INVESTOR INFORMATION
2012 Cash Dividend Data
Quarter
1
2
3
4
Record Date
April 10, 2012
July 10, 2012
October 9, 2012
December 11, 2012
Payment Date
April 19, 2012
July 19, 2012
October 18, 2012
December 20, 2012
Share Amount
$0.13
$0.13
$0.13
$0.14
2013 Anticipated Dividend Dates 1
2013 Anticipated Earnings 1
Quarter
1
2
3
4
Record Date
April 9, 2013
July 9, 2013
October 8, 2013
January 14, 2014
Payment Date
April 18, 2013
July 18, 2013
October 17, 2013
January 23, 2014
Quarter
1
2
3
4
Announcement Date
April 18, 2013
July 25, 2013
October 24, 2013
January 23, 2014
Common Stock Price
2012
$16.17
$12.43
$14.71
2011
$15.94
$9.09
$12.03
2010
$18.88
$13.00
$15.11
2009
$19.36
$11.92
$13.72
2008
$27.72
$14.12
$19.02
Ten-year Dividend History
Cash Dividends
Declared 2
$0.32
$0.36
$0.40
$0.45
$0.50
$0.52
$0.52
$0.52
$0.52
$0.53
Stock
Dividends/Splits
10% Stock Dividend
5 for 4 stock split
5 for 4 stock split
3 for 2 stock split
None
None
None
None
None
None
Distribution Date of
Stock Dividends/Splits
May 22, 2003
May 20, 2004
May 26, 2005
December 14, 2006
None
None
None
None
None
None
High close
Low close
Close
Year
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
__________
1 Subject to approval by the Board of Directors
2 Restated for stock dividends and stock splits
Stock Listing
Glacier Bancorp, Inc.'s common stock trades on the
NASDAQ Global Select Market under the symbol
GBCI. There are approximately 1,370 shareholders
of record of Glacier Bancorp, Inc. stock.
Stock Transfer Agent
American Stock Transfer & Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
(800) 937-5449
www.amstock.com
Automatic Dividend Reinvestment Plan
Shareholders may reinvest their dividends and make
additional cash purchases of common stock by
participating in the Company's dividend
reinvestment plan. Call American Stock Transfer
& Trust Company at (877) 390-3076 for more
information and to request a prospectus.
Corporate Headquarters
49 Commons Loop
Kalispell, MT 59901
(406) 756-4200
www.glacierbancorp.com
Independent Registered Public Accountants
BKD, LLP
1700 Lincoln Street Suite 1400
Denver, CO 80203
Legal Counsel
Moore, Cockrell, Goicoechea & Axelberg, P.C.
145 Commons Loop, Suite 200
Kalispell, MT 59901
Graham & Dunn PC
Pier 70, Suite 300
2801 Alaskan Way
Seattle, WA 98121
Dear Shareholder,
LETTER TO SHAREHOLDERS
2012 was a very good year for your Company as Glacier Bancorp recorded all time record earnings of $76 million.
As a result, we produced diluted earnings per share of $1.05 which on an operating basis was a 50 percent increase
from the prior year. Your Company’s stock price was up 22 percent, with a total return for the year of 28 percent. It
was a year when our credit quality saw vast improvement and a reorganization of our operating model brought
significant efficiencies and productivity to each of our newly formed Bank Divisions. What makes this past year
especially rewarding was that it took place against the backdrop of an increasingly challenging interest rate and
regulatory environment, one that continues to pressure revenue growth and add to operating costs. Yet, with
seventeen hundred talented and dedicated people you can overcome a great deal of adversity and obstacles. Quite
simply, our people consistently found ways to get the job done. They did it with one common purpose:
to make
Glacier Bancorp the best it can be.
SUBSTANTIAL IMPROVEMENT IN CREDIT QUALITY
Entering the year our expectations for a significant improvement in performance centered upon what we thought
would be better credit quality trends and lower credit costs. Although we believed credit costs would remain above
what we historically have experienced, we felt there was a strong likelihood that we could materially reduce the
amount of our distressed assets and sustain the momentum we saw building toward the end of 2011. What our banks
were able to achieve, however, far exceeded our original expectations. We saw a substantial decrease in overall
credit costs as loan charge-offs were half the amount of the prior year. This allowed us to reduce our loan loss
provision while still maintaining an allowance for loan and lease losses as a percentage of total loans of near 4
percent, significantly above the industry average.
The cost of owning and maintaining other real estate owned ("OREO") properties was another pleasant and
unexpected surprise. As real estate values stabilized, we saw a sizable reduction in both loan write downs and
charge-offs compared to the previous year. Not only did we sell a large amount of OREO property throughout the
year, but I believe it validated our disciplined and methodical approach to disposing of these assets. During the last
three years we resisted the scrutiny and pressure to package these properties and sell them in bulk. Even as real
estate values declined and uncertainty grew as to the length of the crisis, accepting a large discount in order to
quickly remove distressed assets from the balance sheet just did not make sense economically.
In hindsight, and
based on what was accomplished this past year, there is little doubt we took the right approach. In numerous cases
projects and properties were sold at levels well above the offers received a year or two ago. Even accounting for the
expense and lack of income to hold and maintain these assets, this strategy was a clear winner that ultimately saved
millions of dollars. We are convinced it was the right course of action to take for the Company and our shareholders.
OTHER NOTABLE ACHIEVEMENTS
Credit quality was undoubtedly a key driver in last year’s improved earnings performance as the need to add to the
loan loss provision and the cost of OREO was greatly reduced. There were, however, a number of other positive
developments that helped shape the performance of your Company. For the second consecutive year we grew the
balance of our non-interest bearing deposits by 18 percent while generating a record number of new personal and
business checking account customers which now total over a quarter of a million accounts. With interest rates at
historic lows, we recognize these transaction accounts might not create the same value proposition they would in a
more normalized interest rate environment; nonetheless, we manage the Company for the long-term and firmly
believe these types of account relationships and low cost deposits will prove to be very valuable in the future as
In the meantime they have broadened our base of customers and again this past
interest rates eventually increase.
year allowed us to post record fee income on these transactions.
On April 30 we took an innovative approach and changed the operating model we have embraced for over twenty
years. By converting our eleven bank charters to bank divisions, we were able to dramatically reduce our regulatory
and compliance burden, and, more importantly, still maintain the culture and core values that make Glacier Bancorp
a unique banking organization. I am happy to report the process is complete and went without a hitch. In addition to
numerous cost savings, the key component to reorganizing the operating model was to free up our staff from
i administrative duties and allow them to spend more time “on the street” generating new customers and business
opportunities, reengaging and making sure we are taking good care of our existing customers, and developing and
selling new products and services. This reallocation of time and effort has already paid dividends. Now our banks
can focus their resources and attention on growing their customer base and not on their next regulatory exam. This is
critical in order to remain efficient and productive.
It will also be necessary to continue to challenge our business
model and make the necessary adjustments in a thoughtful and strategic fashion if we hope to meet the needs and
interests of all our constituents.
Another highlight of 2012 was the record level of mortgage originations and the fee income derived from this record
volume. Our volume of 1-4 family residential loans exceeded $1.3 billion last year, $200 million more than we had
ever produced before. A combination of government programs along with an accommodative interest rate policy and
a mortgage purchase program by the Federal Reserve made refinancing more accessible to many homeowners. We,
like many banks across the country, benefitted from these programs and policies. Last year our mortgage origination
fee income topped $32 million, an $11 million increase over the prior year, with approximately $6 million of the
increase coming from higher refinance activity. Surprisingly, with the availability of all these special programs and
incentives to refinance, purchase transactions were an important and growing segment of our mortgage volume. Last
year 40 percent of our total mortgage volume was in the form of purchase transactions. It will be essential to have a
game plan that focuses on increasing this type of volume in order to maintain a reasonable amount of mortgage
origination fee income once the refinance volume starts declining.
One of the records we are most proud of has been our ability to sustain and increase our cash dividend over the past
29 years as a shareholder owned Company. For 111 consecutive quarters, during good times as well as the worst
financial crisis since the Great Depression, our dividend was rock solid. In the fourth quarter last year we announced
an 8 percent increase in the dividend from $0.13 per quarter to $0.14 per quarter, or $0.56 per share annualized. The
dividend yield on Glacier Bancorp stock was at or near 4 percent for much of the year which, in the current interest
rate environment, is very attractive. Last quarter’s increase marked the 34th time we have increased the cash dividend
since becoming a public company in 1984.
OVERCOMING OBSTACLES IN 2012
It seems each year has its own set of challenges and 2012 was no exception. By far the biggest headwind we faced
last year was the reduction in the yield earned on our securities portfolio which was caused by a significant increase
in premium amortization expense. This was brought on by the wave in refinance volume which shortened the
lifespan of the collateral mortgage obligations in which we were invested. As refinance activity escalated throughout
the year, this expense also increased in lock step for most of our mortgage related securities. Premium amortization
expense totaled $72 million compared to $38 million the year before. This additional $34 million expense negatively
impacted both our interest income and net
interest margin throughout the year; nevertheless, even with this
extraordinary expense we were still able to post record profits last year, a testament to the Company’s core earning
capacity.
This latest surge of refinance volume is one of the longest on record and expectations of a slowdown in the second
half of 2013 appear realistic. In fact, barring any further significant government intervention, signs are beginning to
point to a slowdown. However, I believed back in the first quarter of last year that mortgage refinances were likely
to decrease during the remainder of 2012, only to see the pace increase each successive quarter. So obviously I was
wrong and should have known that forecasting mortgage prepayment speeds and the level of refinance activity is
difficult and unfortunately subject to government programs and economic forces that cannot be easily predicted. At
some point refinances are going to burn out, the result of rates moving higher or homeowners no longer economically
incented to take action. Whatever the reason, when that day comes it should have a very positive impact on our
interest income and net interest margin, an impact that should more than offset the reduction in fee income from a
loss of refinance volume.
Another challenge we battled last year was growing our loan portfolio. Although loan originations were much
stronger, including the all time record year for mortgage originations, our loan portfolio still experienced a 2 percent
decrease. There were three main reasons for last year’s decline in loans. First, we passed on numerous opportunities
to make loans that would have required fixing the rate for terms of ten years and longer. With interest rates at
ii historically low levels we could not justify exposing ourselves to significantly greater levels of long-term interest rate
risk. The risk reward of making that bet seemed stacked against us. Second, we refused to buy other banks’ loan
production or involve ourselves in the national shared credit market. We made some of our own mistakes in the
years leading up to the credit crisis, but buying other banks’ problems was not one of them. Purchasing other’s loans
never seemed like the prudent thing to do. And the third cause for the lack of generating greater loan growth last
year was the fact that we were still cleaning up our own credit issues and working to move distressed loans off the
balance sheet. We disposed of a significant amount of troubled credits last year, and replacing that volume with new
loans made the task of growing our overall loan portfolio that much more difficult.
Our goal in 2013 is to grow the loan portfolio by 2 percent. We believe this is achievable as loan demand appears to
be showing signs of improvement. Although competition for loans has arguably increased, a stronger housing
market and an improving economy should provide the catalyst necessary to increase the loan portfolio this coming
year. I think we have reached an inflection point regarding residential construction loans. It appears that after four
years of substantial decreases in this particular portfolio, we are on the verge of once again generating growth as the
housing market is showing numerous signs of recovering. We have seen four long years with no net growth in loans.
Last year our goal was to break even and we did not quite get there. This coming year I am more confident we can,
and will, increase the overall size of our loan portfolio and do it organically.
One obstacle we faced this past year, not dissimilar to every other bank in the country, was the barrage of regulatory
and compliance rules being written and enforced. In my 35 years with the Company I have never seen anything quite
like it. Even with the resources we have available, the shear volume and time and effort spent complying creates a
considerable burden.
In addition, the cost to comply with this wave of rules and regulation has increased
exponentially. I have no problem with good sound regulations; however, the regulatory and compliance rules being
mandated to supposedly mitigate risk are so complex and burdensome they themselves are creating their own set of
risks for banks, especially the smaller community banks. Taking a one size fits all approach to regulation rarely
works and I struggle to see how this time it will be any different. There needs to be a simple, straight forward and
effective approach for less complex institutions like ourselves. During the past seven years we have built what I
believe is a terrific risk management system that encompasses all facets of our Company. Mitigating risk is the
centerpiece to the products and services we develop and offer our customers, the capital we deploy, the balance sheet
we build, and the earnings we strive to produce. We have to bring some common sense back into the equation.
Community banks like us did not cause the problems that many of these rules and regulations were put in place to
alleviate, and our shareholders should not have to pay such a steep financial price each year complying with this
regulatory tsunami.
A BETTER YEAR FOR MERGERS AND ACQUISITONS
On February 25 we announced the acquisition of Wheatland Bankshares Inc., the holding company for First State
Bank of Wheatland, Wyoming. This is an exciting addition to our Company as we join forces with one of the
premier banking organizations in the state of Wyoming. We are partnering with a very strong and profitable bank
that collectively will make us both even better. For years we have built this Company by acquiring top-notch
franchises and for us that begins with the people. Far more than assets or markets, we believe the most critical
component in a partnership is the talent we acquire, and we are really excited with the depth and strength of this
management team and the quality of its staff. You do not perform at the level they have for the past four years
without very good people.
This is our first acquisition in over three years and we believe it will make a terrific addition to your Company. At
closing they will become our twelfth bank division operating under its current name.
It provides all three of the
attributes we are looking for in an acquisition. It expands our footprint geographically as we establish a presence in
Southeast Wyoming.
It further diversifies our loan portfolio and provides us outstanding credit quality metrics.
With the changes made to our model last year, integration risk should be minimal. In addition, we now have a solid
base to expand both organically and through additional “bolt on” type acquisitions in that region. The First State
Bank transaction was priced fairly, structured properly, and incorporated conservative assumptions. This disciplined
approach to acquisitions has served us well for over fifteen years and we have no plans to change or deviate from this
practice.
iii Although I believe we have the talent and skills within our Company to consider larger transformational deals, those
opportunities are not as prevalent in our markets and would be a departure from the type of transactions we have
done in the past. We are content to continue to seek out and partner with quality community banks in the $200 to
$700 million asset range located in our geographic footprint. We believe our Rocky Mountains hold terrific potential
from a merger and acquisition perspective, and we hope to tap into that potential over the next five years.
The dialogues we are having and the inquiries we are receiving from interested sellers have definitely escalated
during the past twelve months. Hopefully the future presents more opportunities consistent with the quality
transaction pending with First State Bank. Our bank division model is a good fit for those banks intent on focusing
more attention on their customers and communities with our Company providing regulatory, operational and
financial support which they cannot obtain on their own. We believe it offers community banks in our region of the
country the “best of both worlds,” and we expect to be presented with additional exciting opportunities throughout
2013 and beyond that will continue to enhance Glacier Bancorp’s long-term shareholder value.
AN ECONOMY CONTINUING TO GAIN TRACTION
Last year we had the good fortune to operate in states along the Rocky Mountain Front whose economies
demonstrated a great deal of growth and potential. Clearly our Company relies on the abundance of natural resources
found throughout the six states that make up our footprint. These mining, agriculture, energy, and timber resources
along with an ever expanding tourism industry provide the cornerstone that has allowed our part of the country to
escape many of the problems caused by the economic downturn. In particular, the energy complex has been a nice
boost for a number of our banks by providing excellent paying jobs throughout the region and affording many of our
business customers the chance to take advantage of the significant amount of service work necessary to support and
maintain this energy boom and its infrastructure. Most of this activity to date has been centered in Montana and
Wyoming which together accounts for 75 percent of Glacier Bancorp’s asset base.
Stabilizing and, in some of our markets, increasing real estate values proved to be a welcome change from the prior
four years. Western Montana and parts of Idaho were especially hard hit by the downturn in real estate prices. As
we saw a firming in home prices throughout the year there was a significant amount of housing inventory absorbed,
especially in overbuilt markets such as Boise, Idaho. Although the situation is much improved, recreational
properties and high-end vacation homes have not recovered at the same pace. It will take a stronger economy and
greater consumer confidence to clear some of this higher priced inventory. Yet there are signs that the interest level
even in this category is showing improvement.
In addition to the notable impact that energy and housing had on our economy last year, I do not want to minimize
the importance that other key sectors play in our overall economy. Tourism, agriculture, timber and health care,
along with the profound and positive impact our Canadian neighbors have had on retail and real estate, have all made
major contributions to our Rocky Mountain economy. Barring any unforeseen events, it appears each of these
sectors is on track to once again generate positive momentum in 2013.
2013 AND BEYOND
As we begin 2013 there is a renewed sense of optimism among our banks and their staffs. The weight of nearly $300
million of non-performing assets has been cut by more than half along with all the time and cost that was consumed
in dealing with them. We have a goal this year of further reducing our non-performing assets below $100 million,
which is still above the levels we have maintained in the past, but a substantial improvement from the high water
mark of December 2010. Attaining this goal will require some further OREO expense; however, that too should be
less than this past year, especially if real estate values continue to rebound. The bottom line is that we expect
If credit trends
additional decreases in our non-performing assets accompanied by lower expenses in credit costs.
continue to get better as we expect, our allowance for loan and lease losses should prove to be sufficient and
definitely capable of handling more growth in the loan portfolio without requiring significant additions to the loan
loss provision.
Revenue growth will continue to challenge us this year.
In the near term it appears our net interest income will
continue to be pressured by one of the most punitive interest rate environments in decades. To generate any type of
yield, banks are increasingly hard-pressed to accept some additional level of interest rate or credit risk, neither
iv especially palatable. Nevertheless, if we have to choose between the two, managing interest rate risk would
definitely and always be our preference. Again, any sizable reduction in refinance volume would be a tremendous
benefit to our Company. We will gladly trade the reduction in mortgage origination fee income for the reduction in
premium amortization. Exchanging $34 million in additional expense for $6 million in revenue is a no brainer and a
trade we hope gets made.
The banks continue to do an outstanding job of controlling those operating expenses they have direct control over.
However, we have to be smart about how we go about managing and reducing these expenses. We recognize that
our customers are transacting business at our branch offices less frequently. The popularity of our mobile banking
system and the other electronic delivery channels we offer will continue to force each of our banks to reassess their
branch locations to make sure they are being utilized effectively. A number of our banks chose to consolidate
locations last year and there are other locations currently being analyzed for future closure or consolidation. These
decisions are left to the individual banks. They know and understand their markets and are in the best position to
make the right decisions on the composition and effectiveness of their branch system.
Once again this year we have a challenge among each of our banks to find new ways to improve the productivity and
cost structure of their operations. This competition brings out new ideas to add revenue and reduce expenses that are
then shared for the benefit of all of the other banks. For many years we have taken a great deal of pride in
maintaining a very low cost and efficient operating system. We plan to work very hard this upcoming year to sustain
the level of efficiency we have achieved in the past.
Finally, deploying our capital in a thoughtful and efficient manner will be critical this year. We are sensitive to the
fact that you, our shareholders, expect a reasonable risk adjusted return on the dollars you have invested in Glacier
Bancorp. Our goal is to continue to prudently leverage this capital, always mindful that we only create value when
the return on the capital you have entrusted to us exceeds the cost of that capital. The last three years we fell short of
this goal and did not deliver the return on capital necessary to add value. Our intent this year is to exceed this cost of
capital and provide an attractive return on the equity we have been entrusted with.
OUR PEOPLE MAKE IT ALL POSSIBLE
My letter to you our shareholders would never be complete without expressing gratitude and appreciation to the
terrific individuals who make up this Company. They are the brightest and most productive people I know. Our
record performance this past year was only made possible thanks to the effort each of them put forth. Their
willingness to work the extra hours and give up their evenings and weekends in order to better serve our customers
and communities is a testament to their dedication and commitment. After three challenging years, it was gratifying
to reward these individuals with a profit sharing contribution last year. For all they accomplished there is no doubt it
was well deserved and earned. We are so fortunate to have over 1700 individuals collectively working as one to
make your Company the best it can be.
To our shareholders, thank you for your support. Hopefully you will continue to find value in your investment in
Glacier Bancorp. We recognize that we are accountable to wisely and prudently manage this Company for the long-
term success of you our owners.
It is a responsibility we take very seriously. We understand there are countless
choices and opportunities as to how and where to invest your hard-earned dollars. We sincerely appreciate the
confidence and trust you have shown by investing in us, and we will continue to work hard each day to make sure we
earn it.
Sincerely,
Michael J. Blodnick
President and Chief Executive Officer
v Compounded Annual
Growth Rate
1-Year
2012/2011
5-Year
2012/2008
7.8 %
17.8 %
(1.9)%
(4.8)%
(1.8)%
11.3 %
(6.7)%
11.5 %
6.0 %
5.9 %
(1.7)%
(9.4)%
(19.7)%
(7.5)%
(66.6)%
17.0 %
0.8 %
64.9 %
10.0 %
41.9 %
(1.5)%
19.2 %
(6.2)%
11.0 %
13.1 %
(5.7)%
11.3 %
4.9 %
1.2 %
(3.6)%
(21.7)%
3.5 %
26.4 %
7.1 %
7.0 %
(1.8)%
162.6 %
(11.5)%
50.8 %
50.0 %
50.0 %
1.9 %
1.9 %
(4.0)%
(3.9)%
1.2 %
FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share data)
Selected Statement of Financial
Condition Information
Total assets
Investment securities, available-for-sale
Loans receivable, net
Allowance for loan and lease losses
Goodwill and intangibles
Deposits
Federal Home Loan Bank advances
Securities sold under agreements to repurchase
and other borrowed funds
Stockholders’ equity
Equity per share
At or for the Years ended December 31,
2012
2011
2010
2009
2008
$
7,747,440
3,683,005
3,266,571
(130,854)
112,274
5,364,461
997,013
299,540
900,949
12.52
7,187,906
3,126,743
3,328,619
(137,516)
114,384
4,821,213
1,069,046
268,638
850,227
11.82
6,759,287
2,395,847
3,612,182
(137,107)
157,016
4,521,902
965,141
269,408
838,204
11.66
6,191,795
1,443,817
3,920,988
(142,927)
160,196
4,100,152
790,367
451,251
685,890
11.13
5,553,970
929,147
3,998,478
(76,739)
159,765
3,262,475
338,456
1,110,731
676,940
11.04
Equity as a percentage of total assets
11.63 %
11.83 %
12.40 %
11.08 %
12.19 %
Summary Statements of Operations
Interest income
Interest expense
Net interest income
Provision for loan losses
Non-interest income
Non-interest expense 1
Income before income taxes 1
Income tax expense 1
Net income 1
Basic earnings per share 1
Diluted earnings per share 1
Dividends declared per share
Selected Ratios and Other Data
Return on average assets 1
Return on average equity 1
Dividend payout ratio 1
Average equity to average asset ratio
Net interest margin on average earning
assets (tax equivalent)
Efficiency ratio 2
Allowance for loan and lease losses as a
percent of loans
Allowance for loan and lease losses as a
percent of nonperforming loans
Non-performing assets as a percentage of
subsidiary assets
$
253,757
35,714
218,043
21,525
91,496
193,421
94,593
19,077
75,516
1.05
1.05
0.53
280,109
44,494
235,615
64,500
78,199
191,965
57,349
7,265
50,084
0.70
0.70
0.52
288,402
53,634
234,768
84,693
87,546
187,948
49,673
7,343
42,330
0.61
0.61
0.52
302,494
57,167
245,327
124,618
86,474
168,818
38,365
3,991
34,374
0.56
0.56
0.52
302,985
90,372
212,613
28,480
61,034
145,909
99,258
33,601
65,657
1.20
1.19
0.52
1.01 %
8.54 %
50.48 %
11.84 %
3.37 %
54.02 %
0.72 %
5.78 %
74.29 %
12.39 %
3.89 %
51.34 %
0.67 %
5.18 %
85.25 %
12.96 %
4.21 %
51.35 %
0.60 %
4.97 %
92.86 %
12.16 %
4.82 %
47.47 %
1.31 %
11.63 %
43.33 %
11.23 %
4.70 %
49.94 %
3.85 %
3.97 %
3.66 %
3.52 %
1.88 %
133 %
102 %
70 %
70 %
105 %
1.87 %
2.92 %
3.91 %
4.13 %
1.46 %
Loans originated and acquired
$
2,237,977
1,650,418
1,935,311
2,430,967
2,456,749
Number of full time equivalent employees
Number of locations
1,677
108
1,653
106
1,674
105
1,643
106
1,571
101
__________
1
Excludes 2011 goodwill impairment charge of $32.6 million ($40.2 million pre-tax). For additional information on the goodwill impairment charge see the Non-GAAP Financial Measures section
in "Item 6. Selected Financial Data."
2
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.
vi UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________________________________
FORM 10-K
______________________________________________________________________
Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2012 or
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from __________ to __________
Commission file number 000-18911
______________________________________________________________________
GLACIER BANCORP, INC.
(Exact name of registrant as specified in its charter)
______________________________________________________________________
MONTANA
(State or other jurisdiction of
incorporation or organization)
49 Commons Loop, Kalispell, Montana
(Address of principal executive offices)
81-0519541
(IRS Employer
Identification No.)
59901
(Zip Code)
(406) 756-4200
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value per share
(Title of each class)
NASDAQ Global Select Market
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive
No
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months.
Yes
Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
No
The aggregate market value of the voting common equity held by non-affiliates of the Registrant at June 30, 2012 (the last business day
of the most recent second quarter), was $1,078,136,586 (based on the average bid and ask price as quoted on the NASDAQ Global Select
Market at the close of business on that date).
As of February 18, 2013, there were issued and outstanding 71,954,982 shares of the Registrant’s common stock. No preferred shares
are issued or outstanding.
Document Incorporated by Reference
Portions of the 2013 Annual Meeting Proxy Statement dated March 25, 2013 are incorporated by reference into Part III of this
Form 10-K.
1
TABLE OF CONTENTS
PART I
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
PART III
Item 10
Item 11
Item 12
Item 13
Item 14
PART IV
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosure about Market Risk
Financial Statements and Supplementary Data
Consolidated Statements of Financial Condition
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 15
Exhibits, Financial Statement Schedules
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16
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21
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56
60
61
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63
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66
105
105
105
106
106
106
106
106
107
Item 1. Business
PART I
Glacier Bancorp, Inc. (“Company”), headquartered in Kalispell, Montana, is a Montana corporation incorporated in 2004 as a successor
corporation to the Delaware corporation originally incorporated in 1990. The Company is a publicly-traded company and its common
stock trades on the NASDAQ Global Select Market under the symbol GBCI. The Company provides commercial banking services from
108 locations in Montana, Idaho, Wyoming, Colorado, Utah and Washington through eleven divisions of its wholly-owned bank subsidiary,
Glacier Bank (“Bank”). The Company offers a wide range of banking products and services, including transaction and savings deposits,
real estate, commercial, agriculture, and consumer loans, mortgage origination services, and retail brokerage services. The Company
serves individuals, small to medium-sized businesses, community organizations and public entities. For information regarding the
Company’s lending, investment and funding activities, see “Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations.”
Subsidiaries
The Company includes the parent holding company and nine wholly-owned subsidiaries which consist of the Bank and eight non-bank
subsidiaries. The eight non-bank subsidiaries include GBCI Other Real Estate Owned ("GORE") and seven trust subsidiaries. The
Company formed GORE to isolate certain bank foreclosed properties for legal protection and administrative purposes and the remaining
properties are currently held for sale. GORE is included in the Bank operating segment due to its insignificant activity. The Company
owns the following trust subsidiaries, each of which issued trust preferred securities as Tier 1 capital instruments: Glacier Capital Trust
II, Glacier Capital Trust III, Glacier Capital Trust IV, Citizens (ID) Statutory Trust I, Bank of the San Juans Bancorporation Trust I, First
Company Statutory Trust 2001 and First Company Statutory Trust 2003. The trust subsidiaries are not included in the Company’s
consolidated financial statements. As of December 31, 2012, none of the Company's subsidiaries were engaged in any operations in
foreign countries.
On April 30, 2012, the Company combined its eleven bank subsidiaries into eleven bank divisions within Glacier Bank, such divisions
operating with the same names and management teams as before the combination. Prior to the combination of the bank subsidiaries, the
Company considered its eleven bank subsidiaries, GORE, and the parent holding company to be its operating segments. Subsequent to
the combination of the bank subsidiaries, the Company considers the Bank to be its sole operating segment. The change to combining
the bank subsidiaries into a single operating segment is appropriate as the Bank 1) engages in similar bank business activity from which
it earns revenues and incurs expenses, 2) the operating results of the Bank are regularly reviewed by the Chief Executive Officer (i.e.,
the chief operating decision maker) who makes decisions about resources to be allocated to the Bank, and 3) discrete financial information
is available for the Bank. The eleven divisions within Glacier Bank are as follows: Glacier Bank, Mountain West Bank, First Security
Bank of Missoula, Western Security Bank, 1st Bank, Valley Bank of Helena, Big Sky Western Bank, First Bank of Wyoming, Citizens
Community Bank, First Bank of Montana and Bank of the San Juans.
The Company provides full service brokerage services (selling products such as stocks, bonds, mutual funds, limited partnerships, annuities
and other insurance products) through Raymond James Financial Services, a non-affiliated company. The Company shares in the
commissions generated, without devoting significant employee time to this portion of the business.
Recent and Pending Acquisitions
The Company’s strategy is to profitably grow its business through internal growth and selective acquisitions. The Company continues
to look for profitable expansion opportunities in existing markets and new markets in the Rocky Mountain states. During the last five
years, the Company has completed the following acquisitions: On October 2, 2009, First Company and its subsidiary, First Bank of
Wyoming, formerly First National Bank & Trust, was acquired by the Company. On December 1, 2008, Bank of the San Juans
Bancorporation and its subsidiary, Bank of the San Juans ("San Juans") in Durango, Colorado, was acquired by the Company.
On February 25, 2013, the Company announced the signing of a definitive agreement to acquire First State Bank, a community bank
based in Wheatland, Wyoming. First State Bank provides community banking services to individuals and businesses from three banking
offices in Wheatland, Torrington and Guernsey, Wyoming. As of December 31, 2012, First State Bank had total assets of $281 million,
gross loans of $179 million and total deposits of $249 million. The transaction provides for the payment to Wheatland Bankshares, Inc.
shareholders of $10.62 million in cash and 1,652,000 shares of the Company's common stock, so long as the average closing price for
the Company stock is between $13.50 and $16.50. Upon closing of the transaction, which is anticipated to take place in the second
quarter of 2013, First State Bank will be merged into the Bank and operate as a separate bank division doing business under its existing
name.
3
Market Area
The Company has 108 locations, of which 9 are loan or administration offices, in 35 counties within 6 states including Montana, Idaho,
Wyoming, Colorado, Utah, and Washington. The Company has 55 locations in Montana, 29 locations in Idaho, 14 locations in Wyoming,
3 locations in Colorado, 4 locations in Utah and 3 locations in Washington.
The market area’s economic base primarily focuses on tourism, energy, construction, mining, manufacturing, service industry, and health
care. The tourism industry is highly influenced by two national parks, several ski resorts, significant lakes, and rural scenic areas.
Competition
Based on the Federal Deposit Insurance Corporation (“FDIC”) summary of deposits survey as of June 30, 2012, the Company has
approximately 23 percent of the total FDIC insured deposits in the 13 counties that it services in Montana. In Idaho, the Company has
approximately 7 percent of the deposits in the 9 counties that it services. In Wyoming, the Company has 26 percent of the deposits in the
6 counties it services. In Colorado, the Company has 10 percent of the deposits in the 2 counties it services. In Utah, the Company has
11 percent of the deposits in the 3 counties it services. In Washington, the Company has 1 percent of the deposits in the 2 counties it
services.
Commercial banking is a highly competitive business and operates in a rapidly changing environment. There are a large number of
depository institutions including savings and loans, commercial banks, and credit unions in the markets in which the Company has offices.
Non-depository financial service institutions, primarily in the securities and insurance industries, have also become competitors for retail
savings and investment funds. In addition to offering competitive interest rates, the principal methods used by the Bank to attract deposits
include the offering of a variety of services including on-line banking, mobile banking and convenient office locations and business hours.
The primary factors in competing for loans are interest rates and rate adjustment provisions, loan maturities, loan fees, and the quality
of service to borrowers and brokers.
Employees
As of December 31, 2012, the Company employed 1,753 persons, 1,553 of whom were employed full time, none of whom were represented
by a collective bargaining group. The Company provides its employees with a comprehensive benefit program, including health and
dental insurance, life and accident insurance, long-term disability coverage, sick leave, 401(k) plan, profit sharing plan and a stock-based
compensation plan. The Company considers its employee relations to be excellent. See Note 16 in the Consolidated Financial Statements
in “Item 8. Financial Statements and Supplementary Data” for detailed information regarding employee benefit plans and eligibility
requirements.
Board of Directors and Committees
The Company's Board of Directors ("Board") has the ultimate authority and responsibility for overseeing risk management at the Company.
Some aspects of risk oversight are fulfilled at the full Board level and the Board delegates other aspects of its risk oversight function to
its committees. The Board has established, among others, an Audit Committee, a Compensation Committee, a Nominating/Corporate
Governance Committee, and a Risk Oversight Committee. Additional information regarding Board committees is set forth under the
heading "Meetings and Committees of the Board of Directors - Committee Membership" in the Company's 2013 Annual Meeting Proxy
Statement and is incorporated herein by reference.
Website Access
Copies of the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments
to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge
through the Company’s website (www.glacierbancorp.com) as soon as reasonably practicable after the Company has filed the material
with, or furnished it to, the United States Securities and Exchange Commission (“SEC”). Copies can also be obtained by accessing the
SEC’s website (www.sec.gov).
Supervision and Regulation
The following discussion provides an overview of certain elements of the extensive regulatory framework applicable to the Company
and the Bank. This regulatory framework is primarily designed for the protection of depositors, the federal Deposit Insurance Funds and
the banking system as a whole, rather than specifically for the protection of shareholders. Due to the breadth and growth of this regulatory
framework, the costs of compliance continue to increase in order to monitor and satisfy these requirements.
To the extent that this section describes statutory and regulatory provisions, it is qualified by reference to those provisions. These statutes
and regulations, as well as related policies, are subject to change by Congress, state legislatures and federal and state regulators. Changes
in statutes, regulations or regulatory policies applicable to the Company, including the interpretation or implementation thereof, could
have a material effect on the Company’s business or operations. Numerous changes to the statutes, regulations or regulatory policies
applicable to the Company have been made or proposed in recent years. The full extent to which these changes will impact the Company
is not yet known. However, continued efforts to monitor and comply with new regulatory requirements add to the complexity and cost
of the Company’s business.
4
Glacier Bank, the sole bank subsidiary of the Company, is subject to regulation and supervision by the Montana Department of
Administration's Banking and Financial Institutions Division, the FDIC, and, with respect to branches of the Bank outside of Montana,
applicable state regulators. The Company recently consolidated its bank subsidiaries which operated throughout the states of Montana,
Colorado, Idaho, Utah, Washington and Wyoming, into Glacier Bank.
Federal Bank Holding Company Regulation
General. The Company is a bank holding company as defined in the Bank Holding Company Act of 1956, as amended (“BHCA”), due
to its ownership of the Bank. As a bank holding company, the Company is subject to regulation, supervision and examination by the
Federal Reserve. In general, the BHCA limits the business of bank holding companies to owning or controlling banks and engaging in
other activities closely related to banking. The Company must also file reports with and provide additional information to the Federal
Reserve. Under the Financial Services Modernization Act of 1999, a bank holding company may apply to the Federal Reserve to become
a financial holding company, and thereby engage (directly or through a subsidiary) in certain expanded activities deemed financial in
nature, such as securities and insurance underwriting.
Holding Company Bank Ownership. The BHCA requires every bank holding company to obtain the prior approval of the Federal Reserve
before 1) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after
such acquisition, it would own or control more than 5 percent of such shares; 2) acquiring all or substantially all of the assets of another
bank or bank holding company; or 3) merging or consolidating with another bank holding company.
Holding Company Control of Nonbanks. With some exceptions, the BHCA also prohibits a bank holding company from acquiring or
retaining direct or indirect ownership or control of more than 5 percent of the voting shares of any company that is not a bank or bank
holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks or
providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities that, by federal
statute, agency regulation or order, have been identified as activities closely related to the business of banking or of managing or controlling
banks.
Transactions with Affiliates. Bank subsidiaries of a bank holding company are subject to restrictions imposed by the Federal Reserve
Act on extensions of credit to the holding company or its subsidiaries, on investments in securities, and on the use of securities as collateral
for loans to any borrower. These regulations and restrictions may limit the Company’s ability to obtain funds from the Bank for its cash
needs, including funds for payment of dividends, interest and operational expenses.
Tying Arrangements. The Company is prohibited from engaging in certain tie-in arrangements in connection with any extension of credit,
sale or lease of property or furnishing of services. For example, with certain exceptions, neither the Company nor the Bank may condition
an extension of credit to a customer on either 1) a requirement that the customer obtain additional services provided by the Company or
the Bank or 2) an agreement by the customer to refrain from obtaining other services from a competitor.
Support of Bank Subsidiaries. Under Federal Reserve policy and the Dodd-Frank Wall Street Reform and Consumer Protection Act
(“Dodd-Frank Act”), the Company is expected to act as a source of financial and managerial strength to the Bank. This means that the
Company is required to commit, as necessary, resources to support the Bank. Any capital loans a bank holding company makes to its
bank subsidiaries are subordinate to deposits and to certain other indebtedness of the bank subsidiaries.
State Law Restrictions. As a Montana corporation, the Company is subject to certain limitations and restrictions under applicable Montana
corporate law. For example, state law restrictions in Montana include limitations and restrictions relating to indemnification of directors,
distributions to shareholders, transactions involving directors, officers or interested shareholders, maintenance of books, records and
minutes, and observance of certain corporate formalities.
Federal and State Regulation of the Bank
General. Deposits in Glacier Bank, a Montana state-chartered bank with branches in Montana, Colorado, Idaho, Utah, Washington and
Wyoming, are insured by the FDIC. The Bank is subject to regulation and supervision by the Montana Department of Administration's
Banking and Financial Institutions Division and the FDIC. In addition, with respect to branches of the Bank outside of Montana, Glacier
is subject to regulation and supervision by the applicable state banking regulators. The federal laws that apply to the Bank regulate,
among other things, the scope of its business, its investments, its reserves against deposits, the timing of the availability of deposited
funds, and the nature, amount of, and collateral for loans. Federal laws also regulate community reinvestment and insider credit transactions
and impose safety and soundness standards.
5
Consumer Protection. The Bank is subject to a variety of federal and state consumer protection laws and regulations that govern their
relationship with consumers including laws and regulations that impose certain disclosure requirements and regulate the manner in which
the Bank takes deposits, make and collect loans, and provide other services. Failure to comply with these laws and regulations may subject
the Bank to various penalties, including but not limited to, enforcement actions, injunctions, fines, civil liability, criminal penalties,
punitive damages, and the loss of certain contractual rights.
Community Reinvestment. The Community Reinvestment Act of 1977 ("CRA") requires that, in connection with examinations of financial
institutions within their jurisdiction, federal bank regulators must evaluate the record of financial institutions in meeting the credit needs
of their local communities, including low and moderate-income neighborhoods, consistent with the safe and sound operation of those
banks. A bank’s community reinvestment record is also considered by the applicable banking agencies in evaluating mergers, acquisitions,
and applications to open a branch or facility.
Insider Credit Transactions. Banks are also subject to certain restrictions on extensions of credit to executive officers, directors, principal
shareholders, and their related interests. Extensions of credit 1) must be made on substantially the same terms, including interest rates
and collateral, and follow credit underwriting procedures that are at least as stringent, as those prevailing at the time for comparable
transactions with persons not related to the lending bank; and 2) must not involve more than the normal risk of repayment or present
other unfavorable features. Banks are also subject to certain lending limits and restrictions on overdrafts to insiders. A violation of these
restrictions may result in the assessment of substantial civil monetary penalties, regulatory enforcement actions, and other regulatory
sanctions.
Regulation of Management. Federal law 1) sets forth circumstances under which officers or directors of a bank may be removed by the
institution’s federal supervisory agency; 2) places restraints on lending by a bank to its executive officers, directors, principal shareholders,
and their related interests; and 3) generally prohibits management personnel of a bank from serving as directors or in other management
positions of another financial institution whose assets exceed a specified amount or which has an office within a specified geographic
area.
Safety and Soundness Standards. Certain non-capital safety and soundness standards are also imposed upon banks. These standards cover,
among other things, internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest
rate exposure, asset growth, compensation, fees and benefits, such other operational and managerial standards as the agency determines
to be appropriate, and standards for asset quality, earnings and stock valuation. An institution that fails to meet these standards may be
subject to regulatory sanctions.
Interstate Banking and Branching
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (“Interstate Act”) together with the Dodd-Frank Act relaxed
prior interstate branching restrictions under federal law by permitting, subject to regulatory approval, state and federally chartered
commercial banks to establish branches in states where the laws permit banks chartered in such states to establish branches. The Interstate
Act requires regulators to consult with community organizations before permitting an interstate institution to close a branch in a low-
income area. Federal bank regulations prohibit banks from using their interstate branches primarily for deposit production and federal
bank regulatory agencies have implemented a loan-to-deposit ratio screen to ensure compliance with this prohibition.
Dividends
A principal source of the Company’s cash is from dividends received from the Bank, which are subject to government regulation and
limitation. Regulatory authorities may prohibit banks and bank holding companies from paying dividends in a manner that would constitute
an unsafe or unsound banking practice. In addition, a bank may not pay cash dividends if that payment could reduce the amount of its
capital below that necessary to meet minimum applicable regulatory capital requirements. The Bank is subject to Montana state law and
cannot declare a dividend greater than the previous two years' net earnings without providing notice to the state. Additionally, current
guidance from the Federal Reserve provides, among other things, that dividends per share on the Company’s common stock generally
should not exceed earnings per share, measured over the previous four fiscal quarters.
Capital Adequacy
Regulatory Capital Guidelines. Federal bank regulatory agencies use capital adequacy guidelines in the examination and regulation of
bank holding companies and banks. The guidelines are “risk-based,” meaning that they are designed to make capital requirements more
sensitive to differences in risk profiles among banks and bank holding companies.
Tier I and Tier II Capital. Under the guidelines, an institution’s capital is divided into two broad categories, Tier I capital and Tier II
capital. Tier I capital generally consists of common shareholders’ equity (including surplus and undivided profits), qualifying non-
cumulative perpetual preferred stock, and qualified minority interests in the equity accounts of consolidated subsidiaries. Tier II capital
generally consists of the allowance for loan and lease losses, hybrid capital instruments, and qualifying subordinated debt. The sum of
Tier I capital and Tier II capital represents an institution’s total capital. The guidelines require that at least 50 percent of an institution’s
total capital consist of Tier I capital.
6
Risk-based Capital Ratios. The adequacy of an institution’s capital is gauged primarily with reference to the institution’s risk-weighted
assets. The guidelines assign risk weightings to an institution’s assets in an effort to quantify the relative risk of each asset and to determine
the minimum capital required to support that risk. An institution’s risk-weighted assets are then compared with its Tier I capital and total
capital to arrive at a Tier I risk-based capital ratio and a Total risk-based capital ratio, respectively. The guidelines provide that an institution
must have a minimum Tier I risk-based capital ratio of 4 percent and a minimum Total risk-based capital ratio of 8 percent.
Leverage Ratio. The guidelines also employ a leverage ratio, which is Tier I capital as a percentage of average total assets, less intangibles.
The principal objective of the leverage ratio is to constrain the maximum degree to which banks may leverage its equity capital base.
The minimum leverage ratio is 4 percent.
Prompt Corrective Action. Under the guidelines, an institution is assigned to one of five capital categories depending on its Total risk-
based capital ratio, Tier I risk-based capital ratio, and leverage ratio, together with certain subjective factors. The categories range from
“well capitalized” to “critically undercapitalized.” Institutions that are “undercapitalized” or lower are subject to certain mandatory
supervisory corrective actions. At each successively lower capital category, an insured bank is subject to increased restrictions on its
operations. During these challenging economic times, the federal banking regulators have actively enforced these provisions.
Regulatory Oversight and Examination
The Federal Reserve conducts periodic inspections of bank holding companies, which are performed both onsite and offsite. The
supervisory objectives of the inspection program are to ascertain whether the financial strength of a bank holding company is maintained
on an ongoing basis and to determine the effects or consequences of transactions between a bank holding company or its non-banking
subsidiaries and its bank subsidiaries. For bank holding companies under $10 billion in assets, the inspection type and frequency varies
depending on asset size, complexity of the organization, and the bank holding company’s rating at its last inspection.
Banks are subject to periodic examinations by their primary regulators. Bank examinations have evolved from reliance on transaction
testing in assessing a bank’s condition to a risk-focused approach. These examinations are extensive and cover the entire breadth of
operations of a bank. Generally, safety and soundness examinations occur on an 18-month cycle for banks under $500 million in total
assets that are well capitalized and without regulatory issues, and 12-months otherwise. Examinations alternate between the federal and
state bank regulatory agency or may occur on a combined schedule. The frequency of consumer compliance and CRA examinations is
linked to the size of the institution and its compliance and CRA ratings at its most recent examinations. However, the examination authority
of the Federal Reserve and the FDIC allows them to examine supervised banks as frequently as deemed necessary based on the condition
of the bank or as a result of certain triggering events.
Corporate Governance and Accounting
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 (“Act”) addresses, among other things, corporate governance, auditing
and accounting, enhanced and timely disclosure of corporate information, and penalties for non-compliance. Generally, the Act 1) requires
chief executive officers and chief financial officers to certify to the accuracy of periodic reports filed with the SEC; 2) imposes specific
and enhanced corporate disclosure requirements; 3) accelerates the time frame for reporting of insider transactions and periodic disclosures
by public companies; 4) requires companies to adopt and disclose information about corporate governance practices, including whether
or not they have adopted a code of ethics for senior financial officers and whether the audit committee includes at least one “audit
committee financial expert;” and 5) requires the SEC, based on certain enumerated factors, to regularly and systematically review corporate
filings.
As a publicly reporting company, the Company is subject to the requirements of the Act and related rules and regulations issued by the
SEC and NASDAQ. After enactment, the Company updated its policies and procedures to comply with the Act’s requirements and has
found that such compliance, including compliance with Section 404 of the Act relating to the Company’s internal control over financial
reporting, has resulted in significant additional expense for the Company. The Company anticipates that it will continue to incur such
additional expense in its ongoing compliance.
Anti-Terrorism
USA Patriot Act of 2001. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism Act of 2001, intended to combat terrorism, was renewed with certain amendments in 2006 (“Patriot Act”). The Patriot Act, in
relevant part, 1) prohibits banks from providing correspondent accounts directly to foreign shell banks; 2) imposes due diligence
requirements on banks opening or holding accounts for foreign financial institutions or wealthy foreign individuals; 3) requires financial
institutions to establish an anti-money-laundering compliance program; and 4) eliminates civil liability for persons who file suspicious
activity reports.
7
Financial Services Modernization
Gramm-Leach-Bliley Act of 1999. The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (“GLB Act”) brought about
significant changes to the laws affecting banks and bank holding companies. Generally, the GLB Act 1) repeals historical restrictions on
preventing banks from affiliating with securities firms; 2) provides a uniform framework for the activities of banks, savings institutions
and their holding companies; 3) broadens the activities that may be conducted by national banks and banking subsidiaries of bank holding
companies; 4) provides an enhanced framework for protecting the privacy of consumer information and requires notification to consumers
of bank privacy policies; and 5) addresses a variety of other legal and regulatory issues affecting both day-to-day operations and long-
term activities of financial institutions. Bank holding companies that qualify and elect to become financial holding companies can engage
in a wider variety of financial activities than permitted under previous law, particularly with respect to insurance and securities underwriting
activities.
The Emergency Economic Stabilization Act of 2008
Emergency Economic Stabilization Act of 2008. In response to market turmoil and financial crises affecting the overall banking system
and financial markets in the United States, the Emergency Economic Stabilization Act of 2008 (“EESA”) was enacted on October 3,
2008. EESA provides the U.S. Department of the Treasury (“Treasury”) with broad authority to implement certain actions intended to
help restore stability and liquidity to the U.S. financial markets.
Troubled Asset Relief Program. Under the EESA, the Treasury has authority, among other things, to purchase up to $700 billion in
mortgage loans, mortgage-related securities and certain other financial instruments, including debt and equity securities issued by financial
institutions pursuant to the Troubled Asset Relief Program (“TARP”). The purpose of TARP is to restore confidence and stability to the
U.S. banking system and to encourage financial institutions to increase lending to customers and to each other. Pursuant to the EESA,
the Treasury was initially authorized to use $350 billion for TARP. Of this amount, the Treasury allocated $250 billion to the TARP Capital
Purchase Program (“CPP”), which funds were used to purchase preferred stock from qualifying financial institutions. After receiving
preliminary approval from Treasury to participate in the program, the Company elected not to participate in light of its capital position
and due to its ability to raise capital successfully in private equity markets.
Temporary Liquidity Guarantee Program. Another program established pursuant to the EESA is the Temporary Liquidity Guarantee
Program (“TLGP”), which 1) removed the limit on FDIC deposit insurance coverage for non-interest bearing transaction accounts through
December 31, 2009, and 2) provided FDIC backing for certain types of senior unsecured debt issued from October 14, 2008 through
June 30, 2009. The end-date for issuing senior unsecured debt was later extended to October 31, 2009 and the FDIC also extended the
Transaction Account Guarantee portion of the TLGP through December 31, 2010. In November 2010, the FDIC issued a final rule to
implement provisions of the Dodd-Frank Act that provides for temporary unlimited coverage for non-interest-bearing transaction accounts.
The separate coverage for non-interest-bearing transaction accounts became effective on December 31, 2010 and expired on December 31,
2012.
Deposit Insurance
The Bank's deposits are insured under the Federal Deposit Insurance Act, up to the maximum applicable limits and are subject to deposit
insurance assessments designed to tie what banks pay for deposit insurance to the risks they pose. The Dodd-Frank Act broadened the
base for FDIC insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital
of a financial institution. In addition, the Dodd-Frank Act raised the minimum designated reserve ratio (the FDIC is required to set the
reserve ratio each year) of the Deposit Insurance Fund (“DIF”) from 1.15 percent to 1.35 percent; requires that the DIF meet that minimum
ratio of insured deposits by 2020; and eliminates the requirement that the FDIC pay dividends to insured depository institutions when
the reserve ratio exceeds certain thresholds. The FDIC has established a higher reserve ratio of 2 percent as a long-term goal beyond
what is required by statute. The deposit insurance assessments to be paid by the Bank could increase as a result.
Insurance of Deposit Accounts. The Emergency Economic Stabilization Act of 2008 (“EESA”) included a provision for a temporary
increase from $100,000 to $250,000 per depositor in deposit insurance. The temporary increase was made permanent under the Dodd-
Frank Act. The FDIC insurance coverage limit applies per depositor, per insured depository institution for each account ownership
category. EESA also temporarily raised the limit on federal deposit insurance coverage to an unlimited amount for non-interest or low-
interest bearing demand deposits. Unlimited coverage for non-interest transaction accounts expired December 31, 2012.
Recent Legislation
Dodd-Frank Wall Street Reform and Consumer Protection Act. As a result of the recent financial crises, on July 21, 2010 the Dodd-Frank
Act was signed into law. The Dodd-Frank Act significantly changed the bank regulatory structure and is affecting the lending, deposit,
investment, trading and operating activities of financial institutions and their holding companies, including the Company and the Bank.
The full impact of the Dodd-Frank Act may not be known for years. Some of the provisions of the Dodd-Frank Act that may impact the
Company's business are summarized below.
8
Under the Dodd-Frank Act, trust preferred securities will generally be excluded from the Tier 1 capital of a bank holding company between
$500 million and $15 billion in assets unless such securities were issued prior to May 19, 2010.
The Dodd-Frank Act requires publicly traded companies to provide their shareholders with 1) a non-binding shareholder vote on executive
compensation; 2) a non-binding shareholder vote on the frequency of such vote; 3) disclosure of “golden parachute” arrangements in
connection with specified change in control transactions; and 4) a non-binding shareholder vote on golden parachute arrangements in
connection with these change in control transactions. Except with respect to “smaller reporting companies” and participants in the CPP,
the new rules applied to proxy statements relating to annual meetings of shareholders held after January 20, 2011. “Smaller reporting
companies,” those with a public float of less than $75 million, are required to include the non-binding shareholder votes on executive
compensation and the frequency thereof in proxy statements relating to annual meetings occurring on or after January 21, 2013.
The Dodd-Frank Act generally prohibits a depository institution from converting from a state to federal charter, or vice versa, while it is
the subject to an enforcement action unless the depository institution seeks prior approval from its regulator and complies with specified
procedures to ensure compliance with the enforcement action.
The Dodd-Frank Act created a new, independent federal agency called the Bureau of Consumer Financial Protection (“CFPB”). The
CFPB has broad rulemaking, supervision and enforcement authority for a wide range of consumer protection laws applicable to banks
and thrifts with greater than $10 billion in assets. Smaller institutions are subject to certain rules promulgated by the CFPB but will
continue to be examined and supervised by their federal banking regulators for compliance purposes.
The Dodd-Frank Act repeals the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository
institutions to pay interest on business transaction and other accounts.
Proposed Legislation
General. Proposed legislation is introduced in almost every legislative session. Certain of such legislation could dramatically affect the
regulation of the banking industry. The Company cannot predict if any such legislation will be adopted or if it is adopted how it would
affect the business of the Company or the Bank. Recent history has demonstrated that new legislation or changes to existing laws or
regulations usually results in a greater compliance burden and, therefore, generally increases the cost of doing business.
Basel III. Basel III updates and revises significantly the current international bank capital accords (so-called “Basel I” and “Basel II”).
Basel III is intended to be implemented by participating countries for large, internationally active banks. However, standards consistent
with Basel III will be formally implemented in the United States through a series of regulations, some of which may apply to other banks.
Among other things, Basel III creates “Tier 1 common equity,” a new measure of regulatory capital closer to pure tangible common
equity than the present Tier 1 definition. Basel III also increases minimum capital ratios. Capital buffers are added to each capital ratio
to enable banks to absorb losses during a stressed period while remaining above their regulatory minimum ratios. The full impact of the
Basel III rules cannot be determined at this time as many regulations are still being written and the implementation date has not yet been
finalized.
Effects of Federal Government Monetary Policy
The Company’s earnings and growth are affected not only by general economic conditions, but also by the fiscal and monetary policies
of the federal government, particularly the Federal Reserve. The Federal Reserve implements national monetary policy for such purposes
as curbing inflation and combating recession, but its open market operations in U.S. government securities, control of the discount rate
applicable to borrowings from the Federal Reserve, and establishment of reserve requirements against certain deposits, influence the
growth of bank loans, investments and deposits, and also affect interest rates charged on loans or paid on deposits. The nature and impact
of future changes in monetary policies and their impact on the Company or the Bank cannot be predicted with certainty.
9
Item 1A. Risk Factors
An investment in the Company's common stock involves certain risks. The following is a discussion of the most significant risks and
uncertainties that may affect the Company’s business, financial condition and future results.
The continued challenging economic environment could have a material adverse effect on the Company’s future results of operations or
the market price of stock.
The national economy, and the financial services sector in particular, are still facing significant challenges. Substantially all of the
Company’s loans are to businesses and individuals in Montana, Idaho, Wyoming, Utah, Colorado and Washington markets facing many
of the same challenges as the national economy, including continued unemployment and slow recovery in commercial and residential
real estate. Although some economic indicators are improving both nationally and in the Company’s markets, there remains substantial
uncertainty regarding when and how strongly a sustained economic recovery will occur, and whether there will be another recession.
These economic conditions can cause borrowers to be unable to pay their loans. The inability of borrowers to repay loans can erode
earnings by reducing net interest income and by requiring the Company to add to its allowance for loan and lease losses (“ALLL” or
“allowance”). While the Company cannot accurately predict how long these conditions may exist, the challenging economy could
continue to present risks for some time for the industry and Company. A further deterioration in economic conditions in the nation as a
whole or in the Company’s markets could result in the following consequences, any of which could have an adverse impact, which may
be material, on the Company’s business, financial condition, results of operations and prospects, and could also cause the market price
of the Company’s stock to decline:
•
•
•
•
•
loan delinquencies may increase;
problem assets and foreclosures may increase;
collateral for loans made may decline in value, in turn reducing customers’ borrowing power, reducing the value of assets and
collateral associated with existing loans and increasing the potential severity of loss in the event of loan defaults;
demand for banking products and services may decline; and
low cost or non-interest bearing deposits may decrease.
The allowance for loan and lease losses may not be adequate to cover actual loan losses, which could adversely affect earnings.
The Company maintains an allowance in an amount that it believes is adequate to provide for losses in the loan portfolio. While the
Company strives to carefully manage and monitor credit quality and to identify loans that may become non-performing, at any time there
are loans included in the portfolio that will result in losses, but that have not been identified as non-performing or potential problem loans.
With respect to real estate loans and property taken in satisfaction of such loans (“other real estate owned” or “OREO”), the Company
can be required to recognize significant declines in the value of the underlying real estate collateral or OREO quite suddenly as values
are updated through appraisals and evaluations (new or updated) performed in the normal course of monitoring the credit quality of the
loans. There are many factors that can cause the value of real estate to decline, including declines in the general real estate market,
changes in methodology applied by appraisers, and/or using a different appraiser than was used for the prior appraisal or evaluation. The
Company’s ability to recover on real estate loans by selling or disposing of the underlying real estate collateral is adversely impacted by
declining values, which increases the likelihood the Company will suffer losses on defaulted loans beyond the amounts provided for in
the ALLL. This, in turn, could require material increases in the Company’s provision for loan losses and ALLL. By closely monitoring
credit quality, the Company attempts to identify deteriorating loans before they become non-performing assets and adjust the ALLL
accordingly. However, because future events are uncertain, and if difficult economic conditions continue or worsen, there may be loans
that deteriorate to a non-performing status in an accelerated time frame. As a result, future additions to the ALLL may be necessary.
Because the loan portfolio contains a number of loans with relatively large balances, the deterioration of one or a few of these loans may
cause a significant increase in non-performing loans, requiring an increase to the ALLL. Additionally, future significant additions to the
ALLL may be required based on changes in the mix of loans comprising the portfolio, changes in the financial condition of borrowers,
which may result from changes in economic conditions, or changes in the assumptions used in determining the ALLL. Additionally,
federal banking regulators, as an integral part of their supervisory function, periodically review the Company’s loan portfolio and the
adequacy of the ALLL. These regulatory agencies may require the Company to recognize further loan loss provisions or charge-offs
based upon their judgments, which may be different from the Company’s judgments. Any increase in the ALLL would have an adverse
effect, which could be material, on the Company’s financial condition and results of operations.
The Company has a high concentration of loans secured by real estate, so any further deterioration in the real estate markets could
require material increases in the ALLL and adversely affect the Company’s financial condition and results of operations.
The Company has a high degree of concentration in loans secured by real estate. A sluggish recovery in the real estate markets could
adversely impact borrowers' ability to repay loans secured by real estate and the value of real estate collateral, thereby increasing the
credit risk associated with the loan portfolio. The Company's ability to recover on these loans by selling or disposing of the underlying
real estate collateral is adversely impacted by declining real estate values, which increases the likelihood that the Company will suffer
losses on defaulted loans secured by real estate beyond the amounts provided for in the ALLL. This, in turn, could require material
increases in the ALLL which would adversely affect the Company's financial condition and results of operations, perhaps materially.
10
There can be no assurance the Company will be able to continue paying dividends on the common stock at recent levels.
The Company declared dividends of $0.53 per share in 2012 and declared dividends of $0.52 per share in 2011. The Company may not
be able to continue paying quarterly dividends commensurate with recent levels given that the ability to pay dividends on the Company’s
common stock depends on a variety of factors. 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.
Current guidance from the Federal Reserve provides, among other things, that dividends per share should not exceed earnings per share
measured over the previous four fiscal quarters. The Bank is also subject to Montana state law and cannot declare a dividend greater
than the previous two years' net earnings without providing notice to the state. As a result, future dividends will generally depend on
the sufficiency of earnings.
The Company may not be able to continue to grow organically or through acquisitions.
Historically, the Company has expanded through a combination of organic growth and acquisitions. If market and regulatory conditions
remain challenging, the Company may be unable to grow organically or successfully complete or integrate potential future acquisitions.
Furthermore, there can be no assurance that the Company can successfully complete such transactions, since they are subject to regulatory
review and approval.
The expiration of unlimited FDIC insurance on certain noninterest-bearing transaction accounts may increase the Company's interest
expense and reduce liquidity.
On December 31, 2012, unlimited FDIC insurance on certain noninterest-bearing transaction accounts under the Transaction Account
Guarantee (“TAG”) program expired. Prior to its expiration, all funds under TAG in a noninterest-bearing transaction account were
insured in full by the FDIC from December 31, 2010, through December 31, 2012. This temporary unlimited coverage was in addition
to, and separate from, the coverage of at least $250,000 available to depositors under the FDIC's general deposit insurance rules. The
reduction in FDIC insurance on these noninterest-bearing transaction accounts to the standard $250,000 maximum may cause depositors
to move funds previously held in such noninterest-bearing accounts to interest-bearing accounts, which could increase the Company's
costs of funds and negatively impact its results of operations, or may cause depositors to withdraw their deposits and invest funds in
investments perceived as being more secure. This could reduce the Company's liquidity, or require the payment of higher interest rates
to retain deposits in order to maintain liquidity and could adversely affect the Company's earnings.
The FDIC has adopted a plan to increase the federal Deposit Insurance Fund, including additional future premium increases and special
assessments.
The Dodd-Frank Act broadened the base for FDIC insurance assessments and assessments are now based on the average consolidated
total assets less tangible equity capital of a financial institution. In addition, the Dodd-Frank Act established 1.35 percent as the minimum
Deposit Insurance Fund reserve ratio. The FDIC has determined that the fund reserve ratio should be 2.0 percent and has adopted a plan
under which it will meet the statutory minimum fund reserve ratio of 1.35 percent by the statutory deadline of September 30, 2020. The
Dodd-Frank Act requires the FDIC to offset the effect on institutions with assets less than $10 billion of the increase in the statutory
minimum fund reserve ratio to 1.35 percent from the former statutory minimum of 1.15 percent. As a result, the deposit insurance
assessments to be paid by the Company could increase.
Despite the FDIC’s actions to restore the Deposit Insurance Fund, the fund will suffer additional losses in the future due to failures of
insured institutions. There could be additional significant deposit insurance premium increases, special assessments or prepayments in
order to restore the insurance fund’s reserve ratio. Any significant premium increases or special assessments could have a material adverse
effect on the Company’s financial condition and results of operations.
The Company’s loan portfolio mix increases the exposure to credit risks tied to deteriorating conditions.
The loan portfolio contains a high percentage of commercial, commercial real estate, real estate acquisition and development loans in
relation to the total loans and total assets. These types of loans have historically been viewed as having more risk of default than residential
real estate loans or certain other types of loans or investments. In fact, the FDIC has issued pronouncements alerting banks of its concern
about banks with a heavy concentration of commercial real estate loans. These types of loans also typically are larger than residential
real estate loans and other commercial loans. Because the Company’s loan portfolio contains a significant number of commercial and
commercial real estate loans with relatively large balances, the deterioration of one or more of these loans may cause a significant increase
in non-performing loans. An increase in non-performing loans could result in a loss of earnings from these loans, an increase in the
provision for loan losses, or an increase in loan charge-offs, which could have a material adverse impact on results of operations and
financial condition.
11
Non-performing assets could increase, which could adversely affect the Company’s results of operations and financial condition.
Non-performing assets (which include OREO) adversely affect the Company’s net income and financial condition in various ways. The
Company does not record interest income on non-accrual loans or OREO, thereby adversely affecting its income. When the Company
takes collateral in foreclosures and similar proceedings, it is required to mark the related asset to the then fair value of the collateral, less
estimated cost to sell, which may result in a charge-off of the value of the asset and lead the Company to increase the provision for loan
losses. An increase in the level of non-performing assets also increases the Company’s risk profile and may impact the capital levels its
regulators believe are appropriate in light of such risks. Continued decreases in the value of these assets, or the underlying collateral, or
in these borrowers’ performance or financial condition, whether or not due to economic and market conditions beyond the Company’s
control, could adversely affect the Company’s business, results of operations and financial condition, perhaps materially. In addition to
the carrying costs to maintain OREO, the resolution of non-performing assets increases the Company’s loan administration costs generally,
and requires significant commitments of time from management and the Company’s directors, which reduces the time they have to focus
on profitably growing the Company’s business. The Company may experience further increases in non-performing assets in the future.
A decline in the fair value of the Company’s investment portfolio could adversely affect earnings.
The fair value of the Company’s investment securities could decline as a result of factors including changes in market interest rates, credit
quality and credit ratings, lack of market liquidity and other economic conditions. An investment security is impaired if the fair value
of the security is less than the carrying value. When a security is impaired, the Company determines whether the impairment is temporary
or other-than-temporary. If an impairment is determined to be other-than temporary, an impairment loss is recognized by reducing the
amortized cost only for the credit loss associated with the other-than-temporary loss with a corresponding charge to earnings for a like
amount. Any such impairment charge would have an adverse effect, which could be material, on the Company’s results of operations
and financial condition.
With relatively soft loan demand and increased market liquidity, the investment securities portfolio has grown significantly and represented
48 percent of total assets at December 31, 2012. While the Company believes that the terms of such investments have been kept relatively
short, the Company is subject to elevated interest rate risk exposure if rates were to increase sharply. Further, the change in the mix of
the Company’s assets to more investment securities presents a different type of asset quality risk than the loan portfolio. While the
Company believes a relatively conservative management approach has been applied to the investment portfolio, there is always potential
loss exposure under changing economic conditions.
Recent and/or future U.S. federal government credit downgrades or changes in outlook by major credit rating agencies may have an
adverse effect on financial markets, including financial institutions and the financial industry.
In August 2011, Standard and Poor’s downgraded the United States long-term debt rating from its AAA rating to AA+. On August 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-term United States debt. It is difficult to predict the effect of these
actions, or any future downgrades or changes in outlook by Standard & Poor’s or either of the other two major credit rating agencies.
However, these events could impact the trading market for U.S. government securities, including U.S. agency securities, and the securities
markets more broadly, and consequently could impact the value and liquidity of financial assets, including assets in the Company’s
investment portfolio. These actions could also create broader financial turmoil and uncertainty, which may negatively affect the global
banking system and limit the availability of funding, including borrowing under securities sold under agreements to repurchase
(“repurchase agreements”), at reasonable terms. In turn, this could have a material adverse effect on the Company’s liquidity, financial
condition and results of operations.
Fluctuating interest rates can adversely affect profitability.
The Company’s profitability is dependent to a large extent upon net interest income, which is the difference (or “spread”) between the
interest earned on loans, investment securities and other interest-earning assets and interest paid on deposits, borrowings, and other
interest-bearing liabilities. Because of the differences in maturities and repricing characteristics of interest-earning assets and interest-
bearing liabilities, changes in interest rates do not produce equivalent changes in interest income earned on interest-earning assets and
interest paid on interest-bearing liabilities. Accordingly, fluctuations in interest rates could adversely affect the Company’s interest rate
spread, and, in turn, profitability. The Company seeks to manage its interest rate risk within well established policies and guidelines.
Generally, the Company seeks an asset and liability structure that insulates net interest income from large deviations attributable to
changes in market rates. However, the Company’s structures and practices to manage interest rate risk may not be effective in a highly
volatile rate environment.
Interest rate swaps expose the Company to certain risks, and may not be effective in mitigating exposure to changes in interest rates.
The Company has entered into interest rate swap agreements in order to manage a portion of the risk to interest rate volatility. The
Company anticipates that additional interest rate swaps may be entered into in the future. These swap agreements involve other risks,
such as the risk that counterparties may fail to honor their obligations under these arrangements, leaving the Company vulnerable to
interest rate movements. There can be no assurance that these arrangements will be effective in reducing the Company’s exposure to
changes in interest rates.
12
If goodwill recorded in connection with acquisitions becomes additionally impaired, it could have an adverse impact on earnings and
capital.
Accounting standards require the Company to account for acquisitions using the acquisition method of accounting. Under acquisition
accounting, if the purchase price of an acquired company exceeds the fair value of its net assets, the excess is carried on the acquirer’s
balance sheet as goodwill. In accordance with accounting principles generally accepted in the United States of America, goodwill is not
amortized but rather is evaluated for impairment on an annual basis or more frequently if events or circumstances indicate that a potential
impairment exists. The Company's goodwill was not considered impaired as of December 31, 2012; however, the Company incurred an
impairment of goodwill of $40.2 million ($32.6 million after-tax) during the third quarter of 2011. The Company continues to maintain
$106 million in goodwill on its balance sheet and there can be no assurance that future evaluations of goodwill will not result in findings
of additional impairment and write-downs, which could be material. While a non-cash item, additional impairment of goodwill could
have a material adverse effect on the Company’s business, financial condition and results of operations. Furthermore, additional
impairment of goodwill could subject the Company to regulatory limitations, including the ability to pay dividends on its common stock.
Growth through future acquisitions could, in some circumstances, adversely affect profitability or other performance measures.
The Company may in the future engage in selected acquisitions of additional financial institutions. There are risks associated with any
such acquisitions that could adversely affect profitability and other performance measures. These risks include, among other things,
incorrectly assessing the asset quality of a financial institution being acquired, encountering greater than anticipated cost of integrating
acquired businesses into the Company’s operations, and being unable to profitably deploy funds acquired in an acquisition. The Company
may not be able to continue to grow through acquisitions, and if it does, there is a risk of negative impacts of such acquisitions on the
Company’s operating results and financial condition.
The Company anticipates that it might issue capital stock in connection with future acquisitions. Acquisitions and related issuances of
stock may have a dilutive effect on earnings per share and the percentage ownership of current shareholders.
A tightening of the credit markets may make it difficult to obtain adequate funding for loan growth, which could adversely affect earnings.
A tightening of the credit markets and the inability to obtain or retain adequate funds for continued loan growth at an acceptable cost
may negatively affect the Company's asset growth and liquidity position and, therefore, earnings capability. In addition to core deposit
growth, maturity of investment securities and loan payments, the Company also relies on alternative funding sources through correspondent
banking and borrowings with the Federal Home Loan Bank ("FHLB") to fund loan growth. In the event the economy continues to see
a slow recovery, particularly in the housing market, these resources could be negatively affected, both as to price and availability, which
would limit and or raise the cost of the funds available to the Company.
The Company may pursue additional capital in the future, which could dilute the holders of the Company’s outstanding common stock
and may adversely affect the market price of common stock.
In the current economic environment, the Company believes it is prudent to consider alternatives for raising capital when opportunities
to raise capital at attractive prices present themselves, in order to further strengthen the Company’s capital and better position itself to
take advantage of opportunities that may arise in the future. Such alternatives may include issuance and sale of common or preferred
stock or borrowings by the Company, with proceeds contributed to the Bank. Any such capital raising alternatives could dilute the holders
of the Company’s outstanding common stock, and may adversely affect the market price of the Company’s common stock and performance
measures such as earnings per share.
Business would be harmed if the Company lost the services of any of the senior management team.
The Company believes its success to date has been substantially dependent on its Chief Executive Officer ("CEO") and other members
of the executive management team, and on the Presidents of its bank divisions. The loss of any of these persons could have an adverse
effect on the Company’s business and future growth prospects.
Competition in the Company’s market areas may limit future success.
Commercial banking is a highly competitive business. The Company competes with other commercial banks, savings and loans, credit
unions, finance, insurance and other non-depository companies operating in its market areas. The Company is subject to substantial
competition for loans and deposits from other financial institutions. Some of its competitors are not subject to the same degree of regulation
and restriction as the Company. Some of the Company’s competitors have greater financial resources than the Company. If the Company
is unable to effectively compete in its market areas, the Company’s business, results of operations and prospects could be adversely
affected.
13
A failure in or breach of the Company's operational or security systems, or those of the Company's third party service providers, including
as a result of cyber attacks, could disrupt business, result in the disclosure or misuse of confidential or proprietary information, damage
the Company's reputation, increase costs and cause losses.
The Company's operations rely heavily on the secure processing, storage and transmission of confidential and other information on the
its computer systems and networks. Any failure, interruption or breach in security or operational integrity of these systems could result
in failures or disruptions in the Company's online banking system, customer relationship management, general ledger, deposit and loan
servicing and other systems. The security and integrity of the Company's systems could be threatened by a variety of interruptions or
information security breaches, including those caused by computer hacking, cyber attacks, electronic fraudulent activity or attempted
theft of financial assets. The Company cannot assure that any such failures, interruption or security breaches will not occur, or if they
do occur, that they will be adequately addressed. While the Company has certain protective policies and procedures in place, the nature
and sophistication of the threats continue to evolve. The Company may be required to expend significant additional resources in the
future to modify and enhance its protective measures.
Additionally, the Company faces the risk of operational disruption, failure, termination or capacity constraints of any of the third parties
that facilitate its business activities, including exchanges, clearing agents, clearing houses or other financial intermediaries. Such parties
could also be the source of an attack on, or breach of, the Company's operational systems.
Any failures, interruptions or security breaches in the Company's information systems could damage its reputation, result in a loss of
customer business, result in a violation of privacy or other laws, or expose the Company to civil litigation, regulatory fines or losses not
covered by insurance.
The Company operates in a highly regulated environment and changes or increases in, or supervisory enforcement of, banking or other
laws and regulations or governmental fiscal or monetary policies could adversely affect the Company.
The Company is subject to extensive regulation, supervision and examination by federal and state banking authorities. In addition, as a
publicly-traded company, the Company is subject to regulation by the SEC. Any change in applicable regulations or federal, state or
local legislation or in policies or interpretations or regulatory approaches to compliance and enforcement, income tax laws and accounting
principles could have a substantial impact on the Company and its operations. Changes in laws and regulations may also increase expenses
by imposing additional fees or taxes or restrictions on operations. Additional legislation and regulations that could significantly affect
powers, authority and operations may be enacted or adopted in the future, which could have a material adverse effect on the Company’s
financial condition and results of operations. Failure to appropriately comply with any such laws, regulations or principles could result
in sanctions by regulatory agencies or damage to the Company’s reputation, all of which could adversely affect the Company’s business,
financial condition or results of operations.
In that regard, sweeping financial regulatory reform legislation was enacted in July 2010. Among other provisions, the new legislation
1) creates a new CFPB with broad powers to regulate consumer financial products such as credit cards and mortgages; 2) creates a
Financial Stability Oversight Council comprised of the heads of other regulatory agencies; 3) will lead to new capital requirements from
federal banking regulatory agencies; 4) places new limits on electronic debt card interchange fees; and 5) requires the SEC and national
stock exchanges to adopt significant new corporate governance and executive compensation reforms. The new legislation and regulations
are expected to increase the overall costs of regulatory compliance.
Further, regulators have significant discretion and authority to prevent or remedy unsafe or unsound practices or violations of laws or
regulations by financial institutions and bank holding companies in the performance of their supervisory and enforcement duties. Recently,
these powers have been utilized more frequently due to the challenging national, regional and local economic conditions. The exercise
of regulatory authority may have a negative impact on the Company’s financial condition and results of operations. Additionally, the
Company’s business is affected significantly by the fiscal and monetary policies of the U.S. federal government and its agencies, including
the Federal Reserve Board.
The Company cannot accurately predict the full effects of recent legislation or the various other governmental, regulatory, monetary and
fiscal initiatives which have been and may be enacted on the financial markets and on the Company. The terms and costs of these activities,
or the failure of these actions to help stabilize the financial markets, asset prices, market liquidity and a continuation or worsening of
current financial market and economic conditions could materially and adversely affect the Company’s business, financial condition,
results of operations, and the trading price of the Company’s common stock.
14
The Company has various anti-takeover measures that could impede a takeover.
The Company’s articles of incorporation include certain provisions that could make more difficult the acquisition of the Company by
means of a tender offer, a proxy contest, merger or otherwise. These provisions include a requirement that any “Business Combination” (as
defined in the articles of incorporation) be approved by at least 80 percent of the voting power of the then-outstanding shares, unless it
is either approved by the Board of Directors or certain price and procedural requirements are satisfied. In addition, the authorization of
preferred stock, which is intended primarily as a financing tool and not as a defensive measure against takeovers, may potentially be used
by management to make more difficult uninvited attempts to acquire control of the Company. These provisions may have the effect of
lengthening the time required to acquire control of the Company through a tender offer, proxy contest or otherwise, and may deter any
potentially unfriendly offers or other efforts to obtain control of the Company. This could deprive the Company’s shareholders of
opportunities to realize a premium for their Glacier Bancorp, Inc. common stock, even in circumstances where such action is favored by
a majority of the Company’s shareholders.
Item 1B. Unresolved Staff Comments
None
Item 2. Properties
The following schedule provides information on the Company's 108 properties as of December 31, 2012:
(Dollars in thousands)
Montana
Idaho
Wyoming
Colorado
Utah
Washington
Properties
Leased
Properties
Owned
Net Book
Value
6
11
2
1
1
1
22
49
18
12
2
3
2
86
$
$
72,645
22,836
14,801
2,885
2,507
1,230
116,904
The Company believes that all of its facilities are well maintained, generally adequate and suitable for the current operations of its business,
as well as fully utilized. In the normal course of business, new locations and facility upgrades occur as needed.
For additional information regarding the Company’s premises and equipment and lease obligations, see Note 5 to the Consolidated
Financial Statements in “Item 8. Financial Statements and Supplementary Data.”
Item 3. Legal Proceedings
The Company and its subsidiaries are parties to various claims, legal actions and complaints in the ordinary course of their businesses.
In the Company’s opinion, all such matters are adequately covered by insurance, are without merit or are of such kind, or involve such
amounts, that unfavorable disposition would not have a material adverse effect on the financial position or results of operations of the
Company.
Item 4. Mine Safety Disclosures
Not Applicable
15
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
PART II
The Company’s stock trades on the NASDAQ Global Select Market under the symbol: GBCI. The primary market makers during 2012
are listed below:
Barclays Capital Inc./Le
Deutsche Banc Alex Brown
J.P. Morgan Securities LLC
Merrill Lynch, Pierce, Fenner
SG Americas Securities LLC
Wedbush Securities Inc.
Credit Suisse Securities USA
D.A. Davidson & Co., Inc.
Goldman, Sachs & Co.
Instinet, LLC
Knight Capital Americas LLC
Latour Trading LLC
Morgan Stanley & Co. LLC
RBC Capital Markets Corp.
Tradebot Systems, Inc.
UBS Securities LLC
The market range of high and low closing prices for the Company’s common stock for the periods indicated are shown below. As of
December 31, 2012, there were approximately 1,370 shareholders of record for the Company’s common stock.
First quarter
Second quarter
Third quarter
Fourth quarter
2012
2011
High
Low
High
Low
$
15.50
$
12.43
$
15.94
$
15.46
16.17
15.53
13.66
14.93
13.43
15.29
13.75
12.51
14.09
12.97
9.23
9.09
The Company paid cash dividends on its common stock of $0.53 and $0.52 per share for the years ended December 31, 2012 and 2011,
respectively. Future cash dividends will depend on a variety of factors, including net income, capital, asset quality, general economic
conditions and regulatory considerations. The following table summarizes the Company's dividends paid per quarter for the periods
indicated:
First quarter
Second quarter
Third quarter
Fourth quarter
2012
2011
0.13
0.13
0.13
0.14
0.13
0.13
0.13
0.13
Unregistered Securities
There have been no securities of the Company sold within the last three years which were not registered under the Securities Act.
Issuer Stock Purchases
The Company made no stock repurchases during 2012.
16
Equity Compensation Plan Information
The Company currently maintains the 2005 Employee Stock Incentive Plan which was approved by the shareholders and provides for
the issuance of stock-based compensation to officers, other employees and directors. Although the 1994 Director Stock Option Plan
expired in March 2009, there are issued options outstanding that have not been exercised as of December 31, 2012.
The following table sets forth information regarding outstanding options and shares reserved for future issuance under the following
plans as of December 31, 2012:
Number of Shares to be
Issued Upon Exercise of
Outstanding Options,
Warrants and Rights
(a)
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
(b)
Number of Shares Remaining
Available for Future
Issuance Under Equity
Compensation Plans
(Excluding Shares
Reflected in Column (a))
(c)
791,440
$
16.95
3,849,531
Plan Category
Equity compensation plans
approved by the shareholders
Stock Performance Graphs
The following graphs compare the yearly cumulative total return of the Company’s common stock over both a five-year and ten-year
measurement period with the yearly cumulative total return on the stocks included in 1) the Russell 2000 Index, and 2) the SNL Bank
Index comprised of banks and bank holding companies with total assets between $5 billion and $10 billion. Each of the cumulative total
returns are computed assuming the reinvestment of dividends at the frequency with which dividends were paid during the applicable
years.
17
Item 6. Selected Financial Data
The following financial data of the Company is derived from the Company’s historical audited financial statements and related notes.
The information set forth below should be read in conjunction with "Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations" and "Item 8. Financial Statements and Supplementary Data" contained elsewhere in this report.
(Dollars in thousands, except per share data)
2012
2011
December 31,
2010
2009
2008
Compounded Annual
Growth Rate
1-Year
2012/2011
5-Year
2012/2008
Selected Statement of Financial
Condition Information
Total assets
Investment securities, available-for-sale
Loans receivable, net
Allowance for loan and lease losses
Goodwill and intangibles
Deposits
Federal Home Loan Bank advances
Repurchase agreements and other
borrowed funds
Stockholders’ equity
Equity per share
Equity as a percentage of total assets
$7,747,440
3,683,005
3,266,571
(130,854)
112,274
5,364,461
997,013
7,187,906
3,126,743
3,328,619
(137,516)
114,384
4,821,213
1,069,046
6,759,287
2,395,847
3,612,182
(137,107)
157,016
4,521,902
965,141
6,191,795
1,443,817
3,920,988
(142,927)
160,196
4,100,152
790,367
5,553,970
929,147
3,998,478
(76,739)
159,765
3,262,475
338,456
299,540
900,949
12.52
11.63%
268,638
850,227
11.82
11.83%
269,408
838,204
11.66
12.40%
451,251
685,890
11.13
11.08%
1,110,731
676,940
11.04
12.19%
7.8 %
17.8 %
(1.9)%
(4.8)%
(1.8)%
11.3 %
(6.7)%
11.5 %
6.0 %
5.9 %
(1.7)%
10.0 %
41.9 %
(1.5)%
19.2 %
(6.2)%
11.0 %
13.1 %
(5.7)%
11.3 %
4.9 %
1.2 %
18
(Dollars in thousands, except per share data)
Summary Statements of Operations
Interest income
Interest expense
Net interest income
Provision for loan losses
Non-interest income
Non-interest expense 1
Income before income taxes 1
Income tax expense 1
Net income 1
Basic earnings per share 1
Diluted earnings per share 1
Dividends declared per share
2012
253,757
35,714
218,043
21,525
91,496
193,421
94,593
19,077
75,516
1.05
1.05
0.53
$
$
$
$
$
Years ended December 31,
2010
2009
2011
280,109
44,494
235,615
64,500
78,199
191,965
57,349
7,265
50,084
0.70
0.70
0.52
288,402
53,634
234,768
84,693
87,546
187,948
49,673
7,343
42,330
0.61
0.61
0.52
302,494
57,167
245,327
124,618
86,474
168,818
38,365
3,991
34,374
0.56
0.56
0.52
(Dollars in thousands)
Selected Ratios and Other Data
Return on average assets 1
Return on average equity 1
Dividend payout ratio 1
Average equity to average asset ratio
Net interest margin on average earning
assets (tax equivalent)
Efficiency ratio 2
Allowance for loan and lease losses as a
percent of loans
Allowance for loan and lease losses as a
percent of nonperforming loans
Non-performing assets as a percentage of
subsidiary assets
Loans originated and acquired
Number of full time equivalent employees
Number of locations
$
2012
1.01%
8.54%
50.48%
11.84%
3.37%
54.02%
At or for the Years ended December 31,
2010
2009
2011
0.72%
5.78%
74.29%
12.39%
3.89%
51.34%
0.67%
5.18%
85.25%
12.96%
4.21%
51.35%
0.60%
4.97%
92.86%
12.16%
4.82%
47.47%
3.85%
3.97%
3.66%
3.52%
1.88%
133%
102%
70%
70%
105%
1.87%
2,238
1,677
108
2.92%
1,650
1,653
106
3.91%
1,935
1,674
105
4.13%
2,431
1,643
106
1.46%
2,457
1,571
101
Compounded Annual
Growth Rate
1-Year
2012/2011
5-Year
2012/2008
(9.4)%
(19.7)%
(7.5)%
(66.6)%
17.0 %
0.8 %
64.9 %
162.6 %
50.8 %
50.0 %
50.0 %
1.9 %
(3.6)%
(21.7)%
3.5 %
26.4 %
7.1 %
7.0 %
(1.8)%
(11.5)%
1.9 %
(4.0)%
(3.9)%
1.2 %
2008
302,985
90,372
212,613
28,480
61,034
145,909
99,258
33,601
65,657
1.20
1.19
0.52
2008
1.31%
11.63%
43.33%
11.23%
4.70%
49.94%
__________
1 Excludes 2011 goodwill impairment charge of $32.6 million ($40.2 million pre-tax). For additional information on the goodwill impairment charge
see the "Non-GAAP Financial Measures" section below.
2 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.
19
Non-GAAP Financial Measures
In addition to the results presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”),
this Form 10-K contains certain non-GAAP financial measures. The Company believes that providing these non-GAAP financial measures
provides investors with information useful in understanding the Company’s financial performance, performance trends, and financial
position. While the Company uses these non-GAAP measures in its analysis of the Company’s performance, this information should not
be considered an alternative to measurements required by GAAP.
(Dollars in thousands, except per share data)
Non-interest expense
Income before income taxes
Income tax expense
Net income
Basic earnings per share
Diluted earnings per share
Return on average assets
Return on average equity
Dividend payout ratio
Year ended December 31, 2011
Goodwill
Impairment Charge,
Net of Tax
GAAP
Non-GAAP
$
$
$
$
$
$
232,124
17,190
(281)
17,471
0.24
0.24
0.25%
2.04%
(40,159)
40,159
7,546
32,613
0.46
0.46
0.47 %
3.74 %
216.67%
(142.38)%
191,965
57,349
7,265
50,084
0.70
0.70
0.72%
5.78%
74.29%
The reconciling item between the GAAP and non-GAAP financial measures was the third quarter of 2011 goodwill impairment charge
(net of tax) of $32.6 million.
• The goodwill impairment charge was $40.2 million with a tax benefit of $7.6 million which resulted in a goodwill impairment
charge (net of tax) of $32.6 million. The tax benefit applied only to the $19.4 million of goodwill associated with taxable
acquisitions and was determined based on the Company's marginal income tax rate of 38.9 percent.
• The basic and diluted earnings per share reconciling items were determined based on the goodwill impairment charge (net of
tax) divided by the weighted average diluted shares of 71,915,073.
• The goodwill impairment charge (net of tax) was included in determining earnings for both the GAAP return on average assets
and GAAP return on average equity. The average assets used in the GAAP and non-GAAP return on average assets ratios were
$6.923 billion and $6.931 billion for the year ended December 31, 2011, respectively. The average equity used in the GAAP
and non-GAAP return on average equity ratios were $858 million and $866 million for the year ended December 31, 2011,
respectively.
• The dividend payout ratio is calculated by dividing dividends declared per share by basic earnings per share. The non-GAAP
dividend payout ratio uses the non-GAAP basic earnings per share for calculating the ratio.
20
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 a slow recovery in the housing and real estate markets in its geographic areas;
increased loan delinquency rates;
the risks presented by a slow economic recovery, which could adversely affect credit quality, loan collateral values, OREO
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 completion and integration of acquisitions;
the goodwill the Company has recorded in connection with acquisitions could become additionally impaired, which may have
an adverse impact on 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 the Company's common
stock and the ability to raise additional capital in the future;
competition from other financial services companies in the Company's markets;
loss of services from the CEO and senior management team;
potential interruption or breach in security of the Company's systems; 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 "Item 1A. Risk Factors." 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.
21
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2012 COMPARED TO DECEMBER 31, 2011
Highlights and Overview
The Company had all time record earnings of $75.5 million for 2012, which was an increase of $25.4 million, or 51 percent over the
2011 operating net income of $50.1 million. Diluted earnings per share for 2012 was $1.05, an increase of $0.35, or 50 percent, from
the prior year diluted operating earnings per share of $0.70. The 2011 operating net income is considered a non-GAAP financial measure
and resulted from a goodwill impairment charge reconciling item of $32.6 million ($40.2 million pre-tax). For additional information
regarding non-GAAP financial measures relating to the goodwill impairment charge, see the section captioned “Non-GAAP Financial
Measures” included in “Item 6. Selected Financial Data.” Including the goodwill impairment charge, net income for 2011 was $17.5
million.
The net income improvement for 2012 over the 2011 operating income was largely attributable to the $43.0 million reduction, or 67
percent decrease, in the provision for loan losses as a result of the improvement in credit quality. The improvement in credit quality was
also reflected in the decrease in OREO expense which decreased $8.3 million, or 30 percent, over the prior year. The reduction in provision
for loan losses was partially offset by the $17.6 million reduction in net interest income driven by the low interest rate environment and
the increase in premium amortization (net of discount accretion) on investment securities. Although the refinance and purchase activity
during 2012 caused an increase in premium amortization on the investment portfolio, there was relief in part from the increase in gain
on sale of loans which increased $11.1 million, or 53 percent, from the prior year.
The real bright spot for the Company this year was the noteworthy improvement in credit quality of the loan portfolio. Non-performing
assets were $144 million at year end, a decrease of $70.0 million, or 33 percent, from the prior year end and a decrease of $127 million,
or 47 percent, from the Company's historically high levels in 2010. The decrease in non-performing assets was the result of the Company's
continued patience and focus on actively managing the disposal of the non-performing assets.
During the current and prior two years, the low interest rate environment combined with the decline in the loan portfolio and the increase
in low-yielding investment securities has put significant pressure on the Company's net interest margin. The net interest margin as a
percentage of earning assets, on a tax-equivalent basis, decreased 52 basis points from 3.89 percent in 2011 to 3.37 percent in 2012. Net
interest income of $218 million in 2012 decreased $17.6 million, or 7 percent, from net interest income of $236 million in 2011. The
Company purchased the investment securities over the past three years to offset the weak loan demand and preserve net interest income.
The majority of investment securities purchased were short weighted-average life collateralized mortgage obligations ("CMO") to allow
the Company the ability to redeploy principal paydowns as loan demand returns. As a result of offsetting the decline in the loan portfolio
with investment securities, the Company has both reduced the negative impact to current net interest income, while positioning the
Company for future economic growth.
The loan portfolio of $3.397 billion decreased $68.7 million, or 2 percent, from the prior year end. Investment securities of $3.683
million increased $556 million, or 18 percent, from the prior year end and represented 48 percent of total assets at the end of 2012. The
Company experienced another year of increased deposits with non-interest bearing deposits increasing $181 million, or 18 percent, during
the year and interest bearing deposits (excluding wholesale deposits) increasing $212 million, or 7 percent, during the year. As a result
of the increase in deposits, the Company required less borrowings to fund the investment growth and decreased FHLB advances by $72
million during the year. Tangible stockholders’ equity increased $52.8 million, or $0.73 per share, as a result of earnings retention and
the increase in accumulated other comprehensive income. The Company increased its quarterly dividend during the fourth quarter of
2012 from $0.13 per share to $0.14 per share for a record dividend of $0.53 per share for 2012 compared to $0.52 per share for 2011.
During the second quarter of 2012, the Company combined its eleven bank subsidiaries into one bank subsidiary with eleven bank
divisions. The eleven bank divisions operate with the same names and management teams as before the combination. The primary
purpose of the combination was to minimize regulatory burden and free up resources to focus on delivering products and services to its
customers in a faster and more efficient way. Following the combination of the bank subsidiaries, the eleven bank divisions have been
focused on centralizing and standardizing processes and resources across the Company.
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.
22
Assets
The following table summarizes the asset balances as of the dates indicated, and the amount of change from December 31, 2011:
Financial Condition Analysis
(Dollars in thousands)
Cash and cash equivalents
Investment securities, available-for-sale
Loans receivable
Residential real estate
Commercial
Consumer and other
Loans receivable
Allowance for loan and lease losses
Loans receivable, net
Other assets
Total assets
December 31,
2012
December 31,
2011
$ Change
% Change
$
187,040
3,683,005
128,032
3,126,743
516,467
2,278,905
602,053
3,397,425
(130,854)
3,266,571
610,824
7,747,440
$
516,807
2,295,927
653,401
3,466,135
(137,516)
3,328,619
604,512
7,187,906
59,008
556,262
(340)
(17,022)
(51,348)
(68,710)
6,662
(62,048)
6,312
559,534
46 %
18 %
— %
(1)%
(8)%
(2)%
(5)%
(2)%
1 %
8 %
Investment securities increased $556 million, or 18 percent, from December 31, 2011. The Company continued to purchase investment
securities to primarily offset the lack of loan growth and to maintain interest income. The increase in investment securities for the current
quarter occurred in CMO, corporate and municipal bonds. The majority of the purchases were short weighted-average life CMOs which
were significantly offset by CMO principal paydowns during the quarter. Investment securities represent 48 percent of total assets at
December 31, 2012 versus 44 percent at December 31, 2011.
The heightened uncertainty with the current economy and muted loan demand continued to put pressure on the Company and was the
primary cause of the decrease in the loan portfolio. During the year 2012, the loan portfolio decreased $68.7 million, or 2 percent, from
total loans of $3.466 billion at December 31, 2011. The largest decrease during the year was in consumer and other loans which decreased
$51.3 million, or 8 percent, from December 31, 2011 and was primarily attributable to customers paying off home equity lines of credit
during the process of refinancing their home. In addition, the Company continues to reduce its exposure to land, lot and other construction
loans which totaled $330 million as of December 31, 2012, a decrease of $51.2 million, or 13 percent, from the prior year end.
Liabilities
The following table summarizes the liability balances as of the dates indicated, and the amount of change from December 31, 2011:
(Dollars in thousands)
Non-interest bearing deposits
Interest bearing deposits
Repurchase agreements
FHLB advances
Other borrowed funds
Subordinated debentures
Other liabilities
Total liabilities
December 31,
2012
December 31,
2011
$ Change
% Change
$
1,191,933
4,172,528
289,508
997,013
10,032
125,418
60,059
1,010,899
3,810,314
258,643
1,069,046
9,995
125,275
53,507
$
6,846,491
6,337,679
181,034
362,214
30,865
(72,033)
37
143
6,552
508,812
18 %
10 %
12 %
(7)%
— %
— %
12 %
8 %
23
The Company's deposits continued to increase during the current year and over the past several years which has allowed the Company
to fund the increase in the investment securities portfolio at lower funding costs. The increase in deposits during 2012 and throughout
2011 has been driven by the Company's success in generating new personal and business customer relationships, as well as existing
customers retaining cash deposits for liquidity purposes due to the continued uncertainty in the current economic environment. Non-
interest bearing deposits of $1.192 billion increased $181 million, or 18 percent, since December 31, 2011. Interest bearing deposits of
$4.173 billion at December 31, 2012 included $758 million of wholesale deposits of which $128 million were reciprocal deposits (e.g.,
Certificate of Deposit Account Registry System deposits ("CDARS")). In addition to reciprocal deposits, wholesale deposits include
brokered deposits classified as NOW, money market deposit and certificate accounts. Interest bearing deposits increased $362 million,
or 10 percent, from December 31, 2011 and included a decrease of $41.4 million in wholesale deposits.
The Company's level and mix of borrowings has fluctuated as needed to supplement deposit growth and to fund growth in the investment
securities. The decrease in funding through repurchase agreements from the prior quarter was primarily due to the decrease of $112
million in wholesale repurchase funding to a total of $4.2 million as of December 31, 2012. The wholesale repurchase agreements are
utilized as a source of low cost funding and fluctuate as other lower cost funding sources are utilized. FHLB advances decreased $72.0
million since the prior year end.
Stockholders’ Equity
The following table summarizes the stockholders’ equity balances as of the dates indicated, and the amount of change from December 31,
2011:
(Dollars in thousands, except per share data)
December 31,
2012
December 31,
2011
$ Change
% Change
Common equity
$
852,987
Accumulated other comprehensive income
Total stockholders’ equity
Goodwill and core deposit intangible, net
Tangible stockholders’ equity
Stockholders’ equity to total assets
Tangible stockholders’ equity to total tangible assets
Book value per common share
Tangible book value per common share
Market price per share at end of period
47,962
900,949
(112,274)
788,675
11.63%
10.33%
12.52
10.96
14.71
$
$
$
$
816,740
33,487
850,227
(114,384)
735,843
11.83%
10.40%
11.82
10.23
12.03
36,247
14,475
50,722
2,110
52,832
0.70
0.73
2.68
4 %
43 %
6 %
(2)%
7 %
(2)%
(1)%
6 %
7 %
22 %
Tangible stockholders' equity and tangible book value per share increased $52.8 million and $0.73 per share from the prior year end,
resulting in tangible stockholders' equity to tangible assets of 10.33 percent and tangible book value per share of $10.96 as of December
31, 2012. The increases were from earnings retention and an increase in accumulated other comprehensive income.
Results of Operations
Performance Summary
Net income for 2012 was $75.5 million, an increase of $25.4 million, or 51 percent, over the 2011 operating net income of $50.1 million.
Operating net income is considered a non-GAAP financial measure and additional information regarding this measurement and
reconciliation is provided in “Item 6. Selected Financial Data.” Diluted earnings per share for 2012 was $1.05 per share, an increase of
$0.35, or 50 percent, from the prior year diluted operating earnings per share of $0.70. The net income improvement for 2012 over the
2011 operating net income was largely attributable to the $43.0 million (pre-tax) reduction in the provision for loan losses as a result of
the improvement in credit quality. The reduction in provision for loan losses was partially offset by the $17.6 million (pre-tax) reduction
in net interest income driven by the low interest rate environment and the increase in premium amortization (net of discount accretion)
on investment securities.
24
Income Summary
The following table summarizes revenue for the periods indicated, including the amount and percentage change from December 31, 2011:
(Dollars in thousands)
Net interest income
Interest income
Interest expense
Total net interest income
Non-interest income
Service charges, loan fees, and other fees
Gain on sale of loans
Loss on sale of investments
Other income
Total non-interest income
Years ended
December 31,
2012
December 31,
2011
$ Change
% Change
$
253,757
$
280,109
$
35,714
218,043
44,494
235,615
49,706
32,227
—
9,563
91,496
48,113
21,132
346
8,608
78,199
(26,352)
(8,780)
(17,572)
1,593
11,095
(346)
955
13,297
$
309,539
$
313,814
$
(4,275)
(9)%
(20)%
(7)%
3 %
53 %
(100)%
11 %
17 %
(1)%
Net interest margin (tax-equivalent)
3.37%
3.89%
Net Interest Income
Net interest income for 2012 decreased $17.6 million, or 7 percent, over the same period last year. Interest income decreased $26.4
million, or 9 percent, while interest expense decreased $8.8 million, or 20 percent from 2011. The decrease in interest income from the
prior year was principally due to the increase in premium amortization (net of discount accretion) on investment securities and the
reduction in balances and yield on loans, the combination of which put further pressure on earning asset yields. Interest income was
reduced by $72.0 million in premium amortization (net of discount accretion) on investment securities which was an increase of $33.9
million from the prior year. This increase in premium amortization (net of discount accretion) was the result of both the increased
purchases of investment securities combined with the continued refinance activity. The decrease in interest expense during the current
year was primarily attributable to the decreases in rates on interest bearing deposits and borrowings. The funding cost (including non-
interest bearing deposits) for 2012 was 55 basis points compared to 74 basis points for 2011.
The net interest margin, on a tax-equivalent basis, for 2012 was 3.37 percent, a 52 basis points reduction from the net interest margin of
3.89 percent 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 premium amortization on investment securities, both of which outpaced the reduction in funding cost.
The premium amortization in 2012 accounted for a 104 basis points reduction in the net interest margin which was an increase of 44
basis points compared to the 60 basis points reduction in the net interest margin for the same period last year.
Non-interest Income
Non-interest income of $91.5 million for 2012 increased $13.3 million, or 17 percent, over non-interest income of $78.2 million for
2011. Service charge fee income increased $1.6 million, or 3 percent, the majority of which was from higher debit card income driven
by the increased number of deposit accounts. Gain on sale of loans for 2012 increased $11.1 million, or 53 percent, from 2011 due to
greater refinance and loan origination activity. Included in other income was operating revenue of $355 thousand from OREO and gains
of $2.0 million on the sale of OREO, which totaled $2.4 million for 2012 compared to $2.7 million for the same period in the prior year.
25
Non-interest Expense
The following table summarizes non-interest expense for the periods indicated, including the amount and percentage change from
December 31, 2011:
(Dollars in thousands)
Compensation and employee benefits
Occupancy and equipment
Advertising and promotions
Outsourced data processing
Other real estate owned
Federal Deposit Insurance Corporation premiums
Core deposit intangible amortization
Other expense
Total non-interest expense before
goodwill impairment charge
Goodwill impairment charge
Total non-interest expense
Years ended
December 31,
2012
December 31,
2011
$
95,373
$
85,691
$
23,837
6,413
3,324
18,964
6,085
2,110
37,315
193,421
—
23,599
6,469
3,153
27,255
8,169
2,473
35,156
191,965
40,159
$
193,421
$
232,124
$
$ Change
% Change
9,682
238
(56)
171
(8,291)
(2,084)
(363)
2,159
1,456
(40,159)
(38,703)
11 %
1 %
(1)%
5 %
(30)%
(26)%
(15)%
6 %
1 %
(100)%
(17)%
Compensation and employee benefits for 2012 increased $9.7 million, or 11 percent, and was attributable to an increase in commissions
on residential real estate loan originations, a revised Company incentive program and the restoration in 2012 of certain compensation
cuts made in 2011. OREO expense of $19.0 million for 2012 decreased $8.3 million, or 30 percent, from the prior year. The OREO
expense for 2012 included $3.6 million of operating expenses, $13.3 million of fair value write-downs, and $2.1 million of loss on sale
of OREO.
Efficiency Ratio
The Company calculates the efficiency ratio as non-interest expense before OREO expenses, core deposit intangibles amortization,
goodwill impairment charges, and non-recurring expense items as a percentage of tax-equivalent net interest income and non-interest
income, excluding gains or losses on sale of investments, OREO income, and non-recurring income items. The efficiency ratio was 54
percent for 2012 and 51 percent for 2011. Although there was a significant increase in non-interest income from the the prior year, it
was not enough to offset the combination of the decrease in net interest income and the increase in non-interest expense (before the
goodwill impairment charge) in 2012.
Provision for Loan Losses
(Dollars in thousands)
Fourth quarter 2012
Third quarter 2012
Second quarter 2012
First quarter 2012
Fourth quarter 2011
Third quarter 2011
Second quarter 2011
First quarter 2011
Provision
for Loan
Losses
Net
Charge-Offs
ALLL
as a Percent
of Loans
Accruing
Loans 30-89
Days Past Due
as a Percent of
Loans
Non-
Performing
Assets to
Total Sub-
sidiary Assets
$
2,275
$
2,700
7,925
8,625
8,675
17,175
19,150
19,500
8,081
3,499
7,052
9,555
9,252
18,877
20,184
15,778
3.85%
4.01%
3.99%
3.98%
3.97%
3.92%
3.88%
3.86%
0.80%
0.83%
1.41%
1.24%
1.42%
0.60%
1.14%
1.44%
1.87%
2.33%
2.69%
2.91%
2.92%
3.49%
3.68%
3.78%
The provision for loan losses was $21.5 million for 2012, a decrease of $43.0 million, or 67 percent, from the same period in the prior
year. Net charged-off loans during the 2012 was $28.2 million, a decrease of $35.9 million from 2011. The largest category of net charge-
offs was in land, lot and other construction loans which had net charge-offs of $9.8 million, or 35 percent of total net charged-off loans.
Last year in this loan category, net charge-offs totaled $31.3 million.
26
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF THE RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2011 COMPARED TO DECEMBER 31, 2010
Income Summary
The following table summarizes revenue for the periods indicated, including the amount and percentage change from December 31, 2010:
(Dollars in thousands)
Net interest income
Interest income
Interest expense
Total net interest income
Non-interest income
Service charges, loan fees, and other fees
Gain on sale of loans
Loss on sale of investments
Other income
Total non-interest income
Years ended
December 31,
2011
December 31,
2010
$ Change
% Change
$
280,109
$
288,402
$
44,494
235,615
53,634
234,768
48,113
21,132
346
8,608
78,199
47,946
27,233
4,822
7,545
87,546
(8,293)
(9,140)
847
167
(6,101)
(4,476)
1,063
(9,347)
$
313,814
$
322,314
$
(8,500)
(3)%
(17)%
— %
— %
(22)%
(93)%
14 %
(11)%
(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 2010 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 2010. 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 in 2010.
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 $2.0 million gain on the sale of merchant card servicing portfolio in 2010, 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.
27
Non-interest Expense
The following table summarizes non-interest expense for the periods indicated, including the amount and percentage change from
December 31, 2010:
(Dollars in thousands)
Compensation and employee benefits
Occupancy and equipment
Advertising and promotions
Outsourced data processing
Other real estate owned
Federal Deposit Insurance Corporation premiums
Core deposit intangible amortization
Other expense
Total non-interest expense before
goodwill impairment charge
Goodwill impairment charge
Total non-interest expense
Years ended
December 31,
2011
December 31,
2010
$
85,691
$
87,728
$
23,599
6,469
3,153
27,255
8,169
2,473
35,156
191,965
40,159
24,261
6,831
3,057
22,193
9,121
3,180
31,577
187,948
—
$
232,124
$
187,948
$
$ Change
% Change
(2,037)
(662)
(362)
96
5,062
(952)
(707)
3,579
4,017
40,159
44,176
(2)%
(3)%
(5)%
3 %
23 %
(10)%
(22)%
11 %
2 %
n/m
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 2010. OREO expense of $27.3
million increased $5.1 million, or 23 percent, from 2010. 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 2010 as a result of a change in the FDIC assessment calculation. Other expense increased $3.6 million, or 11 percent,
from 2010 and was primarily driven by increases in debit card expenses and expenses associated with New Markets Tax Credits investments.
Provision for Loan Losses
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 2010. 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.
ADDITIONAL MANAGEMENT’S DISCUSSION AND ANALYSIS
Lending Activity and Practices
The Company focuses its lending activities 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.). Supplemental information regarding the Company's loan portfolio and
credit quality based on regulatory classification is provided in the section captioned “Loans by Regulatory Classification” included in
“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The regulatory classification of
loans is based primarily on the type of collateral for the loans. Loan information included in "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" is based on the Company's loan segments and classes which is based on the
purpose of the loan, unless otherwise noted as a regulatory classification.
28
The following table summarizes the Company’s loan portfolio as of the dates indicated:
(Dollars in thousands)
Residential real estate
loans
Commercial loans
Real estate
Other commercial
Total
Consumer and other loans
Home equity
Other consumer
Total
Loans receivable
Allowance for loan and
lease losses
December 31, 2012
December 31, 2011
December 31, 2010
December 31, 2009
December 31, 2008
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
$
516,467
15.81 % $
516,807
15.53 % $
632,877
17.52 % $
743,147
18.95 % $
783,399
19.59 %
1,655,508
50.68 % 1,672,059
50.23 %
1,796,503
49.73 %
1,894,690
48.33 % 1,930,849
48.29 %
623,397
19.08 %
623,868
18.74 %
654,588
18.12 %
724,579
18.48 %
644,980
16.13 %
2,278,905
69.76 % 2,295,927
68.97 %
2,451,091
67.85 %
2,619,269
66.81 % 2,575,829
64.42 %
403,925
12.37 %
440,569
13.24 %
483,137
13.38 %
501,866
12.80 %
507,839
12.70 %
198,128
6.07 %
212,832
6.39 %
182,184
5.04 %
199,633
5.09 %
208,150
5.21 %
602,053
18.44 %
653,401
19.63 %
665,321
18.42 %
701,499
17.89 %
715,989
17.91 %
3,397,425
104.01 % 3,466,135
104.13 %
3,749,289
103.79 %
4,063,915
103.65 % 4,075,217
101.92 %
(130,854)
(4.01)%
(137,516)
(4.13)%
(137,107)
(3.79)%
(142,927)
(3.65)%
(76,739)
(1.92)%
Loans receivable, net
$ 3,266,571
100.00 % $ 3,328,619
100.00 % $ 3,612,182
100.00 % $ 3,920,988
100.00 % $ 3,998,478
100.00 %
The stated maturities or first repricing term (if applicable) for the loan portfolio at December 31, 2012 was as follows:
(Dollars in thousands)
Variable rate maturing or repricing in
One year or less
One to five years
Thereafter
Fixed rate maturing in
One year or less
One to five years
Thereafter
Totals
Residential
Real Estate
Commercial
Consumer
and Other
Totals
$
$
198,989
99,553
14,991
110,397
76,270
16,267
516,467
755,798
792,941
147,532
216,043
260,526
106,065
2,278,905
257,309
21,557
6,497
117,147
176,842
22,701
602,053
1,212,096
914,051
169,020
443,587
513,638
145,033
3,397,425
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. Policies allow the loan-to-value to be above 80 percent
of the loan when insured by a private mortgage insurance company. The Company also provides interim construction financing for
single-family dwellings. These loans are supported by a term take-out commitment.
Consumer Land or Lot Loans
The Company originates land and lot acquisition loans to borrowers who intend to construct their primary residence on the respective
land or lot. These loans are generally for a term of three to five years and are secured by the developed land or lot with the loan to value
limited to the lesser of 75 percent of the appraised value or 75 percent of the cost.
29
Unimproved Land and Land Development Loans
Although unimproved land and land development loans have not been originated in the past four years, 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, the Company requires 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
appraised value or 50 percent of cost.
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 the appraised value or 75 percent
of the cost 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 appraised value or 70 percent of cost
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 Company intends 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 Company also originates 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.
Home Equity Loans
The Company's $403.9 million of home equity loans as of December 31, 2012 consist of 1-4 family junior lien mortgages and first and
junior lien lines of credit secured by residential real estate. The home equity loan portfolio consists of 64 percent variable interest rate
and 36 percent fixed interest rate loans. Approximately 50 percent of the home equity loans are in a first lien status with the remaining
50 percent in junior lien status. Approximately 20 percent of the home equity loans are closed-end amortizing loans and 80 percent are
open-end, revolving home equity lines of credit.
Home equity lines of credit are generally originated with maturity terms from 10 to 15 years. At origination, borrowers can choose a
variable interest rate or fixed interest rate for the full term of the line of credit, or a fixed interest rate for the first 3 or 5 years from
origination which then converts to a variable interest rate for the remaining term of the home equity lines of credit. The draw period
usually exists from origination to the maturity of the home equity lines of credit. During the draw period, a borrower with a variable
interest rate term has the option of converting to a fixed interest rate for all or a portion of the remaining term to maturity. During the
draw period, the Company has home equity lines of credit where the borrowers pay interest only and home equity lines of credit where
borrowers pay principal and interest.
Credit Risk Management
The Company is committed to a conservative management of the credit risk within the loan portfolio, 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 portfolio, semi-annual review of loans by industry, and periodic
stress testing of the loans secured by real estate. Federal and state regulatory safety and soundness examinations are conducted annually.
30
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.
Monitoring of the junior lien and home equity lines of credit portfolios includes evaluating payment delinquency, collateral values,
bankruptcy notices and foreclosure filings. Additionally, the Company places junior lien mortgages and junior lien home equity lines of
credit on non-accrual status when there is evidence that the associated senior lien is 90 days past due or is in the process of foreclosure,
regardless of the junior lien delinquency status.
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 division has an Officer Loan Committee consisting of senior lenders and members of senior management. The bank divisions’
Officer Loan Committees have loan approval authority between $250,000 and $1,000,000. The bank divisions’ Advisory Boards’ 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 bank divisions’ senior loan officers and the Company’s Credit Administrator. Loans greater
than $10,000,000 are subject to approval by the Bank’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 the Bank.
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 $52.2 million and $75.7 million in loans with interest reserves with remaining reserves of $945 thousand and $568
thousand as of December 31, 2012 and 2011, respectively. During 2012, the Company extended, renewed, or restructured 20 loans with
interest reserves, such loans having an aggregate outstanding principal balance of $16.2 million as of December 31, 2012. However,
such actions were based on prudent underwriting standards and not to keep the loans current. As of December 31, 2012, the Company
had 4 construction loans totaling $1.6 million with interest reserves that are currently non-performing or which are potential problem
loans.
31
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 0.5 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 have adopted and implemented 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 the Appraisal Standards Board. The Company’s Loan Policy establishes criteria for obtaining appraisals or
evaluations (new or updated), including transactions that are otherwise exempt from the appraisal requirements set forth within the
Guidelines.
Each of the Company’s bank divisions 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 (new or
updated).
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 (new or updated) 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 (new or updated) 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 Bank's Board of Directors and prompt
corrective action is taken.
32
Non-performing Assets
The following table summarizes information regarding non-performing assets at the dates indicated:
(Dollars in thousands)
December 31,
2012
December 31,
2011
At or for the Years ended
December 31,
2010
December 31,
2009
December 31,
2008
Other real estate owned
$
45,115
78,354
73,485
57,320
11,539
Accruing loans 90 days or more past due
Residential real estate
Commercial
Consumer and other
Total
Non-accrual loans
Residential real estate
Commercial
Consumer and other
Total
451
791
237
1,479
14,237
68,887
13,809
96,933
59
1,168
186
1,413
11,881
109,641
12,167
133,689
506
3,051
974
4,531
23,095
161,136
8,274
192,505
1,965
1,311
2,261
5,537
20,093
168,328
9,860
198,281
Total non-performing assets 1
$
143,527
213,456
270,521
261,138
4,103
2,897
1,613
8,613
3,575
58,454
2,272
64,301
84,453
Non-performing assets as a percentage of
subsidiary assets
Allowance for loan and lease losses as a
percentage of non-performing loans
Accruing loans 30-89 days past due
Troubled debt restructurings not included in
non-performing assets
Interest income 2
$
$
$
1.87%
2.92%
3.91%
4.13%
1.46%
133%
102%
70%
70%
105%
27,097
49,086
45,497
87,491
54,787
100,151
98,859
5,161
7,441
26,475
10,987
13,829
11,730
n/m
4,434
__________
1 As of December 31, 2012, non-performing assets have not been reduced by U.S. government guarantees of $1.6 million.
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
As a result of the Company's continued focus on actively managing the disposition of its non-performing assets, the Company had a
current year decrease of $69.9 million, or 33 percent, in non-performing assets to $143.5 million at December 31, 2012. The Company's
early stage delinquencies (accruing loans 30-89 days past due) has seen a significant decrease during the second half of 2012 and decreased
$22.0 million, or 45 percent, to $27.1 million at December 31, 2012 compared to early stage delinquencies of $49.1 million as of December
31, 2011.
The largest category of non-performing assets was the land, lot and other construction loans category, a regulatory classification, which
was $66.5 million, or 46 percent, of the non-performing assets at December 31, 2012. Included in this category was $31.5 million of
land development loans and $19.1 million in unimproved land loans at December 31, 2012. Although land, lot and other construction
loans have put pressure on the Company's credit quality, the Company has continued to reduce this category in the current and prior year.
33
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 (new or updated), the Company believes the value of the underlying real estate
collateral is adequate to minimize significant charge-offs or loss to the Company. The Company 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 Company works closely with its 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 is a product of this effort.
For non-performing construction loans involving residential structures, the percentage of completion exceeds 95 percent at December 31,
2012. For non-performing construction loans involving commercial structures, the percentage of completion ranges from projects not
started to projects completed at December 31, 2012. 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.
Construction loans, a regulatory classification. accounted for 40 percent of the Company's non-accrual loans as of December 31, 2012.
Land, lot and other construction loans, a regulatory classification, were 95 percent of the non-accrual construction loans. Of the Company’s
$39.2 million of non-accrual construction loans at December 31, 2012, 96 percent of such loans had collateral properties securing the
loans in Western Montana and Idaho. With locations and operations in the contiguous northern Rocky Mountain states of Idaho and
Montana, the geography and economies of each of these geographic areas 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 land, lot and other construction 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."
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. Impaired loans include non-performing
loans (i.e., non-accrual loans and accruing loans ninety days or more past due) and accruing loans under ninety days past due where it is
probable payments will not be received according to the loan agreement (e.g., troubled debt restructuring). 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 $202 million and $259 million as of
December 31, 2012 and 2011, respectively. The ALLL includes valuation allowances of $15.5 million and $18.8 million specific to
impaired loans as of December 31, 2012 and 2011, respectively. Of the total impaired loans at December 31, 2012, there were 32
significant commercial real estate and other commercial loans that accounted for $84.0 million, or 42 percent, of the impaired loans. The
32 loans were collateralized by 135 percent of the loan value, the majority of which had appraisals or evaluations (new or updated) during
the last year, such appraisals reviewed at least quarterly taking into account current market conditions. Of the total impaired loans at
December 31, 2012, there were 119 loans aggregating $100 million, or 50 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 $12.9 million. Of these loans, there were charge-offs of $3.5 million during
2012.
34
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 (new or
updated), 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 an appraisal or evaluation (new or updated), 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 appraisals or evaluations (new or updated) 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 and 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.
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 $151 million
and $165 million as of December 31, 2012 and 2011, respectively. The Company’s TDR loans are considered impaired loans of which
$50.9 million and $65.6 million as of December 31, 2012 and 2011, respectively, are designated as non-accrual.
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 use of 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 of December 31, 2012 that have
repayment dates extended at or near the original maturity date for which the Company has not classified as impaired. At December 31,
2012, the Company has TDR loans of $29.0 million that are in non-accrual status or that have had partial charge-offs during the year, the
borrowers of which continue to have $37.8 million in other loans that are on accrual status.
35
Other Real Estate Owned
The loan book value prior to the acquisition and transfer of the loan into OREO during 2012 was $39.8 million of which $16.1 million
was residential real estate, $18.2 million was commercial, and $5.5 million was consumer loans. The fair value of the loan collateral
acquired in foreclosure during 2012 was $27.5 million of which $11.6 million was residential real estate, $12.2 million was commercial,
and $3.7 million was consumer loans. The following table sets forth the changes in OREO for the periods indicated:
(Dollars in thousands)
Balance at beginning of period
Additions
Capital improvements
Write-downs
Sales
Balance at end of period
December 31,
2012
Years ended
December 31,
2011
December 31,
2010
$
$
78,354
27,536
—
(13,258)
(47,517)
45,115
73,485
79,295
669
(16,246)
(58,849)
78,354
57,320
72,572
273
(10,429)
(46,251)
73,485
The Company believes that the write-downs in 2012 and 2011 are not considered 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 also determined
that the write-downs were not indicative of a trend which would likely affect the future operating results in light of the remaining holdings
of real property and the Company’s experience in the geographic markets where the properties are located. However, there can be no
assurance that future significant write-downs will not occur.
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 the Company’s loan
portfolio. 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 portfolio, economic
conditions nationally and in the local markets in which the Company operates, changes in collateral values, delinquencies, non-performing
assets and net charge-offs.
Although the Company continues 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 portfolio may adversely affect the credit risk and potential for loss to
the Company.
The ALLL evaluation is well documented and approved by the Company’s Board of Directors. In addition, the policy and procedures for
determining the balance of the ALLL are reviewed annually by the Company’s Board of Directors, the internal audit department,
independent credit reviewers and state and federal bank regulatory agencies.
At the end of each quarter, the Company analyzes its loan portfolio and maintains an ALLL at a level that is appropriate and determined
in accordance with GAAP. 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.
36
The Bank divisions’ credit administration reviews their respective loan portfolios to determine which loans are impaired and estimates
the specific valuation allowance. The impaired loans and related specific valuation allowance are then provided to the Company’s credit
administration for further review and approval. The Company’s credit administration also determines the estimated general valuation
and reviews and approves the overall ALLL for the Company. The credit administration of the Company exercises significant judgment
when evaluating the effect of applicable qualitative or environmental factors on the Company’s historical loss experience for loans not
identified as impaired. Quantification of the impact upon the Company’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 Company’s unimpaired loan portfolio as of each evaluation date. The Company’s credit administration 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. To have directional consistency, the
provision for loan losses and credit quality should generally move in the same direction.
The Company’s model of eleven bank divisions with separate management teams provides substantial local oversight to the lending and
credit management function. The Company’s 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
operates 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 of identifying impaired loans 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.
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 portfolio 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:
(Dollars in
thousands)
Residential
real estate
Commercial
real estate
Other
commercial
Home equity
Other
consumer
December 31, 2012
Percent
of
Loans in
Category
ALLL
December 31, 2011
Percent
of Loans
in
Category
ALLL
December 31, 2010
Percent
of Loans
in
Category
ALLL
December 31, 2009
Percent
of Loans
in
Category
ALLL
December 31, 2008
Percent
of Loans
in
Category
ALLL
19%
47%
16%
13%
5%
100%
$ 15,482
15%
17,227
15%
20,957
17%
13,496
18%
7,233
74,398
49%
76,920
48%
76,147
48%
66,791
47%
35,305
21,567
10,659
18%
12%
20,833
13,616
18%
13%
19,932
13,334
17%
13%
39,558
13,419
18%
12%
21,590
6,975
8,748
6%
8,920
6%
6,737
5%
9,663
5%
5,636
Totals
$130,854
100% 137,516
100% 137,107
100% 142,927
100%
76,739
37
The following table summarizes the ALLL experience for the periods indicated:
(Dollars in thousands)
December 31,
2012
December 31,
2011
Years ended
December 31,
2010
December 31,
2009
December 31,
2008
Balance at beginning of period
Provision for loan losses
$
137,516
21,525
137,107
64,500
142,927
84,693
76,739
124,618
54,413
28,480
Charge-offs
Residential real estate
Commercial loans
Consumer and other loans
Total charge-offs
Recoveries
Residential real estate
Commercial loans
Consumer and other loans
Total recoveries
(5,267)
(21,578)
(7,827)
(34,672)
643
4,088
1,754
6,485
(5,671)
(52,428)
(11,267)
(69,366)
486
3,830
959
5,275
(16,575)
(69,595)
(7,780)
(93,950)
749
2,203
485
3,437
(18,854)
(35,077)
(6,965)
(60,896)
423
1,636
407
2,466
(3,233)
(4,957)
(1,649)
(9,839)
23
716
321
1,060
Charge-offs, net of recoveries
(28,187)
(64,091)
(90,513)
(58,430)
(8,779)
Acquisitions 1
—
—
—
—
2,625
Balance at end of period
$
130,854
137,516
137,107
142,927
76,739
Allowance for loan and lease losses as a
percentage of total loans
Net charge-offs as a percentage of average
loans
__________
1 Acquisition of San Juans in 2008.
3.85%
0.80%
3.97%
1.77%
3.66%
2.26%
3.52%
1.41%
1.88%
0.23%
The Company’s allowance of $131 million is considered adequate to absorb losses from any class of its loan portfolio. For the periods
ended December 31, 2012 and 2011, 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.
At December 31, 2012, the allowance for loan and lease losses was $131 million, a decrease of $6.7 million from the prior year. The
allowance was 3.85 percent of total loans outstanding at December 31, 2012, compared to 3.97 percent at December 31, 2011. The
decrease in the allowance as a percentage of loans was determined to be adequate based on the Company's assessment of the allowance
and was reflective of the improvement in credit quality measurements. The allowance was 133 percent of non-performing loans at
December 31, 2012, an increase from 102 percent at December 31, 2011.
When applied to the Company’s historical loss experience, the qualitative or 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 2012, loan charge-offs, net of recoveries, exceeded the provision for loan losses by $6.7 million. During the same period in 2011,
the provision for loan losses exceeded loan charge-offs, net of recoveries, by $409 thousand.
The Company provides commercial services to individuals, small to medium size businesses, community organizations and public entities
from 108 locations, including 99 branches, across Montana, Idaho, Wyoming, Colorado, Utah, and Washington. The Rocky Mountain
states in which the Company operates has 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 the Company’s geographic locations.
38
Although there continues to be heightened uncertainty in the economic environment, there was notable improvements during 2012
compared to 2011 and the past several years. There was steady growth in the housing permits, housing starts, and completions for new
privately owned units during 2012 in Montana, Idaho, Colorado and Utah in relation to the US national statistics. There was improvement
in single family residential real estate construction and sales for all of the Company's market areas. Single family residential collateral
values in Idaho, Wyoming and Montana stabilized (with some improvement in isolated markets in which the Company operates) compared
to the prior year and prior 5 year historical trends. There was a steady decline in the number of foreclosures initiated in 2012 for Montana,
Idaho, and Wyoming. The unemployment rates for the states in which the Company conducts operations were generally lower compared
to the national unemployment rate. National unemployment rates increased steadily from 5.0 in the first part of 2008 to a range of 7.8
to 10.0 during 2009 through 2011 and has recently declined to 7.8 in December of 2012. 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 continue to
remain weak (due to excess supply) especially when compared to the exceptionally high price levels of natural gas during 2008. The
tourism industry and related lodging continues to be a source of strength for the locations where the Company’s market areas have national
parks and similar recreational areas in the market areas served.
In evaluating the need for a specific or general valuation allowance for impaired and unimpaired loans, respectively, within the Company’s
construction loan portfolio, (i.e., regulatory classification), 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 appraisals or evaluations (new or updated) 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 12 percent of the Company’s total loan portfolio and account for 40 percent of the Company’s
non-accrual loans at December 31, 2012. 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).
The Company’s allowance consisted of the following components as of the dates indicated:
(Dollars in thousands)
Specific valuation allowance
General valuation allowance
Total ALLL
December 31,
2012
December 31,
2011
$
$
15,534
115,320
130,854
18,828
118,688
137,516
During 2012, the ALLL decreased by $6.7 million, the net result of a $3.3 million decrease in the specific valuation allowance and a $3.4
million decrease in the general valuation allowance. The decrease in the specific valuation allowance since the prior year end was
primarily due to the decrease in loans with a specific valuation allowance of $15.0 million. The decrease in the general valuation allowance
was the result of a $11.8 million decrease in loans collectively evaluated for impairment and an improvement in the historical loss
experience adjusted for qualitative or environmental factors. Further supporting the decrease in the ALLL were the following trends:
• Non-accrual construction loans, (i.e., residential construction and land, lot and other construction, each a regulatory classification)
were $39.2 million, or 40 percent, of the $96.9 million of non-accrual loans at year end 2012, a decrease of $28.7 million from
the prior year end. Non-accrual construction loans at year end 2011 accounted for 51 percent of the $134 million of non-accrual
loans.
• Non-performing loans as a percent of total loans decreased to 2.90 percent at December 31, 2012 as compared to 3.90 percent at
December 31, 2011.
• Charge-offs, net of recoveries, in 2012 were $28.2 million, a $35.9 million decrease from 2011.
• Net charge-offs of construction loans were $12.4 million, or 44 percent, of the $28.2 million of net charge-offs in 2012 compared
to net charge-offs of construction loans of $35.6 million, or 56 percent, of the $64.1 million of net charge-offs in 2011.
• Early stage delinquencies (accruing loans 30-89 days past due) decreased to $27.1 million at year end 2012 from $49.1 million
•
at the prior year end.
Impaired loans as a percent of total loans decreased to 5.94 percent at year end 2012 as compared to 7.46 percent at year end
2011.
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.”
39
Loans by Regulatory Classification
Supplemental information regarding identification of the Company's loan portfolio and credit quality based on regulatory classification
is provided in the following tables. The regulatory classification of loans is based primarily on the type of collateral for the loans. There
may be differences when compared to loan tables and loan amounts appearing elsewhere which reflect the Company's internal loan
segments and classes which are based on the purpose of the loan.
The following table summarizes the Company’s loan portfolio by regulatory classification:
(Dollars in thousands)
December 31,
2012
December 31,
2011
$ Change
% Change
Custom and owner occupied construction
$
Pre-sold and spec construction
Total residential construction
Land development
Consumer land or lots
Unimproved land
Developed lots for operative builders
Commercial lots
Other construction
40,327
34,970
75,297
80,132
104,229
53,459
16,675
19,654
56,109
35,422
58,811
94,233
103,881
125,396
66,074
25,180
26,621
34,346
4,905
(23,841)
(18,936)
(23,749)
(21,167)
(12,615)
(8,505)
(6,967)
21,763
Total land, lot, and other construction
330,258
381,498
(51,240)
Owner occupied
Non-owner occupied
Total commercial real estate
710,161
452,966
697,131
436,021
1,163,127
1,133,152
Commercial and industrial
420,459
408,054
14 %
(41)%
(20)%
(23)%
(17)%
(19)%
(34)%
(26)%
63 %
(13)%
2 %
4 %
3 %
3 %
7 %
(14)%
5 %
(9)%
— %
(7)%
(3)%
5 %
52 %
(2)%
13,030
16,945
29,975
12,405
50,399
(13,425)
36,974
(30,450)
(216)
(30,666)
(5,141)
7,963
(50,044)
738,854
82,083
820,937
319,779
109,019
428,798
145,890
158,160
(145,501)
688,455
95,508
783,963
350,229
109,235
459,464
151,031
150,197
(95,457)
$
3,397,425
3,466,135
(68,710)
40
1st lien
Junior lien
Total 1-4 family
Home equity lines of credit
Other consumer
Total consumer
Agriculture
Other
Loans held for sale
Total
The following tables summarize selected information identified by regulatory classification on the Company’s non-performing assets.
Commercial and industrial
5,970
12,855
5,774
(Dollars in thousands)
Custom and owner occupied construction
Pre-sold and spec construction
Total residential construction
Land development
Consumer land or lots
Unimproved land
Developed lots for operative builders
Commercial lots
Other construction
Total land, lot and other construction
Owner occupied
Non-owner occupied
Total commercial real estate
1st lien
Junior lien
Total 1-4 family
Home equity lines of credit
Other consumer
Total consumer
Agriculture
Other
Total
Non-performing Assets,
by Loan Type
December 31,
2012
December 31,
2011
Non-
Accruing
Loans
December 31,
2012
Accruing
Loans 90
Days
or More Past
Due
December 31,
2012
Other
Real Estate
Owned
December 31,
2012
$
1,343
1,603
2,946
31,471
6,459
19,121
2,393
1,959
5,105
66,508
15,662
4,621
20,283
1,531
5,506
7,037
56,152
8,878
35,771
9,001
2,032
5,133
1,343
785
2,128
16,563
3,169
14,752
1,381
979
194
116,967
37,038
23,931
4,897
28,828
10,495
3,611
14,106
25,739
6,660
32,399
8,041
441
8,482
6,686
253
31,083
2,506
33,589
6,361
360
6,721
7,010
449
20,261
6,559
26,820
7,120
306
7,426
3,641
—
—
—
—
—
37
—
—
—
—
37
568
42
610
181
459
—
459
180
12
192
—
—
—
818
818
14,908
3,253
4,369
1,012
980
4,911
29,433
4,599
968
5,567
15
5,019
101
5,120
741
123
864
3,045
253
$
143,527
213,456
96,933
1,479
45,115
41
(Dollars in thousands)
Custom and owner occupied construction
Pre-sold and spec construction
Total residential construction
Land development
Consumer land or lots
Unimproved land
Developed lots for operative builders
Commercial lots
Total land, lot and other construction
Owner occupied
Non-owner occupied
Total commercial real estate
Commercial and industrial
1st lien
Junior lien
Total 1-4 family
Home equity lines of credit
Other consumer
Total consumer
Agriculture
Other
Total
__________
n/m - not measurable
Accruing 30-89 Days Delinquent
Loans, by Loan Type
December 31,
2012
December 31,
2011
$ Change
% Change
$
5
893
898
191
762
422
422
11
1,808
5,523
2,802
8,325
1,905
7,352
732
8,084
4,164
1,001
5,165
912
—
—
250
250
458
1,801
1,342
1,336
—
4,937
8,187
1,791
9,978
4,637
14,405
6,471
20,876
3,416
1,172
4,588
3,428
392
5
643
648
(267)
(1,039)
(920)
(914)
11
(3,129)
(2,664)
1,011
(1,653)
(2,732)
(7,053)
(5,739)
(12,792)
748
(171)
577
(2,516)
(392)
n/m
257 %
259 %
(58)%
(58)%
(69)%
(68)%
n/m
(63)%
(33)%
56 %
(17)%
(59)%
(49)%
(89)%
(61)%
22 %
(15)%
13 %
(73)%
(100)%
$
27,097
49,086
(21,989)
(45)%
42
The following table summarizes net charge-offs at the dates indicated, including identification by regulatory classification:
(Dollars in thousands)
Custom and owner occupied construction
Pre-sold and spec construction
Total residential construction
Land development
Consumer land or lots
Unimproved land
Developed lots for operative builders
Commercial lots
Other construction
Total land, lot and other construction
Owner occupied
Non-owner occupied
Total commercial real estate
Commercial and industrial
1st lien
Junior lien
Total 1-4 family
Home equity lines of credit
Other consumer
Total consumer
Agriculture
Other
Total
Net Charge-Offs (Recoveries),
Years Ended, By Loan Type
December 31,
2012
December 31,
2011
Charge-Offs
December 31,
2012
Recoveries
December 31,
2012
$
24
2,489
2,513
3,035
4,003
636
1,802
362
—
9,838
1,312
597
1,909
2,651
5,257
3,464
8,721
2,124
262
2,386
125
44
206
4,069
4,275
17,055
7,456
4,047
943
237
1,568
31,306
3,815
3,861
7,676
7,871
7,031
1,663
8,694
3,261
615
3,876
134
259
75
2,641
2,716
3,975
4,442
1,039
2,098
489
—
51
152
203
940
439
403
296
127
—
12,043
2,205
1,507
1,037
2,544
3,696
6,420
3,787
10,207
2,443
641
3,084
261
121
195
440
635
1,045
1,163
323
1,486
319
379
698
136
77
$
28,187
64,091
34,672
6,485
43
Investment Activity
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. Investment securities designated as available-for-sale are
summarized below:
(Dollars in thousands)
Amount
Percent
Amount
Percent
Amount
Percent
December 31, 2012
December 31, 2011
December 31, 2010
U.S. government and federal agency
U.S. government sponsored enterprises
State and local governments
Corporate bonds
Collateralized debt obligations
Residential mortgage-backed securities
Total investment securities,
available-for-sale
$
202
17,480
1,214,518
288,795
1,708
2,160,302
—% $
—%
208
31,155
33% 1,064,655
8%
—%
62,237
5,366
—% $
211
1%
34%
2%
—%
41,518
657,421
—
6,595
59% 1,963,122
63% 1,690,102
—%
2%
27%
—%
—%
71%
$ 3,683,005
100% $ 3,126,743
100% $ 2,395,847
100%
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 maximum federal statutory rate of 35 percent in
calculating its tax-equivalent yield. The residential mortgage-backed securities are typically short weighted-average life U.S. government
agency CMOs and provide the Company with on-going liquidity as scheduled and pre-paid principal payments are made on the securities.
It has generally been the Company’s policy to maintain a liquid portfolio above policy limits.
Interest income from investment securities consisted of the following:
(Dollars in thousands)
Taxable interest
Tax-exempt interest
Total interest income
December 31,
2012
$
$
28,687
37,699
66,386
Years ended
December 31,
2011
December 31,
2010
44,842
31,420
76,262
33,659
23,351
57,010
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 at December 31, 2012 primarily consisted of stock issued by the FHLB of Seattle, such shares
measured at cost in recognition of the transferability restrictions imposed by the issuers. Other non-marketable equity securities include
Federal 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.
Based on the Company's analysis of its impaired non-marketable equity securities as of December 31, 2012, the Company determined
that none of such securities had other-than-temporary impairment.
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.
44
The Company believes that macroeconomic conditions occurring throughout 2012 and 2011 have unfavorably impacted the fair value
of certain debt securities in its investment portfolio. In August 2011, Standard and Poor's downgraded the United States long-term debt
rating from its AAA rating to AA+ with a negative outlook. Both Moody's and Fitch have continued to maintain their long-term debt
ratings of the United States as Aaa and AAA, respectively, each with a negative outlook. Standard and Poor's, Moody's and Fitch have
similar credit ratings and outlooks with respect to certain long-term debt instruments issued by Fannie Mae, Freddie Mac and other U.S.
government agencies linked to long-term United 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, Standard and Poor's, and Fitch).
The following table separates investments with an unrealized loss position at December 31, 2012 into two categories: investments
purchased prior to 2012 and those purchased during 2012. Of those investments purchased prior to 2012, the fair market value and
unrealized loss at December 31, 2011 is also presented.
December 31, 2012
December 31, 2011
Fair Value
Unrealized
Loss
Unrealized
Loss as a
Percent of
Fair Value
Fair Value
Unrealized
Loss
Unrealized
Loss as a
Percent of
Fair Value
(Dollars in thousands)
Temporarily impaired securities purchased
prior to 2012
State and local governments
Residential mortgage-backed securities
Total
Temporarily impaired securities purchased
during 2012
State and local governments
Corporate bonds
Residential mortgage-backed securities
$
$
$
12,286
165,500
177,786
95,143
41,856
852,640
Total
$
989,639
Temporarily impaired securities
State and local governments
Corporate bonds
Residential mortgage-backed securities
Total
$
107,429
41,856
1,018,140
$ 1,167,425
12,366
508,996
521,362
(131)
(3,669)
(3,800)
(1)%
(1)%
(1)%
(111)
(819)
(930)
(1,494)
(238)
(3,788)
(5,520)
(1,605)
(238)
(4,607)
(6,450)
(1)%
— %
(1)%
(2)%
(1)%
— %
(1)%
(1)%
(1)%
— %
(1)%
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 at December 31, 2012:
(Dollars in thousands)
Greater than 15.0%
10.1% to 15.0%
5.1% to 10.0%
0.1% to 5.0%
Total
Number of
Debt
Securities
Unrealized
Loss
1
1
7
557
566
$
$
(14)
(61)
(638)
(5,737)
(6,450)
45
With respect to the duration of the impaired debt securities, the Company identified 48 securities which have been continuously impaired
for the twelve months ending December 31, 2012. 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.
The following table provides details of the 48 securities which have been continuously impaired for the twelve months ended December
31, 2012, including the most notable loss for any one bond in each category.
(Dollars in thousands)
State and local governments
Residential mortgage-backed securities
Total
Number of
Debt
Securities
Unrealized
Loss for
12 Months
Or More
Most
Notable
Loss
9
39
48
$
$
(74) $
(566)
(640)
(18)
(410)
Of the 39 residential mortgage-backed securities, 35 have underlying collateral consisting of U.S. government guaranteed mortgages
(e.g. GNMA) and U.S. government sponsored enterprise (e.g. FHLMC) guaranteed mortgages. Each of the 4 remaining residential
mortgage-backed securities have underlying non-guaranteed private label whole loan collateral of which 3 have 30-year fixed rate
residential mortgages considered to be “Prime” and 1 has 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 Company's analysis of its impaired debt securities as of December 31, 2012, the Company determined that none of such
securities had other-than-temporary impairment.
Sources of Funds
The Company’s deposits have traditionally been the principal source of funds for use in lending and other business purposes. The Company
has 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 Company obtains wholesale deposits
through various programs including reciprocal deposit programs (e.g., CDARS).
The Company also obtains 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.
46
Deposits
Deposits are obtained primarily from individual and business residents of the Bank's market area. The Bank issues negotiated-rate
certificate of deposits accounts and has paid a limited amount of fees to brokers to obtain deposits. The following table illustrates the
amounts outstanding at December 31, 2012 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 $505 million. Included in Demand
Deposits are brokered deposits of $236 million.
(Dollars in thousands)
Within three months
Three months to six months
Seven months to twelve months
Over twelve months
Totals
Certificates
of Deposit
Demand
Deposits
Totals
$
$
316,568
154,766
205,395
367,759
1,044,488
2,361,528
—
—
—
2,361,528
2,678,096
154,766
205,395
367,759
3,406,016
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 Bank has borrowed money through repurchase agreements. This process involves the “selling” of one or more of the securities in
the Bank’s investment portfolio and by simultaneously 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 a policy adopted by the Bank's Board of
Directors, the Bank enters 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.
The Company has not entered into reverse repurchase agreements.
The Bank is a member of the FHLB of Seattle which is one of twelve banks that comprise the FHLB System. As a member of the FHLB,
the Bank may borrow from the FHLB on the security of FHLB stock, which the Bank is 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 U.S. government 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.
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 the Asset Liability Committee (“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, federal funds purchased, wholesale deposits, and retail and wholesale repurchase agreements.
The Company also has access to the short-term discount window borrowing programs (i.e., primary credit) of the Federal Reserve Bank
("FRB"). 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.
47
The following table provides information relating to short-term borrowings which consists of borrowings that mature within one year of
period end:
(Dollars in thousands)
Repurchase agreements
Amount outstanding at end of period
Weighted interest rate on outstanding amount
Maximum outstanding at any month-end
Average balance
Weighted average interest rate
FHLB advances
Amount outstanding at end of period
Weighted interest rate on outstanding amount
Maximum outstanding at any month-end
Average balance
Weighted average interest rate
December 31,
2012
At or for the Years ended
December 31,
2011
December 31,
2010
$
$
$
$
$
$
289,508
258,643
249,403
0.32%
0.42%
0.63%
466,784
354,324
338,352
267,058
252,083
227,202
0.37%
0.51%
0.71%
720,000
792,000
761,064
0.28%
0.68%
0.33%
792,018
719,762
877,017
721,226
773,076
488,044
0.50%
0.76%
0.39%
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 of December 31, 2012 were $125 million, 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
The Company has outstanding debt maturities, the largest aggregate amount of which were FHLB advances. In the normal course of
business, there may be various outstanding commitments to obtain funding, such as brokered deposits, and to extend credit, such as letters
of credit and un-advanced loan commitments, which are not reflected in the accompanying condensed consolidated financial statements.
The Company does not anticipate any material losses as a result of these transactions. For the schedules of outstanding commitments,
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 of December 31, 2012:
(Dollars in thousands)
Total
Deposits
Repurchase agreements
FHLB advances
Other borrowed funds
Subordinated debentures
Capital lease obligations
Operating lease
obligations
$ 5,364,461
289,508
997,013
8,244
125,418
2,407
Indeter-
minate
Maturity 1
3,827,346
—
—
—
—
—
1,246,425
289,508
720,000
50
—
238
14,042
$ 6,801,093
—
3,827,346
2,317
2,258,538
Payments Due by Period
2013
2014
2015
2016
2017
Thereafter
161,973
—
—
—
—
828
2,227
165,028
73,115
—
75,000
—
—
195
2,043
150,353
37,073
—
45,000
—
—
197
1,813
84,083
18,439
—
—
97
—
200
1,506
20,242
90
—
157,013
8,097
125,418
749
4,136
295,503
__________
1 Represents non-interest bearing deposits and NOW, savings, and money market accounts.
48
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, 2012:
(Dollars in thousands)
FHLB advances
Borrowing capacity
Amount utilized
Amount available
FRB discount window
Borrowing capacity
Amount utilized
Amount available
Unsecured lines of credit available
Unencumbered investment securities
U.S. government and federal agency
U.S. government sponsored enterprises
State and local governments
Corporate bonds
Collateralized debt obligations
Residential mortgage-backed securities
Total unencumbered securities
December 31,
2012
$
$
$
$
$
$
1,081,728
(997,013)
84,715
463,038
—
463,038
171,000
202
2,010
1,026,203
288,795
1,708
944,163
$
2,263,081
The Company has a wide range of versatility in managing the liquidity and asset/liability mix. The Company’s ALCO committee meets
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 is also 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.
49
The Federal Reserve Board has adopted capital adequacy guidelines that are used to assess the adequacy of capital in supervising a bank
holding company. The Company and the Bank were considered well capitalized by their respective regulators as of December 31, 2012
and 2011. There are no conditions or events after December 31, 2012 that management believes have changed the Company’s or the
Bank’s risk-based capital category.
The following table illustrates the Federal Reserve Board’s capital adequacy guidelines and the Company’s compliance with those
guidelines as of December 31, 2012.
(Dollars in thousands)
Total stockholders’ equity
Less:
Goodwill and intangibles
Net unrealized gains on investment securities and change in
fair value of derivatives used for cash flow hedges
Plus:
Allowance for loan and lease losses
Subordinated debentures
Total regulatory capital
Risk-weighted assets
Total adjusted average assets
Capital ratio
Regulatory “well capitalized” requirement
Excess over “well capitalized” requirement
Tier 1
Capital
Total
Capital
Tier 1 Leverage
Capital
$
900,949
900,949
900,949
(112,274)
(112,274)
(112,274)
(47,962)
(47,962)
(47,962)
—
124,500
865,213
58,361
124,500
923,574
—
124,500
865,213
4,596,267
4,596,267
$
$
$
7,650,136
11.31%
18.82%
6.00%
12.82%
20.09%
10.00%
10.09%
In addition to the primary and contingent liquidity sources available, the Company has the capacity to issue 117,187,500 shares of common
stock of which 71,937,222 has been issued as of December 31, 2012. The Company also has the capacity to issue 1,000,000 shares of
preferred shares of which none are currently issued. For additional information regarding regulatory capital, 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.
Under Montana, Idaho, Colorado and Utah law, financial institutions are subject to a corporation income tax, which incorporates or is
substantially similar to applicable provisions of the Internal Revenue Code. The corporation income tax is imposed on federal taxable
income, subject to certain adjustments. State taxes are incurred at the rate of 6.75 percent in Montana, 7.6 percent in Idaho, 5 percent in
Utah and 4.63 percent in Colorado. Wyoming and Washington do not impose a corporate-level income tax.
The Company has equity investments in Certified Development Entities which have received allocations of New Markets Tax Credits
(“NMTC”). Administered by the Community Development Financial Institutions Fund of the U.S. Department of the Treasury, the
NMTC program is aimed at stimulating economic and community development and job creation in low-income communities. The federal
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 are claimed over a ten-year credit allowance period. The Company has investments
in Qualified Zone Academy and Qualified 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.
50
Following is a list of expected federal income tax credits to be received in the years indicated.
(Dollars in thousands)
2013
2014
2015
2016
2017
Thereafter
New
Markets
Tax Credits
Low-Income
Housing
Tax Credits
Investment
Securities
Tax Credits
Total
$
$
2,775
2,850
2,850
1,014
450
—
9,939
1,270
1,270
1,175
1,175
1,060
3,082
9,032
930
908
883
858
782
4,456
8,817
4,975
5,028
4,908
3,047
2,292
7,538
27,788
Income tax expense (benefit) for the years ended December 31, 2012 and 2011 was $19.1 million and $(281) thousand, respectively.
The Company’s effective tax rate for the years ended December 31, 2012 and 2011 was 20.2 percent and (1.6) percent, respectively. The
primary reason for the current year's low effective tax rate is the amount of tax-exempt investment income and federal tax credits. In
addition to the tax-exempt investment income and federal tax credits, the prior year's negative effective rate was largely due to the goodwill
impairment charge. The tax-exempt income was $37.7 million and $31.4 million for the years ended December 31, 2012 and 2011,
respectively. The federal tax credit benefits were $3.9 million and $3.6 million for the years ended December 31, 2012 and 2011,
respectively. The Company continues to hold its investments in select municipal securities and variable interest entities 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.
Average Balance Sheet
The following 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 (tax-equivalent).
51
5.88%
5.66%
6.15%
5.79%
7.02%
2.55%
5.13%
—%
0.35%
0.21%
0.82%
1.94%
0.81%
1.38%
December 31, 2012
Years ended
December 31, 2011
December 31, 2010
Average
Balance
Interest &
Dividends
Average
Yield/
Rate
Average
Balance
Interest &
Dividends
Average
Yield/
Rate
Average
Balance
Interest &
Dividends
Average
Yield/
Rate
(Dollars in thousands)
Assets
Residential real estate loans
Commercial loans
Consumer and other loans
$ 611,910
2,274,128
620,584
$ 30,850
121,425
35,096
5.04% $ 581,644
5.32% 2,364,115
680,032
5.64%
$ 33,060
130,249
40,538
5.68% $ 772,074
5.51% 2,542,186
684,752
5.96%
$ 45,401
143,861
42,130
Total loans 1
3,506,622
187,371
5.33% 3,625,791
203,847
5.62% 3,999,012
231,392
Tax-exempt investment
securities 2
Taxable investment securities 3
Total earning assets
Goodwill and intangibles
Non-earning assets
Total assets
Liabilities
Non-interest bearing deposits
NOW accounts
Savings accounts
Money market deposit accounts
Certificate accounts
Wholesale deposits 4
FHLB advances
Repurchase agreements, federal
funds purchased and other
borrowed funds
Total interest bearing
liabilities
Other liabilities
Total liabilities
Stockholders’ Equity
Common stock
Paid-in capital
Retained earnings
Accumulated other
comprehensive income
Total stockholders’ equity
Total liabilities and
stockholders’ equity
Net interest income
(tax-equivalent)
Net interest spread
(tax-equivalent)
Net interest margin
(tax-equivalent)
888,839
54,389
6.12%
705,548
45,331
6.42%
479,640
30,231
271,991
2,598,589
6,994,050
113,321
365,408
$7,472,779
46,410
295,588
1.16% 2,115,779
3.88% 6,447,118
145,623
330,075
$6,922,816
2.19% 1,378,468
4.58% 5,857,120
158,636
291,284
$6,307,040
33,690
35,162
300,244
$1,080,854
872,529
450,940
888,620
1,049,752
693,463
996,766
$
—
1,370
342
2,221
11,633
2,617
12,566
—% $ 923,039
775,383
387,921
0.16%
0.08%
875,127
0.25%
1.11% 1,085,293
0.38%
1.26%
622,808
942,651
$
—
1,906
511
3,667
16,332
2,853
12,687
—% $ 850,513
718,175
345,297
0.25%
0.13%
848,495
0.42%
1.50% 1,082,428
0.46%
1.35%
533,476
691,969
$
—
2,545
725
6,975
21,016
4,337
9,523
495,871
4,965
1.00%
418,626
6,538
1.56%
407,516
8,513
2.09%
6,528,795
59,571
6,588,366
35,714
0.55% 6,030,848
34,343
6,065,191
44,494
0.87% 5,477,869
31,675
5,509,544
53,634
1.16%
719
642,009
194,413
47,272
884,413
719
643,140
195,301
18,465
857,625
697
611,577
196,785
8,437
817,496
$7,472,779
$6,922,816
$6,327,040
$ 236,277
$ 251,094
$ 246,610
3.33%
3.37%
3.71%
3.89%
3.97%
4.21%
__________
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
2
3
included in the average volume for the entire period.
Includes tax effect of $16.7 million, $13.9 million and $10.3 million on tax-exempt investment security income for the years ended December 31,
2012, 2011 and 2010, respectively.
Includes tax effect of $1.5 million, $1.6 million and $1.5 million on investment security tax credits for the years ended December 31, 2012, 2011
and 2010, respectively.
4 Wholesale deposits include brokered deposits classified as NOW, money market deposit and certificate accounts, including reciprocal deposits.
52
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.
(Dollars in thousands)
Interest income
Residential real estate loans
Commercial loans
Consumer and other loans
$
Investment securities (tax-equivalent)
Total interest income
Interest expense
NOW accounts
Savings accounts
Money market deposit accounts
Certificate accounts
Wholesale deposits
FHLB advances
Repurchase agreements,
federal funds purchased and
other borrowed funds
Total interest expense
Net interest income (tax-
equivalent)
Year ended December 31,
2012 vs. 2011
Increase (Decrease) Due to:
Rate
Volume
Year ended December 31,
2011 vs. 2010
Increase (Decrease) Due to:
Rate
Net
Net
Volume
1,720
(4,958)
(3,544)
21,659
14,877
239
83
56
(535)
324
728
(3,930)
(3,866)
(1,898)
(28,780)
(38,474)
(774)
(253)
(1,502)
(4,164)
(560)
(849)
1,206
2,101
(2,779)
(10,881)
(2,210) $
(8,824)
(11,198) $
(10,077)
(1,143) $
(3,535)
(5,442)
(7,121)
(23,597)
(290)
35,692
14,127
(1,302)
(12,803)
(18,783)
(535)
(170)
(1,446)
(4,699)
(236)
(121)
(1,573)
(8,780)
203
89
219
56
726
3,450
232
4,975
(842)
(303)
(3,527)
(4,740)
(2,210)
(286)
(2,207)
(14,115)
(12,341)
(13,612)
(1,592)
22,889
(4,656)
(639)
(214)
(3,308)
(4,684)
(1,484)
3,164
(1,975)
(9,140)
$
12,776
(27,593)
(14,817)
9,152
(4,668)
4,484
Net interest income (tax-equivalent) decreased $14.8 million for the year ended December 31, 2012 compared to the same period in 2011.
The decrease in interest income was driven primarily by the continued purchase of low yielding investment securities to offset the lower
volume and reduced rate loans. Additionally, there was an increase in premium amortization on investment securities which reduced
interest income. Although, the Company was able to lower interest expense by reducing deposit and borrowing interest rates, it was not
enough to offset the reduction in interest income. The changes during the year 2012 over 2011 were consistent with the changes during
2011 over 2010; however, the volume increase from the investment securities during 2011 over 2010 were significant enough to result
in an increase in net interest income (tax-equivalent) of $4.5 million.
Effect of inflation and changing prices
GAAP often requires 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 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 GAAP 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.
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.”
53
Goodwill
For information on goodwill, see Notes 1, 6 and 20 to the Consolidated Financial Statements in “Item 8. Financial Statements and
Supplementary Data.”
Fair Value Measurements
For 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
For 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 2012 and may possibly have a material impact
on the Company includes amendments to: Financial Accounting Standards Board ("FASB") Accounting Standards Codification™ (“ASC”)
Topic 350, Intangibles – Goodwill and Other, FASB ASC Topic 220, Comprehensive Income 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.”
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The disclosures set forth in this item are qualified by the section captioned “Forward-Looking Statements” included in “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Market Risk
Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates/prices such as interest rates, foreign
currency exchange rates, commodity prices, and equity prices. The Company’s primary market risk exposure is interest rate risk. The
ongoing monitoring and management of this risk is an important component of the Company’s asset/liability management process which
is governed by policies established by its Board of Directors that are reviewed and approved annually. The Board of Directors delegates
responsibility for carrying out the asset/liability management policies to the Bank's ALCO committee. In this capacity, ALCO committee
develops guidelines and strategies impacting the Company’s asset/liability management related activities based upon estimated market
risk sensitivity, policy limits and overall market interest rate levels and trends.
Interest Rate Risk
The objective of interest rate risk management is to contain the risks associated with interest rate fluctuations. The process involves
identification and management of the sensitivity of net interest income to changing interest rates. Managing interest rate risk is not an
exact science. The interval between repricing of interest rates of assets and liabilities changes from day to day as the assets and liabilities
change. For some assets and liabilities, contractual maturity and the actual cash flows experienced are not the same. A good example
is residential mortgages that have long-term contractual maturities but may be repaid well in advance of the maturity when current
prevailing interest rates become lower than the contractual rate. Interest bearing deposits without a stated maturity could be withdrawn
upon demand. However, the Company's experience indicates that these funding pools have a much longer duration and are not as sensitive
to interest rate changes as other financial instruments. Prime based loans generally have rate changes when the FRB changes short-term
interest rates. However, depending on the magnitude of the rate change and the relationship of the current rates to rate floors and rate
ceilings that may be in place on the loans, the loan rate may not change. 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.
For asset and liability management purposes, the Company has entered into forecasted interest rate swap agreements to hedge various
interest rate exposures. For more information on the Company's interest rate swaps, see Note 11 to the Consolidated Financial Statements
in “Item 8. Financial Statements and Supplementary Data.”
54
GAP analysis
The GAP table below estimates the repricing and maturities of the contractual characteristics of the assets and liabilities, based upon the
Company’s assessment of the repricing characteristics of the various instruments. Interest bearing checking and regular savings are
included in the categories that reflect the interest rate sensitivity of the individual programs and if the deposits are not clearly rate sensitive,
the deposits are included in the more than 5 years category. Money market balances are included in the less than 6 months category.
Residential mortgage-backed securities are categorized based on the anticipated payments.
The following table gives a description of our GAP position for various time periods. As of December 31, 2012, the Company had a
negative GAP position at six months and at twelve months. The cumulative GAP as a percentage of total assets for six months is a
negative 13.85 percent which compares to a negative 13.54 percent at December 31, 2011 and a negative 17.77 percent at December 31,
2010.
(Dollars in thousands)
Assets
Projected Maturity or Repricing
0-6
Months
6-12
Months
1 - 5
Years
More than
5 Years
Total
Interest bearing cash deposits
$
63,770
Residential mortgage-backed securities
Other investment securities
Variable rate loans
Fixed rate loans
Non-marketable equity securities
Total interest bearing assets
Liabilities
Interest bearing deposits
FHLB advances
Repurchase agreements and
other borrowed funds
Subordinated debentures
946,550
42,908
966,857
264,571
—
—
565,255
64,875
245,239
179,016
—
—
641,498
700,812
914,051
513,638
48,812
—
6,999
714,108
169,020
145,033
—
$ 2,284,656
1,054,385
2,818,811
1,035,160
$ 2,271,080
261,547
720,000
289,676
—
—
118
—
281,228
120,000
1,358,673
157,013
1,519
—
8,846
125,418
63,770
2,160,302
1,522,703
2,295,167
1,102,258
48,812
7,193,012
4,172,528
997,013
300,159
125,418
Total interest bearing liabilities
$ 3,280,756
261,665
402,747
1,649,950
5,595,118
Repricing GAP
Cumulative repricing GAP
Cumulative GAP as a % of
interest bearing assets
$ (996,100)
$ (996,100)
792,720
(203,380)
2,416,064
2,212,684
(614,790)
1,597,894
1,597,894
(13.85)%
(2.83)%
30.76%
22.21%
Net interest income simulation
The traditional one-dimensional view of GAP is not sufficient to show a bank’s ability to withstand interest rate changes. Because of
limitations in GAP modeling the ALCO of the Company uses a detailed and dynamic simulation model to quantify the estimated exposure
of net interest income (“NII”) to sustained interest rate changes. While ALCO routinely monitors simulated NII sensitivity over rolling
two-year and five-year horizons, it also utilizes additional tools to monitor potential longer-term interest rate risk. The simulation model
captures the impact of changing interest rates on the interest income received and interest expense paid on all assets and liabilities reflected
on the Company’s statement of financial condition. This sensitivity analysis is compared to ALCO policy limits which specify a maximum
tolerance level for NII exposure over a one year and two year horizon, assuming no balance sheet growth. The ALCO policy rate scenarios
include upward and downward shift in interest rates for a 200 basis point (“bp”), 400bp, and 300bp scenario. The 200bp and 400bp rate
scenarios include parallel and pro rata shifts in interest rates over a 12-month period and 24 month period, respectively. The 300bp rate
scenario is a shock scenario with instantaneous and parallel changes in interest rates. Given the historically low rate environment, a
downward shift in interest rates of only 100bp is modeled. Since the model assumes that interest rates will not be negative, the 100bp
scenario represents a flattening of market yield curves. Other non-parallel rate movement scenarios are also modeled to determine the
potential impact on net interest income.
55
The following is indicative of the Company’s overall NII sensitivity analysis as of December 31, 2012 and 2011 as compared to the policy
limits approved by the Company’s Board of Directors. The Company’s interest sensitivity remained within policy limits at December 31,
2012.
Rate Scenarios
-100 bp Rate ramp
+200 bp Rate ramp
+400 bp Rate ramp
+300 bp Rate shock
Year 1
Year 2
Policy
Limits
Estimated
Sensitivity
Policy
Limits
Estimated
Sensitivity
N/A
(10.0)%
(10.0)%
(20.0)%
(0.8)%
(0.9)%
0.6 %
3.0 %
N/A
(15.0)%
(25.0)%
(20.0)%
(5.8)%
(0.6)%
(6.2)%
7.3 %
The preceding sensitivity analysis does not represent a forecast and should not be relied upon as being indicative of expected operating
results. These hypothetical estimates are based upon numerous assumptions including: the nature and timing of interest rate levels
including yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/
replacement of assets and liability cash flows, and others. While assumptions are developed based upon current economic and local
market conditions, the Company cannot make any assurances as to the predictive nature of these assumptions including how customer
preferences or competitor influences might change. Also, as market conditions vary from those assumed in the sensitivity analysis, actual
results will also differ due to prepayment/refinancing levels likely deviating from those assumed, the varying impact of interest rate
change caps or floors on adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate loans,
depositor early withdrawals and product preference changes, and other internal and external variables. Furthermore, the sensitivity
analysis does not reflect actions that ALCO might take in responding to or anticipating changes in interest rates.
Economic value of equity
In addition to the GAP and NII analyses, the Company calculates the economic value of equity (“EVE”) which focuses on longer term
interest rate risk. The EVE process models the cash flow of financial instruments to maturity and then discounts those cashflows based
on prevailing interest rates in order to develop a baseline EVE. The interest rates used in the model are then shocked for an immediate
increase and decrease in interest rates. The results for the shocked model are compared to the baseline results to determine the percentage
change in EVE under the various scenarios. The resulting percentage change in the EVE is an indication of the longer term re-pricing
risk and option risks embedded in the balance sheet. The measure is not designed to estimate the Company’s capital levels, such as
tangible, regulatory, or market capitalization.
The following reflects the Company’s EVE maximum sensitivity policy limits and EVE analysis as of December 31, 2012:
Rate Scenarios
-100 bp Rate shock
+100 bp Rate shock
+200 bp Rate shock
+300 bp Rate shock
Policy
Limits
Post
Shock Ratio
(15)%
(15)%
(25)%
(35)%
(9.4)%
0.6 %
(3.3)%
(10.4)%
Item 8. Financial Statements and Supplementary Data
56
Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors and Stockholders
Glacier Bancorp, Inc.
Kalispell, Montana
We have audited the accompanying consolidated statements of financial condition of Glacier Bancorp,
Inc. as of December 31, 2012 and 2011, and the related consolidated statements of operations,
comprehensive income, changes in stockholders’ equity and cash flows for each of the years in the three-
year period ended December 31, 2012. The Company’s management is responsible for these financial
statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement. Our audits included
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management and evaluating
the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of Glacier Bancorp, Inc. as of December 31, 2012 and 2011, and the
results of its operations and its cash flows for each of the years in the three-year period ended December
31, 2012, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Glacier Bancorp, Inc.’s internal control over financial reporting as of December
31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated
February 28, 2013, expressed an unqualified opinion on the effectiveness of the Company’s internal
control over financial reporting.
/s/ BKD, LLP
Denver, Colorado
February 28, 2013
57
Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors and Stockholders
Glacier Bancorp, Inc.
Kalispell, Montana
We have audited Glacier Bancorp, Inc.’s internal control over financial reporting as of December 31,
2012, based on criteria established in Internal Control – Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is
responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Report of
Management. Our responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of reliable financial
statements in accordance with accounting principles generally accepted in the United States of America.
Because management’s assessment and our audit were conducted to meet the reporting requirements of
Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA), our examination
of Glacier Bancorp, Inc.’s internal control over financial reporting included controls over the preparation
of financial statements in accordance with accounting principles generally accepted in the United States
of America and with the instructions to the Consolidated Financial Statements for Bank Holding
Companies (Form FR Y-9C). A company’s internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the United States of America, and that
receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention, or
timely detection and correction of unauthorized acquisition, use, or disposition of the company’s assets
that could have a material effect on the financial statements.
58
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in conditions or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, Glacier Bancorp, Inc. maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2012, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated financial statements of Glacier Bancorp, Inc. and our report dated
February 28, 2013, expressed an unqualified opinion thereon.
/s/ BKD, LLP
Denver, Colorado
February 28, 2013
59
Glacier Bancorp, Inc.
Consolidated Statements of Financial Condition
(Dollars in thousands, except per share data)
Assets
Cash on hand and in banks
Interest bearing cash deposits
Cash and cash equivalents
Investment securities, available-for-sale
Loans held for sale
Loans receivable
Allowance for loan and lease losses
Loans receivable, net
Premises and equipment, net
Other real estate owned
Accrued interest receivable
Deferred tax asset
Core deposit intangible, net
Goodwill
Non-marketable equity securities
Other assets
Total assets
Liabilities
Non-interest bearing deposits
Interest bearing deposits
Securities sold under agreements to repurchase
Federal Home Loan Bank advances
Other borrowed funds
Subordinated debentures
Accrued interest payable
Other liabilities
Total liabilities
Stockholders’ Equity
Preferred shares, $0.01 par value per share, 1,000,000 shares authorized,
none issued or outstanding
Common stock, $0.01 par value per share, 117,187,500 shares authorized
Paid-in capital
Retained earnings - substantially restricted
Accumulated other comprehensive income
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
$
$
December 31,
2012
December 31,
2011
123,270
63,770
187,040
104,674
23,358
128,032
3,683,005
3,126,743
145,501
95,457
3,397,425
(130,854)
3,266,571
3,466,135
(137,516)
3,328,619
158,989
45,115
37,770
20,394
6,174
106,100
48,812
41,969
158,872
78,354
34,961
31,081
8,284
106,100
49,694
41,709
7,747,440
7,187,906
1,191,933
4,172,528
289,508
997,013
10,032
125,418
4,675
55,384
6,846,491
—
719
641,737
210,531
47,962
900,949
1,010,899
3,810,314
258,643
1,069,046
9,995
125,275
5,825
47,682
6,337,679
—
719
642,882
173,139
33,487
850,227
$
7,747,440
7,187,906
Number of common stock shares issued and outstanding
71,937,222
71,915,073
See accompanying notes to consolidated financial statements.
60
Glacier Bancorp, Inc.
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
Interest Income
Residential real estate loans
Commercial loans
Consumer and other loans
Investment securities
Total interest income
Interest Expense
Deposits
Securities sold under agreements to repurchase
Federal Home Loan Bank advances
Federal funds purchased and other borrowed funds
Subordinated debentures
Total interest expense
Net Interest Income
Provision for loan losses
Net interest income after provision for loan losses
Non-Interest Income
Service charges and other fees
Miscellaneous loan fees and charges
Gain on sale of loans
Gain on sale of investments
Other income
Total non-interest income
Non-Interest Expense
Compensation and employee benefits
Occupancy and equipment
Advertising and promotions
Outsourced data processing
Other real estate owned
Federal Deposit Insurance Corporation premiums
Core deposit intangible amortization
Goodwill impairment charge
Other expense
Total non-interest expense
Income Before Income Taxes
Federal and state income tax expense (benefit)
Net Income
Basic earnings per share
Diluted earnings per share
Dividends declared per share
Average outstanding shares - basic
Average outstanding shares - diluted
December 31,
2012
Years ended
December 31,
2011
December 31,
2010
$
$
$
$
$
30,850
121,425
35,096
66,386
253,757
18,183
1,308
12,566
229
3,428
35,714
218,043
21,525
196,518
45,343
4,363
32,227
—
9,563
91,496
95,373
23,837
6,413
3,324
18,964
6,085
2,110
—
37,315
193,421
94,593
19,077
75,516
33,060
130,249
40,538
76,262
280,109
25,269
1,353
12,687
224
4,961
44,494
235,615
64,500
171,115
44,194
3,919
21,132
346
8,608
78,199
85,691
23,599
6,469
3,153
27,255
8,169
2,473
40,159
35,156
232,124
17,190
(281)
17,471
45,401
143,861
42,130
57,010
288,402
35,598
1,607
9,523
284
6,622
53,634
234,768
84,693
150,075
43,040
4,906
27,233
4,822
7,545
87,546
87,728
24,261
6,831
3,057
22,193
9,121
3,180
—
31,577
187,948
49,673
7,343
42,330
1.05
1.05
0.53
71,928,570
71,928,656
0.24
0.24
0.52
71,915,073
71,915,073
0.61
0.61
0.52
69,657,980
69,660,345
See accompanying notes to consolidated financial statements.
61
Glacier Bancorp, Inc.
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
Net Income
Other Comprehensive Income, Net of Tax
Unrealized gains on available-for-sale securities
Reclassification adjustment for gains included in net income
Net unrealized gains on securities
Tax effect
Net of tax amount
Unrealized losses on derivatives used for cash flow hedges
Tax effect
Net of tax amount
Total other comprehensive income, net of tax
December 31,
2012
Years ended
December 31,
2011
December 31,
2010
$
75,516
17,471
42,330
31,617
—
31,617
(12,300)
19,317
(7,926)
3,084
(4,842)
14,475
63,190
(346)
62,844
(24,444)
38,400
(8,906)
3,465
(5,441)
32,959
50,430
6,263
(4,822)
1,441
(565)
876
—
—
—
876
43,206
Total Comprehensive Income
$
89,991
See accompanying notes to consolidated financial statements.
62
Glacier Bancorp, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
Years ended December 31, 2012, 2011 and 2010
(Dollars in thousands, except per share data)
Common Stock
Shares
Amount
Paid-in
Capital
Retained
Earnings
Substantially
Restricted
Accumulated
Other Comp-
rehensive
(Loss)
Income
Total
Balance at December 31, 2009
61,619,803
$
616
497,493
188,129
(348)
685,890
Comprehensive income
Cash dividends declared ($0.52 per share)
Stock issuances under stock incentive plans
Public offering of stock issued
Stock-based compensation and related taxes
—
—
3,805
10,291,465
—
Balance at December 31, 2010
71,915,073
$
Comprehensive income
Cash dividends declared ($0.52 per share)
Stock-based compensation and related taxes
—
—
—
Balance at December 31, 2011
71,915,073
$
Comprehensive income
Cash dividends declared ($0.53 per share)
Stock issuances under stock incentive plans
Stock-based compensation and related taxes
Balance at December 31, 2012
—
—
22,149
—
71,937,222
$
719
—
—
—
103
—
719
—
—
—
719
—
—
—
—
—
—
58
145,493
850
42,330
(37,396)
—
—
—
876
—
—
—
—
43,206
(37,396)
58
145,596
850
643,894
193,063
528
838,204
—
—
(1,012)
642,882
—
—
323
(1,468)
641,737
17,471
(37,395)
—
173,139
75,516
(38,124)
—
—
32,959
—
—
50,430
(37,395)
(1,012)
33,487
850,227
14,475
—
—
—
89,991
(38,124)
323
(1,468)
210,531
47,962
900,949
See accompanying notes to consolidated financial statements.
63
Glacier Bancorp, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands)
Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses
Net amortization of investment securities premiums and discounts
Federal Home Loan Bank stock dividends
Mortgage loans held for sale originated or acquired
Proceeds from sales of mortgage loans held for sale
Gain on sale of loans
Gain on sale of investments
Stock-based compensation expense, net of tax benefits
Excess tax deficiencies from stock options exercised
Depreciation of premises and equipment
Loss on sale of other real estate owned and writedown
Amortization of core deposit intangibles
Goodwill impairment charge
Deferred tax expense (benefit)
Net increase in accrued interest receivable
Net (increase) decrease in other assets
Net decrease in accrued interest payable
Net increase in other liabilities
Net cash provided by operating activities
Investing Activities
Proceeds from sales, maturities and prepayments of investment securities,
available-for-sale
Purchases of investment securities, available-for-sale
Principal collected on loans
Loans originated or acquired
Net addition of premises and equipment and other real estate owned
Proceeds from sale of other real estate owned
Net sale (purchase) of non-marketable equity securities
Net cash used in investment activities
Financing Activities
December 31,
2012
Years ended
December 31,
2011
December 31,
2010
$
75,516
17,471
42,330
21,525
71,992
(5)
(1,188,632)
1,204,431
(32,227)
—
254
8
10,615
13,311
2,110
—
837
(2,809)
(3,286)
(1,150)
11,303
183,793
64,500
38,035
(17)
(824,089)
842,337
(21,132)
(346)
45
—
10,443
19,727
2,473
40,159
(13,308)
(4,715)
12,464
(1,420)
4,216
186,843
84,693
17,782
(23)
(1,086,089)
1,129,592
(27,233)
(4,822)
932
4
10,808
15,937
3,180
—
138
(517)
6,878
(683)
1,036
193,943
2,041,416
1,024,508
700,182
(2,638,054)
1,034,374
(1,049,344)
(10,730)
41,804
888
(579,646)
(1,730,244)
958,401
(826,329)
(17,492)
46,703
15,357
(529,096)
Net increase in deposits
Net increase in securities sold under agreements to repurchase
Net (decrease) increase in Federal Home Loan Bank advances
Net decrease in Federal Reserve Bank discount window
Net increase (decrease) in federal funds purchased and other borrowed
funds
Cash dividends paid
Excess tax deficiencies from stock options exercised
Proceeds from stock options exercised and other stock issued
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
$
543,248
30,865
(72,033)
—
180
(47,472)
(8)
81
454,861
59,008
128,032
187,040
299,311
9,240
103,905
—
(9,867)
(37,395)
—
—
365,194
22,941
105,091
128,032
See accompanying notes to consolidated financial statements.
64
(1,664,341)
984,827
(849,222)
(22,652)
30,529
(1,829)
(822,506)
421,750
36,897
174,774
(225,000)
6,404
(37,396)
(4)
145,654
523,079
(105,484)
210,575
105,091
Glacier Bancorp, Inc.
Consolidated Statements of Cash Flows (Continued)
(Dollars in thousands)
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for interest
Cash paid during the period for income taxes
Sale and refinancing of other real estate owned
Transfer of loans to other real estate owned
December 31,
2012
Years ended
December 31,
2011
December 31,
2010
$
36,865
21,257
5,659
27,536
45,913
7,925
8,665
79,295
54,318
9,371
10,215
72,572
See accompanying notes to consolidated financial statements.
65
Glacier Bancorp, Inc.
Notes to Consolidated Financial Statements
Note 1. Nature of Operations and Summary of Significant Accounting Policies
General
Glacier Bancorp, Inc. (“Company”) is a Montana corporation headquartered in Kalispell, Montana. The Company provides a full range
of banking services to individual and corporate customers in Montana, Idaho, Wyoming, Colorado, Utah and Washington through eleven
divisions of its wholly-owned bank subsidiary, Glacier Bank (“Bank”). The Company is subject to competition from other financial
service providers. The Company is also subject to the regulations of certain government agencies and undergoes periodic examinations
by those regulatory authorities.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the
reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change include: 1) the determination of the allowance for loan and lease
losses (“ALLL” or “allowance”), 2) the valuations related to investments and real estate acquired in connection with foreclosures or in
satisfaction of loans, and 3) the evaluation of goodwill impairment. In connection with the determination of the ALLL and other real
estate valuation estimates, management obtains independent appraisals (new or updated) for significant items. Estimates relating to
investments are obtained from independent third parties. Estimates relating to the evaluation of goodwill for impairment are determined
based on internal calculations using significant independent party inputs.
Principles of Consolidation
The consolidated financial statements of the Company include the parent holding company and the Bank. All significant inter-company
transactions have been eliminated in consolidation.
The Company formed GBCI Other Real Estate (“GORE”) to isolate certain bank foreclosed properties for legal protection and
administrative purposes and the remaining properties are currently held for sale. GORE is included in the Bank operating segment due
to its insignificant activity.
The Company owns the following trust subsidiaries, each of which issued trust preferred securities as Tier 1 capital instruments: Glacier
Capital Trust II, Glacier Capital Trust III, Glacier Capital Trust IV, Citizens (ID) Statutory Trust I, Bank of the San Juans Bancorporation
Trust I, First Company Statutory Trust 2001 and First Company Statutory Trust 2003. The trust subsidiaries are not included in the
Company’s consolidated financial statements.
On April 30, 2012, the Company combined its eleven bank subsidiaries into eleven bank divisions within Glacier Bank, such divisions
operating with the same names and management teams as before the combination. Prior to the combination of the bank subsidiaries, the
Company considered its eleven bank subsidiaries, GORE, and the parent holding company to be its operating segments. Subsequent to
the combination of the bank subsidiaries, the Company considers the Bank to be its sole operating segment. The change to combining
the bank subsidiaries into a single segment is appropriate as the Bank 1) engages in similar bank business activity from which it earns
revenues and incurs expenses, 2) the operating results of the Bank are regularly reviewed by the Chief Executive Officer (i.e., the chief
operating decision maker) who makes decisions about resources to be allocated to the Bank, and 3) financial information is available for
the Bank.
Variable Interest Entities
A variable interest entity (“VIE”) exists when either 1) the entity's total equity investment at risk is not sufficient to permit the entity to
finance its activities without additional subordinated financial support from other parties, or 2) the entity has equity investors that cannot
make significant decisions about the entity's operations or that do not absorb their proportionate share of the expected losses or receive
the expected returns of the entity. In addition, a VIE must be consolidated by the Company if it is deemed to be the primary beneficiary
of the VIE, which is the party involved with the VIE that has the power to direct the VIE's significant activities and will absorb a majority
of the expected losses, receive a majority of the expected residual returns, or both. The VIEs are regularly monitored to determine if any
reconsideration events have occurred that could cause the primary beneficiary status to change.
66
Note 1. Nature of Operations and Summary of Significant Accounting Policies (continued)
The Company has equity investments in Certified Development Entities (“CDE”) which have received allocations of New Markets Tax
Credits (“NMTC”). The Company also has equity investments in Low-Income Housing Tax Credit (“LIHTC”) partnerships. The CDEs
and the LIHTC partnerships are VIEs. The underlying activities of the VIEs are community development projects designed primarily to
promote community welfare, such as economic rehabilitation and development of low-income areas by providing housing, services, or
jobs for residents. The maximum exposure to loss in the VIEs is the amount of equity invested and credit extended by the Company.
However, the Company has credit protection in the form of indemnification agreements, guarantees, and collateral arrangements. The
primary activities of the VIEs are recognized in commercial loans interest income, other non-interest income and other borrowed funds
interest expense on the Company's statements of operations. Such related cash flows are recognized in loans originated, principal collected
on loans and change in other borrowed funds. The Company has evaluated the variable interests held by the Company in each CDE
(NMTC) and LIHTC partnership investment and determined that the Company continues to be the primary beneficiary of such VIEs.
As the primary beneficiary, the VIEs' assets, liabilities, and results of operations are included in the Company's consolidated financial
statements.
The following table summarizes the carrying amounts of the VIE’s assets and liabilities included in the Company’s consolidated financial
statements at December 31, 2012 and 2011:
(Dollars in thousands)
Assets
Loans receivable
Premises and equipment, net
Accrued interest receivable
Other assets
Total assets
Liabilities
Other borrowed funds
Accrued interest payable
Other liabilities
Total liabilities
December 31, 2012
December 31, 2011
CDE (NMTC)
LIHTC
CDE (NMTC)
LIHTC
$
$
$
$
35,480
—
117
1,114
36,711
4,555
4
182
4,741
—
16,066
—
143
16,209
3,639
6
136
3,781
32,748
—
116
1,439
34,303
4,629
4
186
4,819
—
15,996
—
31
16,027
3,306
9
363
3,678
Amounts presented in the table above are adjusted for intercompany eliminations. All assets presented can be used only to settle obligations
of the consolidated VIEs and all liabilities presented consist of liabilities for which creditors and other beneficial interest holders therein
have no recourse to the general credit of the Company.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, cash held as demand deposits at various banks and regulatory agencies, interest bearing
deposits, federal funds sold and liquid investments with original maturities of three months or less. Pursuant to legislation enacted in
2010, the Federal Deposit Insurance Corporation (“FDIC”) fully insured all non-interest bearing transaction accounts beginning
December 31, 2010 at all FDIC-insured institutions which expired on December 31, 2012. Beginning January 1, 2013, non-interest
bearing transaction accounts are subject to the $250,000 limit on FDIC insurance per covered institution.
Investment Securities
Debt securities for which the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and are
carried at amortized cost. Debt and equity securities held primarily for the purpose of selling in the near term are classified as trading
securities and are reported at fair market value, with unrealized gains and losses included in income. Debt and equity securities not
classified as held-to-maturity or trading are classified as available-for-sale and are reported at fair value with unrealized gains and losses,
net of income taxes, as a separate component of stockholders’ equity. As of December 31, 2012 and 2011, the Company has only available-
for-sale securities. Premiums and discounts on investment securities are amortized or accreted into income using a method that
approximates the level-yield interest method. For additional information relating to investment securities, see Note 3.
67
Note 1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Temporary versus Other-Than-Temporary Impairment
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.
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. If impairment is determined to
be other-than-temporary and the Company does not intend to sell a debt security, and it is more-likely-than-not the Company will not be
required to sell the security before recovery of its cost basis, it recognizes the credit component of an other-than-temporary impairment
of a debt security in earnings and the remaining portion (noncredit portion) in other comprehensive income, net of tax. For held-to-
maturity debt securities, the amount of an other-than-temporary impairment recorded in other comprehensive income for the noncredit
portion of a previous other-than-temporary impairment is amortized prospectively over the remaining life of the security on the basis of
the timing of future estimated cash flows of the security.
If impairment is determined to be other-than-temporary and the Company intends to sell a debt security or it is more-likely-than-not the
Company will be required to sell the security before recovery of its cost basis, it recognizes the entire amount of the other-than-temporary
impairment in earnings.
For debt securities with other-than-temporary impairment, the previous amortized cost basis less the other-than-temporary impairment
recognized in earnings shall be the new amortized cost basis of the security. In subsequent periods, the Company accretes into interest
income the difference between the new amortized cost basis and cash flows expected to be collected prospectively over the life of the
debt security.
Loans Held for Sale
Loans held for sale generally consist of long-term, fixed rate, conforming, single-family residential real estate loans and are carried at
the lower of cost or estimated fair value in the aggregate. Net unrealized losses are recognized by charges to non-interest income. A sale
is recognized when the Company surrenders control of the loan and consideration, other than beneficial interests in the loan, is received
in exchange. A gain is recognized in non-interest income to the extent the sales price exceeds the carrying value of the sold loan.
Loans Receivable
Loans that are intended to be held-to-maturity are reported at the unpaid principal balance less charge-offs and adjusted for deferred fees
and costs on originated loans and unamortized premiums or discounts on acquired loans. Interest income is reported using the interest
method and includes discount accretion and premium amortization on acquired loans and net loan fees on originated loans which are
amortized over the expected life of the loans using a method that approximates the level-yield interest method. The Company’s loan
segments, which are based on the purpose of the loan, include residential real estate, commercial, and consumer loans. The Company’s
loan classes, a further disaggregation of segments, include residential real estate loans (residential real estate segment), commercial real
estate and other commercial loans (commercial segment), and home equity and other consumer loans (consumer segment).
68
Note 1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Loans that are thirty days or more past due based on payments received and applied to the loan are considered delinquent. Loans are
designated non-accrual and the accrual of interest is discontinued when the collection of the contractual principal or interest is unlikely.
A loan is typically placed on non-accrual when principal or interest is due and has remained unpaid for ninety days or more. When a
loan is placed on non-accrual status, interest previously accrued but not collected is reversed against current period interest income.
Subsequent payments are applied to the outstanding principal balance if doubt remains as to the ultimate collectability of the loan. Interest
accruals are not resumed on partially charged-off impaired loans. For other loans on nonaccrual, interest accruals are resumed on such
loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans
are estimated to be fully collectible as to both principal and interest.
The Company recognizes that while borrowers may experience deterioration in their financial condition, many continue to be creditworthy
customers who have the willingness and capacity for debt repayment. In determining whether non-restructured or unimpaired loans
issued to a single or related party group of borrowers should continue to accrue interest when the borrower has other loans that are
impaired or troubled debt restructurings ("TDR"), the Company on a quarterly or more frequent basis performs an updated and
comprehensive assessment of the willingness and capacity of the borrowers to timely and ultimately repay their total debt obligations,
including contingent obligations. Such analysis takes into account current financial information about the borrowers and financially
responsible guarantors, if any, including for example:
•
•
•
analysis of global, i.e., aggregate debt service for total debt obligations;
assessment of the value and security protection of collateral pledged using current market conditions and alternative market
assumptions across a variety of potential future situations; and
loan structures and related covenants.
The Company considers impaired loans to be the primary credit quality indicator for monitoring the credit quality of the loan portfolio.
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. Impaired loans include non-performing
loans (i.e., non-accrual loans and accruing loans ninety days or more past due) and accruing loans under ninety days past due where it is
probable payments will not be received according to the loan agreement (e.g., TDR). The Company measures impairment on a loan-by-
loan basis in the same manner for each class within the loan portfolio. An insignificant delay or shortfall in the amounts of payments
would not cause a loan or lease to be considered impaired. The Company determines the significance of payment delays and shortfalls
on a case-by-case basis, taking into consideration all of the facts and circumstances surrounding the loan and the borrower, including the
length and reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and
interest due.
A restructured loan is considered a 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. A TDR loan is considered an impaired loan and a specific valuation
allowance is established when the fair value of the collateral-dependent loan or present value of the loan's expected future cash flows
(discounted at the loan's effective interest rate based on the original contractual rate) is lower than the carrying value of the impaired
loan. The Company made the following types of loan modifications, some of which were considered a TDR:
• Reduction of the stated interest rate for the remaining term of the debt;
• Extension of the maturity date(s) at a stated rate of interest lower than the current market rate for newly originated debt having
similar risk characteristics; and
• Reduction of the face amount of the debt as stated in the debt agreements.
For additional information relating to loans, see Note 4.
Allowance for Loan and Lease Losses
Based upon management’s analysis of the Company’s loan portfolio, the balance of the ALLL is an estimate of probable credit losses
known and inherent within the Bank's loan portfolio as of the date of the consolidated financial statements. The ALLL is analyzed at the
loan class level and is maintained within a range of estimated 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 determination of the ALLL and the related provision
for loan losses is a critical accounting estimate that involves management’s judgments about all known relevant internal and external
environmental factors that affect loan losses. The balance of the ALLL is highly dependent upon management’s evaluations of borrowers’
current and prospective performance, appraisals and other variables affecting the quality of the loan portfolio. Individually significant
loans and major lending areas are reviewed periodically to determine potential problems at an early date. Changes in management’s
estimates and assumptions are reasonably possible and may have a material impact upon the Company’s consolidated financial statements,
results of operations or capital.
69
Note 1. Nature of Operations and Summary of Significant Accounting Policies (continued)
The ALLL consists of a specific valuation allowance component and a general valuation allowance component. The specific component
relates to loans that are determined to be impaired and individually evaluated for impairment. The Company measures impairment on a
loan-by-loan basis based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except when
it is determined that repayment of the loan is expected to be provided solely by the underlying collateral. For impairment based on
expected future cash flows, the Company considers all information available as of a measurement date, including past events, current
conditions, potential prepayments, and estimated cost to sell when such costs are expected to reduce the cash flows available to repay or
otherwise satisfy the loan. For alternative ranges of cash flows, the likelihood of the possible outcomes is considered in determining the
best estimate of expected future cash flows. The effective interest rate for a loan restructured in a TDR is based on the original contractual
rate. 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 of the underlying real property value.
The general valuation allowance component relates to probable credit losses inherent in the balance of the loan portfolio based on historical
loss experience, adjusted for changes in trends and conditions of qualitative or environmental factors. The historical loss experience is
based on the previous twelve quarters loss experience by loan class adjusted for risk characteristics in the existing loan portfolio. The
same trends and conditions are evaluated for each class within the loan portfolio; however, the risk characteristics are weighted separately
at the individual class level based on each of the bank divisions’ judgment and experience.
The changes in trends and conditions of certain items include the following:
• Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery
practices not considered elsewhere in estimating credit losses;
• Changes in international, national, regional, and local economic and business conditions and developments that affect the
collectability of the portfolio, including the condition of various market segments;
• Changes in the nature and volume of the portfolio and in the terms of loans;
• Changes in experience, ability, and depth of lending management and other relevant staff;
• Changes in the volume and severity of past due and nonaccrual loans;
• Changes in the quality of the Company’s loan review system;
• Changes in the value of underlying collateral for collateral-dependent loans;
• The existence and effect of any concentrations of credit, and changes in the level of such concentrations; and
• The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit
losses in the Company’s existing portfolio.
The ALLL is increased by provisions for loan losses which are charged to expense. The portions of loan balances determined by
management to be uncollectible are charged-off as a reduction of the ALLL. Recoveries of amounts previously charged-off are credited
as an increase to the ALLL. The Company's charge-off policy is consistent with bank regulatory standards. Consumer loans generally
are charged off when the loan becomes over 120 days delinquent. Real estate acquired as a result of foreclosure or by deed-in-lieu of
foreclosure is classified as real estate owned until such time as it is sold.
Premises and Equipment
Premises and equipment are accounted for at cost less depreciation. Depreciation is computed on a straight-line method over the estimated
useful lives or the term of the related lease. The estimated useful life for office buildings is 15 - 40 years and the estimated useful life
for furniture, fixtures, and equipment is 3 - 10 years. Interest is capitalized for any significant building projects. For additional information
relating to premises and equipment, see Note 5.
Leases
The Company leases certain land, premises and equipment from third parties under operating and capital leases. The lease payments for
operating lease agreements are recognized on a straight-line basis. The present value of the future minimum rental payments for capital
leases is recognized as an asset when the lease is formed. Lease improvements incurred at the inception of the lease are recorded as an
asset and depreciated over the initial term of the lease and lease improvements incurred subsequently are depreciated over the remaining
term of the lease. For additional information relating to leases, see Note 5.
70
Note 1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Other Real Estate Owned
Property acquired by foreclosure or deed-in-lieu of foreclosure is carried at the lower of fair value at acquisition date or current estimated
fair value, less estimated selling cost. Fair value is determined as the amount that could be reasonably expected in a current sale between
a willing buyer and a willing seller in an orderly transaction between market participants at the measurement date. Subsequent to the
initial acquisition, if the fair value of the asset, less estimated selling cost, is less than the cost of the property, a loss is recognized in
other expense and the asset carrying value is reduced. Gain or loss on disposition of other real estate owned ("OREO") is recorded in
non-interest income or non-interest expense, respectively. In determining the fair value of the properties on the date of transfer and any
subsequent estimated losses of net realizable value, the fair value of other real estate acquired by foreclosure or deed-in-lieu of foreclosure
is determined primarily based upon appraisal or evaluation of the underlying property value.
Long-lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. An asset is deemed impaired if the sum of the expected future cash flows is less than the carrying amount of
the asset. If impaired, an impairment loss is recognized in other expense to reduce the carrying value of the asset to fair value. At
December 31, 2012 and 2011, no long-lived assets were considered impaired.
Business Combinations and Intangible Assets
Acquisition accounting requires the total purchase price to be allocated to the estimated fair values of assets acquired and liabilities
assumed, including certain intangible assets. Goodwill is recorded if the purchase price exceeds the net fair value of assets acquired and
a bargain purchase gain is recorded in other income if the net fair value of assets acquired exceeds the purchase price.
Adjustment of the allocated purchase price may be related to fair value estimates for which all information has not been obtained of the
acquired entity known or discovered during the allocation period, the period of time required to identify and measure the fair values of
the assets and liabilities acquired in the business combination. The allocation period is generally limited to one year following
consummation of a business combination.
Core deposit intangible represents the intangible value of depositor relationships resulting from deposit liabilities assumed in acquisitions
and is amortized using an accelerated method based on an estimated runoff of the related deposits, not exceeding ten years. The useful
life of the core deposit intangible is reevaluated on an annual basis, with any changes in estimated useful life accounted for prospectively
over the revised remaining life. For additional information relating to core deposit intangibles, see Note 6.
The Company tests goodwill and other intangible assets for impairment at the reporting unit level annually during the third quarter. Prior
to April 30, 2012, the Company had eleven bank subsidiary operating segments and reporting units, each of which were subject to a
goodwill impairment assessment. On April 30, 2012, the Company combined its eleven bank subsidiaries into a single commercial bank
operating segment resulting in eleven bank division reporting units which are now aggregated for assessment of goodwill impairment.
The Company identified that each of the bank divisions are reporting units (i.e., components of the Glacier Bank operating segment)
given that each division has a separate management team that regularly reviews its respective division financial information; however,
the reporting units are aggregated into a single reporting unit due to the reporting units having similar economic characteristics.
Goodwill and other intangible assets of a reporting unit is tested for impairment between annual tests if an event occurs or circumstances
change that would more-likely-than not reduce the fair value of a reporting units below its carrying amount. Examples of events and
circumstances that could trigger the need for interim impairment testing include:
• A significant change in legal factors or in the business climate;
• An adverse action or assessment by a regulator;
• Unanticipated competition;
• A loss of key personnel;
• A more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise
disposed of; and
• The testing for recoverability of a significant asset group within a reporting unit.
71
Note 1. Nature of Operations and Summary of Significant Accounting Policies (continued)
For the goodwill impairment assessment, the Company has the option, prior to the two-step process, to first assess qualitative factors to
determine whether the existence of events or circumstances leads to a determination that it is more-likely-than-not that the fair value of
a reporting unit is less than its carrying value. The Company opted to bypass the qualitative assessment for its 2012 and 2011 annual
goodwill impairment testing and proceed directly to the two-step goodwill impairment test. The goodwill impairment two-step process
requires the Company to make assumptions and judgments regarding fair value. In the first step for evaluating for possible impairment,
the Company compares the estimated fair value of its reporting units to the carrying value, which includes goodwill. If the estimated fair
value is less than the carrying value, the second step is completed to compute the impairment amount, if any, by determining the “implied
fair value” of goodwill. This determination requires the allocation of the estimated fair value of the reporting units to the assets and
liabilities of the reporting units. Any remaining unallocated fair value represents the “implied fair value” of goodwill, which is compared
to the corresponding carrying value of goodwill to compute impairment, if any.
For the first step in evaluating goodwill for possible impairment, the Company performs two analysis. The first analysis estimates the
fair value based on market multiples of deal price to equity. The deal price multiple is obtained from an independent third party for
acquisitions of financial institutions completed within the prior twelve months preceding the testing date, such acquisitions excluding
financial institutions whose size and operations are not comparable to the Company. The deal price multiple is then adjusted for a premium
or discount for the Company's specific fair value based on the Company's return on equity and asset quality metrics. As an additional
fair value analysis, the Company reviews its market capitalization adjusted for control value.
For additional information relating to goodwill, see Note 6.
Non-Marketable Equity Securities
The Company holds stock in the Federal Home Loan Bank (“FHLB”). FHLB stock is restricted because such stock may only be sold to
the FHLB at its par value. Due to restrictive terms, and the lack of a readily determinable market value, FHLB stock is carried at cost.
The investments in FHLB stock are required investments related to the Company’s borrowings from FHLB. FHLB obtains its funding
primarily through issuance of consolidated obligations of the FHLB system. The U.S. government does not guarantee these obligations,
and each of the regional FHLBs are jointly and severally liable for repayment of each other’s debt.
Derivatives and Hedging Activities
For asset and liability management purposes, the Company has entered into interest rate swap agreements to hedge against changes in
forecasted cash flows due to interest rate exposures. The interest rate swaps are recognized as assets or liabilities on the Company’s
statement of financial condition and measured at fair value. Fair value estimates are obtained from third parties and are based on pricing
models. The Company does not enter into interest rate swap agreements for trading or speculative purposes.
Interest rate swaps are contracts in which a series of interest payments are exchanged over a prescribed period. The notional amount
upon which the interest payments are based is not exchanged. The swap agreements are derivative instruments and convert a portion of
the Company’s forecasted variable rate debt to a fixed rate (i.e., cash flow hedge). The effective portion of the gain or loss on the cash
flow hedging instruments is initially reported as a component of other comprehensive income and subsequently reclassified into earnings
in the same period during which the transaction affects earnings. The ineffective portion of the gain or loss on derivative instruments, if
any, is recognized in earnings. The Company currently has cash flow hedges of which no portion is ineffective.
Interest rate derivative financial instruments receive hedge accounting treatment only if they are designated as a hedge and are expected
to be, and are, effective in substantially reducing interest rate risk arising from the assets and liabilities identified as exposing the Company
to risk. Derivative financial instruments that do not meet specified hedging criteria are recorded at fair value with changes in fair value
recorded in income. The Company’s interest rate swaps are considered highly effective and currently meet the hedging accounting criteria.
Cash flows resulting from the interest rate derivative financial instruments that are accounted for as hedges of assets and liabilities are
classified in the Company’s cash flow statement in the same category as the cash flows of the items being hedged. For additional
information relating to interest rate swap agreements, see Note 11.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains
and losses, net of tax effect, on available-for-sale securities and unrealized gains and losses, net of tax effect, on derivatives used for cash
flow hedges.
Advertising and Promotion
Advertising and promotion costs are recognized in the period incurred.
72
Note 1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Income Taxes
The Company’s income tax expense consists of current and deferred income tax expense. Current income tax expense reflects taxes to
be paid or refunded for the current period by applying the provisions of enacted tax law to earnings or losses. Deferred income tax
expense results from changes in deferred assets and liabilities between periods.
Deferred tax assets and liabilities are recognized for estimated future tax consequences attributable to differences between the financial
statement carrying amounts of assets and liabilities and their respective tax bases. The effect on deferred tax assets and liabilities of a
change in income tax rates is recognized in income in the period that includes the enactment date.
Deferred tax assets are reduced by a valuation allowance, if based on the weight of available evidence, it is more-likely-than-not that
some portion or all of the deferred tax assets will not be realized. The term more-likely-than-not means a likelihood of more than fifty
percent. The recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to
the Company’s judgment. In assessing the need for a valuation allowance, the Company considers both positive and negative evidence.
For additional information relating to income taxes, see Note 14.
Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding
during the period presented. Diluted earnings per share is computed by including the net increase in shares as if dilutive outstanding
stock options were exercised, using the treasury stock method. For additional information relating to earnings per share, see Note 15.
Stock-based Compensation
Stock-based compensation awards granted, comprised of stock options and restricted stock awards, are valued at fair value and
compensation cost is recognized on a straight-line basis, net of estimated forfeitures, over the requisite service period of each award. For
additional information relating to stock-based compensation, see Note 17.
Reclassifications
Certain reclassifications have been made to the 2011 and 2010 financial statements to conform to the 2012 presentation.
Impact of Recent Authoritative Accounting Guidance
The Accounting Standards Codification™ (“ASC”) is the Financial Accounting Standards Board’s (“FASB”) officially recognized source
of authoritative GAAP applicable to all public and non-public non-governmental entities. Rules and interpretive releases of the Securities
and Exchange Commission (“SEC”) under the authority of the federal securities laws are also sources of authoritative GAAP for the
Company as an SEC registrant. All other accounting literature is non-authoritative.
In September 2011, FASB amended FASB ASC Topic 350, Intangibles - Goodwill and Other. The amendment provides an entity the
option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is
more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. If the entity concludes it is not more-likely-
than-not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary.
The amendment is effective prospectively during interim and annual periods beginning after December 15, 2011 and early adoption is
permitted. The Company has evaluated the impact of the adoption of this amendment and determined there was not a material effect on
the Company’s financial position or results of operations.
In June 2011, FASB amended FASB ASC Topic 220, Comprehensive Income. The amendment provides an entity the option to present
the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single
continuous statement or in two separate but consecutive statements. Accounting Standards Update ("ASU") No. 2011-12, Comprehensive
Income (Topic 220) deferred the specific requirement of the amendment to present items that are reclassified from accumulated other
comprehensive income to net income separately with their respective components of net income and other comprehensive income. The
amendments are effective retrospectively during interim and annual periods beginning after December 15, 2011. ASU No. 2013-2,
Comprehensive Income (Topic 220) reversed the deferment of ASU 2011-12 and will be effective prospectively for reporting periods
beginning after December 15, 2012 and early adoption is permitted. The Company has evaluated the impact of the adoption of these
amendments and determined there was not a material effect on the Company’s financial position or results of operations.
73
Note 1. Nature of Operations and Summary of Significant Accounting Policies (continued)
In May 2011, FASB amended FASB ASC Topic 820, Fair Value Measurement. The amendment achieves common fair value measurement
and disclosure requirements in GAAP and International Financial Reporting Standards. The amendment changes the wording used to
describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements. The
amendment is effective prospectively during interim and annual periods beginning after December 15, 2011. The Company has evaluated
the impact of the adoption of this amendment and determined there was not a material effect on the Company’s financial position or
results of operations.
Note 2. Cash on Hand and in Banks
At December 31, 2012 and 2011, cash and cash equivalents primarily consisted of cash on hand and cash items in process. The Bank is
required to maintain an average reserve balance with either the Federal Reserve Bank ("FRB") or in the form of cash on hand. The
required reserve balance at December 31, 2012 was $31,701,000.
Note 3. Investment Securities, Available-for-Sale
A comparison of the amortized cost and estimated fair value of the Company’s investment securities designated as available-for-sale is
presented below.
(Dollars in thousands)
U.S. government and federal agency
Maturing within one year
U.S. government sponsored enterprises
Maturing after one year through five years
Maturing after five years through ten years
State and local governments
Maturing within one year
Maturing after one year through five years
Maturing after five years through ten years
Maturing after ten years
Corporate bonds
Maturing within one year
Maturing after one year through five years
Maturing after five years through ten years
Collateralized debt obligations
Maturing after ten years
December 31, 2012
Weighted
Amortized
Gross Unrealized
Yield
Cost
Gains
Losses
Fair
Value
1.62% $
201
2.30%
2.03%
2.29%
2.01%
2.11%
2.95%
4.70%
17,064
44
17,108
4,288
149,497
38,346
935,897
4.29% 1,128,028
1.73%
2.22%
2.23%
2.19%
18,412
250,027
16,144
284,583
1
371
1
372
28
4,142
1,102
82,823
88,095
51
4,018
381
4,450
—
—
—
—
(2)
(142)
(99)
(1,362)
(1,605)
—
(238)
—
(238)
202
17,435
45
17,480
4,314
153,497
39,349
1,017,358
1,214,518
18,463
253,807
16,525
288,795
8.03%
1,708
—
—
1,708
Residential mortgage-backed securities
Total investment securities
1.95% 2,156,049
2.71% $ 3,587,677
8,860
101,778
(4,607)
(6,450)
2,160,302
3,683,005
74
Note 3. Investment Securities, Available-for-Sale (continued)
(Dollars in thousands)
U.S. government and federal agency
December 31, 2011
Weighted
Amortized
Gross Unrealized
Yield
Cost
Gains
Losses
Fair
Value
Maturing after one year through five years
1.62% $
204
U.S. government sponsored enterprises
Maturing within one year
Maturing after one year through five years
Maturing after five years through ten years
State and local governments
Maturing within one year
Maturing after one year through five years
Maturing after five years through ten years
Maturing after ten years
Corporate bonds
Maturing after one year through five years
Maturing after five years through ten years
Collateralized debt obligations
Maturing after ten years
1.58%
2.36%
1.90%
2.26%
1.31%
2.22%
2.59%
4.84%
3,979
26,399
78
30,456
4,786
89,752
63,143
845,657
4.44% 1,003,338
2.55%
2.38%
2.54%
60,810
2,409
63,219
8.03%
5,648
4
17
682
—
699
3
2,660
2,094
57,138
61,895
261
21
282
—
—
—
—
—
—
(2)
(22)
(19)
(535)
(578)
(1,264)
—
(1,264)
208
3,996
27,081
78
31,155
4,787
92,390
65,218
902,260
1,064,655
59,807
2,430
62,237
(282)
5,366
Residential mortgage-backed securities
Total investment securities
1.70% 1,960,167
2.64% $ 3,063,032
10,138
73,018
(7,183)
(9,307)
1,963,122
3,126,743
Included in the residential mortgage-backed securities are $46,733,000 and $49,252,000 as of December 31, 2012 and 2011, respectively,
of non-guaranteed private label whole loan mortgage-backed securities of which none of the underlying collateral is considered “subprime.”
Maturities of securities do not reflect repricing opportunities present in adjustable rate securities, nor do they reflect expected shorter
maturities based upon early prepayment of principal. Weighted average yields are based on the level-yield method taking into account
premium amortization, discount accretion and mortgage-backed securities' prepayment provisions. Weighted average yields on tax-
exempt investment securities exclude the federal income tax benefit.
75
Note 3. Investment Securities, Available-for-Sale (continued)
The cost of each investment sold is determined by specific identification. Gain or loss on sale of investments consists of the following:
(Dollars in thousands)
Gross proceeds
Less amortized cost
Net gain on sale of investments
Gross gain on sale of investments
Gross loss on sale of investments
Net gain on sale of investments
December 31,
2012
Years ended
December 31,
2011
December 31,
2010
$
$
$
$
—
—
—
—
—
—
18,916
(18,570)
346
1,048
(702)
346
142,925
(138,103)
4,822
7,779
(2,957)
4,822
At December 31, 2012 and 2011, the Company had investment securities with fair values of $1,525,400,000 and $1,120,047,000,
respectively, pledged as collateral for FHLB advances, FRB discount window borrowings, securities sold under agreements to repurchase
(“repurchase agreements”), interest rate swap agreements and deposits of several local government units.
Investments with an unrealized loss position are summarized as follows:
(Dollars in thousands)
Less than 12 Months
Fair
Value
Unrealized
Loss
December 31, 2012
12 Months or More
Fair
Value
Unrealized
Loss
Total
Fair
Value
Unrealized
Loss
State and local governments
Corporate bonds
Residential mortgage-backed securities
$
102,896
41,856
955,235
Total temporarily impaired securities
$ 1,099,987
(1,531)
(238)
(4,041)
(5,810)
4,533
—
62,905
67,438
(74)
—
(566)
(640)
107,429
41,856
1,018,140
1,167,425
(1,605)
(238)
(4,607)
(6,450)
(Dollars in thousands)
Less than 12 Months
Fair
Value
Unrealized
Loss
December 31, 2011
12 Months or More
Fair
Value
Unrealized
Loss
Total
Fair
Value
Unrealized
Loss
State and local governments
Corporate bonds
Collateralized debt obligations
Residential mortgage-backed securities
$
26,434
31,782
—
943,372
Total temporarily impaired securities
$ 1,001,588
(90)
(1,264)
—
(6,850)
(8,204)
9,948
—
5,366
8,244
23,558
(488)
—
(282)
(333)
(1,103)
36,382
31,782
5,366
951,616
1,025,146
(578)
(1,264)
(282)
(7,183)
(9,307)
With respect to the Company's review of its securities in an unrealized loss position at December 31, 2012, management determined that
it did not intend to sell and there was no expected requirement to sell any of its impaired securities. Based on an analysis of its impaired
securities as of December 31, 2012 and 2011, the Company determined that none of such securities had other-than-temporary impairment.
76
Note 4. Loans Receivable, Net
Substantially all of the Company’s loan receivables are with customers in the Company’s geographic market areas. Although the Company
has a diversified loan portfolio, a substantial portion of its customers’ ability to honor their obligations is dependent upon the economic
performance in the Company’s market areas. The Company is subject to regulatory limits for the amount of loans to any individual
borrower and the Company is in compliance with this regulation as of December 31, 2012 and 2011. No borrower had outstanding loans
or commitments exceeding 10 percent of the Company’s consolidated stockholders’ equity as of December 31, 2012.
Net deferred fees, costs, premiums, and discounts of $1,379,000 and $3,123,000 were included in the loans receivable balance at
December 31, 2012 and 2011, respectively. At December 31, 2012, the Company had $2,295,167,000 in variable rate loans and
$1,102,258,000 in fixed rate loans. The weighted average interest rate on loans was 5.33 percent and 5.62 percent at December 31, 2012
and 2011, respectively. At December 31, 2012, 2011, and 2010, loans sold and serviced for others were $116,439,000, $160,465,000,
and $173,446,000, respectively. At December 31, 2012, the Company had loans of $1,660,469,000 pledged as collateral for FHLB
advances and FRB discount window. There were no significant purchases or sales of loans designated held-to-maturity during 2012 and
2011.
The Company has entered into transactions with its executive officers and directors and their affiliates. The aggregate amount of loans
outstanding to such related parties at December 31, 2012 and 2011 was $33,869,000 and $89,089,000, respectively. During 2012, new
loans to such related parties were $8,386,000 and repayments were $4,736,000. The decrease in the related party loans from the prior
year is a result of combining the eleven bank subsidiaries into Glacier Bank. For additional information relating to the combination of
the bank subsidiaries, see Note 1. In management’s opinion, such loans were made in the ordinary course of business and were made on
substantially the same terms as those prevailing at the time for comparable transaction with other persons.
The following schedules summarize the activity in the ALLL on a portfolio class basis:
(Dollars in thousands)
Allowance for loan and lease losses
Year ended December 31, 2012
Total
Residential
Real Estate
Commercial
Real Estate
Other
Commercial
Home
Equity
Other
Consumer
Balance at beginning of period
$
137,516
Provision for loan losses
Charge-offs
Recoveries
21,525
(34,672)
6,485
Balance at end of period
$
130,854
17,227
2,879
(5,267)
643
15,482
76,920
11,012
(16,339)
2,805
74,398
20,833
4,690
(5,239)
1,283
21,567
13,616
324
(4,369)
1,088
10,659
8,920
2,620
(3,458)
666
8,748
(Dollars in thousands)
Allowance for loan and lease losses
Year ended December 31, 2011
Total
Residential
Real Estate
Commercial
Real Estate
Other
Commercial
Home
Equity
Other
Consumer
Balance at beginning of period
$
137,107
Provision for loan losses
Charge-offs
Recoveries
64,500
(69,366)
5,275
Balance at end of period
$
137,516
20,957
1,455
(5,671)
486
17,227
76,147
39,563
(42,042)
3,252
76,920
19,932
10,709
(10,386)
578
20,833
13,334
4,450
(4,644)
476
13,616
6,737
8,323
(6,623)
483
8,920
The ALLL at the beginning of the period, the provision for loan losses, charge-offs and recoveries for the year ended December 31, 2010
was $142,927,000, $84,693,000, $(93,950,000) and $3,437,000, respectively.
77
(Dollars in thousands)
Allowance for loan and lease losses
Individually evaluated for impairment
Collectively evaluated for impairment
Total allowance for loan and lease
losses
Loans receivable
Individually evaluated for impairment
Collectively evaluated for impairment
$
$
$
(Dollars in thousands)
Allowance for loan and lease losses
Individually evaluated for impairment
Collectively evaluated for impairment
Total allowance for loan and lease
losses
Loans receivable
Individually evaluated for impairment
Collectively evaluated for impairment
$
$
$
Note 4. Loans Receivable, Net (continued)
The following schedules disclose the ALLL and loans receivable on a portfolio class basis:
Total
Residential
Real Estate
December 31, 2012
Other
Commercial
Commercial
Real Estate
Home
Equity
Other
Consumer
15,534
115,320
1,680
13,802
7,716
66,682
3,859
17,708
870
9,789
130,854
15,482
74,398
21,567
10,659
1,409
7,339
8,748
Total loans receivable
$ 3,397,425
201,735
3,195,690
25,862
490,605
516,467
125,282
1,530,226
1,655,508
33,593
589,804
623,397
11,074
392,851
403,925
5,924
192,204
198,128
Total
Residential
Real Estate
December 31, 2011
Other
Commercial
Commercial
Real Estate
Home
Equity
Other
Consumer
18,828
118,688
2,659
14,568
9,756
67,164
4,233
16,600
584
13,032
137,516
17,227
76,920
20,833
13,616
1,596
7,324
8,920
Total loans receivable
$ 3,466,135
258,659
3,207,476
24,453
492,354
516,807
162,959
1,509,100
1,672,059
49,962
573,906
623,868
14,750
425,819
440,569
6,535
206,297
212,832
The following schedules disclose the impaired loans on a portfolio class basis:
(Dollars in thousands)
Loans with a specific valuation allowance
Recorded balance
Unpaid principal balance
Specific valuation allowance
Average balance
Loans without a specific valuation
allowance
Recorded balance
Unpaid principal balance
Average balance
Totals
Recorded balance
Unpaid principal balance
Specific valuation allowance
Average balance
At or for the Year ended December 31, 2012
Total
Residential
Real Estate
Commercial
Real Estate
Other
Commercial
Home
Equity
Other
Consumer
$
62,759
70,261
15,534
76,656
$
138,976
149,412
162,505
$
201,735
219,673
15,534
239,161
7,334
7,459
1,680
12,797
18,528
19,613
16,034
25,862
27,072
1,680
28,831
78
29,595
36,887
7,716
36,164
95,687
102,798
111,554
125,282
139,685
7,716
147,718
21,205
21,278
3,859
22,665
12,388
14,318
19,733
33,593
35,596
3,859
42,398
1,354
1,362
870
1,390
9,720
9,965
11,993
11,074
11,327
870
13,383
3,271
3,275
1,409
3,640
2,653
2,718
3,191
5,924
5,993
1,409
6,831
Note 4. Loans Receivable, Net (continued)
(Dollars in thousands)
Loans with a specific valuation allowance
Recorded balance
Unpaid principal balance
Specific valuation allowance
Average balance
Loans without a specific valuation
allowance
Recorded balance
Unpaid principal balance
Average balance
Totals
Recorded balance
Unpaid principal balance
Specific valuation allowance
Average balance
At or for the Year ended December 31, 2011
Total
Residential
Real Estate
Commercial
Real Estate
Other
Commercial
Home
Equity
Other
Consumer
$
77,717
85,514
18,828
66,871
$
180,942
208,828
168,983
$
258,659
294,342
18,828
235,854
11,111
11,177
2,659
10,330
13,342
14,741
14,730
24,453
25,918
2,659
25,060
39,971
47,569
9,756
38,805
122,988
139,962
123,231
162,959
187,531
9,756
162,036
22,087
22,196
4,233
13,395
27,875
35,174
19,963
49,962
57,370
4,233
33,358
1,219
1,238
584
1,284
13,531
15,097
8,975
14,750
16,335
584
10,259
3,329
3,334
1,596
3,057
3,206
3,854
2,084
6,535
7,188
1,596
5,141
Interest income recognized on impaired loans for the years ended December 31, 2012, 2011, and 2010 was not significant.
The following is a loans receivable aging analysis on a portfolio class basis:
(Dollars in thousands)
Total
Residential
Real Estate
December 31, 2012
Other
Commercial
Commercial
Real Estate
Home
Equity
Other
Consumer
Accruing loans 30-59 days past due
Accruing loans 60-89 days past due
Accruing loans 90 days or more past due
Non-accrual loans
Total past due and non-accrual loans
Current loans receivable
Total loans receivable
$
17,454
9,643
1,479
96,933
125,509
3,271,916
$ 3,397,425
3,897
1,870
451
14,237
20,455
496,012
516,467
7,424
3,745
594
55,687
67,450
1,588,058
1,655,508
2,020
645
197
13,200
16,062
607,335
623,397
2,872
2,980
188
11,241
17,281
386,644
403,925
1,241
403
49
2,568
4,261
193,867
198,128
(Dollars in thousands)
Total
Residential
Real Estate
December 31, 2011
Other
Commercial
Commercial
Real Estate
Home
Equity
Other
Consumer
Accruing loans 30-59 days past due
Accruing loans 60-89 days past due
$
Accruing loans 90 days or more past due
Non-accrual loans
Total past due and non-accrual loans
31,386
17,700
1,413
133,689
184,188
Current loans receivable
Total loans receivable
3,281,947
$ 3,466,135
12,683
11,660
108
87,956
112,407
1,559,652
1,672,059
3,279
1,034
1,060
21,685
27,058
596,810
623,868
4,092
1,276
156
10,272
15,796
424,773
440,569
2,294
1,052
30
1,895
5,271
207,561
212,832
9,038
2,678
59
11,881
23,656
493,151
516,807
79
Note 4. Loans Receivable, Net (continued)
Interest income that would have been recorded on non-accrual loans if such loans had been current for the entire period would have been
approximately $5,161,000, $7,441,000, and $10,987,000 for the years ended December 31, 2012, 2011, and 2010, respectively.
The following is a summary of the TDRs that occurred during the periods presented and the TDRs that occurred within the previous
twelve months that subsequently defaulted during the periods presented on a portfolio class basis:
(Dollars in thousands)
Troubled debt restructurings
Number of loans
Pre-modification recorded balance
Post-modification recorded balance
Troubled debt restructurings that
subsequently defaulted
Number of loans
Recorded balance
(Dollars in thousands)
Troubled debt restructurings
Number of loans
Pre-modification recorded balance
Post-modification recorded balance
Troubled debt restructurings that
subsequently defaulted
Number of loans
Recorded balance
Year ended December 31, 2012
Total
Residential
Real Estate
Commercial
Real Estate
Other
Commercial
Home
Equity
Other
Consumer
198
90,747
89,558
$
$
11
2,280
2,281
85
57,382
56,120
75
28,639
28,711
10
1,358
1,358
17
1,088
1,088
14
$
8,304
—
—
4
6,192
6
1,753
3
301
1
58
Year ended December 31, 2011
Total
Residential
Real Estate
Commercial
Real Estate
Other
Commercial
Home
Equity
Other
Consumer
338
$
$
158,295
155,827
20
13,500
13,452
120
109,593
107,778
149
20,446
20,434
22
9,198
9,200
27
5,558
4,963
66
$
41,236
4
2,291
29
32,615
22
2,718
7
3,202
4
410
For the years ended December 31, 2012 and 2011 the majority of TDRs occurring in most loan classes was a result of an extension of
the maturity date which aggregated 49 percent and 58 percent, respectively, of total TDRs. For commercial real estate, the class with the
largest dollar amount of TDRs, approximately 36 percent and 56 percent, respectively, was a result of an extension of the maturity date
and 30 percent and 31 percent, respectively, was due to a combination of an interest rate reduction, extension of the maturity date, or
reduction in the face amount.
In addition to the TDRs that occurred during the period provided in the preceding table, the Company had TDRs with pre-modification
loan balances of $39,769,000 and $96,528,000 for the years ended December 31, 2012 and 2011, respectively, for which OREO was
received in full or partial satisfaction of the loans. The majority of such TDRs for both years was in commercial real estate.
There were $4,534,000 and $3,158,000 of additional outstanding commitments on TDRs outstanding at December 31, 2012 and 2011,
respectively. The amount of charge-offs on TDRs during 2012 and 2011 was $6,271,000 and $8,792,000, respectively.
80
Note 5. Premises and Equipment
Premises and equipment, net of accumulated depreciation, consist of the following at:
(Dollars in thousands)
Land
Office buildings and construction in progress
Furniture, fixtures and equipment
Leasehold improvements
Accumulated depreciation
Net premises and equipment
December 31,
2012
December 31,
2011
$
$
25,027
153,340
63,467
7,393
(90,238)
158,989
25,022
145,999
62,002
7,766
(81,917)
158,872
Depreciation expense for the years ended December 31, 2012, 2011, and 2010 was $10,615,000, $10,443,000, and $10,808,000,
respectively. Interest expense capitalized for various construction projects for the years ended December 31, 2012, 2011 and 2010 was
$11,000, $35,000 and $65,000, respectively.
The Company leases certain land, premises and equipment from third parties under operating and capital leases. Total rent expense for
the years ended December 31, 2012, 2011, and 2010 was $2,868,000, $3,239,000, and $3,566,000, respectively. Amortization of building
capital lease assets is included in depreciation. The Company has entered into lease transactions with related parties. Rent expense with
such related parties for the years ended December 31, 2012, 2011, and 2010 was $410,000, $937,000, and $902,000. The decrease in
the related party rent expense from the prior year is a result of combining the eleven bank subsidiaries into Glacier Bank. For additional
information relating to the combination of the bank subsidiaries, see Note 1.
The total future minimum rental commitments required under operating and capital leases that have initial or remaining noncancelable
lease terms in excess of one year at December 31, 2012 are as follows:
(Dollars in thousands)
Years ending December 31,
2013
2014
2015
2016
2017
Thereafter
Total minimum lease payments
Less: Amount representing interest
Present value of minimum lease payments
Less: Current portion of obligations under capital leases
Long-term portion of obligations under capital leases
Capital
Leases
Operating
Leases
Total
2,317
2,227
2,043
1,813
1,506
4,136
2,555
3,055
2,238
2,010
1,706
4,885
14,042
16,449
$
$
238
828
195
197
200
749
2,407
619
1,788
98
1,690
81
Note 6. Other Intangible Assets and Goodwill
The following table sets forth information regarding the Company’s core deposit intangibles:
(Dollars in thousands)
Gross carrying value
Accumulated amortization
Net carrying value
Aggregate amortization expense
Weighted-average amortization period
(Period in years)
Estimated amortization expense for the years ending December 31,
2013
2014
2015
2016
2017
At or for the Years ended
December 31,
2012
December 31,
2011
December 31,
2010
$
$
$
$
22,404
(16,230)
6,174
28,248
(19,964)
8,284
30,050
(19,293)
10,757
2,110
2,473
3,180
9.5
1,860
1,611
1,368
1,037
298
The following schedule discloses the changes in the carrying value of goodwill:
(Dollars in thousands)
Net carrying value at beginning of period
Impairment charge
Net carrying value at end of period
December 31,
2012
$
$
106,100
—
106,100
Years ended
December 31,
2011
December 31,
2010
146,259
(40,159)
106,100
146,259
—
146,259
The gross carrying value of goodwill and the accumulated impairment charge consists of the following:
(Dollars in thousands)
Gross carrying value
Accumulated impairment charge
Net carrying value
December 31,
2012
December 31,
2011
$
$
146,259
(40,159)
106,100
146,259
(40,159)
106,100
The Company performed its annual goodwill impairment test during the third quarter of 2012 and determined the fair value of the
aggregated reporting units exceeded the carrying value, such that the Company's goodwill was not considered impaired. In recognition
there were no events or circumstances that occurred during the fourth quarter of 2012 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 at December 31, 2012. However, further
adverse changes in the economic environment, operations of the aggregated reporting units, or other factors could result in the decline
in the fair value of the aggregated reporting units which could result in a goodwill impairment in the future. Due to high levels of volatility
and dislocation in prices of shares of publicly-held, exchange listed banking companies in 2011, a goodwill impairment charge was
recognized by the Company during the third quarter of 2011.
82
Note 7. Deposits
Deposits consist of the following at:
(Dollars in thousands)
December 31, 2012
December 31, 2011
Non-interest bearing deposits
$
1,191,933
22.2%
1,010,899
NOW accounts
Savings accounts
Money market deposit accounts
Certificate accounts
Wholesale deposits 1
Total interest bearing deposits
Total deposits
Deposits with a balance of $100,000 and greater
Demand deposits
Certificate accounts
Total balances of $100,000 and greater
$
$
$
988,984
478,809
931,370
1,015,491
757,874
4,172,528
18.4%
8.9%
17.4%
19.0%
14.1%
77.8%
843,129
404,671
873,562
1,080,917
608,035
3,810,314
21.0%
17.5%
8.4%
18.1%
22.4%
12.6%
79.0%
5,364,461
100.0%
4,821,213
100.0%
2,361,528
1,044,488
3,406,016
1,986,757
933,183
2,919,940
__________
1 Wholesale deposits include brokered deposits classified as NOW, money market deposit and certificate accounts, including reciprocal deposits.
The scheduled maturities of time deposits are as follows and include $521,624,000 of wholesale deposits as of December 31, 2012:
(Dollars in thousands)
Years ending December 31,
2013
2014
2015
2016
2017
Thereafter
Amount
$
1,246,425
161,973
73,115
37,073
18,439
90
$
1,537,115
The Company reclassified $3,482,000 and $2,205,000 of overdraft demand deposits to loans as of December 31, 2012 and 2011,
respectively. The Company has entered into deposit transactions with its executive officers and directors and their affiliates. The aggregate
amount of deposits with such related parties at December 31, 2012, and 2011 was $20,404,000 and $71,504,000, respectively. The
decrease in the related party deposits from the prior year is a result of combining the eleven bank subsidiaries into Glacier Bank. For
additional information relating to the combination of the bank subsidiaries, see Note 1.
Debit card expense for the years ended December 31, 2012, 2011, and 2010 was $4,082,000, $4,073,000, and $3,003,000, respectively,
and was included in other expense in the Company’s statements of operations.
83
Note 8. Securities Sold Under Agreements to Repurchase
Repurchase agreements consist of the following:
(Dollars in thousands)
Overnight
Maturing within 30 days
(Dollars in thousands)
Overnight
Maturing within 30 days
December 31, 2012
Repurchase
Amount
Weighted
Average
Fixed Rate
Amortized
Cost of
Underlying
Assets
Fair
Value of
Underlying
Assets
285,349
4,159
289,508
0.32% $
287,597
0.50%
4,228
0.32% $
291,825
293,958
4,306
298,264
December 31, 2011
Repurchase
Amount
Weighted
Average
Fixed Rate
Amortized
Cost of
Underlying
Assets
Fair
Value of
Underlying
Assets
257,802
841
258,643
0.42% $
260,124
1.00%
1,855
0.42% $
261,979
265,592
1,916
267,508
$
$
$
$
The securities, consisting of U.S. government sponsored enterprises issued or guaranteed residential mortgage-backed securities, subject
to agreements to repurchase, were for the same securities originally sold, and were held in custody accounts by third parties.
Note 9. Borrowings
Each advance from the FHLB bears a fixed rate of interest and consists of the following:
(Dollars in thousands)
Maturing within one year
Maturing one year through two years
Maturing two years through three years
Maturing three years through four years
Maturing four years through five years
Thereafter
Total
December 31, 2012
December 31, 2011
Amount
Weighted
Rate
Amount
Weighted
Rate
$
720,000
—
75,000
45,000
—
157,013
997,013
$
0.28%
—%
3.48%
2.99%
—%
3.07%
1.09%
792,000
—
—
75,000
45,000
157,046
1,069,046
0.68%
—%
—%
3.48%
2.99%
3.07%
1.32%
In addition to specifically pledged loans and investment securities, FHLB advances are collateralized by FHLB stock owned by the
Company and a blanket assignment of the unpledged qualifying loans and investments.
84
Note 9. Borrowings (continued)
With respect to $275,000,000 of FHLB advances at December 31, 2012, the FHLB holds put options that will be exercised on the quarterly
measurement date when 3-month LIBOR is 8 percent or greater. The FHLB put options as of December 31, 2012 are summarized as
follows:
(Dollars in thousands)
Maturing during years ending December 31,
2015
2016
2018
2021
Amount
Interest
Rate
$
$
75,000
45,000
20,000
3.16% - 3.64%
2.93% - 3.05%
2.73% - 2.85%
135,000
2.88% - 3.43%
275,000
The Company’s remaining borrowings consisted of capital lease obligations, liens on OREO and other debt obligations through
consolidation of certain VIEs. At December 31, 2012, the Company had $171,000,000 in unsecured lines of credit which are typically
renewed on an annual basis with various correspondent entities.
Note 10. Subordinated Debentures
Trust preferred securities were issued by the Company’s trust subsidiaries, the common stock of which is wholly-owned by the Company,
in conjunction with the Company issuing subordinated debentures to the trust subsidiaries. The terms of the subordinated debentures are
the same as the terms of the trust preferred securities. The Company guaranteed the payment of distributions and payments for redemption
or liquidation of the trust preferred securities to the extent of funds held by the trust subsidiaries. The obligations of the Company under
the subordinated debentures together with the guarantee and other back-up obligations, in the aggregate, constitute a full and unconditional
guarantee by the Company of the obligations of all trusts under the trust preferred securities.
The trust preferred securities are subject to mandatory redemption upon repayment of the subordinated debentures at their stated maturity
date or the earlier redemption in an amount equal to their liquidation amount plus accumulated and unpaid distributions to the date of
redemption. Interest distributions are payable quarterly. The Company may defer the payment of interest at any time from time to time
for a period not exceeding 20 consecutive quarters provided that the deferral period does not extend past the stated maturity. During any
such deferral period, distributions on the trust preferred securities will also be deferred and the Company’s ability to pay dividends on
its common shares will be restricted.
Subject to prior approval by the FRB, the trust preferred securities may be redeemed at par prior to maturity at the Company’s option on
or after the redemption date. All of the Company's trust preferred securities have reached the redemption date and could be redeemed at
the Company's option. The trust preferred securities may also be redeemed at any time in whole (but not in part) for the Trusts in the
event of unfavorable changes in laws or regulations that result in 1) subsidiary trusts becoming subject to federal income tax on income
received on the subordinated debentures, 2) interest payable by the Company on the subordinated debentures becoming non-deductible
for federal tax purposes, 3) the requirement for the trusts to register under the Investment Company Act of 1940, as amended, or 4) loss
of the ability to treat the trust preferred securities as Tier 1 capital under the FRB capital adequacy guidelines.
For regulatory purposes, the FRB has allowed bank holding companies to include trust preferred securities in Tier 1 capital up to a certain
limit. Provisions of the Dodd-Frank Act require the FRB to generally exclude trust preferred securities from Tier 1 capital, but a grandfather
provision permits bank holding companies with consolidated assets of less than $15 billion to continue counting existing trust preferred
securities as Tier 1 capital until they mature. All of the Company's trust preferred securities qualified as Tier 1 instruments at December
31, 2012.
85
Note 10. Subordinated Debentures (continued)
The terms of the subordinated debentures, arranged by maturity date, are reflected in the table below. The amounts include fair value
adjustments from acquisitions.
(Dollars in thousands)
December 31, 2012
Balance
Rate
Variable Rate
Structure
Maturity
Date
First Company Statutory Trust 2001
$
First Company Statutory Trust 2003
Glacier Capital Trust II
Citizens (ID) Statutory Trust I
Glacier Capital Trust III
Glacier Capital Trust IV
Bank of the San Juans Bancorporation Trust I
2,955
2,182
46,393
5,155
36,083
30,928
1,722
$
125,418
Note 11. Derivatives and Hedging Activities
3.613% 3 mo LIBOR plus 3.30
07/31/2031
3.560% 3 mo LIBOR plus 3.25
03/26/2033
3.090% 3 mo LIBOR plus 2.75
04/07/2034
2.958% 3 mo LIBOR plus 2.65
06/17/2034
1.630% 3 mo LIBOR plus 1.29
04/07/2036
1.878% 3 mo LIBOR plus 1.57
09/15/2036
2.131% 3 mo LIBOR plus 1.82
03/01/2037
The Company is exposed to certain risk relating to its ongoing business operations. The primary risk managed by using derivative
instruments is interest rate risk. Interest rate swaps are entered into to manage interest rate risk associated with the Company’s forecasted
variable rate borrowings. The Company recognizes interest rate swaps as either assets or liabilities at fair value in the statement of
financial condition.
The interest rate swaps on variable rate borrowings were designated as cash flow hedges and were over-the-counter contracts. The
contracts were entered into by the Company with counterparties and the specific agreement of terms were negotiated, including the
forecasted notional amount, the interest rate, and the maturity date.
The Company is exposed to credit-related losses in the event of nonperformance by the counterparties to the agreements. The Company
controls the credit risk through monitoring procedures and does not expect the counterparties to fail on their obligations. The Company
only conducts business with primary dealers as counterparties and believes that the credit risk inherent in these contracts was not significant.
The Company’s interest rate derivative financial instruments as of December 31, 2012 are as follows:
(Dollars in thousands)
Interest rate swap
Interest rate swap
Forecasted
Notional
Amount
Variable
Interest Rate 1
Fixed
Interest Rate 1
Term 2
$
160,000
3 month LIBOR
3.378% Oct. 21, 2014 - Oct. 21, 2021
100,000
3 month LIBOR
2.498% Nov 30, 2015 - Nov. 30, 2022
__________
1 The Company pays the fixed interest rate and the counterparties pay the Company the variable interest rate.
2 No cash will be exchanged prior to the term.
The hedging strategy converts the LIBOR based variable interest rate on forecasted borrowings to a fixed interest rate, thereby protecting
the Company from floating interest rate variability.
86
Note 11. Derivatives and Hedging Activities (continued)
The following table summarizes the fair value of the Company’s interest rate derivative financial instruments:
(Dollars in thousands)
Balance Sheet
Location
December 31,
2012
December 31,
2011
Fair Value
Interest rate swap
Other liabilities
$
16,832
8,906
Pursuant to the interest rate swap agreements, the Company pledged collateral to the counterparties in the form of investment securities
totaling $18,684,000 at December 31, 2012. There was $0 collateral pledged from the counterparties to the Company as of December 31,
2012. There is the possibility that the Company may need to pledge additional collateral in the future if there were further declines in
the fair value.
Note 12. Regulatory Capital
The FRB has adopted capital adequacy guidelines pursuant to which it assesses the adequacy of capital in supervising a bank holding
company. As a result of combining the eleven bank subsidiaries into Glacier Bank on April 30, 2012, there were changes in the regulatory
capital ratios at the subsidiary level which are reflected in the following tables for December 31, 2012 and December 31, 2011. For
additional information relating to the combination of the bank subsidiaries, see Note 1. The following table illustrates the FRB’s adequacy
guidelines and the Company’s and the Bank's compliance with those guidelines as of December 31, 2012:
(Dollars in thousands)
Total capital (to risk-weighted assets)
Consolidated
Glacier Bank
Tier 1 capital (to risk-weighted assets)
Consolidated
Glacier Bank
Tier 1 capital (to average assets)
Consolidated
Glacier Bank
Actual
Minimum Capital
Requirement
Well Capitalized
Requirement
Amount
Ratio
Amount
Ratio
Amount
Ratio
923,574
851,819
865,213
794,228
865,213
794,228
20.09%
18.79%
367,701
362,711
18.82%
17.52%
183,851
181,355
11.31%
10.55%
306,005
301,013
8.00%
8.00%
4.00%
4.00%
4.00%
4.00%
459,627
453,388
275,776
272,033
N/A
376,267
10.00%
10.00%
6.00%
6.00%
N/A
5.00%
87
Note 12. Regulatory Capital (continued)
The following table illustrates the FRB’s adequacy guidelines and the Company’s and bank subsidiaries’ compliance with those guidelines
as of December 31, 2011:
(Dollars in thousands)
Total capital (to risk-weighted assets)
Consolidated
Glacier Bank
Mountain West Bank
First Security Bank of Missoula
Western Security Bank
1st Bank
Valley Bank of Helena
Big Sky Western Bank
First Bank of Wyoming
Citizens Community Bank
First Bank of Montana
Bank of the San Juans
Tier 1 capital (to risk-weighted assets)
Consolidated
Glacier Bank
Mountain West Bank
First Security Bank of Missoula
Western Security Bank
1st Bank
Valley Bank of Helena
Big Sky Western Bank
First Bank of Wyoming
Citizens Community Bank
First Bank of Montana
Bank of the San Juans
Tier 1 capital (to average assets)
Consolidated
Glacier Bank
Mountain West Bank
First Security Bank of Missoula
Western Security Bank
1st Bank
Valley Bank of Helena
Big Sky Western Bank
First Bank of Wyoming
Citizens Community Bank
First Bank of Montana
Bank of the San Juans
Actual
Minimum Capital
Requirement
Well Capitalized
Requirement
Amount
Ratio
Amount
Ratio
Amount
Ratio
883,954
187,082
149,280
121,181
69,646
68,729
34,117
68,661
41,860
29,011
22,757
21,127
828,404
175,066
139,809
112,198
64,520
64,267
31,059
65,218
39,670
26,358
20,854
19,161
828,404
175,066
139,809
112,198
64,520
64,267
31,059
65,218
39,670
26,358
20,854
19,161
348,950
75,033
58,474
56,414
32,632
28,225
19,476
21,601
16,789
16,763
12,100
12,402
174,475
37,517
29,237
28,207
16,316
14,113
9,738
10,801
8,395
8,382
6,050
6,201
280,602
53,846
43,660
42,793
31,159
30,279
17,906
15,057
15,264
13,783
10,008
9,042
20.27%
19.95%
20.42%
17.18%
17.07%
19.48%
14.01%
25.43%
19.95%
13.85%
15.05%
13.63%
18.99%
18.67%
19.13%
15.91%
15.82%
18.22%
12.76%
24.15%
18.90%
12.58%
13.79%
12.36%
11.81%
13.00%
12.81%
10.49%
8.28%
8.49%
6.94%
17.33%
10.40%
7.65%
8.33%
8.48%
88
8.00%
8.00%
8.00%
8.00%
8.00%
8.00%
8.00%
8.00%
8.00%
8.00%
8.00%
8.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
436,187
93,792
73,092
70,517
40,790
35,282
24,345
27,002
20,987
20,954
15,124
15,503
261,712
56,275
43,855
42,310
24,474
21,169
14,607
16,201
12,592
12,572
9,075
9,302
N/A
67,308
54,575
53,492
38,949
37,849
22,382
18,821
19,080
17,228
12,510
11,303
10.00%
10.00%
10.00%
10.00%
10.00%
10.00%
10.00%
10.00%
10.00%
10.00%
10.00%
10.00%
6.00%
6.00%
6.00%
6.00%
6.00%
6.00%
6.00%
6.00%
6.00%
6.00%
6.00%
6.00%
N/A
5.00%
5.00%
5.00%
5.00%
5.00%
5.00%
5.00%
5.00%
5.00%
5.00%
5.00%
Note 12. Regulatory Capital (continued)
The Federal Deposit Insurance Corporation Improvement Act generally restricts a depository institution from making any capital
distribution (including payment of a dividend) or paying any management fee to its bank holding company if the institution would
thereafter be capitalized at less than 8 percent Total capital (to risk-weighted assets), 4 percent Tier 1 capital (to risk-weighted assets), or
4 percent Tier 1 capital (to average assets).
At December 31, 2012 for the Bank and at December 31, 2011 for each of the bank subsidiaries, the capital measures exceeded the well
capitalized threshold, which requires Total capital (to risk-weighted assets) of at least 10 percent, Tier 1 capital (to risk-weighted assets)
of at least 6 percent, and Tier 1 capital (to average assets) of at least 5 percent. Failure to meet minimum capital requirements can initiate
certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on
the Company’s and Bank’s financial condition. There are no conditions or events since year end that management believes have changed
the Company’s or Bank's risk-based capital category.
Current guidance from the Federal Reserve provides, among other things, that dividends per share on the Company’s common stock
generally should not exceed earnings per share, measured over the previous four fiscal quarters. The Bank is also subject to Montana
state law and cannot declare a dividend greater than the previous two years' net earnings without providing notice to the state.
Note 13. Accumulated Other Comprehensive Income
The components of accumulated other comprehensive income, included in stockholders’ equity, are as follows:
(Dollars in thousands)
Unrealized gains on available-for-sale securities
$
Tax effect
Net of tax amount
Unrealized losses on derivatives used for cash flow hedges
Tax effect
Net of tax amount
December 31,
2012
December 31,
2011
95,328
(37,083)
58,245
(16,832)
6,549
(10,283)
63,711
(24,783)
38,928
(8,906)
3,465
(5,441)
Total accumulated other comprehensive income
$
47,962
33,487
Note 14. Federal and State Income Taxes
The following is a summary of consolidated income tax expense:
(Dollars in thousands)
Current
Federal
State
Total current tax expense
Deferred
Federal
State
Total deferred tax expense (benefit)
Total income tax expense (benefit)
December 31,
2012
Years ended
December 31,
2011
December 31,
2010
$
12,718
5,522
18,240
708
129
837
$
19,077
8,836
4,191
13,027
(11,256)
(2,052)
(13,308)
(281)
3,724
3,481
7,205
115
23
138
7,343
89
Note 14. Federal and State Income Taxes (continued)
Combined federal and state income tax expense differs from that computed at the federal statutory corporate tax rate as follows:
Federal statutory rate
State taxes, net of federal income tax benefit
Tax-exempt interest income
Tax credits
Goodwill impairment charge
Other, net
Effective tax rate
December 31,
2012
Years ended
December 31,
2011
December 31,
2010
35.0 %
3.9 %
(14.0)%
(4.2)%
— %
(0.5)%
20.2 %
35.0 %
8.1 %
(65.5)%
(22.1)%
42.3 %
0.6 %
(1.6)%
35.0 %
4.6 %
(17.3)%
(7.3)%
— %
(0.2)%
14.8 %
The tax effect of temporary differences which give rise to a significant portion of deferred tax assets and deferred tax liabilities are as
follows:
December 31,
2012
December 31,
2011
$
50,963
53,555
7,685
6,549
3,543
3,129
2,954
2,715
2,008
2,446
7,852
3,465
2,400
2,964
2,954
2,610
2,894
2,713
81,992
81,407
(37,083)
(10,143)
(5,437)
(5,316)
(1,832)
(1,787)
(61,598)
20,394
$
(24,783)
(10,165)
(6,169)
(4,954)
(1,566)
(2,689)
(50,326)
31,081
(Dollars in thousands)
Deferred tax assets
Allowance for loan and lease losses
Other real estate owned
Interest rate swap agreements
Federal income tax credits
Deferred compensation
Impairment of equity securities (FHLMC & FNMA)
Employee benefits
Non-accrued interest
Other
Total gross deferred tax assets
Deferred tax liabilities
Available-for-sale securities
FHLB stock dividends
Depreciation of premises and equipment
Deferred loan costs
Intangibles
Other
Total gross deferred tax liabilities
Net deferred tax asset
The Company’s federal income tax credit carryforwards will expire in 2031 and 2032.
90
Note 14. Federal and State Income Taxes (continued)
The Company and the Bank join together in the filing of consolidated income tax returns in the following jurisdictions: federal, Montana,
Idaho, Colorado and Utah. Although the Bank has operations in Wyoming and Washington, neither Wyoming nor Washington imposes
a corporate-level income tax. All required income tax returns have been timely filed. The following schedule summarizes the years that
remain subject to examination as of December 31, 2012:
Years ended December 31,
Federal
Montana
Idaho
Colorado
Utah
2009, 2010 and 2011
2009, 2010 and 2011
2009, 2010 and 2011
2008, 2009, 2010 and 2011
2009, 2010 and 2011
The Company had no unrecognized tax benefit as of December 31, 2012, and 2011. The Company recognizes interest related to
unrecognized income tax benefits in interest expense and penalties are recognized in other expense.
During the years ended December 31, 2012, and 2011, the Company did not recognize any interest expense or penalties with respect to
income tax liabilities. The Company had no accrued liabilities for the payment of interest or penalties at December 31, 2012, and 2011.
The Company has assessed the need for a valuation allowance and determined that a valuation allowance is not necessary at December 31,
2012, and 2011. The Company believes that it is more-likely-than-not that the Company’s deferred tax assets will be realizable by
offsetting future taxable income from reversing taxable temporary differences and anticipated future taxable income (exclusive of reversing
temporary differences). In its assessment, the Company considered its strong earnings history, no history of tax credit carryforwards
expiring unused, and no future net operating losses (for tax purposes) are expected.
Retained earnings at December 31, 2012 includes $3,600,000 for which no provision for federal income tax has been made. This amount
represents the base year reserve for bad debts, which is essentially an allocation of earnings to pre-1988 bad debt deductions for federal
income tax purposes only. This amount is treated as a permanent difference and deferred taxes are not recognized unless it appears that
this bad debt reserve will be reduced and thereby result in taxable income in the foreseeable future. The Company is not currently
contemplating any changes in its business or operations which would result in a recapture of this reserve for bad debts for federal tax
income purposes.
Note 15. Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding
during the period presented. Diluted earnings per share is computed by including the net increase in shares as if dilutive outstanding stock
options were exercised, using the treasury stock method.
Basic and diluted earnings per share has been computed based on the following:
(Dollars in thousands, except per share data)
December 31,
2012
Years ended
December 31,
2011
December 31,
2010
Net income available to common stockholders, basic and diluted
$
75,516
17,471
42,330
Average outstanding shares - basic
Add: dilutive stock options and awards
Average outstanding shares - diluted
Basic earnings per share
Diluted earnings per share
71,928,570
71,915,073
69,657,980
86
—
2,365
71,928,656
71,915,073
69,660,345
$
$
1.05
1.05
0.24
0.24
0.61
0.61
91
Note 15. Earnings Per Share (continued)
There were 879,525, 1,567,561 and 2,295,424 options excluded from the diluted average outstanding share calculation for December 31,
2012, 2011, and 2010, respectively, due to the option exercise price exceeding the market price of the Company’s common stock.
Note 16. Employee Benefit Plans
The Company has a 401(k) plan and a profit sharing plan which has safe harbor and employer discretionary components. To be considered
eligible for the 401(k) and safe harbor components of the profit sharing plan, an employee must be 21 years of age and employed for
three full months. Employees are eligible to participate in the 401(k) plan the first day of the month once they have met the eligibility
requirements. To be considered eligible for the employer discretionary contribution of the profit sharing plan, an employee must be 21
years of age, worked one full calendar quarter, worked 501 hours in the plan year and be employed as of the last day of the plan year.
Participants are at all times fully vested in all contributions.
The profit sharing plan contributions consists of a 3 percent non-elective safe harbor contribution fully funded by the Company and an
employer discretionary contribution. The employer discretionary contribution depends on the Company’s profitability. The total profit
sharing plan expense for the years ended December 31, 2012, 2011, and 2010 was $3,974,000, $2,043,000 and $2,223,000 respectively.
The 401(k) plan allows eligible employees to contribute up to 60 percent of their eligible annual compensation up to the limit set annually
by the Internal Revenue Service. The Company matches an amount equal to 50 percent of the first 6 percent of an employee’s contribution.
The Company’s contribution to the 401(k) for the years ended December 31, 2012, 2011 and 2010 was $1,751,000, $1,644,000, and
$1,570,000, respectively.
The Company has a non-funded deferred compensation plan for directors and senior officers. The plan provides for participants’ elective
deferral of cash payments of up to 50 percent of a participants’ salary and 100 percent of bonuses and directors fees. The total amount
deferred for the plan was $278,000, $362,000, and $358,000, for the years ending December 31, 2012, 2011, and 2010, respectively. The
participant receives an earnings credit at a rate equal to 50 percent of the Company’s return on average equity. The total earnings for the
years ended December 31, 2012, 2011, and 2010 for the plan was $231,000, $54,000 and $116,000, respectively. In connection with
several acquisitions, the Company assumed the obligations of deferred compensation plans for certain key employees. As of December 31,
2012 and 2011, the liability related to the obligations was $1,255,000 and $1,288,000 and was included in other liabilities. The amount
expensed related to the obligations during 2012, 2011 and 2010 was insignificant.
The Company has a Supplemental Executive Retirement Plan (“SERP”) which is intended to supplement payments due to participants
upon retirement under the Company’s other qualified plans. The Company credits the participant’s account on annual basis for an amount
equal to employer contributions that would have otherwise been allocated to the participant’s account under the tax-qualified plans were
it not for limitations imposed by the Internal Revenue Service ("IRS") or the participation in the non-funded deferred compensation plan.
Eligible employees include participants of the non-funded deferred compensation plan and employees whose benefits were limited as a
result of IRS regulations. The Company’s required contribution to the SERP for the years ended December 31, 2012, 2011 and 2010
was $47,000, $21,000, and $10,000, respectively. The participant receives an earnings credit at a rate equal to 50 percent of the Company’s
return on average equity. The total earnings for the years ended December 31, 2012, 2011, and 2010 for this plan was $37,000, $9,000,
and $22,000, respectively.
The Company has elected to self-insure certain costs related to employee health and dental benefit programs. Costs resulting from
noninsured losses are expensed as incurred. The Company has purchased insurance that limits its exposure on an aggregate and individual
claims basis for the employee health benefit programs.
The Company has entered into employment contracts with 15 senior officers that provide benefits under certain conditions following a
change in control of the Company.
92
Note 17. Stock-based Compensation Plans
The Company has the following stock-based compensation plans outstanding: 1) the Directors 1994 Stock Option Plan and 2) the 2005
Stock Incentive Plan. The Directors 1994 Stock Option Plan was approved to provide for the grant of stock options to outside Directors
of the Company. The Directors 1994 Stock Option Plan expired in March of 2009 and has granted but unexpired stock options outstanding.
The 2005 Stock Incentive Plan provides awards to certain full-time employees and directors of the Company. The 2005 Stock Incentive
Plan permits the granting of stock options, share appreciation rights, restricted shares, restricted share units, and unrestricted shares,
deferred share units, and performance awards. At December 31, 2012, 3,849,531 shares were available to grant to employees and directors.
Stock Options
The Company has granted stock options to certain full-time employees and directors of the Company under the Directors 1994 Stock
Option Plan and the 2005 Stock Incentive Plan. Both plans contain provisions authorizing the grant of limited stock rights, which permit
the optionee, upon a change in control of the Company, to surrender his or her stock options for cancellation and receive cash or common
stock equal to the difference between the exercise price and the fair market value of the shares on the date of the grant. The option price
at which the Company’s common stock may be purchased upon exercise of stock options granted under the plans must be at least equal
to the per share market value of such stock at the date the option is granted. All stock option shares are adjusted for stock splits and stock
dividends. The term of the stock options may not exceed five years from the date the options are granted.
The fair value of stock options granted is estimated at the date of grant using the Black Scholes option-pricing model. The Company
uses historical data to estimate option exercise and termination within the valuation model. Employee and director awards, which have
dissimilar historical exercise behavior, are considered separately for valuation purposes. The risk-free interest rate for periods within the
contractual life of the stock option is based on the U.S. Treasury yield in effect at the time of the grant. The stock option grants generally
vest upon six months or two years of service for directors and employees, respectively, and generally expire in five years. Expected
volatilities are based on historical volatility and other factors. The following lists the various assumptions and fair value of the stock
options granted during the years indicated. There were no stock options granted during 2012 or 2011.
Fair value of stock options - Black Scholes
Expected volatility
Dividend yield
Risk-free interest rate
Expected life
__________
N/A - not applicable
Options Granted During
2012
2011
2010
N/A
N/A
N/A
N/A
N/A
N/A $
N/A
N/A
N/A
N/A
4.63
44%
2.74%
1.40%
3.47
Compensation expense related to stock options for the years ended December 31, 2012, 2011 and 2010 was $4,000, $74,000 and $912,000,
respectively, and the recognized tax benefit related to this expense was $2,000, $29,000 and $359,000. There was no unrecognized
compensation cost related to stock options as of December 31, 2012.
The total intrinsic value of options exercised during the years ended December 31, 2012, 2011 and 2010 was $3,000, $0 and $5,000,
respectively, and the tax benefit received related to these exercises was $1,000, $0 and $2,000. Total cash received from options exercised
during the years ended December 31, 2012, 2011 and 2010 was $81,000, $0 and $58,000. Upon exercise of stock options, the shares are
issued from the Company's authorized stock balance.
93
Note 17. Stock-based Compensation Plans (continued)
Changes in shares granted for stock options for the year ended December 31, 2012 are summarized as follows:
Outstanding at December 31, 2011
Exercised
Forfeited or expired
Outstanding at December 31, 2012
Exercisable at December 31, 2012
Options
Weighted
Average
Exercise Price
$
1,446,860
(5,250)
(650,170)
791,440
791,440
19.52
15.37
22.68
16.95
16.95
The average remaining life on stock options outstanding and exercisable at December 31, 2012 is 0.5 years. The aggregate intrinsic value
of the outstanding and exercisable shares at December 31, 2012 was not significant.
Restricted Stock Awards
Beginning in 2012, the Company awarded restricted stock to certain executive officers and directors under the 2005 Stock Incentive Plan.
Common stock issued under restricted stock awards may be issued under the terms of a vesting schedule or with an immediate vest and
may not be sold or otherwise transferred until restrictions have lapsed. The recipient does not have voting rights until the restricted stock
award has vested. Dividends paid on the restricted shares during the restriction period are paid immediately in cash. The fair value of
the restricted stock awarded is the closing price of the Company's common stock on the award date.
During 2012, the Company awarded 16,899 shares of restricted stock to certain executive officers and directors. The restricted shares
were service based and vested immediately.
Compensation expense and the associated tax benefit related to restricted stock awards for the year ended December 31, 2012 was
$243,000 and $96,000, respectively. There was no unrecognized compensation cost related to restricted stock awards as of December 31,
2012.
The fair value of restricted stock awards that vested during the year ended December 31, 2012 was $243,000 and the tax benefit recognized
related to these awards was $96,000. Upon vesting of restricted stock awards, the shares are issued from the Company's authorized stock
balance.
The following table summarizes the restricted stock award activity for the year ended December 31, 2012:
Non-vested at December 31, 2011
Granted
Vested
Non-vested at December 31, 2012
Restricted
Stock
Weighted
Average
Grant Date
Fair Value
— $
16,899
(16,899)
—
—
14.36
14.36
—
94
Note 18. Parent Holding Company Information (Condensed)
The following condensed financial information was the unconsolidated information for the parent holding company:
Statements of Financial Condition
(Dollars in thousands)
Assets
Cash on hand and in banks
Interest bearing cash deposits
Cash and cash equivalents
Investment securities, available-for-sale
Other assets
Investment in subsidiaries
Total assets
Liabilities and Stockholders’ Equity
Dividends payable
Subordinated debentures
Other liabilities
Total liabilities
Common stock
Paid-in capital
Retained earnings
Accumulated other comprehensive income
Total stockholders’ equity
Total liabilities and stockholders’ equity
Statements of Operations
(Dollars in thousands)
Income
Dividends from subsidiaries
Other income
Intercompany charges for services
Total income
Expenses
Compensation, employee benefits and related expense
Other operating expenses
Total expenses
Income before income tax benefit and equity in undistributed net
income of subsidiaries
Income tax benefit
Income before equity in undistributed net income of subsidiaries
Equity in undistributed net income (loss) of subsidiaries
Net Income
95
December 31,
2012
December 31,
2011
$
$
$
2,540
9,887
12,427
29,457
23,221
972,218
1,037,323
—
125,418
10,956
136,374
719
641,737
210,531
47,962
900,949
$
1,037,323
383
30,955
31,338
10,737
19,041
929,518
990,634
9,349
125,275
5,783
140,407
719
642,882
173,139
33,487
850,227
990,634
December 31,
2012
Years ended
December 31,
2011
December 31,
2010
$
$
78,209
566
16,041
94,816
12,392
10,267
22,659
72,157
2,319
74,476
1,040
75,516
43,450
864
14,438
58,752
9,185
11,827
21,012
37,740
2,176
39,916
(22,825)
17,091
31,350
3,730
13,977
49,057
8,287
12,990
21,277
27,780
1,374
29,154
13,558
42,712
Note 18. Parent Holding Company Information (Condensed) (continued)
Statements of Comprehensive Income
(Dollars in thousands)
Net Income
Other Comprehensive Income, Net of Tax
Unrealized gains on available-for-sale securities
Reclassification adjustment for gains included in net income
Net unrealized gains on securities
Tax effect
Net of tax amount
Unrealized losses on derivatives used for cash flow hedges
Tax effect
Net of tax amount
Total other comprehensive income, net of tax
Total Comprehensive Income
$
Statements of Cash Flows
December 31,
2012
Years ended
December 31,
2011
December 31,
2010
$
75,516
17,091
42,712
31,617
—
31,617
(12,300)
19,317
(7,926)
3,084
(4,842)
14,475
89,991
63,190
(346)
62,844
(24,444)
38,400
(8,906)
3,465
(5,441)
32,959
50,050
6,263
(4,822)
1,441
(565)
876
—
—
—
876
43,588
(Dollars in thousands)
Operating Activities
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Subsidiary income (in excess of) less than dividends distributed
Gain on sale of investments
Excess tax deficiencies from stock options exercised
Net (decrease) increase in other assets and other liabilities
Net cash provided by operating activities
Investing Activities
Proceeds from sales, maturities and prepayments of
securities available-for-sale
Purchases of investment securities available-for-sale
Equity contribution to subsidiaries
Net addition of premises and equipment
Net cash used in investing activities
Financing Activities
Net increase (decrease) in other borrowed funds
Cash dividends paid
Excess tax deficiencies from stock options exercised
Proceeds from exercise of stock options and other stock issued
Net cash (used in) provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
$
96
December 31,
2012
Years ended
December 31,
2011
December 31,
2010
$
75,516
17,091
42,712
(1,040)
—
8
3,684
78,168
787
(19,183)
(28,500)
(2,927)
(49,823)
143
(47,472)
(8)
81
(47,256)
(18,911)
31,338
12,427
22,825
—
—
1,215
41,131
1,376
—
(1,110)
(1,920)
(1,654)
143
(37,395)
—
—
(37,252)
2,225
29,113
31,338
(13,558)
(3,013)
4
(708)
25,437
3,671
(13,126)
(105,841)
(2,754)
(118,050)
(4,857)
(37,396)
(4)
145,654
103,397
10,784
18,329
29,113
Note 19. Unaudited Quarterly Financial Data
Summarized unaudited quarterly financial data is as follows:
(Dollars in thousands, except per share data)
March 31
June 30
September 30
December 31
Quarters ended 2012
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income
Non-interest expense
Income before income taxes
Federal and state income tax expense
Net income
Basic earnings per share
Diluted earnings per share
(Dollars in thousands, except per share data)
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income
Non-interest expense
Income (loss) before income taxes
Federal and state income tax expense (benefit)
Net income (loss)
Basic earnings (loss) per share
Diluted earnings (loss) per share
Note 20. Fair Value of Assets and Liabilities
$
$
67,884
9,598
58,286
8,625
49,661
20,338
49,045
20,954
4,621
16,333
0.23
0.23
64,192
9,044
55,148
7,925
47,223
21,791
46,190
22,824
3,843
18,981
0.26
0.26
62,015
8,907
53,108
2,700
50,408
23,974
50,178
24,204
4,760
19,444
0.27
0.27
59,666
8,165
51,501
2,275
49,226
25,393
48,008
26,611
5,853
20,758
0.29
0.29
Quarters ended 2011
March 31
June 30
September 30
December 31
68,373
11,669
56,704
19,500
37,204
17,395
42,476
12,123
1,838
10,285
0.14
0.14
71,562
11,331
60,231
19,150
41,081
17,851
46,220
12,712
826
11,886
0.17
0.17
71,433
11,297
60,136
17,175
42,961
20,936
88,298
(24,401)
(5,353)
(19,048)
(0.27)
(0.27)
68,741
10,197
58,544
8,675
49,869
22,017
55,130
16,756
2,408
14,348
0.20
0.20
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
97
20. Fair Value of Assets and Liabilities (continued)
Recurring Measurements
The following is a description of the inputs and valuation methodologies used for assets and liabilities measured at fair value on a recurring
basis, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy. There have been no significant
changes in the valuation techniques during the year ended December 31, 2012.
Investment securities: fair value for available-for-sale securities is estimated by obtaining quoted market prices for identical assets, where
available. If such prices are not available, fair value is based on independent asset pricing services and models, the inputs of which are
market-based or independently sourced market parameters, including but not limited to, yield curves, interest rates, volatilities,
prepayments, defaults, cumulative loss projections, and cash flows. Such securities are classified in Level 2 of the valuation hierarchy.
Where Level 1 or Level 2 inputs are not available, such securities are classified as Level 3 within the hierarchy.
Fair value determinations of investment securities are the responsibility of the Company’s corporate accounting department. The Company
contracts with independent third party pricing vendors to generate fair value estimates on a monthly basis. The Company reviews the
vendors’ inputs for fair value estimates and the recommended assignments of levels within the fair value hierarchy. The review includes
the extent to which markets for investment securities are determined to have limited or no activity, or are judged to be active markets.
The Company reviews the extent to which observable and unobservable inputs are 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 places less reliance on quotes that are judged to not reflect orderly
transactions, or are non-binding indications. The Company makes independent inquiries 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
reviews 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 are models for which management verifies that
discount rates are appropriately adjusted to reflect illiquidity and credit risk. The Company also independently obtains cash flow estimates
that are stressed at levels that exceed those used by the independent third party pricing vendors.
Interest rate swap derivative agreements: fair values for interest rate swap derivative agreements are based upon the estimated amounts
to settle the contracts considering current interest rates and are calculated using discounted cash flows that are observable or that can be
corroborated by observable market data and, therefore, are classified within Level 2 of the valuation hierarchy. The inputs used to
determine fair value include the 3 month LIBOR forward curve to estimate variable rate cash inflows and the spot LIBOR 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. The Company also obtains and compares the reasonableness
of the pricing from an independent party.
98
Note 20. Fair Value of Assets and Liabilities (continued)
The following schedules disclose the fair value measurement of assets and liabilities measured at fair value on a recurring basis:
(Dollars in thousands)
Investment securities, available-for-sale
U.S. government and federal agency
U.S. government sponsored enterprises
State and local governments
Corporate bonds
Collateralized debt obligations
Residential mortgage-backed securities
Total assets measured at fair value
on a recurring basis
Interest rate swaps
Total liabilities measured at fair value
on a recurring basis
(Dollars in thousands)
Investment securities, available-for-sale
U.S. government and federal agency
U.S. government sponsored enterprises
State and local governments
Corporate bonds
Collateralized debt obligations
Residential mortgage-backed securities
Total assets measured at fair value
on a recurring basis
Interest rate swaps
Total liabilities measured at fair value
on a recurring basis
Fair Value Measurements
At the End of the Reporting Period Using
Quoted Prices
in Active
Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
—
—
—
—
—
—
—
—
—
202
17,480
1,214,518
288,795
1,708
2,160,302
3,683,005
16,832
16,832
—
—
—
—
—
—
—
—
—
Fair Value Measurements
At the End of the Reporting Period Using
Quoted Prices
in Active
Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
—
—
—
—
—
—
—
—
—
208
31,155
1,064,655
62,237
5,366
1,963,122
3,126,743
8,906
8,906
—
—
—
—
—
—
—
—
—
Fair Value
December 31,
2012
$
$
$
$
202
17,480
1,214,518
288,795
1,708
2,160,302
3,683,005
16,832
16,832
Fair Value
December 31,
2011
$
$
$
$
208
31,155
1,064,655
62,237
5,366
1,963,122
3,126,743
8,906
8,906
99
Note 20. Fair Value of Assets and Liabilities (continued)
Recurring Measurements Using Significant Unobservable Inputs (Level 3)
There were no Level 3 fair value measurements of assets and liabilities measured at fair value on a recurring basis during the year ended
December 31, 2012.
The following schedule reconciles the opening and closing balances for assets measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) during the year ended December 31, 2011:
(Dollars in thousands)
Balance at December 31, 2010
Total unrealized gains (losses) for the period included in
other comprehensive income
Amortization, accretion and principal payments
Transfers out of Level 3
Balance at December 31, 2011
Fair Value Measurements Using
Significant Unobservable Inputs (Level 3)
Investment Securities
Collateralized
Debt
Obligations
Total
Residential
Mortgage-
backed
Securities
$
$
6,751
4,167
(5,530)
(5,388)
—
6,595
4,301
(5,530)
(5,366)
—
156
(134)
—
(22)
—
Transfers between Fair Value Hierarchy Levels
Transfers in and out of Level 1 (quoted prices in active markets), Level 2 (significant other observable inputs) and Level 3 (significant
unobservable inputs) are recognized on the actual transfer date. There were no transfers between fair value hierarchy levels during the
year ended December 31, 2012.
Non-recurring Measurements
The following is a description of the inputs and valuation methodologies used for assets recorded at fair value on a non-recurring basis,
as well as the general classification of such assets pursuant to the valuation hierarchy. There have been no significant changes in the
valuation techniques during the year ended December 31, 2012.
Other real estate owned: OREO is carried at the lower of fair value at acquisition date or estimated fair value, less estimated cost to sell.
Estimated fair value of OREO is based on appraisals or evaluations (new or updated). OREO is classified within Level 3 of the fair value
hierarchy.
Collateral-dependent impaired loans, net of ALLL: loans included in the Company’s loan portfolio for which it is probable that the
Company will not collect all principal and interest due according to contractual terms are considered impaired. Estimated fair value of
collateral-dependent impaired loans is based on the 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’s credit departments review appraisals for OREO and collateral-dependent loans, giving consideration to the highest and
best use of the collateral. The appraisal or evaluation (new or updated) is considered the starting point for determining fair value. The
valuation techniques used in preparing appraisals or evaluations (new or updated) include the cost approach, income approach, sales
comparison approach, or a combination of the preceding valuation techniques. The key inputs used to determine the fair value of the
collateral-dependent loans and OREO include selling costs, discounted cash flow rate or capitalization rate, and adjustment to comparables.
Valuations and significant inputs obtained by independent sources are reviewed by the Company for accuracy and reasonableness. The
Company also considers other factors and events in the environment that may affect the fair value. The 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 the impaired loan or OREO may occur. The Company generally obtains appraisals
or evaluations (new or updated) annually.
100
Note 20. Fair Value of Assets and Liabilities (continued)
Goodwill: Prior to April 30, 2012, goodwill was evaluated for impairment at each of the eleven bank subsidiaries at least annually. On
April 30, 2012, the Company combined its eleven bank subsidiaries into a single commercial bank operating segment resulting in eleven
bank division reporting units which are now aggregated for assessment of goodwill impairment. The key inputs used to determine the
implied fair value during the first step of the 2012 goodwill impairment analysis included deal prices of comparable transactions and
applied premiums and discounts that took into account the aggregated reporting units' earnings and credit metrics. The key inputs used
to determine the implied fair value during the 2011 two-step goodwill impairment analysis and the corresponding amount of the impairment
charge included quoted market prices of other banks, discounted cash flows and inputs from comparable transactions. These inputs are
classified within Level 3 of the fair value hierarchy. The goodwill impairment evaluation is the responsibility of the Company’s corporate
accounting department. Valuations and significant inputs obtained by independent sources are reviewed by the Company for accuracy
and reasonableness. For additional information regarding goodwill and reporting unit(s), see Note 6.
The following schedules disclose the fair value measurement of assets with a recorded change during the period resulting from re-
measuring the assets at fair value on a non-recurring basis:
(Dollars in thousands)
Other real estate owned
Collateral-dependent impaired loans, net of ALLL
Total assets measured at fair value
on a non-recurring basis
(Dollars in thousands)
Other real estate owned
Collateral-dependent impaired loans, net of ALLL
Goodwill
Total assets measured at fair value
on a non-recurring basis
Fair Value Measurements
At the End of the Reporting Period Using
Quoted Prices
in Active
Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
—
—
—
—
—
—
13,983
22,966
36,949
Fair Value Measurements
At the End of the Reporting Period Using
Quoted Prices
in Active
Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
—
—
—
—
—
—
—
—
38,076
55,339
24,718
118,133
Fair Value
December 31,
2012
$
$
13,983
22,966
36,949
Fair Value
December 31,
2011
$
$
38,076
55,339
24,718
118,133
101
Note 20. Fair Value of Assets and Liabilities (continued)
Non-recurring Measurements Using Significant Unobservable Inputs (Level 3)
The following table presents additional quantitative information about assets measured at fair value on a non-recurring basis and for
which the Company has utilized Level 3 inputs to determine fair value:
Quantitative Information about Level 3 Fair Value Measurements
(Dollars in thousands)
Fair Value
December 31,
2012
Valuation Technique
Unobservable Input
Other real estate owned
$
93 Cost approach
Selling costs
11,787 Sales comparison approach Selling costs
Range (Weighted
Average) 1
7.0% - 7.0% (7.0%)
7.0% - 14.0% (7.9%)
2,103 Combined approach
$
13,983
Adjustment to comparables
0.0% - 37.0% (11.7%)
Selling costs
Discount rate
5.0% - 8.0% (6.6%)
25.0% - 25.0% (25.0%)
Adjustment to comparables
0.0% - 30.0% (7.7%)
Collateral-dependent
impaired loans, net of ALLL $
84 Cost approach
5,509
Income approach
Selling costs
Selling costs
Discount rate
12,878 Sales comparison approach Selling costs
8.0% - 8.0% (8.0%)
8.0% - 10.0% (8.2%)
0.0% - 8.3% (6.3%)
0.0% - 16.0% (8.6%)
4,495 Combined approach
Adjustment to comparables
0.0% - 12.0% (1.6%)
Selling costs
Discount rate
8.0% - 10.0% (8.4%)
8.0% - 8.0% (8.0%)
Adjustment to comparables
0.0% - 36.0% (17.6%)
$
22,966
__________
1 The range for selling costs and adjustments to comparables indicate reductions to the fair value.
Fair Value of Financial Instruments
The following is a description of the methods used to estimate the fair value of all other assets and liabilities recognized at amounts other
than fair value.
Cash and cash equivalents: fair value is estimated at book value.
Loans held for sale: fair value is estimated at book value.
Loans receivable, net of ALLL: fair value is estimated by discounting the future cash flows using the rates at which similar notes would
be written for the same remaining maturities. The market rates used are based on current rates the Company would impose for similar
loans and reflect a market participant assumption about risks associated with non-performance, illiquidity, and the structure and term of
the loans along with local economic and market conditions. Estimated fair value of impaired loans is based on the fair value of the
collateral, less estimated cost to sell, or the present value of the loan’s expected future cash flows (discounted at the loan’s effective
interest rate). All impaired loans are classified as Level 3 and all other loans are classified as Level 2 within the hierarchy.
Accrued interest receivable: fair value is estimated at book value.
Non-marketable equity securities: fair value is estimated at book value due to restrictions that limit the sale or transfer of such securities.
102
Note 20. Fair Value of Assets and Liabilities (continued)
Deposits: fair value of term deposits is estimated by discounting the future cash flows using rates of similar deposits with similar maturities.
The market rates used were obtained from a knowledgeable independent third party and reviewed by the Company. The rates were the
average of current rates offered by the Company’s local competitors. The estimated fair value of demand, NOW, savings, and money
market deposits is the book value since rates are regularly adjusted to market rates and transactions are executed at book value daily.
Therefore, such deposits are classified in Level 1 of the valuation hierarchy. Certificate accounts and wholesale deposits are classified
as Level 2 within the hierarchy.
FHLB advances: fair value of non-callable FHLB advances is estimated by discounting the future cash flows using rates of similar
advances with similar maturities. Such rates were obtained from current rates offered by FHLB. The estimated fair value of callable
FHLB advances was obtained from FHLB and the model was reviewed by the Company through discussions with FHLB.
Repurchase agreements and other borrowed funds: fair value of term repurchase agreements and other term borrowings is estimated
based on current repurchase rates and borrowing rates currently available to the Company for repurchases and borrowings with similar
terms and maturities. The estimated fair value for overnight repurchase agreements and other borrowings is book value.
Subordinated debentures: fair value of the subordinated debt is estimated by discounting the estimated future cash flows using current
estimated market rates. The market rates used were averages of currently traded trust preferred securities with similar characteristics to
the Company’s issuances and obtained from an independent third party.
Accrued interest payable: fair value is estimated at book value.
Off-balance sheet financial instruments: commitments to extend credit and letters of credit represent the principal categories of off-balance
sheet financial instruments. Rates for these commitments are set at time of loan closing, such that no adjustment is necessary to reflect
these commitments at market value. The Company has an insignificant amount of off-balance sheet financial instruments.
The following schedules present the carrying amounts, estimated fair values and the level within the fair value hierarchy of the Company’s
financial instruments:
(Dollars in thousands)
Financial assets
Cash and cash equivalents
Investment securities, available-for-sale
Loans held for sale
Loans receivable, net of ALLL
Accrued interest receivable
Non-marketable equity securities
Total financial assets
Financial liabilities
Deposits
FHLB advances
Repurchase agreements and other borrowed funds
Subordinated debentures
Accrued interest payable
Interest rate swaps
Total financial liabilities
Fair Value Measurements
At the End of the Reporting Period Using
Carrying
Amount
December 31,
2012
Quoted Prices
in Active
Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
187,040
—
145,501
—
37,770
—
370,311
3,585,126
—
—
—
4,675
—
3,589,801
—
3,683,005
—
3,184,987
—
48,812
6,916,804
1,789,134
1,027,101
299,540
70,895
—
16,832
3,203,502
—
—
—
186,201
—
—
186,201
—
—
—
—
—
—
—
$
$
$
$
187,040
3,683,005
145,501
3,266,571
37,770
48,812
7,368,699
5,364,461
997,013
299,540
125,418
4,675
16,832
6,807,939
103
Note 20. Fair Value of Assets and Liabilities (continued)
(Dollars in thousands)
Financial assets
Cash and cash equivalents
Investment securities, available-for-sale
Loans held for sale
Loans receivable, net of ALLL
Accrued interest receivable
Non-marketable equity securities
Total financial assets
Financial liabilities
Deposits
FHLB advances
Repurchase agreements and other borrowed funds
Subordinated debentures
Accrued interest payable
Interest rate swaps
Total financial liabilities
Note 21. Contingencies and Commitments
Fair Value Measurements
At the End of the Reporting Period Using
Carrying
Amount
December 31,
2011
Quoted Prices
in Active
Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
$
$
$
128,032
3,126,743
95,457
3,328,619
34,961
49,694
6,763,506
4,821,213
1,069,046
268,638
125,275
5,825
8,906
6,298,903
128,032
—
95,457
—
34,961
—
258,450
3,132,261
—
—
—
5,825
—
3,138,086
—
3,126,743
—
3,146,502
—
49,694
6,322,939
1,698,382
1,099,699
268,642
65,903
—
8,906
3,141,532
—
—
—
239,831
—
—
239,831
—
—
—
—
—
—
—
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to extend credit and letters of credit, and involve, to varying
degrees, elements of credit risk. The Company’s exposure to credit loss in the event of nonperformance by the other party to the
financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Company
uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
The Company had the following outstanding commitments:
(Dollars in thousands)
Commitments to extend credit
Letters of credit
Total outstanding commitments
December 31,
2012
December 31,
2011
$
$
802,595
12,600
815,195
728,199
20,463
748,662
The Company is a defendant in legal proceedings arising in the normal course of business. In the opinion of management, the
disposition of pending litigation will not have a material affect on the Company’s consolidated financial position, results of operations
or liquidity.
Note 22. Subsequent Event
On February 25, 2013, the Company announced the signing of a definitive agreement to acquire First State Bank, a community bank
based in Wheatland, Wyoming. First State Bank provides community banking services to individuals and businesses from three banking
offices in Wheatland, Torrington and Guernsey, Wyoming. As of December 31, 2012, First State Bank had total assets of $281,000,000,
gross loans of $179,000,000 and total deposits of $249,000,000. Upon closing of the transaction, which is anticipated to take place in
the second quarter of 2013, First State Bank will be merged into the Bank and operate as a separate bank division doing business under
its existing name.
104
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There have been no changes or disagreements with accountants on accounting and financial disclosure.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief
Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the disclosure controls and procedures. Based
on that evaluation, the CEO and CFO have concluded that as of the end of the period covered by this report, the disclosure controls and
procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in reports that are
filed or submitted under the Securities Exchange Act of 1934 are recorded, processed, summarized and timely reported as provided in
the SEC’s rules and forms. As a result of this evaluation, there were no significant changes in the internal control over financial reporting
during the three months ended December 31, 2012 that have materially affected, or are reasonable likely to materially affect, the internal
control over financial reporting. Although the Company combined its eleven bank subsidiaries into a single commercial bank operating
segment during the second quarter 2012, the Company has determined that there were no related changes in internal controls that have
materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining effective internal control over financial reporting as it relates to its financial
statements presented in conformity with accounting principles generally accepted in the United States of America. The Company’s
internal control system was designed to provide reasonable assurance to the Company’s management and Board of Directors regarding
the preparation and fair presentation of published financial statements in accordance with accounting principles generally accepted in
the United States of America. Internal control over financial reporting includes self monitoring mechanisms and actions are taken to
correct deficiencies as they are identified.
There are inherent limitations in any internal control, no matter how well designed, misstatements due to error or fraud may occur and
not be detected, including the possibility of circumvention or overriding of controls. Accordingly, even an effective internal control
system can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions,
the effectiveness of an internal control system may vary over time.
Management assessed its internal control structure over financial reporting as of December 31, 2012. This assessment was based on
criteria for effective internal control over financial reporting described in “Internal Control – Integrated Framework” issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management asserts that the Company
maintained effective internal control over financial reporting as it relates to its financial statements presented in conformity with accounting
principles generally accepted in the United States of America.
BKD LLP, the independent registered public accounting firm that audited the financial statements for the year ended December 31, 2012,
has issued an attestation report on the Company’s internal control over financial reporting. Such attestation report expresses an unqualified
opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2012.
Item 9B. Other Information
None
105
Item 10. Directors, Executive Officers and Corporate Governance
PART III
Information regarding “Directors and Executive Officers” is set forth under the headings “Election of Directors” and “Management –
Executive Officers who are not Directors” of the Company’s 2013 Annual Meeting Proxy Statement (“Proxy Statement”) and is
incorporated herein by reference.
Information regarding “Compliance with Section 16(a) of the Exchange Act” is set forth under the section “Compliance with Section 16
(a) Filing Requirements” of the Company’s Proxy Statement and is incorporated herein by reference.
Information regarding the Company’s audit committee financial expert is set forth under the heading “Meetings and Committees of the
Board of Directors – Committee Membership” in the Company’s Proxy Statement and is incorporated by reference.
Consistent with the requirements of the Sarbanes-Oxley Act, the Company has a Code of Ethics applicable to senior financial officers
including the principal executive officer. The Code of Ethics can be accessed electronically by visiting the Company’s website at
www.glacierbancorp.com. The Code of Ethics is also listed as Exhibit 14 to this report, and is incorporated by reference to the Company’s
2003 annual report Form 10-K.
Item 11. Executive Compensation
Information regarding “Executive Compensation” is set forth under the headings “Compensation of Directors” and “Executive
Compensation” of the Company’s Proxy Statement and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Information regarding “Security Ownership of Certain Beneficial Owners and Management” is set forth under the headings “Security
Ownership of Certain Beneficial Owners and Management” of the Company’s Proxy Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information regarding “Certain Relationships and Related Transactions, and Director Independence” is set forth under the heading
“Transactions with Management” and “Corporate Governance – Director Independence” of the Company’s Proxy Statement and is
incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
Information regarding “Principal Accounting Fees and Services” is set forth under the heading “Auditors – Fees Paid to Independent
Registered Public Accounting Firm” of the Company’s Proxy Statement and is incorporated herein by reference.
106
PART IV
Item 15. Exhibits, Financial Statement Schedules
List of Financial Statements and Financial Statement Schedules
(a) The following documents are filed as a part of this report:
(1) Financial Statements and
(2) Financial Statement schedules required to be filed by Item 8 of this report.
(3) The following exhibits are required by Item 601 of Regulation S-K and are included as part of this Form 10-K:
Exhibit No.
Exhibit
3(a)
3(b)
10(a) *
10(b) *
10(c) *
10(d) *
10(e) *
10(f) *
10(g) *
10(h) *
14
21
23 ~
31.1 ~
31.2 ~
32 ~
101 ~
Amended and Restated Articles of Incorporation 1
Amended and Restated Bylaws 1
Amended and Restated 1994 Director Stock Option Plan and related agreements 2
Amended and Restated Deferred Compensation Plan effective January 1, 2008 3
Amended and Restated Supplemental Executive Retirement Agreement effective January 1, 2008 3
2005 Stock Incentive Plan and related agreements 4
Employment Agreement dated January 1, 2013 between the Company and Michael J. Blodnick 5
Employment Agreement dated January 1, 2013 between the Company and Ron J. Copher 5
Employment Agreement dated January 1, 2013 between the Company and Don Chery 5
Nonemployee Service Provider Deferred Compensation Plan 6
Code of Ethics 7
Subsidiaries of the Company (See item 1, “Subsidiaries”)
Consent of BKD LLP
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes – Oxley Act of 2002
The following financial information from Glacier Bancorp, Inc’s Annual Report on Form 10-K for the year
ended December 31, 2012 is formatted in XBRL: 1) the Consolidated Statements of Financial Condition,
2) the Consolidated Statements of Operations, 3) the Consolidated Statements of Stockholders’ Equity and
Comprehensive Income, 4) the Consolidated Statements of Cash Flows, and 5) the Notes to Consolidated
Financial Statements.
__________
1 Incorporated by reference to Exhibits 3.i. and 3.ii included in the Company’s Quarterly Report on form 10-Q for the quarter ended June 30, 2008.
2 Incorporated by reference to Exhibits 99.1 - 99.4 of the Company’s S-8 Registration Statement (No. 333-105995).
3 Incorporated by reference to Exhibits 10(c) and 10(d) included in the Company’s Form 10-K for the year ended December 31, 2008.
4 Incorporated by reference to Exhibits 99.1 through 99.3 of the Company’s S-8 Registration Statement (No. 333-125024).
5 Incorporated by reference to Exhibits 10.1 through 10.3 included in the Company’s Form 8-K filed by the Company on December 20, 2012.
6 Incorporated by reference to Exhibit 10.1 included in the Company's Form 8-K filed by the Company on October 31, 2012.
7 Incorporated by reference to Exhibit 14, included in the Company’s Form 10-K for the year ended December 31, 2003.
* Compensatory Plan or Arrangement
~ Exhibit omitted from the 2012 Annual Report to Shareholders
All other financial statement schedules required by Regulation S-X are omitted because they are not applicable, not material or because
the information is included in the consolidated financial statements or related notes.
107
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized on February 28, 2013.
SIGNATURES
GLACIER BANCORP, INC.
By: /s/ Michael J. Blodnick
Michael J. Blodnick
President and CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on February 28, 2013, by the
following persons on behalf of the registrant in the capacities indicated.
/s/ Michael J. Blodnick
Michael J. Blodnick
/s/ Ron J. Copher
Ron J. Copher
Board of Directors
/s/ Everit A. Sliter
Everit A. Sliter
/s/ Sherry L. Cladouhos
Sherry L. Cladouhos
/s/ James M. English
James M. English
/s/ Allen J. Fetscher
Allen J. Fetscher
/s/ Annie M. Goodwin
Annie M. Goodwin
/s/ Dallas I. Herron
Dallas I. Herron
/s/ Craig A. Langel
Craig A. Langel
/s/ L. Peter Larson
L. Peter Larson
/s/ Douglas J. McBride
Douglas J. McBride
/s/ John W. Murdoch
John W. Murdoch
President, CEO, and Director
(Principal Executive Officer)
Executive Vice President and CFO
(Principal Financial Accounting Officer)
Chairman
Director
Director
Director
Director
Director
Director
Director
Director
Director
108
GLACIER BANCORP, INC. DIRECTORS AND OFFICERS
Glacier Bancorp, Inc. and Glacier Bank
Board of Directors
Everit A. Sliter, CPA, Chairman
Jordahl & Sliter, PLLC
Michael J. Blodnick
President/CEO of Glacier Bancorp, Inc.
Sherry L. Cladouhos
Retired CEO of Blue Cross Blue Shield of Montana
James M. English
Attorney/English Law Firm
Allen J. Fetscher
President of Fetscher's, Inc./Vice President of
American Public Land Exchange Co, Inc./
Owner of Associated Agency
Annie M. Goodwin, RN
Attorney/Goodwin Law Office LLC/Former Montana
Commissioner of Banking and Financial Institutions
Corporate Officers
Michael J. Blodnick
President/Chief Executive Officer
Dallas I. Herron
CEO of CityServiceValcon, LLC
Craig A. Langel, CPA, CVA
President of Langel & Associates, P.C./Owner and
CEO of CLC Restaurants, Inc.
L. Peter Larson
Retired Chairman/CEO of American Timber Company
Douglas J. McBride, OD, FAAO
Doctor of Optometry
John W. Murdoch
Retired Chairman of Murdoch’s Ranch &
Home Supply, LLC
Mark D. MacMillan
Senior Vice President/Information Technology
Ron J. Copher, CPA
Executive Vice President/Chief Financial Officer/Treasurer
Donald B. McCarthy
Senior Vice President/Controller
Don J. Chery
Executive Vice President/Chief Administrative Officer
Robin S. Roush
Senior Vice President/Human Resources
Angela L. Dose, CPA
Senior Vice President/Principal Accounting Officer
Ryan T. Screnar, CPA, CGMA
Senior Vice President/Internal Audit and Compliance
Marcia L. Johnson
Senior Vice President/Operations
T.J. Frickle
Vice President/Enterprise-Wide Risk Management
Barry L. Johnston
Senior Vice President/Credit Administration
LeeAnn Wardinsky
Vice President/Secretary
Cover photo by David M. Cobb
www.dmcobbphoto.com
"Above it All"
Hidden Lake, Glacier National Park, Montana