal income tax return, using the accrual method of accounting. All required tax returns have been timely filed. Financial institutions are subject to the provisions of the Internal Revenue Code of 1986, as amended, in the same general manner as other corporations. UnderMontana ,Idaho ,Colorado andUtah law, financial institutions are subject to a corporation tax, which incorporates or is substantially similar to applicable provisions of the Internal Revenue Code. The corporation tax is imposed on federal taxable income, subject to certain adjustments. State taxes are incurred at the rate of 6.75 percent inMontana , 7.6 percent inIdaho , 5 percent inUtah and 4.63 percent inColorado .Wyoming andWashington do not impose a corporate income tax. 56
--------------------------------------------------------------------------------
Table of Contents
The Company has equity investments in Certified Development Entities which have received allocations of New Markets Tax Credits ("NMTC"). Administered by theCommunity Development Financial Institutions Fund of theU.S. Department of the Treasury , theNMTC program is aimed at stimulating economic and community development and job creation in low-income communities. The federal income tax credits received are claimed over a seven-year credit allowance period. The Company also has equity investments in Low-Income Housing Tax Credits which are indirect federal subsidies used to finance the development of affordable rental housing for low-income households. The federal income tax credits received are claimed over a ten-year credit allowance period. The Company has investments inQualified Zone Academy andQualified School Construction bonds whereby the Company receives quarterly federal income tax credits in lieu of taxable interest income until the bonds mature. The federal income tax credits on these bonds are subject to federal and state income tax. Following is a list of expected federal income tax credits to be received in the years indicated. New Low-Income Investment Market Housing Securities (Dollars in thousands) Tax Credits Tax Credits Tax Credits Total 2012 2,681 1,270 943 4,894 2013 2,775 1,270 926 4,971 2014 2,850 1,270 904 5,024 2015 2,850 1,174 880 4,904 2016 1,014 1,172 855 3,041 Thereafter 450 4,207 4,432 9,089 $ 12,620 10,363 8,940 31,923 Income tax (benefit) expense for the years endedDecember 31, 2011 and 2010 was$(281) thousand and$7.3 million , respectively. The Company's effective tax rate for the years endedDecember 31, 2011 and 2010 was -1.6 percent and 14.8 percent, respectively. The primary reason for the current year negative effective tax rate is the low pre-tax income of$17.2 million which was mainly a result of the$40.2 million goodwill impairment charge. In addition to the current year goodwill impairment charge, the significant reasons for the low effective rates are the amount of tax-exempt investment income and federal tax credits. The tax-exempt income was$31.4 million and$23.4 million for the years endedDecember 31, 2011 and 2010, respectively. The federal tax credit benefits were$3.6 million and$3.4 million for the years endedDecember 31, 2011 and 2010, respectively. The Company continues its investments in select municipal securities and various VIEs whereby the Company receives federal tax credits.
See Note 14 to the Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data" for additional information.
57
--------------------------------------------------------------------------------
Table of Contents
Average Balance Sheet
The following three-year schedule provides 1) the total dollar amount of interest and dividend income of the Company for earning assets and the average yield; 2) the total dollar amount of interest expense on interest bearing liabilities and the average rate; 3) net interest and dividend income and interest rate spread; and 4) net interest margin and net interest margin tax-equivalent; and 5) return on average assets and return on average equity.
Year ended December 31, 2011 Year ended December 31, 2010 Year ended December 31, 2009 Average Average Average Average Interest & Yield/ Average Interest & Yield/ Average Interest & Yield/ (Dollars in thousands) Balance Dividends Rate Balance Dividends Rate Balance Dividends Rate Assets Residential real estate loans $ 581,644 $
33,060 5.68 %
$ 829,348 $ 54,498 6.57 % Commercial loans 2,364,115
130,249 5.51 % 2,542,186 143,861 5.66 %
2,608,961 151,580 5.81 % Consumer and other loans 680,032 40,538 5.96 % 684,752 42,130 6.15 % 702,232 44,844 6.39 % Total loans 1 3,625,791 203,847 5.62 % 3,999,012 231,392 5.79 % 4,140,541 250,922 6.06 % Tax-exempt investment securities 2 705,548 31,420 4.45 % 479,640 23,351 4.87 % 445,063 22,196 4.99 % Taxable investment securities 3 2,115,779 44,842 2.12 % 1,378,468 33,659 2.44 % 707,062 29,376 4.15 % Total earning assets 6,447,118
280,109 4.34 % 5,857,120 288,402 4.92 %
5,292,666 302,494 5.72 %
Goodwill and intangibles 145,623 158,636 158,896 Non-earning assets 330,075 291,284 240,367 Total assets $ 6,922,816 $ 6,307,040 $ 5,691,929 Liabilities NOW accounts $ 775,383 $ 1,906 0.25 % $ 718,175 $ 2,545 0.35 % $ 572,260 $ 2,275 0.40 % Savings accounts 387,921 511 0.13 % 345,297 725 0.21 % 303,794 947 0.31 % Money market deposit accounts 875,127 3,667 0.42 % 848,495 6,975 0.82 % 768,939 8,436 1.10 % Certificate accounts 1,085,293 16,332 1.50 % 1,082,428 21,016 1.94 % 960,403 24,719 2.57 % Wholesale deposits 4 622,808 2,853 0.46 % 533,476 4,337 0.81 % 133,083 2,052 1.54 % FHLB advances 942,651 12,687 1.35 % 691,969 9,523 1.38 % 473,038 7,952 1.68 %
Repurchase agreements, federal funds purchased and other borrowed funds
418,626 6,538 1.56 % 407,516 8,513 2.09 % 995,006 10,786 1.08 % Total interest bearing liabilities 5,107,809 44,494 0.87 % 4,627,356 53,634 1.16 % 4,206,523 57,167 1.36 % Non-interest bearing deposits 923,039 830,513 755,128 Other liabilities 34,343 31,675 38,356 Total liabilities 6,065,191 5,489,544 5,000,007 Stockholders' Equity Common stock 719 697 615 Paid-in capital 643,140 611,577 495,340 Retained earnings 195,301 196,785 193,973 Accumulated other comprehensive income 18,465 8,437 1,994 Total stockholders' equity 857,625 817,496 691,922 Total liabilities and stockholders' equity $ 6,922,816 $ 6,307,040 $ 5,691,929 Net interest income $ 235,615 $ 234,768 $ 245,327 Net interest spread 3.47 % 3.76 % 4.36 % Net interest margin 3.65 % 4.01 % 4.64 % Net interest margin (tax-equivalent) 3.89 % 4.21 % 4.82 %
1 Total loans are gross of the allowance for loan and lease losses, net of
unearned income and include loans held for sale. Non-accrual loans were
included in the average volume for the entire period.
2 Excludes tax effect of
investment security income for the years ended
2009 respectively.
3 Excludes tax effect of
tax credits for the years endedDecember 31, 2011 , 2010 and 2009 respectively.
4 Wholesale deposits include brokered deposits classified as NOW, money market
deposit and certificate accounts, including reciprocal deposits. 58
--------------------------------------------------------------------------------
Table of Contents
Rate/Volume Analysis
Net interest income can be evaluated from the perspective of relative dollars of change in each period. Interest income and interest expense, which are the components of net interest income, are shown in the following table on the basis of the amount of any increases (or decreases) attributable to changes in the dollar levels of the Company's interest earning assets and interest bearing liabilities ("Volume") and the yields earned and rates paid on such assets and liabilities ("Rate"). The change in interest income and interest expense attributable to changes in both volume and rates has been allocated proportionately to the change due to volume and the change due to rate. Years ended December 31, Years ended December 31, 2011 vs. 2010 2010 vs. 2009 Increase (Decrease) Due to: Increase (Decrease) Due to: (Dollars in thousands) Volume Rate Net Volume Rate Net Interest income Residential real estate loans $ (11,198 ) $ (1,143 ) $ (12,341 ) $ (3,764 ) $ (5,333 ) $ (9,097 ) Commercial loans (10,077 ) (3,535 ) (13,612 ) (3,880 ) (3,839 ) (7,719 ) Consumer and other loans (290 ) (1,302 ) (1,592 ) (1,116 ) (1,598 ) (2,714 ) Investment securities 29,553 (10,301 ) 19,252 31,601 (26,163 ) 5,438 Total interest income 7,988 (16,281 ) (8,293 ) 22,841 (36,933 ) (14,092 ) Interest expense NOW accounts 203 (842 ) (639 ) 580 (310 ) 270 Savings accounts 89 (303 ) (214 ) 129 (351 ) (222 ) Money market deposit accounts 219 (3,527 ) (3,308 ) 873 (2,333 ) (1,460 ) Certificate accounts 56 (4,740 ) (4,684 ) 3,141 (6,844 ) (3,703 ) Wholesale deposits 726 (2,210 ) (1,484 ) 6,173 (3,889 ) 2,284 FHLB advances 3,450 (286 ) 3,164 3,680 (2,109 ) 1,571 Repurchase agreements and other borrowed funds 232 (2,207 ) (1,975 ) (6,368 ) 4,095 (2,273 ) Total interest expense 4,975 (14,115 ) (9,140 ) 8,208 (11,741 ) (3,533 ) Net interest income $ 3,013 $ (2,166 ) $ 847 $ 14,633 $ (25,192 ) $ (10,559 ) Net interest income decreased$10.6 million in 2010 over 2009. The decrease in net interest income was primarily due to lower yield and lower volume of loans which was partially offset by an increased volume of investment securities and net decrease in interest expense. Net interest income increased$847 thousand in 2011 over 2010. During 2011, the Company continued to purchase investment securities and reduce deposit rates to offset the lower volume of loans and maintain net interest income.
Effect of inflation and changing prices
Generally accepted accounting principles often require the measurement of financial position and operating results in terms of historical dollars, without consideration for change in relative purchasing power over time due to inflation. Virtually all assets of the Company and each bank subsidiary are monetary in nature; therefore, interest rates generally have a more significant impact on a company's performance than does the effect of inflation.
Critical Accounting Policies
The preparation of consolidated financial statements in conformity with accounting principles generally accepted inthe United States of America often requires management to use significant judgments as well as subjective and/or complex measurements in making estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses. The Company considers its accounting policies for the ALLL, goodwill, fair value measurements and determination of whether an investment security is temporarily or other-than-temporarily impaired to be critical accounting policies. 59
--------------------------------------------------------------------------------
Table of Contents
Allowance for Loan and Lease Losses
For information regarding the ALLL, its relation to the provision for loan losses and risk related to asset quality, see the section captioned "Allowance for Loan and Lease Losses" included in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 1 and 4 to the Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data."
Goodwill
The Company performed its annual goodwill impairment test during the third quarter of 2011. There were high levels of volatility and dislocation in bank stock prices nationwide during the third quarter of 2011, such that the Company's stock was trading at prices that were below the Company's book value per share for August and September. In addition, soft economic conditions continued in certain market areas of the Company. Due to such factors, as well as the Company's internal evaluation process, the Company engaged an independent valuation firm to determine the implied fair value of Mountain West and 1st Bank. These two bank subsidiaries were selected because of Mountain West's losses and decline in credit quality and 1st Bank's significant amount of goodwill relative to its total assets. As part of step one of the goodwill impairment test, the independent valuation firm estimated the fair value of each of these bank subsidiaries using the quoted market prices of other publicly traded depository banks and thrifts, discounted cash flows and inputs from comparable acquisition transactions. Based on the estimated fair value, it was determined the valuation firm should proceed to step two of the goodwill impairment test whereby the firm valued the assets and liabilities of these banks and concluded that the implied fair value of goodwill was less than the current carrying value of goodwill for each of these two banks. As a result of the valuation, the Company recognized goodwill impairment charges of$23.2 million ($15.6 million after-tax) and$17.0 million at Mountain West and 1st Bank, respectively. For the remaining eight bank subsidiaries each with goodwill, the Company determined an independent valuation was not necessary based on the Company's analysis of each of the separate bank subsidiaries' goodwill carrying value, earnings, capital and credit quality metrics as ofSeptember 30, 2011 . For each of these bank subsidiaries, the Company performed the first step in evaluating goodwill for possible impairment utilizing data provided by the independent valuation firm. The Company determined an estimated fair value based on such data and applying premiums and discounts that took into account each of the individual bank subsidiaries' earnings, capital and credit quality metrics as ofSeptember 30, 2011 . In addition, the Company determined the Company's estimated fair value and compared such value to the Company's market capitalization atSeptember 30, 2011 to calculate an implied control premium for the Company. The implied control premium was determined to be reasonable based upon estimated control premiums provided by an independent third party. Based on the results of these tests, the Company concluded it did not need to proceed to step two of the goodwill impairment testing process for any of the eight bank subsidiaries with goodwill. Based on such analysis, there was no goodwill impairment as ofSeptember 30, 2011 at any of the remaining eight bank subsidiaries each with goodwill. Since there were no events or circumstances that occurred during the fourth quarter of 2011 that would more-likely-than not reduce the fair value of a reporting unit below its carrying value, the Company did not perform interim testing atDecember 31, 2011 . In addition, the Company's stock price increased 28 percent fromSeptember 30, 2011 to$12.03 atDecember 31, 2011 which was above book value per share. Significant judgment was applied in assessing goodwill for impairment and the Company believes the assumptions utilized were reasonable and appropriate. In addition, the Company continues to maintain$106 million in goodwill on its balance sheet and future adverse changes in the economic environment, operating results of the reporting units, or other factors could result in future goodwill impairment.
For additional information on goodwill, see Notes 1 and 6 to the Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data."
60
--------------------------------------------------------------------------------
Table of Contents
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There is a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are as follows:
Level 1 Quoted prices in active markets for identical assets or liabilities
Level 2 Observable inputs other than Level 1 prices, such as quoted prices for
similar assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the assets or
liabilities
Level 3 Unobservable inputs that are supported by little or no market activity and
that are significant to the fair value of the assets or liabilities
On a recurring basis, the Company measures investment securities and interest rate swap agreements at fair value. The fair value of such investment 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. 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 were judged to be active markets. 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. The fair value of interest rate swap derivative agreements are obtained from an independent party and based upon the estimated amounts to settle the contracts considering current interest rates and are calculated using discounted cash flows. The inputs used to determine fair value include the 3 monthLibor forward curve to estimate variable rate cash inflows and the spotLibor curve to estimate the discount rate. The estimated variable rate cash inflows are compared to the fixed rate outflows and such difference is discounted to a present value to estimate the fair value of the interest rate swaps. In performing due diligence of the estimated fair value, the Company obtained and compares the pricing from a secondary independent party. These inputs are classified within Level 2 of the fair value hierarchy. On a non-recurring basis, the Company measures OREO, collateral-dependent impaired loans, net of ALLL, and goodwill at fair value. OREO is carried at the lower of fair value at acquisition date or current estimated fair value, less estimated cost to sell. Estimated fair value of OREO is based on appraisals or evaluations. OREO is classified within Level 3 of the fair value hierarchy. Collateral-dependent impaired loans, net of ALLL, are loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms and are considered impaired. The estimated fair value of collateral-dependent impaired loans is based on the appraised fair value of the collateral, less estimated cost to sell. Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy. The Company reviews appraisals for OREO and collateral-dependent loans, giving consideration to the highest and best use of the collateral. The Company considers the appraisal or evaluation as the starting point for determining fair value and the Company also considers other factors and events in the environment that may affect the fair value. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell. 61
--------------------------------------------------------------------------------
Table of Contents
Goodwill is evaluated for impairment at the bank subsidiary level at least annually. As a result of a goodwill impairment assessment performed by an independent valuation firm for two of the Company's bank subsidiaries, Mountain West and 1st Bank, a goodwill impairment charge was recorded during the third quarter of 2011. The key inputs used to determine the implied fair value of such bank subsidiaries and the corresponding amount of the impairment charge included quoted market prices of other publically traded depository banks and thrifts, discounted cash flows and inputs from comparable transactions. Based on the estimated fair value of the two banks, the firm valued the assets and liabilities of these banks and concluded there was goodwill impairment. Key inputs used in valuing the assets included estimated current interest rates for loans, loan discount rates, loan prepayment speeds and credit risk factors for loans. Key inputs used in valuing the liabilities included estimated current interest rates for borrowings, current interest rates for deposits and core deposit operating expenses, income and decay rates. For the remaining bank subsidiaries, the Company utilized the data provided by the independent valuation firm and estimated a fair value based on such data and applied premiums and discounts that took into account the individual bank subsidiaires' earnings capital and credit quality metrics. These inputs are classified within Level 3 of the fair value hierarchy.
For additional information on fair value measurements, see Note 20 to the Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data."
Other-Than-Temporary Impairment on Securities
The Company assesses individual securities in its investment securities portfolio for impairment at least on a quarterly basis, and more frequently when economic or market conditions warrant. An investment is impaired if the fair value of the security is less than its carrying value at the financial statement date. If impairment is determined to be other-than-temporary, an impairment loss is recognized by reducing the amortized cost for the credit loss portion of the impairment with a corresponding charge to earnings for a like amount. For fair value estimates provided by third party vendors, management also considered the models and methodology for appropriate consideration of both observable and unobservable inputs, including appropriately adjusted discount rates and credit spreads for securities with limited or inactive markets, and whether the quoted prices reflect orderly transactions. For certain securities, the Company obtained independent estimates of inputs, including cash flows, in supplement to third party vendor provided information. The Company also reviewed financial statements of select issuers, with follow up discussions with issuers' management for clarification and verification of information relevant to the Company's impairment analysis. In evaluating impaired securities for other-than-temporary impairment losses, management considers 1) the severity and duration of the impairment, 2) the credit ratings of the security, 3) the overall deal structure, including the Company's position within the structure, the overall and near term financial performance of the issuer and underlying collateral, delinquencies, defaults, loss severities, recoveries, prepayments, cumulative loss projections, discounted cash flows and fair value estimates. For additional information regarding the accounting policy and analysis of other-than-temporary impairment on securities, see the section captioned "Investment Activity" included in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 1 to the Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data."
Impact of Recently Issued Accounting Standards
New authoritative accounting guidance that has either been issued or is effective during 2011 and may possibly have a material impact on the Company includes amendments to: FASB Accounting Standards CodificationTM ("ASC") Topic 220, Comprehensive Income, FASB ASC Topic 310, Receivables, FASB ASC Topic 350, Intangibles - Goodwill and Other, FASB ASC Topic 805, Business Combinations and FASB ASC Topic 820, Fair Value Measurements and Disclosures. For additional information on the topics and the impact on the Company see Note 1 to the Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data." 62
--------------------------------------------------------------------------------
Table of Contents
Wordcount: | 20975 |
Advisor News
Annuity News
Health/Employee Benefits News
Life Insurance News