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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
(Mark One)
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Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For
the fiscal year ended December 31, 2009, or
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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: 000-49733
FIRST INTERSTATE BANCSYSTEM, INC.
(Exact name of registrant as specified in its charter)
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Montana
(State or other jurisdiction of incorporation or organization)
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81-0331430
(IRS Employer Identification No.) |
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401 North 31st Street
Billings, Montana
(Address of principal executive offices)
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59116
(Zip Code) |
(406) 255-5390
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common stock without par value per
share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
o Yes þ 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.
o Yes þ 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. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§223.405 of this chapter) during the preceding 12 months (or for
such shorter period that registrant was required to submit and post such files).
o Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of the registrants 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. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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o Large accelerated filer
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o Accelerated filer
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þ Non-accelerated filer
(Do not check if a smaller reporting company)
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o Smaller reporting company |
Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Act.)
o Yes þ No
The registrants common stock is not publicly traded, and there is no established trading market
for its stock. Therefore, the aggregate market value of voting and non-voting common equity held
by non-affiliates, computed by reference to the price at which the common equity was last sold, or
the average bid and asked price of such common equity, as of the last business day of the
registrants most recently completed second fiscal quarter, was $0.
The number of shares outstanding of the registrants common stock as of January 31, 2010 was
7,837,397.
Documents Incorporated by Reference
The registrant intends to file a definitive Proxy Statement for the Annual Meeting of
Shareholders scheduled to be held May 7, 2010. The information required by Part III of this
Form 10-K is incorporated by reference from such Proxy Statement.
TABLE OF CONTENTS
PART I
Item 1. Business
The disclosures set forth in this report are qualified by Item 1A. Risk Factors included
herein and the section captioned Cautionary Note Regarding Forward-Looking Statements and Factors
that Could Affect Future Results included in Part II, Item 7. Managements Discussion and Analysis
of Financial Condition and Results of Operations. When we refer to we, our, us or the
Company in this annual report, we mean First Interstate BancSystem, Inc. and our consolidated
subsidiaries, including our wholly-owned subsidiary, First Interstate Bank, unless the context
indicates that we refer only to the parent company, First Interstate BancSystem, Inc. When we refer
to the Bank in this annual report, we mean First Interstate Bank.
Our Company
We
are a financial and bank holding company incorporated as a Montana
corporation in 1971. We are headquartered in
Billings, Montana. As of January 31, 2010, we had consolidated assets of $7.0 billion, deposits of
$5.7 billion, loans of $4.5 billion and total stockholders equity of $576 million. We currently
operate 72 banking offices in 42 communities located in Montana, Wyoming and western South Dakota.
Through our wholly-owned subsidiary, First Interstate Bank, or the Bank, we deliver a comprehensive
range of banking products and services to individuals, businesses, municipalities and other
entities throughout our market areas. Our customers participate in a wide variety of industries,
including energy, healthcare and professional services, education and governmental services,
construction, mining, agriculture, retail and wholesale trade and tourism. Our principal markets
range in size from 23,000 to 150,000 people, have diversified economic characteristics and
favorable population growth prospects and usually serve as trade centers for larger rural areas.
We are the licensee under a perpetual trademark license agreement granting us an exclusive,
nontransferable license to use the First Interstate name and logo in Montana, Wyoming and the six
neighboring states of Idaho, Utah, Colorado, Nebraska, South Dakota and North Dakota.
We have grown our business by adhering to a set of guiding principles and a long-term
disciplined perspective that emphasizes our commitment to providing high-quality financial products
and services, delivering quality customer service, effecting business leadership through
professional and dedicated managers and employees, assisting our communities through socially
responsible leadership and cultivating a strong and positive corporate culture. In the future, we
intend to remain a leader in our markets by continuing to adhere to the core principles and values
that have contributed to our growth and success and by continuing to follow our community banking
model. In addition, we plan to continue to expand our business in a disciplined and prudent
manner, including organic growth in our existing market areas and expansion into new and
complementary markets when appropriate opportunities arise.
Community Banking
Community banking encompasses commercial and consumer banking services provided through our
Bank, primarily the acceptance of deposits; extensions of credit; mortgage loan origination and
servicing; and trust, employee benefit, investment and insurance services. Our community banking
philosophy emphasizes providing customers with commercial and consumer banking products and
services locally using a personalized service approach while strengthening the communities in our
market areas through community service activities. We grant our banking offices significant
authority in delivering and pricing products in response to local market considerations and
customer needs. This authority enables our banking offices to remain competitive by responding
quickly to local market conditions and enhances their relationships with the customers they serve
by tailoring our products and price points to each individual customers needs. We also require
accountability by having company-wide standards and established limits on the authority and
discretion of each banking office. This combination of authority and accountability allows our
banking offices to provide personalized customer service and be in close contact with our
communities, while at the same time promoting strong performance at the branch level and remaining
focused on our overall financial performance.
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Lending Activities
We offer short and long-term real estate, consumer, commercial, agricultural and other loans
to individuals and businesses in our market areas. We have comprehensive credit policies
establishing company-wide underwriting and documentation standards to assist management in the
lending process and to limit our risk. These credit policies establish lending guidelines based on
the experience and authority levels of the personnel located in each banking office and market. The
policies also establish thresholds at which loan requests must be recommended by our credit
committee and/or approved by the Banks board of directors. While each loan must meet minimum
underwriting standards established in our credit policies, lending officers are granted certain
levels of authority in approving and pricing loans to assure that the banking offices are
responsive to competitive issues and community needs in each market area.
Deposit Products
We offer traditional depository products including checking, savings and time deposits.
Deposits at the Bank are insured by the Federal Deposit Insurance Corporation, or FDIC, up to
statutory limits. We also offer repurchase agreements primarily to commercial and municipal
depositors. Under repurchase agreements, we sell investment securities held by the Bank to our
customers under an agreement to repurchase the investment securities at a specified time or on
demand. All outstanding repurchase agreements are due in one business day.
Wealth Management
We provide a wide range of trust, employee benefit, investment management, insurance, agency
and custodial services to individuals, businesses and nonprofit organizations. These services
include the administration of estates and personal trusts; management of investment accounts for
individuals, employee benefit plans and charitable foundations; and insurance planning. As of
January 31, 2010, the estimated fair value of trust assets held in a fiduciary or agent capacity
was in excess of $2.4 billion.
Centralized Services
We have centralized certain operational activities to provide consistent service levels to our
customers company-wide, to gain efficiency in management of those activities and to ensure
regulatory compliance. Centralized operational activities generally support our banking offices in
the delivery of products and services to customers and include marketing; credit review; credit
cards; mortgage loan sales and servicing; indirect consumer loan purchasing and processing; loan
collections and, other operational activities. Additionally, policy and management direction and
specialized staff support services have been centralized to enable our branches to serve their
markets more effectively. These services include credit administration, finance, accounting, human
resource management, internal audit and other support services.
Competition
Commercial banking is highly competitive. We compete with other financial institutions located
in Montana, Wyoming, South Dakota and adjoining states for deposits, loans and trust, employee
benefit, investment and insurance accounts. We also compete with savings and loan associations,
savings banks and credit unions for deposits and loans. In addition, we compete with large banks in
major financial centers and other financial intermediaries, such as consumer finance companies,
brokerage firms, mortgage banking companies, insurance companies, securities firms, mutual funds
and certain government agencies as well as major retailers, all actively engaged in providing
various types of loans and other financial services. We generally compete on the basis of customer
service and responsiveness to customer needs, available loan and deposit products, rates of
interest charged on loans, rates of interest paid for deposits and the availability and pricing of
trust, employee benefit, investment and insurance services.
Employees
At January 31, 2010, we employed 1,727 full-time equivalent employees, none of whom are
represented by a collective bargaining agreement. We strive to be the employer of choice in the
markets we serve and consider our employee relations to be good.
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Regulation and Supervision
Regulatory Authorities
We are subject to extensive regulation under federal and state laws. A description of the
significant laws and regulations applicable to us is summarized below. In addition to laws and
regulations, state and federal banking regulatory agencies may issue policy statements,
interpretive letters and similar written guidance applicable to us. Those issuances may affect the
conduct of our business or impose additional regulatory obligations.
As a financial and bank holding company, we are subject to regulation under the Bank Holding
Company Act of 1956, as amended (the Bank Holding Company Act) and to supervision, regulation and
regular examination by the Federal Reserve. Because we have a class of stock registered under the
Securities Exchange Act of 1934, as amended, we are also subject to the disclosure and regulatory
requirements of the Securities Act and the Securities Exchange Act of 1934, as amended, as
administered by the Securities and Exchange Commission, or SEC.
The Bank is subject to supervision and regular examination by its primary banking regulators,
the Federal Reserve and the State of Montana, Department of Administration, Division of Banking and
Financial Institutions, with respect to its activities in Wyoming the State of Wyoming, Department
of Audit, and with respect to its activities in South Dakota, the State of South Dakota Department
of Revenue & Regulation, Division of Banking.
The Banks deposits are insured by the Deposit Insurance Fund, or DIF, of the FDIC in the
manner and to the extent provided by law. The Bank is subject to the Federal Deposit Insurance Act,
or FDIA, and FDIC regulations relating to deposit insurance and may also be subject to supervision
and examination by the FDIC.
The extensive regulation of the Bank limits both the activities in which the Bank may engage
and the conduct of its permitted activities. Further, the laws and regulations impose reporting and
information collection obligations on the Bank. The Bank incurs significant costs relating to
compliance with various laws and regulations and the collection and retention of information.
Financial and Bank Holding Company
The Bank is a bank holding company and has registered as a financial holding company under
regulations issued by the Federal Reserve. As a matter of policy, the Federal Reserve expects a
bank holding company to act as a source of financial and managerial strength to its subsidiary
banks and to commit resources to support its subsidiary banks. Under this source of strength
doctrine, the Federal Reserve may require a bank holding company to make capital injections into a
troubled subsidiary bank. The Federal Reserve may also determine that the bank holding company is
engaging in unsafe and unsound practices if it fails to commit resources to such a subsidiary bank.
A capital injection or other financial or managerial support may be required at times when the bank
holding company does not have the resources to provide it. Such capital injections in the form of
loans are also subordinate to deposits and to certain other indebtedness of its subsidiary banks.
We are required by the Bank Holding Company Act to obtain Federal Reserve approval prior to
acquiring, directly or indirectly, ownership or control of voting shares of any bank, if, after
such acquisition, we would own or control more than 5% of its voting stock. Pursuant to the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the Riegle-Neal Act), a bank
holding company may acquire banks in states other than its home state, subject to any state
requirement that the bank has been organized and operating for a minimum period of time, not to
exceed five years, and the requirement that the bank holding company not control, prior to or
following the proposed acquisition, more than 10% of the total amount of deposits of insured
depository institutions nationwide or, unless the acquisition is the bank holding companys initial
entry into the state, more than 30% of such deposits in the state, or such lesser or greater amount
set by state law of such deposits in that state. The Riegle-Neal Act also authorizes banks to merge
across state lines, thereby creating interstate branches. Banks are also permitted to acquire and
to establish new branches in other states where authorized under the laws of those states. With
regard to interstate bank mergers, a state can prohibit them entirely or prohibit them to the
extent that they would exceed such a specified percentage of insured bank deposits, provided such
prohibition does not discriminate against out-of-state banks. Under Montana law, banks, bank
holding companies and their respective subsidiaries cannot acquire control of a bank located in
Montana if, after the acquisition, the acquiring institution and its affiliates would directly or
indirectly control, in the aggregate, more than 22% of the total deposits of insured depository
institutions located in Montana.
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Under the Gramm-Leach-Bliley Act of 1999, or GLB Act, and as a financial holding company, we
may engage in certain business activities that are determined by the Federal Reserve to be
financial in nature or incidental to financial activities as well as all activities authorized to
bank holding companies generally. In most circumstances, we must notify the Federal Reserve of our
financial activities within a specified time period following our initial engagement in each
business or activity. If the type of proposed business or activity has not been previously
determined by the Federal Reserve to be financially related or incidental to financial activities,
we must receive the prior approval of the Federal Reserve before engaging in the activity.
We may engage in authorized financial activities, such as providing investment services,
provided that we remain a financial holding company and meet certain regulatory standards of being
well capitalized and well managed. If we fail to meet the well capitalized or well managed
regulatory standards, we may be required to cease our financial holding company activities or, in
certain circumstances, to divest of the Bank. We do not currently engage in significant financial
holding company businesses or activities not otherwise permitted for bank holding companies
generally. Should we engage in certain financial activities currently authorized to financial
holding companies, we may become subject to additional laws, regulations, supervision and
examination by regulatory agencies.
In addition, in order to assess the financial strength of the bank holding company, the
Federal Reserve and the State of Montana also conducts throughout the year periodic onsite and
offsite inspections and credit reviews of us.
Our ability to redeem shares of company stock is limited under Federal Reserve regulations. In
general, those regulations permit us to redeem stock without prior approval of the Federal Reserve
only if the company is well-capitalized both before and immediately after the redemption. In
February 2009, the Federal Reserve issued SR 09-4 which, among other things, requires all bank
holding companies to consult with the Federal Reserve prior to redeeming stock without regard to
the bank holding companys capital status or regulations otherwise permitting redemptions without
prior approval of the Federal Reserve. The Federal Reserve has not indicated whether SR 09-4 will
be rescinded.
Restrictions on Transfers of Funds to Us and the Bank
Dividends from the Bank are the primary source of funds for the payment of our expenses of
operating and for the payment of dividends to and the repurchase of shares from our shareholders.
Under both state and federal law, the amount of dividends that may be paid by the Bank from time to
time is limited. In general, the Bank is limited to paying dividends that do not exceed the current
year net profits together with retained earnings from the two preceding calendar years unless the
prior consents of the Montana and federal banking regulators are obtained.
A state or federal banking regulator may impose, by regulatory order or agreement of the Bank,
specific dividend limitations or prohibitions in certain circumstances. The Bank is not currently
subject to a specific regulatory dividend limitation other than generally applicable limitations.
In general, banks are also prohibited from making capital distributions, including dividends
and are prohibited from paying management fees to control persons if it would be undercapitalized
under the regulatory framework for corrective action after making such payments. See Capital
Standards and Prompt Corrective Action.
Certain restrictive covenants in future debt instruments may also limit the Banks ability to
make dividend payments to us. Also, under Montana corporate law, a dividend may not be paid if,
after giving effect to the dividend: (1) the company would not be able to pay its debts as they
become due in the usual course of business; or (2) the companys total assets would be less than
the sum of its total liabilities plus the amount that would be needed, if the company were to be
dissolved at the time of the dividend, to satisfy the preferential rights upon dissolution of
shareholders whose preferential rights are superior to those receiving the dividend.
In addition, under the Federal Reserve Act, the Bank may not lend funds to, or otherwise
extend credit to or for our benefit or the benefit of our affiliates, except on specified types and
amounts of collateral and other terms required by state and federal law. This may limit our ability
to obtain funds from the Bank for our cash needs, including funds for payment of dividends,
interest and operational expenses. The Federal Reserve also has authority to define and limit the
transactions between banks and their affiliates. The Federal Reserves Regulation W and relevant
federal statutes, among other things, impose significant additional limitations on transactions in
which the Bank may engage with us, with each other, or with other affiliates.
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Furthermore, because we are a legal entity separate and distinct from the Bank, our right to
participate in the distribution of assets of the Bank upon its liquidation or reorganization will
be subject to the prior claims of the Banks creditors. In the event of such a liquidation or other
resolution, the claims of depositors and other general or subordinated creditors of the Bank are
entitled to a priority of payment of the claims of holders of any obligation of the Bank to its
shareholders, including us, or our shareholders or creditors.
Capital Standards and Prompt Corrective Action
Banks and bank holding companies are subject to various regulatory capital requirements
administered by state and federal banking agencies. Capital adequacy guidelines and, additionally
for banks, prompt corrective action regulations, involve quantitative measures of assets,
liabilities and certain off-balance sheet items calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative judgments by regulators about
components, risk weighting and other factors.
The Federal Reserve Board and the FDIC have substantially similar risk-based capital ratio and
leverage ratio guidelines for banking organizations. The guidelines are intended to ensure that
banking organizations have adequate capital given the risk levels of assets and off-balance sheet
financial instruments. Under the guidelines, banking organizations are required to maintain minimum
ratios for tier 1 capital and total capital to risk-weighted assets (including certain off-balance
sheet items, such as letters of credit). For purposes of calculating the ratios, a banking
organizations assets and some of its specified off-balance sheet commitments and obligations are
assigned to various risk categories. Generally, under the applicable guidelines, a financial
institutions capital is divided into two tiers. These tiers are:
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Core Capital (tier 1). Tier 1 capital includes common equity, noncumulative
perpetual preferred stock (excluding auction rate issues) and minority interests in
equity accounts of consolidated subsidiaries, less both goodwill and, with certain
limited exceptions, all other intangible assets. Bank holding companies, however, may
include up to a limit of 25% of cumulative preferred stock in their tier 1 capital. |
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Supplementary Capital (tier 2). Tier 2 capital includes, among other things,
cumulative and limited-life preferred stock, hybrid capital instruments, mandatory
convertible securities, qualifying subordinated debt and the allowance for loan and
lease losses, subject to certain limitations. |
Institutions that must incorporate market risk exposure into their risk-based capital
requirements may also have a third tier of capital in the form of restricted short-term
subordinated debt.
We, like other bank holding companies, currently are required to maintain tier 1 capital and
total capital (the sum of tier 1 and tier 2 capital) equal to at least 4.0% and 8.0%, respectively,
of our total risk-weighted assets. The Bank, like other depository institutions, is required to
maintain similar capital levels under capital adequacy guidelines. For a depository institution to
be considered well capitalized under the regulatory framework for prompt corrective action its
tier 1 and total capital ratios must be at least 6.0% and 10.0% on a risk-adjusted basis,
respectively.
Bank holding companies and banks are also required to comply with minimum leverage ratio
requirements. The leverage ratio is the ratio of a banking organizations tier 1 capital to its
total adjusted quarterly average assets (as defined for regulatory purposes). The requirements
necessitate a minimum leverage ratio of 3.0% for financial holding companies and banks that either
have the highest supervisory rating or have implemented the appropriate federal regulatory
authoritys risk-adjusted capital measure for market risk. All other financial holding companies
and banks are required to maintain a minimum leverage ratio of 4.0%, unless a different minimum is
specified by an appropriate regulatory authority. For a depository institution to be considered
well capitalized under the regulatory framework for prompt corrective action, its leverage ratio
must be at least 5.0%.
The capital guidelines also provide that banking organizations experiencing significant
internal growth or making acquisitions will be expected to maintain strong capital positions
substantially above the minimum supervisory levels, without significant reliance on intangible
assets. In addition, the regulations of the bank regulators provide that concentration of credit
risks arising from non-traditional activities, as well as an institutions ability to manage these
risks, are important factors to be taken into account by regulatory agencies in assessing an
organizations overall capital adequacy. The Federal Reserve has not advised us of any specific
minimum leverage ratio applicable to us or the Bank.
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The FDIA requires, among other things, the federal banking agencies to take prompt corrective
action in respect of depository institutions that do not meet minimum capital requirements. The
FDIA sets forth the following five capital tiers: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically undercapitalized. A
depository institutions capital tier will depend upon how its capital levels compare with various
relevant capital measures and certain other factors, as established by regulation. The relevant
capital measures are the total capital ratio, the tier 1 capital ratio and the leverage ratio.
Under the regulations adopted by the federal regulatory authorities, a bank will be: (1) well
capitalized if the institution has a total risk-based capital ratio of 10.0% or greater, a tier 1
risk-based capital ratio of 6.0% or greater and a leverage ratio of 5.0% or greater and is not
subject to any order or written directive by any such regulatory authority to meet and maintain a
specific capital level for any capital measure; (2) adequately capitalized if the institution has
a total risk-based capital ratio of 8.0% or greater, a tier 1 risk-based capital ratio of 4.0% or
greater and a leverage ratio of 4.0% or greater (3.0% in certain circumstances ) and is not well
capitalized; (3) undercapitalized if the institution has a total risk-based capital ratio that
is less than 8.0%, a tier 1 risk-based capital ratio of less than 4.0% or a leverage ratio of less
than 4.0% (3.0% in certain circumstances); (4) significantly undercapitalized if the institution
has a total risk-based capital ratio of less than 6.0%, a tier 1 risk-based capital ratio of less
than 3.0% or a leverage ratio of less than 3.0%; and (5) critically undercapitalized if the
institutions tangible equity is equal to or less than 2.0% of average quarterly tangible assets.
An institution may be downgraded to, or deemed to be in, a capital category that is lower than
indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if
it receives an unsatisfactory examination rating with respect to certain matters. Our regulatory
capital ratios and those of the Bank are in excess of the levels established for well capitalized
institutions. A banks capital category is determined solely for the purpose of applying prompt
corrective action regulations and the capital category may not constitute an accurate
representation of the banks overall financial condition or prospects for other purposes.
The FDIA generally prohibits a depository institution from making any capital distributions
(including payment of a dividend) or paying any management fee to its parent holding company if the
depository institution would thereafter be undercapitalized. Undercapitalized institutions are
subject to growth limitations and are required to submit a capital restoration plan. The agencies
may not accept such a plan without determining, among other things, that the plan is based on
realistic assumptions and is likely to succeed in restoring the depository institutions capital.
In addition, for a capital restoration plan to be acceptable, the depository institutions parent
holding company must guarantee that the institution will comply with such capital restoration plan.
The aggregate liability of the parent holding company is limited to the lesser of (1) an amount
equal to 5.0% of the depository institutions total assets at the time it became undercapitalized
and (2) the amount which is necessary (or would have been necessary) to bring the institution into
compliance with all capital standards applicable with respect to such institution as of the time it
fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it
is treated as if it is significantly undercapitalized.
Significantly undercapitalized depository institutions may be subject to a number of
requirements and restrictions, including mandated capital raising activities such as orders to sell
sufficient voting stock to become adequately capitalized, requirements to reduce total assets,
restrictions for interest rates paid, removal of management and cessation of receipt of deposits
from correspondent banks. Critically undercapitalized institutions are subject to the appointment
of a receiver or conservator.
Safety and Soundness Standards and Other Enforcement Mechanisms
The federal banking agencies have adopted guidelines establishing standards for safety and
soundness, asset quality and earnings, internal controls and audit systems, among others, as
required by the Federal Deposit Insurance Corporation Improvement Act, or FDICIA. These standards
are designed to identify potential concerns and ensure that action is taken to address those
concerns before they pose a risk to the DIF. If a federal banking agency determines that an
institution fails to meet any of these standards, the agency may require the institution to submit
an acceptable plan to achieve compliance with the standard. If the institution fails to submit an
acceptable plan within the time allowed by the agency or fails in any material respect to implement
an accepted plan, the agency must, by order, require the institution to correct the deficiency.
Federal banking agencies possess broad enforcement powers to take corrective and other
supervisory action on an insured bank and its holding company. Moreover, federal laws require each
federal banking agency to take prompt corrective action to resolve the problems of insured banks.
Bank holding companies and insured banks are subject to a wide range of potential enforcement
actions by federal regulators for violation of any law, rule, regulation, standard, condition
imposed in writing by the regulator, or term of a written agreement with the regulator.
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Emergency Economic Stabilization Act of 2008
In response to the financial crisis affecting the banking system and financial markets, the
Emergency Economic Stabilization Act of 2008, or EESA, was enacted on October 3, 2008. The EESA
authorizes the U.S. Treasury, or Treasury, to provide up to $700 billion in funding to stabilize
and provide liquidity to the financial markets. Pursuant to the EESA, the Treasury was initially
authorized to use $350 billion for the Troubled Asset Relief Program, or TARP. Of this amount, the
Treasury allocated $250 billion to the TARP Capital Purchase Program described below. On January
15, 2009, the second $350 billion of TARP monies was released to the Treasury. On February 17,
2009, the American Recovery and Reinvestment of 2009, or AARA, was enacted which amended, in
certain respects, the EESA and provided an additional $787 billion in economic stimulus funding.
Under the TARP Capital Purchase Program, the Treasury will invest up to $250 billion in senior
preferred stock of U.S. banks and savings associations or their holding companies. Qualifying
financial institutions may issue senior preferred stock with a value equal to not less than 1% of
risk-weighted assets and not more than the lesser of $25 billion or 3% of risk-weighted assets. In
conjunction with the issuance of the senior preferred stock, participating institutions must issue
to the Treasury immediately exercisable 10-year warrants to purchase common stock with an aggregate
market price equal to 5% of the amount of senior preferred stock. Participating financial
institutions are required to adopt the Treasurys standards for executive compensation and
corporate governance for the period during which the Treasury holds equity issued under the TARP
Capital Purchase Program. Although we submitted an application for participation in the TARP
Capital Purchase Program and were approved, we have elected not to participate in this program.
Deposit Insurance
The FDIC is an independent federal agency that insures deposits, up to prescribed statutory
limits, of federally insured banks and savings institutions and safeguards the safety and soundness
of the banking and savings industries. The FDIC insures our customer deposits through the DIF up to
prescribed limits for each depositor. Pursuant to the EESA, the maximum deposit insurance amount
has been increased from $100,000 to $250,000 per depositor. The EESA, as amended by the Helping
Families Save Their Homes Act of 2009, provides that the basic deposit insurance limit will return
to $100,000 after December 31, 2013. The amount of FDIC assessments paid by each DIF member
institution is based on its relative risk of default as measured by regulatory capital ratios and
other supervisory factors. Pursuant to the Federal Deposit Insurance Reform Act of 2005, the FDIC
is authorized to set the reserve ratio for the DIF annually at between 1.15% and 1.50% of estimated
insured deposits. The FDIC may increase or decrease the assessment rate schedule on a semi-annual
basis.
The FDIC made several adjustments to the assessment rate during 2009 including a special
assessment permitted under statutory authority granted in 2008. The assessment schedule published
as of April 1, 2009 and effective for assessments on and after September 30, 2009 provides for
assessment ranges, based upon risk assessment of each insured depository institution, of between 7
and 77.5 cents per $100 of domestic deposits. The Bank is currently in Risk Category 1, the lowest
risk category, which provides for a base assessment range of 7 to 24 cents per $100 of domestic
deposits. The special assessment was applicable to all insured
depository institutions and totaled 5 basis points of each
institutions total assets less tier 1 capital as of June 30,
2009, not to exceed 10 basis points of domestic deposits.
On November 21, 2008, the FDIC adopted a final rule relating to the Temporary Liquidity
Guaranty Program, or TLG, Program. Under the TLG Program, the FDIC will (1) guarantee, through the
earlier of maturity or June 30, 2012, certain newly issued senior unsecured debt issued by
participating institutions on or after October 14, 2008 and before June 30, 2009 and (2) provide
full FDIC deposit insurance coverage for non-interest bearing transaction deposit accounts,
Negotiable Order of Withdrawal, or NOW, accounts paying 0.5% or less interest per annum and
Interest on Lawyers Trust Accounts, or IOLTA, held at participating FDIC-insured institutions
through June 30, 2010. On March 17, 2009, the FDIC extended the debt guarantee program through
October 31, 2009. The Bank elected to participate in the deposit insurance coverage guarantee
program. The Bank has not elected to participate in the unsecured debt guarantee program because
more cost-effective liquidity sources are available to us. Coverage under the TLG Program was
available for the first 30 days without charge. The fee assessment for deposit insurance coverage
is 10 basis points per annum on amounts in covered accounts exceeding $250,000.
All FDIC-insured institutions are required to pay assessments to the FDIC to fund interest
payments on bonds issued by the Financing Corporation, or FICO, an agency of the Federal government
established to recapitalize the predecessor to the DIF. The FICO assessment rates, which are
determined quarterly, averaged 0.01% of insured deposits in fiscal 2009. These assessments will
continue until the FICO bonds mature in 2017.
On November 17, 2009, the FDIC imposed a prepayment requirement on most insured depository
organizations, requiring that the organizations prepay estimated quarterly risk-based assessments
for the fourth quarter of 2009 and for each calendar quarter for calendar years 2010, 2011 and
2012. The FDIC has stated that the prepayment requirement was imposed in response to a negative
balance in the DIF.
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The Bank made its prepayment on December 31, 2009 in the total amount of $32 million. The
actual assessments becoming due from the Bank on the last day of each calendar quarter will be
applied against the prepaid amount until the prepayment amount is exhausted. If the prepayment
amount is not exhausted before June 30, 2013 any remaining balance will be returned to the Bank.
The prepayment amount does not bear interest.
Insolvency of an Insured Depository Institution
If the FDIC is appointed the conservator or receiver of an insured depository institution upon
its insolvency or in certain other events, the FDIC has the power, among other things: (1) to
transfer any of the depository institutions assets and liabilities to a new obligor without the
approval of the depository institutions creditors; (2) to enforce the terms of the depository
institutions contracts pursuant to their terms; or (3) to repudiate or disaffirm any contract or
lease to which the depository institution is a party, the performance of which is determined by the
FDIC to be burdensome and the disaffirmation or repudiation of which is determined by the FDIC to
promote the orderly administration of the depository institution.
Depositor Preference
The FDIA provides that, in the event of the liquidation or other resolution of an insured
depository institution, the claims of depositors of the institution, including the claims of the
FDIC as subrogee of insured depositors and certain claims for administrative expenses of the FDIC
as a receiver, will have priority over other general unsecured claims against the institution. If
an insured depository institution fails, insured and uninsured depositors, along with the FDIC,
will have priority in payment ahead of unsecured, non-deposit creditors, including the parent bank
holding company, with respect to any extensions of credit they have made to such insured depository
institution.
Customer Privacy and Other Consumer Protections
The GLB Act imposes customer privacy requirements on any company engaged in financial
activities, including the Bank and us. Under these requirements, a financial company is required to
protect the security and confidentiality of customer nonpublic personal information. In addition,
for customers who obtain a financial product such as a loan for personal, family or household
purposes, a financial holding company is required to disclose its privacy policy to the customer at
the time the relationship is established and annually thereafter. The financial company must also
disclose its policies concerning the sharing of the customers nonpublic personal information with
affiliates and third parties. Finally, a financial company is prohibited from disclosing an account
number or similar item to a third party for use in telemarketing, direct mail marketing or
marketing through electronic mail.
The Bank is subject to a variety of federal and state laws and reporting obligations aimed at
protecting consumers including the Home Mortgage Disclosure Act, the Real Estate Settlement
Procedures Act, the Equal Credit Opportunity Act, the Truth in Lending Act, the Fair Credit
Reporting Act, the Equal Credit Opportunity Act, the Fair Debt Collection Practices Act and the
Electronic Fund Transfer Act.
On November 17, 2009, the Federal Reserve Board published a final rule amending Regulation E,
which implements the Electronic Fund Transfer Act. The final rule limits the ability of a financial
institution to assess an overdraft fee for paying automated teller machine transactions and
one-time debit card transactions that overdraw a customers account, unless the customer
affirmatively consents, or opts in, to the institutions payment of overdrafts for these
transactions.
There have been numerous attempts at the federal level to expand consumer protection measures.
A major focus of recent legislation has been aimed at the creation of a consumer financial
protection agency that would be dedicated to administering and enforcing fair lending and consumer
compliance laws with respect to financial products. If enacted, such legislation may have a
substantial impact on the Banks operations. However, because any final legislation may differ
significantly from current proposals, the specific effects of the legislation cannot be evaluated
at this time.
In addition, the Community Reinvestment Act, or CRA, generally requires the federal banking
agencies to evaluate the record of a financial institution in meeting the credit needs of its local
communities, including low and moderate income neighborhoods. In addition to substantial penalties
and corrective measures that may be required for a violation of fair lending laws, the federal
banking agencies may take compliance with such laws and the CRA into account when regulating and
supervising our other activities or in authorizing new activities.
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In connection with its assessment of CRA performance, the appropriate bank regulatory agency
assigns a rating of outstanding, satisfactory, needs to improve or substantial
noncompliance. The Bank received an outstanding rating on its most recent published examination.
Although the Banks policies and procedures are designed to achieve compliance with all fair
lending and CRA requirements, instances of non-compliance are occasionally identified through
normal operational activities. Management responds proactively to correct all instances of
non-compliance and implement procedures to prevent further violations from occurring.
USA PATRIOT Act
The USA PATRIOT Act of 2001 amended the Bank Secrecy Act of 1970 and adopted additional
measures requiring insured depository institutions, broker-dealers and certain other financial
institutions to have policies, procedures and controls to detect, prevent and report money
laundering and terrorist financing. These acts and their regulations also provide for information
sharing, subject to conditions, between federal law enforcement agencies and financial
institutions, as well as among financial institutions, for counter-terrorism purposes. Federal
banking regulators are required, when reviewing bank holding company acquisition or merger
applications, to take into account the effectiveness of the anti-money laundering activities of the
applicants. Failure of a financial institution to maintain and implement adequate programs to
combat money laundering and terrorist financing could have serious legal and reputational
consequences for the institution. The USA PATRIOT Improvement and Reauthorization Act of 2005,
among other things, made permanent or otherwise generally extended the effectiveness of provisions
applicable to financial institutions.
Effect of Economic Conditions, Government Policies and Legislation
Banking depends on interest rate differentials. In general, the difference between the
interest rate paid by the Bank on deposits and borrowings and the interest rate received by the
Bank on loans extended to customers and on investment securities comprises a major portion of the
Banks earnings. These rates are highly sensitive to many factors that are beyond the control of
the Bank. Accordingly, the earnings and potential growth of the Bank are subject to the influence
of domestic and foreign economic conditions, including inflation, recession and unemployment.
The commercial banking business is not only affected by general economic conditions but is
also influenced by the monetary and fiscal policies of the federal government and the policies of
regulatory agencies, particularly the Federal Reserve. The Federal Reserve implements national
monetary policies (with objectives such as curbing inflation and combating recession) by its
open-market operations in United States government securities, by adjusting the required level of
reserves for financial institutions subject to the Federal Reserves reserve requirements and by
varying the discount rates applicable to borrowings by depository institutions. The actions of the
Federal Reserve in these areas influence the growth of bank loans, investments and deposits and
also affect interest rates charged on loans and paid on deposits. The nature and impact of any
future changes in monetary policies cannot be predicted.
From time to time, legislative and regulatory initiatives are introduced in Congress and state
legislatures, as well as regulatory agencies. Such initiatives may include proposals to expand or
contract the powers of financial and bank holding companies and depository institutions, proposals
to substantially change the financial institution regulatory system or proposals to increase the
required capital levels of insured depository organizations such as the Bank. Such legislation
could change banking statutes and our operating environment in substantial and unpredictable ways.
If enacted, such legislations could increase or decrease the cost of doing business, limit or
expand permissible activities or affect the competitive balance among banks and other financial
services providers. We cannot predict whether such legislation will be enacted and, if enacted, the
effect that it, or any implementing regulations, would have on our financial condition, results of
operations or cash flows.
Website Access to SEC Filings
All of our reports and statements filed or furnished electronically with the SEC, including
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and Proxy
Statements, as well as amendments to these reports and statements filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act, are accessible at no cost through our website at
www.firstinterstatebank.com as soon as reasonably practicable after they have been filed
with the SEC. These reports are also accessible on the SECs website at www.sec.gov. The
public may read and copy materials we file with the SEC at the public reference facilities
maintained by the SEC at Room 1580, 100 F Street N.E., Washington, DC 20549. The public may obtain
information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330.
Our website and the information contained therein or connected thereto is not intended to be
incorporated into this report and should not be considered a part of this report.
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Item 1A. Risk Factors
Like other financial and bank holding companies, we are subject to a number of risks, many of
which are outside of our control. If any of the events or circumstances described in the following
risk factors actually occur, our business, financial condition, results of operations and prospects
could be harmed. These risks are not the only ones that we may face. Other risks of which we are
not aware, including those which relate to the banking and financial services industry in general
and us in particular, or those which we do not currently believe are material, may harm our future
business, financial condition, results of operations and prospects. Readers should consider
carefully the following important factors in evaluating us, our business and an investment in our
securities.
Risks Relating to the Market and Our Business
We may incur significant credit losses, particularly in light of current market conditions.
We take on credit risk by virtue of making loans and extending loan commitments and letters of
credit. Our credit standards, procedures and policies may not prevent us from incurring substantial
credit losses, particularly in light of market developments in recent years. During 2008 and 2009,
we experienced deterioration in credit quality, particularly in certain real estate development
loans, due, in part, to the impact resulting from the downturn in the prevailing economic, real
estate and credit markets. This deterioration resulted in higher levels of non-performing assets,
including other real estate owned and internally risk classified loans, thereby increasing our
provision for loan losses and decreasing our operating income in 2008 and 2009. As of December 31,
2009, we had total non-performing assets of approximately $163 million, compared with approximately
$97 million as of December 31, 2008 and approximately $36 million as of December 31, 2007. Given
the current economic conditions and trends, management believes we will continue to experience
credit deterioration and higher levels of non-performing loans in the near-term, which will likely
have an adverse impact on our business, financial condition, results of operations and prospects.
Our concentration of real estate loans subjects us to increased risks in the event real estate
values continue to decline due to the economic recession, a further deterioration in the real
estate markets or other causes.
At December 31, 2009, we had approximately $3.0 billion of commercial, agricultural,
construction, residential and other real estate loans, representing approximately 65% of our total
loan portfolio. The current economic recession, deterioration in the real estate markets and
increasing delinquencies and foreclosures have had an adverse effect on the collateral value for
many of our loans and on the repayment ability of many of our borrowers. The continuation or
further deterioration of these factors, including increasing foreclosures and unemployment, will
continue to have the same or similar adverse effects. In addition, these factors could reduce the
amount of loans we make to businesses in the construction and real estate industry, which could
negatively impact our interest income and results of operations. A continued decline in real estate
values could also lead to higher charge-offs in the event of defaults in our real estate loan
portfolio. Similarly, the occurrence of a natural or manmade disaster in our market areas could
impair the value of the collateral we hold for real estate secured loans. Any one or a combination
of the factors identified above could negatively impact our business, financial condition, results
of operations and prospects.
Economic and market developments, including the potential for inflation, may have an adverse
effect on our business, possibly in ways that are not predictable or that we may fail to
anticipate.
Recent economic and market developments and the potential for continued economic disruptions
and inflation present considerable risks and challenges to us. Dramatic declines in the housing
market, with decreasing home prices and increasing delinquencies and foreclosures throughout most
of the nation, have negatively impacted the credit performance of mortgage and construction loans
and resulted in significant write-downs of assets by many financial institutions. General downward
economic trends, reduced availability of commercial credit and increasing unemployment have also
negatively impacted the credit performance of commercial and consumer credit, resulting in
additional write-downs. These risks and challenges have significantly diminished overall confidence
in the national economy, the financial markets and many financial institutions. This reduced
confidence could further compound the overall market disruptions and risks to banks and bank
holding companies, including us.
In addition to economic conditions, our business is also affected by political uncertainties,
volatility, illiquidity, interest rates, inflation and other developments impacting the financial
markets. Such factors have affected and may further adversely affect, both credit and financial
markets and future economic growth, resulting in adverse effects on us and other financial
institutions in ways that are not predictable or that we may fail to anticipate.
- 10 -
Many of our loans are to commercial borrowers, which have a higher degree of risk than other
types of loans.
Commercial loans, including commercial real estate loans, are often larger and involve greater
risks than other types of lending. Because payments on such loans are often dependent on the
successful operation or development of the property or business involved, repayment of such loans
is more sensitive than other types of loans to adverse conditions in the real estate market or the
general economy. Accordingly, the recent downturn in the real estate market and economy has
heightened our risk related to commercial loans, particularly commercial real estate loans. Unlike
residential mortgage loans, which generally are made on the basis of the borrowers ability to make
repayment from their employment and other income and which are secured by real property whose value
tends to be more easily ascertainable, commercial loans typically are made on the basis of the
borrowers ability to make repayment from the cash flow of the commercial venture. If the cash flow
from business operations is reduced, the borrowers ability to repay the loan may be impaired. Due
to the larger average size of each commercial loan as compared with other loans such as residential
loans, as well as the collateral which is generally less readily-marketable, losses incurred on a
small number of commercial loans could have a material adverse impact on our financial condition
and results of operations. At December 31, 2009, we had approximately $2.3 billion of commercial
loans, including approximately $1.6 billion of commercial real estate loans, representing
approximately 51% of our total loan portfolio.
If we experience loan losses in excess of estimated amounts, our earnings will be adversely
affected.
The risk of credit losses on loans varies with, among other things, general economic
conditions, the type of loan being made, the creditworthiness of the borrower over the term of the
loan and, in the case of a collateralized loan, the value and marketability of the collateral for
the loan. We maintain an allowance for loan losses based upon, among other things, historical
experience, an evaluation of economic conditions and regular reviews of loan portfolio quality.
Based upon such factors, our management makes various assumptions and judgments about the ultimate
collectability of our loan portfolio and provides an allowance for loan losses. These assumptions
and judgments are even more complex and difficult to determine given recent market developments,
the potential for continued market turmoil and the significant uncertainty of future conditions in
the general economy and banking industry. If managements assumptions and judgments prove to be
incorrect and the allowance for loan losses is inadequate to absorb future losses, or if the
banking authorities or regulations require us to increase the allowance for loan losses, our
earnings, financial condition, results of operations and prospects could be significantly and
adversely affected.
As of December 31, 2009, our allowance for loan losses was approximately $103 million, which
represented 2.28% of total outstanding loans. Our allowance for loan losses may not be sufficient
to cover future loan losses. Future adjustments to the allowance for loan losses may be necessary
if economic conditions differ substantially from the assumptions used or further adverse
developments arise with respect to our non-performing or performing loans. Material additions to
our allowance for loan losses could have a material adverse effect on our financial condition,
results of operations and prospects.
Our goodwill may become impaired, which may adversely impact our results of operations and
financial condition and may limit the ability of our wholly-owned subsidiary, First Interstate
Bank, to pay dividends to us, thereby causing liquidity issues.
The excess purchase price over the fair value of net assets from acquisitions, or goodwill, is
evaluated for impairment at least annually and on an interim basis if an event or circumstance
indicates that it is likely an impairment has occurred. In testing for impairment, the fair value
of net assets is estimated based on an analysis of market-based trading and transaction multiples
of selected peer banks; and, if required, the estimated fair value is allocated to the acquired
assets and liabilities comprising the goodwill. Consequently, the determination of goodwill will be
sensitive to market-based trading and transaction multiples. As such, variability in market
conditions could result in impairment of goodwill, which is recorded as a noncash adjustment to
income. As of December 31, 2009, we had goodwill of approximately $184 million, which was 2.6% of
our total assets. An impairment of goodwill could have a material adverse effect on our business,
financial condition, results of operations and prospects.
Furthermore, an impairment of goodwill could cause the Bank to be unable to pay dividends to
us, which would reduce our cash flow and cause liquidity issues. See below Our Banks ability to
pay dividends to us is subject to regulatory limitations, which, to the extent we are not able to
receive such dividends, may impair our ability to grow, pay dividends, cover operating expenses and
meet debt service requirements.
- 11 -
Changes in interest rates could negatively impact our net interest income, may weaken demand
for our products and services or harm our results of operations and cash flows.
Our earnings and cash flows are largely dependent upon net interest income, which is the
difference between interest income earned on interest-earning assets such as loans and securities
and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds.
Interest rates are highly sensitive to many factors that are beyond our control, including general
economic conditions and policies of various governmental and regulatory agencies, particularly the
Federal Reserve. Changes in monetary policy, including changes in interest rates, could influence
not only the interest we receive on loans and securities and the amount of interest we pay on
deposits and borrowings, but such changes could also adversely affect (1) our ability to originate
loans and obtain deposits, (2) the fair value of our financial assets and liabilities, including
mortgage servicing rights, (3) our ability to realize gains on the sale of assets and (4) the
average duration of our mortgage-backed investment securities portfolio. An increase in interest
rates may reduce customers desire to borrow money from us as it increases their borrowing costs
and may adversely affect the ability of borrowers to pay the principal or interest on loans which
may lead to an increase in non-performing assets and a reduction of income recognized, which could
harm our results of operations and cash flows. Further, because many of our variable rate loans
contain interest rate floors, as market interest rates begin to rise, the interest rates on these
loans may not increase correspondingly. In contrast, decreasing interest rates have the effect of
causing customers to refinance mortgage loans faster than anticipated. This causes the value of
assets related to the servicing rights on mortgage loans sold to be lower than originally
recognized. If this happens, we may need to write down our mortgage servicing rights asset faster,
which would accelerate expense and lower our earnings. Any substantial, unexpected or prolonged
change in market interest rates could have a material adverse effect on our cash flows, financial
condition, results of operations and prospects. If the current low interest rate environment were
to continue for a prolonged period, our interest income could decrease, adversely impacting our
financial condition, results of operations and cash flows.
We may not continue to have access to low-cost funding sources.
We depend on checking and savings, NOW and money market deposit account balances and other
forms of customer deposits as our primary source of funding. Such account and deposit balances can
decrease when customers perceive alternative investments, such as the stock market, as providing a
better risk/return tradeoff. If customers move money out of bank deposits and into other
investments, we could lose a relatively low cost source of funds, increasing its funding costs and
reducing our net interest income and net income.
Our deposit insurance premiums could be substantially higher in the future, which could have a
material adverse effect on our future earnings.
The FDIC insures deposits at FDIC insured depository institutions, including the Bank. Under
current FDIC regulations, each insured depository institution is subject to a risk-based assessment
system and, depending on its assigned risk category, is assessed insurance premiums based on the
amount of deposits held. The FDIC charges insured financial institutions premiums to maintain the
DIF at a certain level. Recent bank failures have reduced the DIFs reserves to their lowest level
in more than 15 years. On October 16, 2008, the FDIC published a restoration plan designed to
replenish the DIF over a period of five years and to increase the deposit insurance reserve ratio
to 1.15% of insured deposits by December 31, 2013. To implement the restoration plan, the FDIC
changed both its risk-based assessment system and its base assessment rates. For the first quarter
of 2009 only, the FDIC increased all FDIC deposit assessment rates by 7 basis points. On February
27, 2009, the FDIC amended the restoration plan to extend the restoration plan horizon to seven
years. The amended restoration plan was accompanied by a final rule on March 4, 2009, which
adjusted how the risk-based assessment system differentiates for risk and that set new assessment
rates. Under the final rule, the base assessment rates increased substantially beginning April 1,
2009.
On May 22, 2009, the FDIC adopted a final rule imposing a 5 basis point special assessment on
each insured depository institutions assets minus Tier 1 capital, as of June 30, 2009. On November
17, 2009, the FDIC also published a final rule requiring insured depository institutions to prepay
their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of
2010, 2011 and 2012.
A change in the risk category assigned to our Bank, further adjustments to base assessment
rates and additional special assessments could have a material adverse effect on our earnings,
financial condition and results of operation.
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We may not be able to continue growing our business.
Our total assets have grown from $5.2 billion as of December 31, 2007 to $7.1 billion as of
December 31, 2009. Our ability to grow depends, in part, upon our ability to successfully attract
deposits, identify favorable loan and investment opportunities, open new branch banking offices and
expand into new and complementary markets when appropriate opportunities arise. In the event we do
not continue to grow, our results of operations could be adversely impacted.
Our ability to grow successfully depends on our capital resources and whether we can continue
to fund growth while maintaining cost controls and asset quality, as well as on other factors
beyond our control, such as national and regional economic conditions and interest rate trends. If
we are not able to make loans, attract deposits and maintain asset quality due to constrained
capital resources or other reasons, we may not be able to continue growing our business, which
could adversely impact our earnings, financial condition, results of operations, and prospects.
Adverse economic conditions affecting Montana, Wyoming and western South Dakota could harm our
business.
Our customers with loan and/or deposit balances are located predominantly in Montana, Wyoming
and western South Dakota. Because of the concentration of loans and deposits in these states,
existing or future adverse economic conditions in Montana, Wyoming or western South Dakota could
cause us to experience higher rates of loss and delinquency on our loans than if the loans were
more geographically diversified. The current economic recession has adversely affected the real
estate and business environment in certain areas in Montana, Wyoming and western South Dakota,
especially in markets dependent upon resort communities and second homes such as Bozeman, Montana,
Kalispell, Montana, and Jackson, Wyoming. In the future, adverse economic conditions, including
inflation, recession and unemployment and other factors, such as political or business
developments, natural disasters, wide-spread disease, terrorist activity, environmental
contamination and other unfavorable conditions and events that affect these states, could reduce
demand for credit or fee-based products and may delay or prevent borrowers from repaying their
loans. Adverse conditions and other factors identified above could also negatively affect real
estate and other collateral values, interest rate levels and the availability of credit to
refinance loans at or prior to maturity. These results could adversely impact our business,
financial condition, results of operations and prospects.
We are subject to significant governmental regulation and new or changes in existing
regulatory, tax and accounting rules and interpretations could significantly harm our business.
The financial services industry is extensively regulated. Federal and state banking
regulations are designed primarily to protect the deposit insurance funds and consumers, not to
benefit a financial companys shareholders. These regulations may impose significant limitations on
operations. The significant federal and state banking regulations that affect us are described in
this report under the heading Regulation and Supervision. These regulations, along with the
currently existing tax, accounting, securities, insurance and monetary laws and regulations, rules,
standards, policies and interpretations control the methods by which we conduct business, implement
strategic initiatives and tax compliance and govern financial reporting and disclosures. These
laws, regulations, rules, standards, policies and interpretations are undergoing significant
review, are constantly evolving and may change significantly, particularly given the recent market
developments in the banking and financial services industries.
Recent events have resulted in legislators, regulators and authoritative bodies, such as the
Financial Accounting Standards Board, the SEC, the Public Company Accounting Oversight Board and
various taxing authorities, responding by adopting and/or proposing substantive revisions to laws,
regulations, rules, standards, policies and interpretations. Further, federal monetary policy as
implemented through the Federal Reserve can significantly affect credit conditions in our markets.
The nature, extent and timing of the adoption of significant new laws, regulations, rules,
standards, policies and interpretations, or changes in or repeal of these items or specific actions
of regulators, may increase our costs of compliance and harm our business. For example, potential
increases in or other modifications affecting regulatory capital thresholds could impact our status
as well capitalized. We may not be able to predict accurately the extent of any impact from
changes in existing laws, regulations, rules, standards, policies and interpretations.
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Non-compliance with laws and regulations could result in fines, sanctions and other
enforcement actions and the loss of our financial holding company status.
Federal and state regulators have broad enforcement powers. If we fail to comply with any
laws, regulations, rules, standards, policies or interpretations applicable to us, we could face
various sanctions and enforcement actions, which include:
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the appointment of a conservator or receiver for us; |
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the issuance of a cease and desist order that can be judicially enforced; |
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the termination of our deposit insurance; |
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the imposition of civil monetary fines and penalties; |
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the issuance of directives to increase capital; |
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the issuance of formal and informal agreements; |
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the issuance of removal and prohibition orders against officers, directors and
other institution- affiliated parties; and |
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the enforcement of such actions through injunctions or restraining orders. |
The imposition of any such sanctions or other enforcement actions could adversely impact our
earnings, financial condition, results of operations and prospects. Furthermore, as a financial
holding company, we may engage in authorized financial activities, provided we are in compliance
with applicable regulatory standards and guidelines. If we fail to meet such standards and
guidelines, we may be required to cease certain financial holding company activities and, in
certain circumstances, to divest the Bank.
The effects of recent legislative and regulatory efforts are uncertain.
In response to market disruptions, legislators and financial regulators have implemented a
number of mechanisms designed to stabilize the financial markets, including the provision of direct
and indirect assistance to distressed financial institutions, assistance by the banking authorities
in arranging acquisitions of weakened banks, broker-dealers, implementation of programs by the
Federal Reserve and to provide liquidity to the commercial paper markets. On October 3, 2008, the
EESA was enacted which, among other things, authorized the Treasury to provide up to $700 billion
of funding to stabilize and provide liquidity to the financial markets. On October 14, 2008, the
Secretary of the Treasury announced the TARP Capital Purchase Program, a program in which
$250 billion of the funds under EESA are made available for the purchase of preferred equity
interests in qualifying financial institutions. On February 17, 2009, the ARRA was enacted which
amended, in certain respects, EESA and provided an additional $787 billion in economic stimulus
funding. Also in 2009, legislation proposing significant structural reforms to the financial
services industry was introduced in the U.S. Congress and passed by the House of Representatives.
Among other things, the legislation proposes the establishment of a consumer financial protection
agency, which would have broad authority to regulate providers of credit, savings, payment and
other consumer financial products and services.
Other recent developments include:
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the Federal Reserves proposed guidance on incentive compensation policies at
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proposals to limit a lenders ability to foreclose on mortgages or make such
foreclosures less economically viable, including allowing Chapter 13 bankruptcy plans
to cram down the value of certain mortgages on a consumers principal residence to
its market value and/or reset interest rates and monthly payments to permit defaulting
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accelerating the effective date of various provisions of the Credit Card
Accountability Responsibility and Disclosure Act of 2009, which restrict certain credit
and charge card practices, require expanded disclosures to consumers and provide
consumers with the right to opt out of interest rate increases (with limited
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These initiatives may increase our expenses or decrease our income by, among other things,
making it harder for us to foreclose on mortgages. Further, the overall effects of these and other
legislative and regulatory efforts on the financial markets remain uncertain and they may not have
the intended stabilization results. These efforts may even have unintended harmful consequences on
the U.S. financial system and our business. Should these or other legislative or regulatory
initiatives have unintended effects, our business, financial condition, results of operations and
prospects could be materially and adversely affected.
In addition, we may need to modify our strategies and business operations in response to these
changes. We may also incur increased capital requirements and constraints or additional costs in
order to satisfy new regulatory requirements. Given the volatile nature of the current market and
the uncertainties underlying efforts to mitigate or reverse disruptions, we may not timely
anticipate or manage existing, new or additional risks, contingencies or developments in the
current or future environment. Our failure to do so could materially and adversely affect our
business, financial condition, results of operations and prospects.
We are dependent upon the services of our management team.
Our future success and profitability is dependent substantially upon the management skills of
our executive officers and directors, many of whom have held officer and director positions with us
for many years. The unanticipated loss or unavailability of key executives, including Lyle R.
Knight, President and Chief Executive Officer, who has announced his plan to retire in March 2012,
Terrill R. Moore, Executive Vice President and Chief Financial Officer, Gregory A. Duncan,
Executive Vice President and Chief Operating Officer, Edward Garding, Executive Vice President and
Chief Credit Officer, and Julie A. Castle, PresidentFirst Interstate Bank Wealth Management, could
harm our ability to operate our business or execute our business strategy. We cannot assure you
that we will be successful in retaining these key employees or finding suitable successors in the
event of their loss or unavailability.
We may not be able to attract and retain qualified employees to operate our business
effectively.
There is substantial competition for qualified personnel in our markets. Although unemployment
rates have been rising in Montana, Wyoming, South Dakota and the surrounding region, it may still
be difficult to attract and retain qualified employees at all management and staffing levels.
Failure to attract and retain employees and maintain adequate staffing of qualified personnel could
adversely impact our operations and our ability to execute our business strategy. Furthermore,
relatively low unemployment rates in certain of our markets, compared with national unemployment
rates, may lead to significant increases in salaries, wages and employee benefits expenses as we
compete for qualified, skilled employees, which could negatively impact our results of operations
and financial condition.
A failure of the technology we use could harm our business and our information systems may
experience a breach in security.
We rely heavily on communications and information systems to conduct our business and we
depend heavily upon data processing, software, communication and information exchange from a number
of vendors on a variety of computing platforms and networks and over the internet. We cannot be
certain that all of our systems are entirely free from vulnerability to breaches of security or
other technological difficulties or failures. A breach in the security of these systems could
result in failures or disruptions in our customer relationship management, general ledger, deposit,
loan, investment, credit card and other information systems. A breach of the security of our
information systems could damage our reputation, result in a loss of customer business, subject us
to additional regulatory scrutiny and expose us to civil litigation and possible financial
liability.
Furthermore, the computer systems and network infrastructure we use could be vulnerable to
other unforeseen problems, such as damage from fire, privacy loss, telecommunications failure or
other similar events which would also have an adverse impact on our financial condition and results
of operations.
An extended disruption of vital infrastructure and other business interruptions could
negatively impact our business.
Our operations depend upon vital infrastructure components including, among other things,
transportation systems, power grids and telecommunication systems. A disruption in our operations
resulting from failure of transportation and telecommunication systems, loss of power, interruption
of other utilities, natural disaster, fire, global climate changes, computer hacking or viruses,
failure of technology, terrorist activity or the domestic and foreign response to such activity or
other events outside of our control could have an adverse impact on the financial services industry
as a whole and/or on our business. Our business recovery plan may not be adequate and may not
prevent significant interruptions of our operations or substantial losses.
-15-
Recent market disruptions have caused increased liquidity risks.
The recent disruption and illiquidity in the credit markets are continuing challenges that
have generally made potential funding sources more difficult to access, less reliable and more
expensive. In addition, liquidity in the inter-bank market, as well as the markets for commercial
paper and other short-term instruments, have contracted significantly. Reflecting concern about the
stability of the financial markets generally and the strength of counterparties, many lenders and
institutional investors have reduced and, in some cases, ceased to provide funding to borrowers,
including other financial institutions. These market conditions have made the management of our own
and our customers liquidity significantly more challenging. A further deterioration in the credit
markets or a prolonged period without improvement of market liquidity could adversely affect our
liquidity and financial condition, including our regulatory capital ratios, and could adversely
affect our business, results of operations and prospects.
We may not be able to meet the cash flow requirements of our depositors and borrowers unless
we maintain sufficient liquidity.
Liquidity is the ability to meet current and future cash flow needs on a timely basis at a
reasonable cost. Our liquidity is used to make loans and to repay deposit liabilities as they
become due or are demanded by customers. Potential alternative sources of liquidity include federal
funds purchased and securities sold under repurchase agreements. We maintain a portfolio of
investment securities that may be used as a secondary source of liquidity to the extent the
securities are not pledged for collateral. Other potential sources of liquidity include the sale of
loans, the utilization of available government and regulatory assistance programs, the ability to
acquire national market, non-core deposits, the issuance of additional collateralized borrowings
such as Federal Home Loan Bank, or FHLB, advances, the issuance of debt securities, issuance of
equity securities and borrowings through the Federal Reserves discount window. Without sufficient
liquidity from these potential sources, we may not be able to meet the cash flow requirements of
our depositors and borrowers.
We may not be able to find suitable acquisition candidates.
Although our growth strategy is to primarily focus and promote organic growth, we also have in
the past and intend in the future to complement and expand our business by pursuing strategic
acquisitions of banks and other financial institutions. We believe, however, there are a limited
number of banks that will meet our acquisition criteria and, consequently, we cannot assure you
that we will be able to identify suitable candidates for acquisitions. In addition, even if
suitable candidates are identified, we expect to compete with other potential bidders for such
businesses, many of which may have greater financial resources than we have. Our failure to find
suitable acquisition candidates, or successfully bid against other competitors for acquisitions,
could adversely affect our ability to successfully implement our business strategy.
We may be unable to manage our growth due to acquisitions, which could have an adverse effect
on our financial condition or results of operations.
Acquisitions of other banks and financial institutions involve risks of changes in results of
operations or cash flows, unforeseen liabilities relating to the acquired institution or arising
out of the acquisition, asset quality problems of the acquired entity and other conditions not
within our control, such as adverse personnel relations, loss of customers because of change of
identity, deterioration in local economic conditions and other risks affecting the acquired
institution. In addition, the process of integrating acquired entities will divert significant
management time and resources. We may not be able to integrate successfully or operate profitably
any financial institutions we may acquire. We may experience disruption and incur unexpected
expenses in integrating acquisitions. There can be no assurance that any such acquisitions will
enhance our cash flows, business, financial condition, results of operations or prospects and such
acquisitions may have an adverse effect on our results of operations, particularly during periods
in which the acquisitions are being integrated into our operations.
-16-
We face significant competition from other financial institutions and financial services
providers.
We face substantial competition in all areas of our operations from a variety of different
competitors, many of which are larger and may have more financial resources, higher lending limits
and large branch networks. Such competitors primarily include national, regional and community
banks within the various markets we serve. We also face competition from many other types of
financial institutions, including, without limitation, savings and loans, credit unions, finance
companies, brokerage firms, insurance companies, factoring companies and other financial
intermediaries. The financial services industry could become even more competitive as a result of
legislative, regulatory and technological changes and continued consolidation. Banks, securities
firms and insurance companies can merge under the umbrella of a financial holding company, which
can offer virtually any type of financial service, including banking, securities underwriting,
insurance (both agency and underwriting) and merchant banking. Increased competition among
financial services companies due to the recent consolidation of certain competing financial
institutions and the conversion of certain investment banks to bank holding companies may adversely
affect our ability to market our products and services. Also, technology has lowered barriers to
entry and made it possible for nonbanks to offer products and services traditionally provided by
banks, such as automatic funds transfer and automatic payment systems. Many of our competitors have
fewer regulatory constraints and may have lower cost structures. Additionally, due to their size,
many competitors may offer a broader range of products and services as well as better pricing for
those products and services than we can.
Our ability to compete successfully depends on a number of factors, including, among other
things:
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the ability to develop, maintain and build upon long-term customer
relationships based on quality service, high ethical standards and safe, sound assets; |
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the ability to expand our market position; |
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the scope, relevance and pricing of products and services offered to meet
customer needs and demands; |
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the rate at which we introduce new products and services relative to our
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customer satisfaction with our level of service; and |
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industry and general economic trends. |
Failure to perform in any of these areas could significantly weaken our competitive position,
which could adversely affect our growth and profitability, which, in turn, could harm our business,
financial condition, results of operations and prospects.
We may not be able to manage risks inherent in our business, particularly given the recent
turbulent and dynamic market conditions.
A comprehensive and well-integrated risk management function is essential for our business. We
have adopted various policies, procedures and systems to monitor and manage risk and are currently
implementing a centralized risk oversight function. These policies, procedures and systems may be
inadequate to identify and mitigate all risks inherent in our business. In addition, our business
and the markets and industry in which we operate are continuously evolving. We may fail to
understand fully the implications of changes in our business or the financial markets and fail to
adequately or timely enhance our risk framework to address those changes, particularly given the
recent turbulent and dynamic market conditions. If our risk framework is ineffective, either
because it fails to keep pace with changes in the financial markets or in our business or for other
reasons, we could incur losses and otherwise experience harm to our business.
Our systems of internal operating controls may not be effective.
We establish and maintain systems of internal operational controls that provide us with
critical information used to manage our business. These systems are subject to various inherent
limitations, including cost, judgments used in decision-making, assumptions about the likelihood of
future events, the soundness of our systems, the possibility of human error and the risk of fraud.
Moreover, controls may become inadequate because of changes in conditions and the risk that the
degree of compliance with policies or procedures may deteriorate over time. Because of these
limitations, any system of internal operating controls may not be successful in preventing all
errors or fraud or in making all material information known in a timely manner to the appropriate
levels of management. From time to time, losses from operational malfunctions or fraud have
occurred and may occur in the future. Any future losses related to internal operating control
systems could have an adverse effect on our business and, in turn, on our financial condition,
results of operations and prospects.
-17-
We may become liable for environmental remediation and other costs on repossessed properties,
which could adversely impact our results of operations, cash flows and financial condition.
A significant portion of our loan portfolio is secured by real property. During the ordinary
course of business, we may foreclose on and take title to properties securing certain loans. If
hazardous or toxic substances are found on these properties, we may be liable for remediation
costs, as well as for personal injury and property damage. Environmental laws may require us to
incur substantial expenses and may materially reduce the affected propertys value or limit our
ability to use or sell the affected property. In addition, future laws or more stringent
interpretations or enforcement policies with respect to existing laws may increase our exposure to
environmental liability. The remediation costs and any other financial liabilities associated with
an environmental hazard could have a material adverse effect on our cash flows, financial condition
and results of operations.
We may not effectively implement new technology-driven products and services or be successful
in marketing these products and services to our customers.
The financial services industry is continually undergoing rapid technological change with
frequent introductions of new technology-driven products and services. The effective use of
technology increases efficiency and enables financial institutions to better serve customers and to
reduce costs. Our future success depends, in part, upon our ability to use technology to provide
products and services that will satisfy customer demands, as well as to create additional
efficiencies in our operations. Many of our competitors have substantially greater resources to
invest in technological improvements. We may not be able to effectively implement new
technology-driven products and services or be successful in marketing these products and services
to our customers. Failure to successfully keep pace with technological change affecting the
financial services industry could have a material adverse impact on our business and, in turn, on
our financial condition, results of operations and prospects.
We are subject to claims and litigation pertaining to our fiduciary responsibilities.
Some of the services we provide, such as trust and investment services, require us to act as
fiduciaries for our customers and others. From time to time, third parties make claims and take
legal action against us pertaining to the performance of our fiduciary responsibilities. If these
claims and legal actions are not resolved in a manner favorable to us, we may be exposed to
significant financial liability and/or our reputation could be damaged. Either of these results may
adversely impact demand for our products and services or otherwise have a harmful effect on our
business and, in turn, on our financial condition, results of operations and prospects.
The Federal Reserve may require us to commit capital resources to support our bank subsidiary.
As a matter of policy, the Federal Reserve, which examines us and our subsidiaries, expects a
bank holding company to act as a source of financial and managerial strength to a subsidiary bank
and to commit resources to support such subsidiary bank. Under the source of strength doctrine,
the Federal Reserve may require a bank holding company to make capital injections into a troubled
subsidiary bank and may charge the bank holding company with engaging in unsafe and unsound
practices for failure to commit resources to such a subsidiary bank. A capital injection may be
required at times when the holding company may not have the resources to provide it and therefore
may be required to borrow the funds. Any loans by a holding company to its subsidiary bank are
subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary
bank. In the event of a bank holding companys bankruptcy, the bankruptcy trustee will assume any
commitment by the holding company to a federal bank regulatory agency to maintain the capital of a
subsidiary bank. Moreover, bankruptcy law provides that claims based on any such commitment will be
entitled to a priority of payment over the claims of the institutions general unsecured creditors,
including the holders of its note obligations. Thus, any borrowing that must be done by the holding
company in order to make the required capital injection becomes more difficult and expensive and
will adversely impact the holding companys cash flows, financial condition, results of operations
and prospects.
-18-
Failure to meet our debt covenants could result in our debt becoming immediately due and
payable, which could adversely impact our results from operations, cash flows and financial
condition.
Our syndicated credit agreement contains covenants that, among other things, establish minimum
capital and financial performance ratios, and place restrictions on capital expenditures,
indebtedness, redemptions or repurchases of common stock and the amount of dividends payable to
shareholders. Since the incurrence of this indebtedness in January 2008 and the subsequent and
continuing downturn in general economic conditions, we have been in default three times under the
terms of the agreement for failing to comply with these debt covenants. The defaults were
attributable primarily to the deterioration in credit quality that we experienced during 2008 and
2009, which has resulted in higher levels of non-performing loans, as well as changed guidance in
November 2009 by federal banking regulators that negatively impacted the calculation of our
regulatory capital ratios. While we have been successful in all three instances in amending and
obtaining waivers of each of the defaults under our syndicated credit agreement, the amendments and
waivers were coupled with concessions, including the elimination of the revolving credit facility
portion of the agreement, the advancement by approximately two years of the maturity date for the
term loan portion of the credit facility, and an increase to the interest rate charged on the term
notes. We also paid during 2009 aggregate amendment and waiver fees of $259,000 to the lenders
under the syndicated credit agreement. Given the current economic conditions and trends,
management believes we will continue to experience credit deterioration and higher levels of
non-performing loans in the near-term, which could cause us to again default under the financial
covenants contained in our syndicated credit agreement. It is possible, therefore, that we will be
required to pursue further waivers or amendments with respect to the covenants, which waivers or
amendments, if available, could contain additional terms that are unfavorable to us. If the
waivers or amendments are not available on terms acceptable to us, or at all, the failure to comply
with the debt covenants could result in, among other remedies, the debt becoming immediately due
and payable and the subsequent liquidation of our assets in satisfaction of the debt. In any such
instance, our results of operations, cash flows and financial condition could be materially
adversely affected.
We may be adversely affected by the soundness of other financial institutions.
The financial services industry as a whole, as well as the securities markets generally, have
been materially and adversely affected by significant declines in the values of nearly all asset
classes and a serious lack of liquidity. If other financial institutions in our markets dispose of
real estate collateral at below-market prices to meet liquidity or regulatory requirements, such
actions could negatively impact overall real estate values, including properties securing our
loans. Our credit risk is exacerbated when the collateral we hold cannot be realized upon or is
liquidated at prices not sufficient to recover the full amount of the credit exposure due to us.
Any such losses could harm our financial condition, results of operations and prospects.
Financial institutions in particular have been subject to increased volatility and an overall
loss of investor confidence. Our ability to engage in routine funding transactions could be
adversely affected by the actions and commercial soundness of other financial institutions.
Financial services companies are interrelated as a result of trading, clearing, counterparty or
other relationships. We have exposure to many different industries and counterparties. For example,
we execute transactions with counterparties in the financial services industry, including brokers
and dealers, commercial banks, investment banks and other institutional clients. As a result,
defaults by, or even rumors or questions about, one or more financial services companies or the
financial services industry generally, have led to market-wide liquidity problems and could lead to
losses or defaults by us or by other institutions. Many of these transactions expose us to
increased credit risk in the event of default of a counterparty or client.
The short-term and long-term impact of the new Basel II capital standards and the forthcoming
new capital rules to be proposed for non-Basel II U.S. banks is uncertain.
On December 17, 2009, the Basel Committee on Banking Supervision, or the Basel Committee,
proposed significant changes to bank capital and liquidity regulation, including revisions to the
definitions of Tier 1 capital and Tier 2 capital applicable to the Basel Committees Revised
Framework for the International Convergence of Capital Measurement and Capital Standards, or Basel
II.
The short-term and long-term impact of the new Basel II capital standards and the forthcoming
new capital rules to be proposed for non-Basel II U.S. banks is uncertain. As a result of the
recent deterioration in the global credit markets and the potential impact of increased liquidity
risk and interest rate risk, it is unclear what the short-term impact of the implementation of
Basel II may be or what impact a pending alternative standardized approach to Basel II option for
non-Basel II U.S. banks may have on the cost and availability of different types of credit and the
potential compliance costs of implementing the new capital standards.
-19-
Our Banks ability to pay dividends to us is subject to regulatory limitations, which, to the
extent we are not able to receive such dividends, may impair our ability to grow, pay dividends,
cover operating expenses and meet debt service requirements.
We are a legal entity separate and distinct from the Bank, our only bank subsidiary. Since we
are a holding company with no significant assets other than the capital stock of our subsidiaries,
we depend upon dividends from the Bank for a substantial part of our revenue. Accordingly, our
ability to grow, pay dividends, cover operating expenses and meet debt service requirements depends
primarily upon the receipt of dividends or other capital distributions from the Bank. The Banks
ability to pay dividends to us is subject to, among other things, its earnings, financial condition
and need for funds, as well as federal and state governmental policies and regulations applicable
to us and the Bank, which limit the amount that may be paid as dividends without prior approval.
For example, in general, the Bank is limited to paying dividends that do not exceed the current
year net profits together with retained earnings from the two preceding calendar years unless the
prior consents of the Montana and federal banking regulators are obtained.
Furthermore, the terms of our Series A Preferred Stock, of which 5,000 shares were outstanding
as of December 31, 2009, prohibit us from declaring or paying dividends or distributions on any
class of our common stock, unless all accrued and unpaid dividends for the three prior consecutive
dividend periods have been paid.
Risks Relating to Investments in Our Common Stock
Our dividend policy may change.
Although we have historically paid dividends to our shareholders, we have no obligation to
continue doing so and may change our dividend policy at any time without notice to our
shareholders. Also, our debt covenants limit the payment of dividends to our shareholders to a
percentage of our consolidated net income for the immediately preceding fiscal year. Holders of our
common stock are only entitled to receive such cash dividends as our board of directors may declare
out of funds legally available for such payments. Furthermore, consistent with our strategic plans,
growth initiatives, capital availability, projected liquidity needs and other factors, we have made
and adopted and will continue to make and adopt, capital management decisions and policies that
could adversely impact the amount of dividends paid to our shareholders.
Our common stock is not publicly traded.
Shares of our common stock are not publicly traded. Our common stock is not listed, quoted or
traded on any securities exchange, market, bulletin board, quotation system or listing service.
Because there is no established market for our common stock, there are limited opportunities for
shareholders to resell their shares. In the event shareholders desire to sell or otherwise dispose
of their shares, they may not be able to do so.
Shares of our common stock are subject to contractual transfer restrictions.
With respect to our outstanding common stock, approximately 92% of the shares are subject to
contractual transfer restrictions set forth in shareholder agreements. Purchasers of our common
stock are generally required to enter into shareholder agreements. We have a right of first refusal
to repurchase the restricted stock at fair market value currently determined as the minority
appraised value per share based upon the most recent quarterly appraisal. Additionally, restricted
stock held by our officers, directors and employees may be called by us under certain conditions.
All stock not subject to such restrictions may be sold at a price per share that is negotiated
between the shareholder and a prospective buyer, which may vary substantially from our appraised
minority value.
Shares of our stock held by participants in the savings and profit sharing plan, or Savings
Plan, established for our employees are not subject to contractual transfer restrictions set forth
in shareholder agreements. Since the Savings Plan does not allow distributions in kind,
distributions from participants Savings Plan accounts require the Bank, as trustee for the Savings
Plan, to sell our stock. In the event we do not elect to purchase the unrestricted stock, the Bank
will be obligated to seek alternative purchasers.
-20-
We have no obligation to repurchase outstanding shares of common stock and we are subject to
limitations on the amount of common stock we may repurchase.
We have no obligation, by contract, policy or otherwise, to purchase restricted or
unrestricted shares of our outstanding common stock held by shareholders. Our debt covenants limit
the repurchase of common shares, net of proceeds from the sale of capital securities, to a
percentage of our consolidated net worth as of the end of the immediately preceding fiscal year.
These covenants, unless amended or waived, restrict us in the number of shares we may repurchase
from existing shareholders, thereby limiting the future liquidity for such shares. Moreover, during
any period in which we may be in default under such covenants, we will be precluded from
repurchasing any shares. Furthermore, we have made and adopted, and will continue to make and
adopt, capital management decisions and policies that could limit the repurchase of outstanding
common stock held by shareholders given regulatory limitations, strategic plans, growth
initiatives, capital availability, projected liquidity needs and other factors. We have announced
we will only receive requests for the repurchase of common shares during a two-week window period
commencing promptly after the quarterly announcement of the minority appraised value of our common
stock and that the number of shares repurchased during any window period may be limited at the
discretion of our board of directors. Any limitations on the number of shares repurchased could
cause a decrease in the value of our stock.
Shares we may repurchase will be priced at fair market value determined in good faith by our
board of directors. The board of directors may, in their sole discretion, utilize an independent
party to assist with the determination of fair value of the shares. Historically, shares
repurchased have been priced at the most recent minority appraised value at the repurchase date.
The appraised minority value of our common stock represents the estimated fair market valuation of
a minority ownership interest, taking into account adjustments for the lack of marketability of the
stock and other factors. This value does not represent an actual trading price between a willing
buyer and seller of our shares in an informed, arms-length transaction. As such, the appraised
minority value is only an estimate as of a specific date, and such appraisal may not be an
indication of the actual value owners may realize with respect to shares they hold. Moreover, the
estimated fair market value of our common stock may be materially different at any date other than
the valuation dates.
Members of the Scott family have voting control of our company and are able to determine
virtually all matters submitted to shareholders, including potential change in control
transactions.
Members of the Scott family, who own approximately 78% of the outstanding shares of common
stock, control approximately 80% of the voting power of our outstanding common stock. Accordingly,
such holders are able to determine the outcome of virtually all matters submitted to shareholders
for approval, including the election of directors, amendment of our articles of incorporation
(except when a class vote is required by law), any merger or consolidation requiring common
shareholder approval and the sale of all or substantially all of the companys assets. Accordingly,
such holders have the ability to prevent change in control transactions as long as they maintain
voting control of the company. In addition, because these holders will have the ability to elect
all of our directors they will be able to control our policies and operations, including the
appointment of management, future issuances of our common stock or other securities, the payments
of dividends on our common stock and entering into extraordinary transactions, and their interests
may not in all cases be aligned with the interests of other shareholders. This concentrated control
may negatively impact the value of our common stock.
Future equity issuances could result in dilution, which could cause the value of our common
stock to decline.
We are not restricted from issuing additional common stock, including any securities that are
convertible into or exchangeable for, or that represent the right to receive common stock. We may
issue additional common stock in the future pursuant to current or future employee stock option
plans or in connection with future acquisitions or financings. Should we choose to raise capital
by selling shares of common stock for any reason, including in connection with the proposed initial
public offering with respect to which a registration statement has been filed with the SEC, but not
declared effective, the issuance would have a dilutive effect on the holders of our common stock
and could have a material negative effect on the value of our existing shares of common stock.
Our common stock is not an insured bank savings account or deposit.
Our common stock is not a bank savings account or deposit and, therefore, is not insured
against loss by the FDIC, any other deposit insurance fund or any other public or private entity.
As a result, holders of our common stock could lose some or all of their investment.
-21-
Anti-takeover provisions and the regulations to which we are subject also may make it more
difficult for a third party to acquire control of us, even if the change in control would be
beneficial to shareholders.
We are a financial and bank holding company incorporated in the State of Montana.
Anti-takeover provisions in Montana law and our articles of incorporation and bylaws, as well as
regulatory approvals that would be required under federal law, could make it more difficult for a
third party to acquire control of us and may prevent shareholders from receiving a premium for
their shares of our common stock. These provisions could adversely affect the value of our common
stock and could reduce the amount that shareholders might receive if we were to be sold.
Our articles of incorporation provide that our board of directors may issue up to 95,000
additional shares of preferred stock, in one or more series, without shareholder approval and with
such terms, conditions, rights, privileges and preferences as the board of directors may deem
appropriate. In addition, our articles of incorporation provide for staggered terms for our board
of directors and limitations on persons authorized to call a special meeting of shareholders. In
addition, certain provisions of Montana law may have the effect of inhibiting a third party from
making a proposal to acquire us or of impeding a change of control under circumstances that
otherwise could provide the holders of our common stock with the opportunity to realize a premium
for their shares.
Further, the acquisition of specified amounts of our common stock (in some cases, the
acquisition of more than 5% of our common stock) may require certain regulatory approvals,
including the approval of the Federal Reserve and one or more of our state banking regulatory
agencies. The filing of applications with these agencies and the accompanying review process can
take several months. Additionally, as discussed above, the members of the Scott family have voting
control of our company. This and the other factors described above may hinder or even prevent a
change in control of us, even if a change in control would be beneficial to our shareholders.
Our common stock is subordinate to our existing and future indebtedness and to our outstanding
Series A Preferred Stock.
Shares of our common stock and Series A Preferred Stock are equity interests and do not
constitute indebtedness. As such, they rank junior to all our indebtedness, including our
subordinated term loans, the subordinated debentures held by trusts that have issued trust
preferred securities and other non-equity claims on us with respect to assets available to satisfy
claims on us. Additionally, holders of our common stock are subject to the prior dividend and
liquidation rights of any holders of our Series A Preferred Stock then outstanding.
In the future, we may attempt to increase our capital resources or, if our Banks capital
ratios fall below the required minimums, we or the Bank could be forced to raise additional capital
by making additional offerings of debt or equity securities, including medium-term notes, trust
preferred securities, senior or subordinated notes and preferred stock. Or, we may issue additional
debt or equity securities as consideration for future mergers and acquisitions. Such additional
debt and equity offerings may place restrictions on our ability to pay dividends on or repurchase
our common stock, dilute the holdings of our existing shareholders or reduce the value of your
common stock. Furthermore, acquisitions typically involve the payment of a premium over book and
market values and therefore, some dilution of our tangible book value and net income per common
stock may occur in connection with any future transaction. Holders of our outstanding capital stock
are not entitled to preemptive rights or other protections against dilution.
Item 1B. Unresolved Staff Comments
We are not an accelerated filer or a large accelerated filer, as defined in Rule 12b-2 of the
Exchange Act, or a well-known seasoned issuer as defined in Rule 405 of the Securities Act. We
have not received any written comments from the SEC staff regarding our periodic or current reports
filed under the Exchange Act.
Item 2. Properties
Our principal executive offices and one of our banking offices are anchor tenants in an
eighteen story commercial building located in Billings, Montana. The building is owned by a joint
venture partnership in which the Bank is one of two partners, owning a 50% interest in the
partnership. We lease approximately 96,532 square feet of office space in the building. We also
own a 65,226 square foot building that houses our operations center in Billings, Montana. We
provide banking services at 71 additional locations in Montana, Wyoming and western South Dakota,
of which 18 properties are leased from independent third parties and 53 properties are owned by us.
We believe each of our facilities is suitable and adequate to meet our current operational needs.
-22-
Item 3. Legal Proceedings
In the normal course of business, we are named or threatened to be named as a defendant in
various lawsuits. Management, following consultation with legal counsel, does not expect the
ultimate disposition of one or a combination of these matters to have a material adverse effect on
our business.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter of 2009.
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
Description of Our Capital Stock
Our authorized capital stock consists of 20,000,000 shares of common stock without par value,
of which 7,837,397 shares were outstanding as of January 31, 2010, and 100,000 shares of preferred
stock without par value, of which 5,000 shares have been designated as 6.75% Series A noncumulative
redeemable preferred stock, or Series A Preferred Stock. As of January 31, 2010, all 5,000 shares
of authorized Series A Preferred Stock were outstanding.
Preferred Stock
Our board of directors is authorized, without approval of the holders of common stock, to
provide for the issuance of preferred stock from time to time in one or more series in such number
and with such designations, preferences, powers and other special rights as may be stated in the
resolution or resolutions providing for such preferred stock. Our board of directors may cause us
to issue preferred stock with voting, conversion and other rights that could adversely affect the
holders of the common stock or make it more difficult to effect a change in control.
In connection with the First Western acquisition in January 2008, our board of directors
authorized the issuance of the Series A Preferred Stock, which ranks senior to our common stock and
to all equity securities issued by us with respect to dividend and liquidation rights. The Series
A Preferred Stock has no voting rights. Holders of the Series A Preferred Stock are entitled to
receive, when and if declared by the board of directors, noncumulative cash dividends at an annual
rate of $675 per share (based on a 360 day year). In the event dividends are not paid for three
consecutive quarters, the Series A Preferred Stock holders are entitled to elect two members to our
board of directors. The Series A Preferred Stock is subject to indemnification obligations and
set-off rights pursuant to the purchase agreement entered into at the time of the First Western
acquisition. We may, at our option, redeem all or any part of the outstanding Series A Preferred
Stock at any time after January 10, 2013, subject to certain conditions, at a price of $10,000 per
share plus accrued but unpaid dividends at the date fixed for redemption. The Series A Preferred
Stock may be redeemed prior to January 10, 2013 only in the event we are entitled to exercise our
set-off rights pursuant to the First Western purchase agreement. After January 10, 2018, the
Series A Preferred Stock may be converted, at the option of the holder, into shares of our common
stock at a ratio of 80 shares of common stock for every one share of Series A Preferred Stock.
Prior to conversion of the Series A Preferred Stock, holders are required to enter into shareholder
agreements that contain transfer restrictions with respect to the common stock.
Common Stock
Each share of the common stock is entitled to one vote in the election of directors and in all
other matters submitted to a vote of shareholders. Accordingly, holders of a majority of the
shares of common stock entitled to vote in any election of directors may elect all of the directors
standing for election if they choose to do so, subject to the rights, if any, of the holders of the
preferred stock. Voting for directors is noncumulative.
Subject to the preferential rights of the Series A Preferred Stock and any other preferred
stock that may at the time be outstanding, each share of common stock has an equal and ratable
right to receive dividends when, if and as declared by the board of directors out of assets legally
available. In the event of our liquidation, dissolution or winding up, the holders of common stock
will be entitled to share equally and ratably in the assets available for distribution after
payments to creditors and to the holders of the Series A Preferred Stock and any other preferred
stock that may at the time be outstanding. Holders of common stock have no conversion, preemptive
or other rights to subscribe for any additional shares of common stock or for other securities.
All outstanding common stock is fully paid and non-assessable.
-23-
Our common stock is not actively traded, and there is no established trading market for the
stock. There is only one class of common stock. As of January 31, 2010, 92% of our shares of
common stock were subject to contractual transfer restrictions set forth in shareholder agreements
and approximately 8% were held by 17 shareholders without such restrictions, including our 401(k)
plan, or Savings Plan, which holds 76% of the unrestricted shares. See also Part I, Item 1, Risk
Factors Risks Relating to Investments in Our Common Stock.
We are planning to convene a special meeting of shareholders in March 2010 to consider certain
amendments to our existing restated articles of incorporation, including the recapitalization of
our common stock. The proposed amendments would, among other things, (i) redesignate our existing
common stock as Class B common stock, with five votes per share, which upon transfer, except for
certain permitted transfers, would automatically convert into shares of Class A common stock; (ii)
increase the number of authorized shares of Class B common stock to 100,000,000 shares; (iii)
create a new class of common stock designated as Class A common stock, with one vote per share,
consisting of 100,000,000 shares; and (iv) effect a forward stock split ranging from 3:1 to 5:1
shares of Class B common stock. Our Board of Directors has determined the amendments are necessary
and appropriate in connection with our proposed initial public offering, which was announced on
January 15, 2010.
Minority appraisal values as of each calendar quarter end for the past two years, determined
by an independent valuation expert, follow:
|
|
|
|
|
|
|
|
|
Valuation Based on |
|
|
|
|
|
Appraised |
|
Financial Data as of |
|
Valuation Effective Date |
|
|
Minority Value |
|
December 31, 2007 |
|
February 15, 2008 |
|
$ |
83.50 |
|
March 31, 2008 |
|
May 15, 2008 |
|
|
84.75 |
|
June 30, 2008 |
|
August 13, 2008 |
|
|
77.00 |
|
September 30, 2008 |
|
November 14, 2008 |
|
|
79.75 |
|
December 31, 2008 |
|
March 2, 2009 |
|
|
74.50 |
|
March 31, 2009 |
|
May 15, 2009 |
|
|
61.00 |
|
June 30, 2009 |
|
August 17, 2009 |
|
|
60.00 |
|
September 30, 2009 |
|
November 16, 2009 |
|
|
61.50 |
|
December 31, 2009 |
|
February 5, 2010 |
|
|
60.00 |
|
Resale of our common stock may be restricted pursuant to the Securities Act and applicable
state securities laws. In addition, most shares of our common stock are subject to shareholders
agreements:
|
|
|
Members of the Scott family, as majority shareholders who own an aggregate
of 6,103,238 shares, are subject to a shareholders agreement. Under this
agreement, the Scott family has agreed to limit the transfer of shares owned by
members of the Scott family to family members or charities, or with our approval,
to our officers, directors, advisory directors or to our Savings Plan. |
|
|
|
|
Shareholders who are not Scott family members, with the exception of 17
shareholders who own an aggregate of 633,502 shares of unrestricted stock, are
subject to shareholders agreements. Stock subject to these agreements may not be
sold or transferred without triggering our option to acquire the stock in
accordance with the terms of these agreements. In addition, the agreements grant
us the right to repurchase all or some of the stock under certain conditions. |
Purchases of our common stock made through our Savings Plan are not restricted by shareholder
agreements. Since the Savings Plan does not allow distributions in kind, however, any
distribution from an employees account in the Savings Plan will require the Savings Plan
administrator to authorize a sale of the stock.
As of January 31, 2010, we had 757 record shareholders, including the Wealth Management
division of First Interstate Bank as trustee for 481,110 shares held on behalf of 1,210 individual
participants in the Savings Plan. Of such participants, 335 individuals also own shares of our
stock outside of the Savings Plan. The Savings Plan Trustee votes the shares based on the
instructions of each participant. In the event the participant does not provide the Savings Plan
Trustee with instructions, the Savings Plan Trustee votes those shares in accordance with voting
instructions received from a majority of the participants in the plan.
-24-
Dividends
It is our policy to pay a dividend to all common shareholders quarterly. Dividends are
declared and paid in the month following the calendar quarter. The board may change or eliminate
the payment of future dividends.
Recent quarterly dividends follow:
|
|
|
|
|
|
|
|
|
|
|
Amount |
|
|
Total Cash |
|
Month Declared and Paid |
|
Per Share |
|
|
Dividends |
|
January 2008 |
|
$ |
0.65 |
|
|
$ |
5,207,192 |
|
April 2008 |
|
|
0.65 |
|
|
|
5,124,399 |
|
July 2008 |
|
|
0.65 |
|
|
|
5,090,168 |
|
October 2008 |
|
|
0.65 |
|
|
|
5,157,034 |
|
January 2009 |
|
|
0.65 |
|
|
|
5,127,714 |
|
April 2009 |
|
|
0.45 |
|
|
|
3,522,836 |
|
July 2009 |
|
|
0.45 |
|
|
|
3,513,986 |
|
October 2009 |
|
|
0.45 |
|
|
|
3,528,996 |
|
January 2010 |
|
|
0.45 |
|
|
|
3,519,163 |
|
Dividend Restrictions
For a description of restrictions on the payment of dividends, see Part I, Item 1, Business
Regulation and Supervision Restrictions on Transfers of Funds to Us and the Bank, and
Managements Discussion and Analysis of Financial Condition and Results of Operations Capital
Resources and Liquidity Management and Managements Discussion and Analysis of Financial
Condition and Results of OperationsFinancial ConditionLong-Term Debt included in Part II, Item 7
herein.
Sales of Unregistered Securities
There were no issuances of unregistered securities during the fourth quarter of 2009.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table provides information with respect to purchases made by or on behalf of us
or any affiliated purchasers (as defined in Rule 10b-18(a)(3) under the Exchange Act) of our
common stock during the three months ended December 31, 2009.
Purchases of Equity Securities by Issuer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number |
|
Maximum Number |
|
|
|
|
|
|
|
|
|
|
of Shares Purchased |
|
of Shares That |
|
|
Total Number |
|
|
|
|
|
|
as Part of Publicly |
|
May Yet Be |
|
|
of Shares |
|
|
Average Price |
|
|
Announced |
|
Purchased Under the |
Period |
|
Purchased (1) |
|
|
Paid Per Share |
|
|
Plans or Programs |
|
Plans or Programs |
|
October 2009 |
|
|
|
|
|
$ |
|
|
|
Not Applicable |
|
Not Applicable |
November 2009 |
|
|
|
|
|
|
|
|
|
Not Applicable |
|
Not Applicable |
December 2009 |
|
|
24,331 |
|
|
|
61.50 |
|
|
Not Applicable |
|
Not Applicable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
24,331 |
|
|
$ |
61.50 |
|
|
Not Applicable |
|
Not Applicable |
|
|
|
|
(1) |
|
Our common stock is not publicly traded, and there is no established trading market for
the stock. There is only one class of common stock. As of December 31, 2009, approximately
92% of our common stock was subject to contractual transfer restrictions set forth in
shareholder agreements. We have a right of first refusal to repurchase the restricted stock.
Additionally, under certain conditions we may call restricted stock held by our officers,
directors and employees. We have no obligation to purchase restricted or unrestricted stock,
but have historically purchased such stock. All purchases indicated in the table above were
effected pursuant to private transactions. |
-25-
Performance Graph
The performance graph below compares the cumulative total shareholder return of our common
stock with the cumulative total return on equity securities of companies included in the Nasdaq
Composite Index and the Nasdaq Bank Index. The Nasdaq Bank Index is a comparative peer index
comprised of financial companies, including banks, savings institutions and related holding
companies that perform banking-related functions, listed on the Nasdaq Stock Market. The Nasdaq
Composite Index is a comparative broad market index comprised of all domestic and international
common stocks listed on the Nasdaq Stock Market. The graph assumes an investment of $100 on
December 31, 2004 and reinvestment of dividends on the date of payment without commissions. The
plot points on the graph were provided by SNL Financial LC, Charlottesville, VA.
Our common stock is not publicly traded, and there is no established trading market for our stock.
The cumulative total shareholder return for our common stock is based on the minority appraised
value of the common stock, which represents the estimated fair market valuation of a minority
interest, taking into account adjustments for the lack of marketability and other factors, as of
December 31st of each year. The performance graph represents past performance, which
may not be indicative of the future performance of our common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ending |
|
Index |
|
12/31/04 |
|
|
12/31/05 |
|
|
12/31/06 |
|
|
12/31/07 |
|
|
12/31/08 |
|
|
12/31/09 |
|
|
First Interstate BancSystems, Inc. |
|
|
100.00 |
|
|
|
115.99 |
|
|
|
149.94 |
|
|
|
145.47 |
|
|
|
134.00 |
|
|
|
111.30 |
|
NASDAQ Composite |
|
|
100.00 |
|
|
|
101.37 |
|
|
|
111.03 |
|
|
|
121.92 |
|
|
|
72.49 |
|
|
|
104.31 |
|
NASDAQ Bank |
|
|
100.00 |
|
|
|
95.67 |
|
|
|
106.20 |
|
|
|
82.76 |
|
|
|
62.96 |
|
|
|
51.31 |
|
-26-
Item 6. Selected Consolidated Financial Data
The following selected consolidated financial data with respect to our consolidated financial
position as of December 31, 2009 and 2008, and the results of our operations for the fiscal years
ended December 31, 2009, 2008 and 2007, has been derived from our audited consolidated financial
statements included in Part IV, Item 15. This data should be read in conjunction with Part II,
Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations and
such consolidated financial statements, including the notes thereto. The selected consolidated
financial data with respect to our consolidated financial position as of December 31,
2007, 2006 and 2005, and the results of our operations for the fiscal years ended December 31, 2006
and 2005, has been derived from our audited consolidated financial statements not included herein.
(Dollars in thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of or for the year ended December 31, |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Selected Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans |
|
$ |
4,424,974 |
|
|
$ |
4,685,497 |
|
|
$ |
3,506,625 |
|
|
$ |
3,262,911 |
|
|
$ |
2,991,904 |
|
Investment securities |
|
|
1,446,280 |
|
|
|
1,072,276 |
|
|
|
1,128,657 |
|
|
|
1,124,598 |
|
|
|
1,019,901 |
|
Total assets |
|
|
7,137,653 |
|
|
|
6,628,347 |
|
|
|
5,216,797 |
|
|
|
4,974,134 |
|
|
|
4,562,313 |
|
Deposits |
|
|
5,824,056 |
|
|
|
5,174,259 |
|
|
|
3,999,401 |
|
|
|
3,708,511 |
|
|
|
3,547,590 |
|
Securities sold under repurchase agreements |
|
|
474,141 |
|
|
|
525,501 |
|
|
|
604,762 |
|
|
|
731,548 |
|
|
|
518,718 |
|
Long-term debt |
|
|
73,353 |
|
|
|
84,148 |
|
|
|
5,145 |
|
|
|
21,601 |
|
|
|
54,654 |
|
Subordinated debentures held by subsidiary
trusts |
|
|
123,715 |
|
|
|
123,715 |
|
|
|
103,095 |
|
|
|
41,238 |
|
|
|
41,238 |
|
Preferred stockholders equity |
|
|
50,000 |
|
|
|
50,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stockholders equity |
|
|
524,434 |
|
|
|
489,062 |
|
|
|
444,443 |
|
|
|
410,375 |
|
|
|
349,847 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Income Statement Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
328,034 |
|
|
$ |
355,919 |
|
|
$ |
325,557 |
|
|
$ |
293,423 |
|
|
$ |
233,857 |
|
Interest expense |
|
|
84,898 |
|
|
|
120,542 |
|
|
|
125,954 |
|
|
|
105,960 |
|
|
|
63,549 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
243,136 |
|
|
|
235,377 |
|
|
|
199,603 |
|
|
|
187,463 |
|
|
|
170,308 |
|
Provision for loan losses |
|
|
45,300 |
|
|
|
33,356 |
|
|
|
7,750 |
|
|
|
7,761 |
|
|
|
5,847 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after
provision for loan losses |
|
|
197,836 |
|
|
|
202,021 |
|
|
|
191,853 |
|
|
|
179,702 |
|
|
|
164,461 |
|
Non-interest income |
|
|
100,690 |
|
|
|
128,597 |
|
|
|
92,367 |
|
|
|
102,181 |
|
|
|
70,651 |
|
Non-interest expense |
|
|
217,710 |
|
|
|
222,541 |
|
|
|
178,786 |
|
|
|
164,775 |
|
|
|
151,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
80,816 |
|
|
|
108,077 |
|
|
|
105,434 |
|
|
|
117,108 |
|
|
|
84,025 |
|
Income tax expense |
|
|
26,953 |
|
|
|
37,429 |
|
|
|
36,793 |
|
|
|
41,499 |
|
|
|
29,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
53,863 |
|
|
|
70,648 |
|
|
|
68,641 |
|
|
|
75,609 |
|
|
|
54,715 |
|
Preferred stock dividends |
|
|
3,422 |
|
|
|
3,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
50,441 |
|
|
$ |
67,301 |
|
|
$ |
68,641 |
|
|
$ |
75,609 |
|
|
$ |
54,715 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Share Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
6.44 |
|
|
$ |
8.55 |
|
|
$ |
8.45 |
|
|
$ |
9.32 |
|
|
$ |
6.84 |
|
Diluted |
|
|
6.37 |
|
|
|
8.38 |
|
|
|
8.25 |
|
|
|
9.11 |
|
|
|
6.71 |
|
Dividends per share |
|
|
2.00 |
|
|
|
2.60 |
|
|
|
2.97 |
|
|
|
2.27 |
|
|
|
1.88 |
|
Book value per share (1) |
|
|
66.91 |
|
|
|
62.00 |
|
|
|
55.51 |
|
|
|
50.38 |
|
|
|
43.20 |
|
Tangible book value per share (2) |
|
|
42.13 |
|
|
|
37.07 |
|
|
|
50.81 |
|
|
|
45.74 |
|
|
|
38.43 |
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
7,833,917 |
|
|
|
7,871,034 |
|
|
|
8,126,804 |
|
|
|
8,112,610 |
|
|
|
8,001,682 |
|
Diluted |
|
|
7,919,625 |
|
|
|
8,028,168 |
|
|
|
8,322,480 |
|
|
|
8,303,990 |
|
|
|
8,149,337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 27 -
Five Year Summary (continued)
(Dollars in thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of or for the year ended December 31, |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Financial Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets |
|
|
0.79 |
% |
|
|
1.12 |
% |
|
|
1.37 |
% |
|
|
1.60 |
% |
|
|
1.26 |
% |
Return on average common stockholders equity |
|
|
9.96 |
|
|
|
14.73 |
|
|
|
16.14 |
|
|
|
20.38 |
|
|
|
16.79 |
|
Average stockholders equity to average assets |
|
|
8.16 |
|
|
|
7.98 |
|
|
|
8.52 |
|
|
|
7.85 |
|
|
|
7.52 |
|
Yield on average earning assets |
|
|
5.44 |
|
|
|
6.37 |
|
|
|
7.21 |
|
|
|
6.94 |
|
|
|
6.12 |
|
Cost of average interest bearing liabilities |
|
|
1.63 |
|
|
|
2.50 |
|
|
|
3.43 |
|
|
|
3.05 |
|
|
|
1.99 |
|
Interest rate spread |
|
|
3.81 |
|
|
|
3.87 |
|
|
|
3.78 |
|
|
|
3.89 |
|
|
|
4.13 |
|
Net interest margin (3) |
|
|
4.05 |
|
|
|
4.25 |
|
|
|
4.46 |
|
|
|
4.47 |
|
|
|
4.48 |
|
Efficiency ratio (4) |
|
|
63.32 |
|
|
|
61.14 |
|
|
|
61.23 |
|
|
|
56.89 |
|
|
|
62.70 |
|
Common stock dividend payout ratio (5) |
|
|
31.06 |
|
|
|
30.41 |
|
|
|
35.15 |
|
|
|
24.36 |
|
|
|
27.49 |
|
Loan to deposit ratio |
|
|
77.75 |
|
|
|
92.24 |
|
|
|
88.99 |
|
|
|
89.26 |
|
|
|
85.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Quality Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans to total loans (6) |
|
|
2.75 |
% |
|
|
1.90 |
% |
|
|
0.98 |
% |
|
|
0.53 |
% |
|
|
0.63 |
% |
Non-performing assets to total loans and
other real estate owned (OREO) (7) |
|
|
3.57 |
|
|
|
2.03 |
|
|
|
1.00 |
|
|
|
0.55 |
|
|
|
0.67 |
|
Non-performing assets to total assets |
|
|
2.28 |
|
|
|
1.46 |
|
|
|
0.68 |
|
|
|
0.36 |
|
|
|
0.45 |
|
Allowance for loan losses to total loans |
|
|
2.28 |
|
|
|
1.83 |
|
|
|
1.47 |
|
|
|
1.43 |
|
|
|
1.40 |
|
Allowance for loan losses to non-performing
loans |
|
|
82.64 |
|
|
|
96.03 |
|
|
|
150.66 |
|
|
|
269.72 |
|
|
|
220.73 |
|
Net charge-offs to average loans |
|
|
0.63 |
|
|
|
0.28 |
|
|
|
0.08 |
|
|
|
0.09 |
|
|
|
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible common equity to tangible assets (8) |
|
|
4.79 |
% |
|
|
4.58 |
% |
|
|
7.85 |
% |
|
|
7.55 |
% |
|
|
6.88 |
% |
Tier 1 common capital to total risk weighted
assets (9) |
|
|
6.43 |
|
|
|
5.35 |
|
|
|
9.95 |
|
|
|
9.68 |
|
|
|
8.94 |
|
Leverage ratio |
|
|
7.30 |
|
|
|
7.13 |
|
|
|
9.92 |
|
|
|
8.61 |
|
|
|
7.91 |
|
Tier 1 risk-based capital |
|
|
9.74 |
|
|
|
8.57 |
|
|
|
12.39 |
|
|
|
10.71 |
|
|
|
10.07 |
|
Total risk-based capital |
|
|
11.68 |
|
|
|
10.49 |
|
|
|
13.64 |
|
|
|
11.93 |
|
|
|
11.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For purposes of computing book value per share, book value equals common stockholders
equity. |
|
(2) |
|
Tangible book value per share is a non-GAAP financial measure that management uses to
evaluate our capital adequacy. For purposes of computing tangible book value per share,
tangible book value equals common stockholders equity less goodwill, core deposit
intangibles and other intangible assets (except mortgage servicing rights). Tangible book
value per share is calculated as tangible common stockholders equity divided by
common shares outstanding, and its most directly comparable GAAP financial measure is book
value per share. See below our reconciliation of non-GAAP financial measures to their
most directly comparable GAAP financial measures under the caption Non-GAAP Financial
Measures in this Part II, Item 6. |
|
(3) |
|
Net interest margin ratio is presented on a fully taxable equivalent, or FTE, basis. |
|
(4) |
|
Efficiency ratio represents non-interest expense, excluding loan loss provision,
divided by the aggregate of net interest income and non-interest income. |
|
(5) |
|
Common stock dividend payout ratio represents dividends per common share divided by
basic earnings per common share. |
|
(6) |
|
Non-performing loans include nonaccrual loans, loans past due 90 days or more and
still accruing interest and restructured loans. |
|
(7) |
|
Non-performing assets include nonaccrual loans, loans past due 90 days or more and
still accruing interest and restructured loans and OREO. |
|
(8) |
|
Tangible common equity to tangible assets is a non-GAAP financial measure that
management uses to evaluate our capital adequacy. For purposes of computing tangible
common equity to tangible assets, tangible common equity is calculated as common
stockholders equity less goodwill and other intangible assets (except mortgage servicing
assets), and tangible assets is calculated as total assets less goodwill and other
intangible assets (except mortgage servicing rights). See below our reconciliation of
non-GAAP financial measures to their most directly comparable GAAP financial measures
under the caption Non-GAAP Financial Measures in this Part II, Item 6. |
|
(9) |
|
For purposes of computing tier 1 common capital to total risk-weighted assets, tier 1
common capital excludes preferred stock and trust preferred securities. |
- 28 -
Non-GAAP Financial Measures
In addition to results presented in accordance with generally accepted accounting principals
in the United States of America, or GAAP, this annual report contains the following non-GAAP
financial measures that management uses to evaluate our capital adequacy: tangible book value per
share and tangible common equity to tangible assets. Tangible book value per share is calculated as
tangible common stockholders equity divided by common shares outstanding. Tangible assets is
calculated as total assets less goodwill and other intangible assets (excluding mortgage servicing
assets). Tangible common equity to tangible assets is calculated as tangible common stockholders
equity divided by tangible assets. These non-GAAP financial measures may not be comparable to
similarly titled measures reported by other companies because other companies may not calculate
these non-GAAP measures in the same manner. They also should not be considered in isolation or as a
substitute for measures prepared in accordance with GAAP.
The following table shows a reconciliation from ending stockholders equity (GAAP) to ending
tangible common stockholders equity (non-GAAP) and ending assets (GAAP) to ending tangible assets
(non-GAAP), their most directly comparable GAAP financial measures,
in each instance as of the
periods presented.
Five Year Summary
(Dollars in thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Preferred stockholders equity |
|
$ |
50,000 |
|
|
$ |
50,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Common stockholders equity |
|
|
524,434 |
|
|
|
489,062 |
|
|
|
444,443 |
|
|
|
410,375 |
|
|
|
349,847 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
574,434 |
|
|
|
539,062 |
|
|
|
444,443 |
|
|
|
410,375 |
|
|
|
349,847 |
|
Less goodwill and other intangible assets |
|
|
194,273 |
|
|
|
196,667 |
|
|
|
37,637 |
|
|
|
37,812 |
|
|
|
38,595 |
|
Less preferred stock |
|
|
50,000 |
|
|
|
50,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible common stockholders equity |
|
$ |
330,161 |
|
|
$ |
292,395 |
|
|
$ |
406,806 |
|
|
$ |
372,563 |
|
|
$ |
311,252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of common shares outstanding |
|
|
7,837,397 |
|
|
|
7,887,519 |
|
|
|
8,006,041 |
|
|
|
8,144,788 |
|
|
|
8,098,933 |
|
Book value per common share |
|
$ |
66.91 |
|
|
$ |
62.00 |
|
|
$ |
55.51 |
|
|
$ |
50.38 |
|
|
$ |
43.20 |
|
Tangible book value per common share |
|
|
42.13 |
|
|
|
37.07 |
|
|
|
50.81 |
|
|
|
45.74 |
|
|
|
38.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
7,137,653 |
|
|
$ |
6,628,347 |
|
|
$ |
5,216,797 |
|
|
$ |
4,974,134 |
|
|
$ |
4,562,313 |
|
Less goodwill and other intangible assets |
|
|
194,273 |
|
|
|
196,667 |
|
|
|
37,637 |
|
|
|
37,812 |
|
|
|
38,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible assets |
|
$ |
6,943,380 |
|
|
$ |
6,431,680 |
|
|
$ |
5,179,160 |
|
|
$ |
4,936,322 |
|
|
$ |
4,523,718 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible common stockholders equity to
tangible assets |
|
|
4.76 |
% |
|
|
4.55 |
% |
|
|
7.85 |
% |
|
|
7.55 |
% |
|
|
6.88 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Note Regarding Forward-Looking Statements and Factors that Could Affect Future Results
This report contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, and Section 21E of the
Securities Exchange Act of 1934, as amended, and Rule 3b-6 promulgated thereunder, that involve
inherent risks and uncertainties. Any statements about our plans, objectives, expectations,
strategies, beliefs, or future performance or events constitute forward-looking statements. Such
statements are identified as those that include words or phrases such as believes, expects,
anticipates, plans, trend, objective, continue or similar expressions or future or
conditional verbs such as will, would, should, could, might, may or similar
expressions.
- 29 -
Forward-looking statements involve known and unknown risks, uncertainties, assumptions,
estimates and other important factors that could cause actual results to differ materially from any
results, performance or events expressed or implied by such forward-looking statements. All
forward-looking statements are qualified in their entirety by reference to the factors discussed in
this report including, among others, the following risk factors discussed more fully in Part I,
Item 1A hereof:
|
|
|
concentrations of real estate loans; |
|
|
|
economic and market developments, including inflation; |
|
|
|
adequacy of our allowance for loan losses; |
|
|
|
impairment of goodwill; |
|
|
|
changes in interest rates; |
|
|
|
access to low-cost funding sources; |
|
|
|
increases in deposit insurance premiums; |
|
|
|
inability to grow our business; |
|
|
|
adverse economic conditions affecting Montana, Wyoming and western South
Dakota; |
|
|
|
governmental regulation and changes in regulatory, tax and accounting rules and
interpretations; |
|
|
|
changes in or noncompliance with governmental regulations; |
|
|
|
effects of recent legislative and regulatory efforts to stabilize financial
markets; |
|
|
|
dependence on our management team; |
|
|
|
ability to attract and retain qualified employees; |
|
|
|
disruption of vital infrastructure and other business interruptions; |
|
|
|
illiquidity in the credit markets; |
|
|
|
inability to meet liquidity requirements; |
|
|
|
lack of acquisition candidates; |
|
|
|
failure to manage growth; |
|
|
|
inability to manage risks in turbulent and dynamic market conditions; |
|
|
|
ineffective internal operational controls; |
|
|
|
environmental remediation and other costs; |
|
|
|
failure to effectively implement technology-driven products and services; |
|
|
|
litigation pertaining to fiduciary responsibilities; |
|
|
|
capital required to support our Bank subsidiary; |
|
|
|
failure to meet our debt covenants; |
|
|
|
soundness of other financial institutions; |
|
|
|
impact of Basel II capital standards; |
|
|
|
inability of our Bank subsidiary to pay dividends; |
|
|
|
change in dividend policy; |
|
|
|
lack of public market for our common stock; |
|
|
|
transfer restrictions on our common stock; |
|
|
|
limitations on stock repurchases |
|
|
|
dilution as a result of future equity issuances; |
|
|
|
anti-takeover provisions; and |
|
|
|
subordination of common stock to company debt and preferred stock. |
These factors are not necessarily all of the factors that could cause our actual results,
performance or achievements to differ materially from those expressed in or implied by any of our
forward-looking statements. Other unknown or unpredictable factors also could harm our results.
All forward-looking statements attributable to us or persons acting on our behalf are
expressly qualified in their entirety by the cautionary statements set forth above.
Forward-looking statements speak only as of the date they are made and we do not undertake or
assume any obligation to update publicly any of these statements to reflect actual results, new
information or future events, changes in assumptions or changes in other factors affecting
forward-looking statements, except to the extent required by applicable laws. If we update one or
more forward-looking statements, no inference should be drawn that we will make additional updates
with respect to those or other forward-looking statements.
- 30 -
Executive Overview
We are a financial and bank holding company headquartered in Billings, Montana. As of
December 31, 2009, we had consolidated assets of $7.1 billion, deposits of $5.8 billion, loans of
$4.5 billion and total stockholders equity of $574 million. We currently operate 72 banking
offices in 42 communities located in Montana, Wyoming and western South Dakota. Through the Bank,
we deliver a comprehensive range of banking products and services to individuals, businesses,
municipalities and other entities throughout our market areas. Our customers participate in a wide
variety of industries, including energy, healthcare and professional services, education and
governmental services, construction, mining, agriculture, retail and wholesale trade and tourism.
Our principal business activity is lending to and accepting deposits from individuals,
businesses, municipalities and other entities. We derive our income principally from interest
charged on loans and, to a lesser extent, from interest and dividends earned on investments. We
also derive income from non-interest sources such as fees received in connection with various
lending and deposit services; trust, employee benefit, investment and insurance services; mortgage
loan originations, sales and servicing; merchant and electronic banking services; and from time to
time, gains on sales of assets. Our principal expenses include interest expense on deposits and
borrowings, operating expenses, provisions for loan losses and income tax expense.
Our loan portfolio consists of a mix of real estate, consumer, commercial, agricultural and
other loans, including fixed and variable rate loans. Our real estate loans comprise commercial
real estate, construction (including residential, commercial and land development loans),
residential, agricultural and other real estate loans. Fluctuations in the loan portfolio are
directly related to the economies of the communities we serve. While each loan originated
generally must meet minimum underwriting standards established in our credit policies, lending
officers are granted discretion within pre-approved limits in approving and pricing loans to assure
that the banking offices are responsive to competitive issues and community needs in each market
area. We fund our loan portfolio primarily with the core deposits from our customers, generally
without utilizing brokered deposits and with minimal reliance on wholesale funding sources.
In furtherance of our strategy to maintain and enhance our long-term performance while we
continue to grow and expand our business, we completed two strategic transactions in 2008. In
January 2008 we completed the First Western acquisition, which comprised the purchase of two banks
(First Western Bank in Wall, South Dakota and The First Western Bank Sturgis in Sturgis, South
Dakota) and a data center located in western South Dakota with combined total assets as of the
acquisition date of approximately $913 million. Because the results of First Western Bank are not
included in our results for the periods prior to the date of acquisition, our results and other
financial data for such prior periods may not be comparable in all respects to our results for
periods after the date of acquisition. On December 31, 2008, we completed the disposition of
i_Tech, our technology services subsidiary, to a national technology services provider. The
disposition eliminated our technology services operating segment, enabling us to focus on our core
business and only remaining segment, community banking. Because the operating results attributable
to our former technology services operating segment are not included in our operating results for
periods subsequent to the date of disposition, our results for periods prior to the date of that
transaction may not be comparable in all respects. See Notes to Consolidated Financial Statements
Summary of Significant Accounting Policies and Notes to Consolidated Financial
StatementsAcquisitions and Dispositions included in Part IV, Item 15 of this report.
Primary Factors Used in Evaluating Our Business
As a banking institution, we manage and evaluate various aspects of both our financial
condition and our results of operations. We monitor our financial condition and performance on a
monthly basis, at our holding company, at the Bank and at each banking office. We evaluate the
levels and trends of the line items included in our balance sheet and statements of income, as well
as various financial ratios that are commonly used in our industry. We analyze these ratios and
financial trends against both our own historical levels and the financial condition and performance
of comparable banking institutions in our region and nationally.
- 31 -
Results of Operations
Principal factors used in managing and evaluating our results of operations include return on
average assets, net interest income, non-interest income, non-interest expense and net income. Net
interest income is affected by the level of interest rates, changes in interest rates and changes
in the composition of interest earning assets and interest bearing liabilities. The most
significant impact on our net interest income between periods is derived from the interaction of
changes in the rates earned or paid on interest earning assets and interest bearing liabilities,
which we refer to as interest rate spread. The volume of loans, investment securities and other
interest earning assets, compared to the volume of interest bearing deposits and indebtedness,
combined with the interest rate spread, produces changes in our net interest income between
periods. Non-interest bearing sources of funds, such as demand deposits and stockholders equity,
also support earning assets. The impact of free funding sources is captured in the net interest
margin, which is calculated as net interest income divided by average earning assets. Given the
interest free nature of free funding sources, the net interest margin is generally higher than the
interest rate spread. We seek to increase our net interest income over time, and we evaluate our
net interest income on factors that include the yields on our loans and other earning assets, the
costs of our deposits and other funding sources, the levels of our net interest spread and net
interest margin and the provisions for loan losses required to maintain our allowance for loan
losses at an adequate level.
We seek to increase our non-interest income over time, and we evaluate our non-interest income
relative to the trends of the individual types of non-interest income in view of prevailing market
conditions.
We seek to manage our non-interest expenses in consideration of the growth of our business and
our community banking model that emphasizes customer service and responsiveness. We evaluate our
non-interest expense on factors that include our non-interest expense relative to our average
assets, our efficiency ratio and the trends of the individual categories of non-interest expense.
Finally, we seek to increase our net income and provide favorable shareholder returns over
time, and we evaluate our net income relative to the performance of other banks and bank holding
companies on factors that include return on average assets, return on average equity, and
consistency and rates of growth in our earnings.
Financial Condition
Principal areas of focus in managing and evaluating our financial condition include liquidity,
the diversification and quality of our loans, the adequacy of our allowance for loan losses, the
diversification and terms of our deposits and other funding sources, the re-pricing characteristics
and maturities of our assets and liabilities, including potential interest rate exposure and the
adequacy of our capital levels. We seek to maintain sufficient levels of cash and investment
securities to meet potential payment and funding obligations, and we evaluate our liquidity on
factors that include the levels of cash and highly liquid assets relative to our liabilities, the
quality and maturities of our investment securities, our ratio of loans to deposits and our
reliance on brokered certificates of deposit or other wholesale funding sources.
We seek to maintain a diverse and high quality loan portfolio, and we evaluate our asset
quality on factors that include the allocation of our loans among loan types, credit exposure to
any single borrower or industry type, non-performing assets as a percentage of total loans and
OREO, and loan charge-offs as a percentage of average loans. We seek to maintain our allowance for
loan losses at a level adequate to absorb potential losses inherent in our loan portfolio at each
balance sheet date, and we evaluate the level of our allowance for loan losses relative to our
overall loan portfolio and the level of non-performing loans and potential charge-offs.
We seek to fund our assets primarily using core customer deposits spread among various deposit
categories, and we evaluate our deposit and funding mix on factors that include the allocation of
our deposits among deposit types, the level of our non-interest bearing deposits, the ratio of our
core deposits (i.e. excluding time deposits above $100,000) to our total deposits and our reliance
on brokered deposits or other wholesale funding sources, such as borrowings from other banks or
agencies. We seek to manage the mix, maturities and re-pricing characteristics of our assets and
liabilities to maintain relative stability of our net interest rate margin in a changing interest
rate environment, and we evaluate our asset-liability management using complex models to evaluate
the changes to our net interest income under different interest rate scenarios.
Finally, we seek to maintain adequate capital levels to absorb unforeseen operating losses and
to help support the growth of our balance sheet. We evaluate our capital adequacy using the
regulatory and financial capital ratios including leverage capital ratio, tier 1 risk-based capital
ratio, total risk-based capital ratio, tangible common equity to tangible assets and tier 1 common
capital to total risk-weighted assets.
- 32 -
Trends and Developments
Our success is highly dependent on economic conditions and market interest rates. Because we
operate in Montana, Wyoming and western South Dakota, the local economic conditions in each of
these areas are particularly important. Our local economies have not been impacted as severely by
the national economic and real estate downturn, sub-prime mortgage crisis and ongoing financial
market turmoil as many areas of the United States. Although the continuing impact of the national
recession and financial market turmoil is uncertain, these factors affect our business and could
have a material negative effect on our cash flows, results of operations, financial condition and
prospects.
FDIC Insurance Premiums
The FDIC made several adjustments to the assessment rate during 2009 including a special
assessment permitted under statutory authority granted in 2008. The assessment schedule published
as of April 1, 2009 and effective for assessments on and after September 30, 2009 provides for
assessment ranges, based upon risk assessment of each insured depository institution, of between 7
and 77.5 cents per $100 of domestic deposits. We are currently in Risk Category 1, the lowest risk
category, which provides for a base assessment range of 7 to 24 cents per $100 of domestic
deposits. The special assessment was applicable to all insured depository institutions and totaled
5 basis points of each institutions total assets less tier 1 capital as of June 30, 2009, not to
exceed 10 basis points of domestic deposits.
On November 21, 2008, the FDIC adopted a final rule relating to the TLG Program. Under the TLG
Program, the FDIC will (1) guarantee, through the earlier of maturity or June 30, 2012, certain
newly issued senior unsecured debt issued by participating institutions on or after October 14,
2008 and before June 30, 2009 and (2) provide full FDIC deposit insurance coverage for non-interest
bearing transaction deposit accounts, NOW accounts paying 0.5% or less interest per annum and IOLTA
held at participating FDIC-insured institutions through June 30, 2010. On March 17, 2009, the FDIC
extended the debt guarantee program through October 31, 2009. We elected to participate in the
deposit insurance coverage guarantee program. We have elected not to participate in the unsecured
debt guarantee program because more cost-effective liquidity sources are available to us. Coverage
under the TLG Program was available for the first 30 days without charge. The fee assessment for
deposit insurance coverage is 10 basis points per annum on amounts in covered accounts exceeding
$250,000.
All FDIC-insured institutions are required to pay assessments to the FDIC to fund interest
payments on bonds issued by FICO, an agency of the Federal government established to recapitalize
the predecessor to the DIF. The FICO assessment rates, which are determined quarterly, averaged
0.01% of insured deposits in fiscal 2009. These assessments will continue until the FICO bonds
mature in 2017.
On November 17, 2009, the FDIC imposed a prepayment requirement on most insured depository
organizations, requiring that the organizations prepay estimated quarterly risk-based assessments
for the fourth quarter of 2009 and for each calendar quarter for calendar years 2010, 2011 and
2012. We made our prepayment on December 31, 2009 in the total amount of $32 million, which is
included in other assets in the accompanying consolidated balance sheet for December 31, 2009. The
actual assessments becoming due from the Bank on the last day of each calendar quarter will be
applied against the prepaid amount until the prepayment amount is exhausted. If the prepayment
amount is not exhausted before June 30, 2013 any remaining balance will be returned to the Bank.
The prepayment amount does not bear interest.
Dividend Policy and Capital Resources
In response to the current recession and uncertain market conditions, we implemented changes
to our capital management practices to conserve capital. Beginning with second quarter 2009, we
paid quarterly dividends of $0.45 per common share, a decrease of $0.20 per common share from
quarterly dividends paid during 2008 and first quarter 2009. In addition, during 2009, we limited
repurchases of common stock outside of our 401(k) retirement plan. During 2009, we repurchased
160,688 shares of common stock with an aggregate value of $11 million compared to repurchases of
the 333,393 shares of common stock with an aggregate value of $28 million during 2008. We intend
to continue to limit repurchases of common stock in 2010.
During second quarter 2009, we received notification that our application for participation in
the TARP Capital Purchase Program was approved though we elected not to participate in this
program.
On January 15, 2010, we filed a registration statement with the SEC for a proposed initial
public offering of shares of our Class A common stock. The offering is expected to consist of
shares of Class A common stock to be sold by us and may include shares of Class A common stock to
be sold by certain existing shareholders. The consummation of the proposed offering is subject to
market conditions and other factors.
- 33 -
Asset Quality
Difficult economic conditions continue to have a negative impact on businesses and consumers
in our market areas. General declines in the real estate and housing markets resulted in
significant deterioration in the credit quality of our loan portfolio, which is reflected by
increases in non-performing and internally risk classified loans. Our non-performing assets
increased to $163 million, or 3.57% of total loans and OREO, as of December 31, 2009, from
$97 million, or 2.03% of total loans and OREO, as of December 31, 2008. Loan charge-offs, net of
recoveries, totaled $30 million during 2009, as compared to $13 million during 2008, with all
major loan categories reflecting increases. Based on our assessment of the adequacy of our
allowance for loan losses, we recorded provisions for loan losses of $45.3 million during 2009,
compared to $33.4 million during 2008. Increased provisions for loan losses reflect our estimation
of the effect of current economic conditions on our loan portfolio. Given the current economic
conditions and trends, management believes we will continue to experience higher levels of
non-performing loans in the near-term, which will likely have an adverse impact on our business,
financial condition, results of operations and prospects.
Net OREO expense was $6.4 million in 2009 compared to $215,000 in 2008. The increase in net
OREO expense was primarily related to one real estate development property written down by
$4.3 million during third quarter 2009 due to a decline in the estimated market value of the
property.
Goodwill
During third quarter 2009, we conducted our annual testing of goodwill for impairment and
determined that goodwill was not impaired as of July 1, 2009. If goodwill were to become impaired
in future periods, we would be required to record a noncash downward adjustment to income, which
would result in a corresponding decrease to our stated book value that could under certain
circumstances render our Bank unable to pay dividends to us, thereby reducing our cash flow,
creating liquidity issues and negatively impacting our ability to pay dividends to our
shareholders. Conversely, any such goodwill impairment charge could enable us to record an
offsetting favorable tax deduction in the year of the impairment, which would result in a
corresponding increase to our tangible book value and benefit to our regulatory capital ratios.
Goodwill as of December 31, 2009 was $184 million. Approximately $159 million of our goodwill
is deductible for tax purposes, of which $41 million has been recognized for tax purposes through
December 31, 2009, resulting in a deferred tax liability of $16 million.
Mortgage Servicing Rights
Mortgage servicing rights are evaluated quarterly for impairment. Impairment adjustments, if
any, are recorded through a valuation allowance. In an effort to reduce our exposure to earning
charges or credits resulting from volatility in the fair value of our mortgage servicing rights, we
sold mortgage servicing rights with a carrying value of $3 million to a secondary market investor
during fourth quarter 2009 at a loss of approximately $48,000. In conjunction with the sale, we
entered into a sub-servicing agreement with the purchaser whereby we will continue to service the
loans for a fee. Management will continue to evaluate opportunities for additional sales of
mortgage servicing rights in the future.
Critical Accounting Estimates and Significant Accounting Policies
Our consolidated financial statements are prepared in accordance with accounting principles
generally accepted in the United States and follow general practices within the industries in which
we operate. Application of these principles requires management to make estimates, assumptions and
judgments that affect the amounts reported in the consolidated financial statements and
accompanying notes. Our significant accounting policies are summarized in Notes to Consolidated
Financial StatementsSummary of Significant Accounting Policies included in financial statements
included Part IV, Item 15 of this report.
Our critical accounting estimates are summarized below. Management considers an accounting
estimate to be critical if: (1) the accounting estimate requires management to make particularly
difficult, subjective and/or complex judgments about matters that are inherently uncertain and
(2) changes in the estimate that are reasonably likely to occur from period to period, or the use
of different estimates that management could have reasonably used in the current period, would have
a material impact on our consolidated financial statements, results of operations or liquidity.
- 34 -
Allowance for Loan Losses
The allowance for loan losses represents managements estimate of probable credit losses
inherent in the loan portfolio. Determining the amount of the allowance for loan losses is
considered a critical accounting estimate because it requires significant judgment and the use of
subjective measurements, including managements assessment of the internal risk classifications of
loans, changes in the nature of the loan portfolio, industry concentrations and the impact of
current local, regional and national economic factors on the quality of the loan portfolio. Changes
in these estimates and assumptions are reasonably possible and may have a material impact on our
consolidated financial statements, liquidity or results of operations. The allowance for loan
losses is maintained at an amount we believe is sufficient to provide for estimated losses inherent
in our loan portfolio at each balance sheet date. Management continuously monitors qualitative and
quantitative trends in the loan portfolio, including changes in the levels of past due, internally
classified and non-performing loans. See Notes to Consolidated Financial Statements Summary of
Significant Accounting Policies for a description of the methodology used to determine the
allowance for loan losses. A discussion of the factors driving changes in the amount of the
allowance for loan losses is included herein under the heading Financial ConditionAllowance for
Loan Losses. See also Part I, Item 1A, Risk FactorsRisks Relating to the Market and Our
Business.
Goodwill
The excess purchase price over the fair value of net assets from acquisitions, or goodwill, is
evaluated for impairment at least annually and on an interim basis if an event or circumstance
indicates that it is likely an impairment has occurred. In testing for impairment, the fair value
of net assets is estimated based on an analysis of market-based trading and transaction multiples
of selected profitable banks in the western and mid-western regions of the United States and, if
required, the estimated fair value is allocated to our assets and liabilities. Determining the
fair value of goodwill is considered a critical accounting estimate because of its sensitivity to
market-based trading and transaction multiples. In addition, any allocation of the fair value of
goodwill to assets and liabilities requires significant management judgment and the use of
subjective measurements. Variability in the market and changes in assumptions or subjective
measurements used to allocate fair value are reasonably possible and may have a material impact on
our consolidated financial statements, liquidity or results of operations. For additional
information regarding goodwill, see Notes to Consolidated Financial StatementsSummary of
Significant Accounting Policies, included in Part IV, Item 15 of this report. See also Part I,
Item 1A, Risk FactorsRisks Relating to the Market and Our Business.
Valuation of Mortgage Servicing Rights
We recognize as assets the rights to service mortgage loans for others, whether acquired or
internally originated. Mortgage servicing rights are initially recorded at fair value and are
amortized in proportion to and over the period of estimated servicing income. Mortgage servicing
rights are carried on the consolidated balance sheet at the lower of amortized cost or fair value.
We utilize the expertise of a third-party consultant to estimate the fair value of our mortgage
servicing rights quarterly. In evaluating the mortgage servicing rights, the consultant uses
discounted cash flow modeling techniques, which require estimates regarding the amount and timing
of expected future cash flows, including assumptions about loan repayment rates, costs to service,
as well as interest rate assumptions that contemplate the risk involved. Management believes the
valuation techniques and assumptions used by the consultant are reasonable.
Determining the fair value of mortgage servicing rights is considered a critical accounting
estimate because of the assets sensitivity to changes in estimates and assumptions used,
particularly loan prepayment speeds and discount rates. Changes in these estimates and assumptions
are reasonably possible and may have a material impact on our consolidated financial statements,
liquidity or results of operations. As of December 31, 2009, the consultants valuation model
indicated that an immediate 25 basis point decrease in mortgage interest rates would result in a
reduction in fair value of mortgage servicing rights of $5 million and an immediate 50 basis
point reduction in mortgage interest rates would result in a
reduction in fair value of $9 million. For additional information regarding the methodology we use to determine fair value of
mortgage servicing rights, see Notes to Consolidated Financial StatementsSummary of Significant
Accounting Policies and Notes to Consolidated Financial StatementsMortgage Servicing Rights,
included in Part IV, Item 15 of this report. See also Part I, Item 1A, Risk FactorsRisks
Relating to the Market and Our Business.
Other Real Estate Owned
Real
estate acquired in satisfaction of loans is initially carried at current fair value less estimated
selling costs. The value of the underlying loan is written down to the fair value of the real
estate acquired by charge to the allowance for loan losses, if necessary, at or within 90 days of
foreclosure.
Subsequent declines in fair value less estimated selling costs are included
in OREO expense. Subsequent increases in fair value less estimated
selling costs are recorded as a reduction in OREO expense to the
extent of recognized losses.
Carrying costs, operating expenses, net of related income, and gains
or losses on sales are included in OREO expense. For additional information regarding OREO, see Notes to Consolidated
Financial StatementsSummary of Significant Accounting Policies and Notes to Consolidated
Financial StatementsOther Real Estate Owned, included in Part IV, Item 15 of this report.
- 35 -
Results of Operations
The following discussion of our results of operations compares the years ended December 31,
2009 to December 31, 2008 and the years ended December 31, 2008 to December 31, 2007.
Net Interest Income
Net interest income, the largest source of our operating income, is derived from interest,
dividends and fees received on interest earning assets, less interest expense incurred on interest
bearing liabilities. Interest earning assets primarily include loans and investment securities.
Interest bearing liabilities include deposits and various forms of indebtedness. Net interest
income is affected by the level of interest rates, changes in interest rates and changes in the
composition of interest earning assets and interest bearing liabilities.
The most significant impact on our net interest income between periods is derived from the
interaction of changes in the volume of and rates earned or paid on interest earning assets and
interest bearing liabilities. The volume of loans, investment securities and other interest
earning assets, compared to the volume of interest bearing deposits and indebtedness, combined with
the interest rate spread, produces changes in the net interest income between periods.
- 36 -
The following table presents, for the periods indicated, condensed average balance sheet
information, together with interest income and yields earned on average interest earning assets and
interest expense and rates paid on average interest bearing liabilities.
Average Balance Sheets, Yields and Rates
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (1)(2) |
|
$ |
4,660,189 |
|
|
$ |
281,799 |
|
|
|
6.05 |
% |
|
$ |
4,527,987 |
|
|
$ |
306,976 |
|
|
|
6.78 |
% |
|
$ |
3,449,809 |
|
|
$ |
274,020 |
|
|
|
7.94 |
% |
U.S. government agency and
mortgage-backed securities |
|
|
1,016,632 |
|
|
|
41,887 |
|
|
|
4.12 |
|
|
|
923,912 |
|
|
|
43,336 |
|
|
|
4.69 |
|
|
|
892,850 |
|
|
|
42,650 |
|
|
|
4.78 |
|
Federal funds sold |
|
|
105,423 |
|
|
|
253 |
|
|
|
0.24 |
|
|
|
55,205 |
|
|
|
1,080 |
|
|
|
1.96 |
|
|
|
87,460 |
|
|
|
4,422 |
|
|
|
5.06 |
|
Other securities |
|
|
1,556 |
|
|
|
50 |
|
|
|
3.21 |
|
|
|
5,020 |
|
|
|
214 |
|
|
|
4.26 |
|
|
|
857 |
|
|
|
3 |
|
|
|
0.35 |
|
Tax exempt securities (2) |
|
|
134,373 |
|
|
|
8,398 |
|
|
|
6.25 |
|
|
|
147,812 |
|
|
|
9,382 |
|
|
|
6.35 |
|
|
|
111,732 |
|
|
|
7,216 |
|
|
|
6.46 |
|
Interest bearing deposits in banks |
|
|
199,316 |
|
|
|
520 |
|
|
|
0.26 |
|
|
|
5,946 |
|
|
|
191 |
|
|
|
3.21 |
|
|
|
26,165 |
|
|
|
1,307 |
|
|
|
5.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earnings assets |
|
|
6,117,489 |
|
|
|
332,907 |
|
|
|
5.44 |
|
|
|
5,665,882 |
|
|
|
361,179 |
|
|
|
6.37 |
|
|
|
4,568,873 |
|
|
|
329,618 |
|
|
|
7.21 |
|
Non-earning assets |
|
|
687,110 |
|
|
|
|
|
|
|
|
|
|
|
667,206 |
|
|
|
|
|
|
|
|
|
|
|
423,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
6,804,599 |
|
|
|
|
|
|
|
|
|
|
$ |
6,333,088 |
|
|
|
|
|
|
|
|
|
|
$ |
4,992,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
$ |
1,083,054 |
|
|
$ |
4,068 |
|
|
|
0.38 |
% |
|
$ |
1,120,807 |
|
|
$ |
12,966 |
|
|
|
1.16 |
% |
|
$ |
1,004,019 |
|
|
$ |
23,631 |
|
|
|
2.35 |
% |
Savings deposits |
|
|
1,321,625 |
|
|
|
10,033 |
|
|
|
0.76 |
|
|
|
1,144,553 |
|
|
|
18,454 |
|
|
|
1.61 |
|
|
|
940,521 |
|
|
|
24,103 |
|
|
|
2.56 |
|
Time deposits |
|
|
2,129,313 |
|
|
|
59,125 |
|
|
|
2.78 |
|
|
|
1,688,859 |
|
|
|
65,443 |
|
|
|
3.87 |
|
|
|
1,105,959 |
|
|
|
51,815 |
|
|
|
4.69 |
|
Repurchase agreements |
|
|
422,713 |
|
|
|
776 |
|
|
|
0.18 |
|
|
|
537,267 |
|
|
|
7,694 |
|
|
|
1.43 |
|
|
|
558,469 |
|
|
|
21,212 |
|
|
|
3.80 |
|
Borrowings (3) |
|
|
56,817 |
|
|
|
1,367 |
|
|
|
2.41 |
|
|
|
126,690 |
|
|
|
3,130 |
|
|
|
2.47 |
|
|
|
8,515 |
|
|
|
428 |
|
|
|
5.03 |
|
Long-term debt |
|
|
79,812 |
|
|
|
3,249 |
|
|
|
4.07 |
|
|
|
86,909 |
|
|
|
4,578 |
|
|
|
5.27 |
|
|
|
9,230 |
|
|
|
467 |
|
|
|
5.06 |
|
Subordinated debentures held by
by subsidiary trusts |
|
|
123,715 |
|
|
|
6,280 |
|
|
|
5.08 |
|
|
|
123,327 |
|
|
|
8,277 |
|
|
|
6.71 |
|
|
|
47,099 |
|
|
|
4,298 |
|
|
|
9.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities |
|
|
5,217,049 |
|
|
|
84,898 |
|
|
|
1.63 |
|
|
|
4,828,412 |
|
|
|
120,542 |
|
|
|
2.50 |
|
|
|
3,673,812 |
|
|
|
125,954 |
|
|
|
3.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits |
|
|
965,226 |
|
|
|
|
|
|
|
|
|
|
|
940,968 |
|
|
|
|
|
|
|
|
|
|
|
842,239 |
|
|
|
|
|
|
|
|
|
Other non-interest bearing
liabilities |
|
|
67,061 |
|
|
|
|
|
|
|
|
|
|
|
58,173 |
|
|
|
|
|
|
|
|
|
|
|
51,529 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
555,263 |
|
|
|
|
|
|
|
|
|
|
|
505,535 |
|
|
|
|
|
|
|
|
|
|
|
425,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity |
|
$ |
6,804,599 |
|
|
|
|
|
|
|
|
|
|
$ |
6,333,088 |
|
|
|
|
|
|
|
|
|
|
$ |
4,992,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net FTE interest income |
|
|
|
|
|
$ |
248,009 |
|
|
|
|
|
|
|
|
|
|
$ |
240,637 |
|
|
|
|
|
|
|
|
|
|
$ |
203,664 |
|
|
|
|
|
Less FTE adjustments (2) |
|
|
|
|
|
|
(4,873 |
) |
|
|
|
|
|
|
|
|
|
|
(5,260 |
) |
|
|
|
|
|
|
|
|
|
|
(4,061 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income from consoli-
dated statements of income |
|
|
|
|
|
$ |
243,136 |
|
|
|
|
|
|
|
|
|
|
$ |
235,377 |
|
|
|
|
|
|
|
|
|
|
$ |
199,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread |
|
|
|
|
|
|
|
|
|
|
3.81 |
% |
|
|
|
|
|
|
|
|
|
|
3.87 |
% |
|
|
|
|
|
|
|
|
|
|
3.78 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net FTE interest margin (4) |
|
|
|
|
|
|
|
|
|
|
4.05 |
% |
|
|
|
|
|
|
|
|
|
|
4.25 |
% |
|
|
|
|
|
|
|
|
|
|
4.46 |
% |
|
|
|
|
(1) |
|
Average loan balances include nonaccrual loans. Interest income on loans includes
amortization of deferred loan fees net of deferred loan costs, which is not material. |
|
(2) |
|
Interest income and average rates for tax exempt loans and securities are presented
on a FTE basis. |
|
(3) |
|
Includes interest on federal funds purchased and other borrowed funds. Excludes
long-term debt. |
|
(4) |
|
Net FTE interest margin during the period equals (i) the difference between interest
income on interest earning assets and the interest expense on interest bearing
liabilities, divided by (ii) average interest earning assets for the period. |
Market interest rates, which declined steadily in 2008 and have remained at low levels
during 2009, reduced our yield on interest earning assets and our cost of funds. Our net interest
income, on a FTE basis, increased $7.4 million, or 3.1%, to $248.0 million in 2009, compared to
$240.6 million in 2008.
- 37 -
Despite growth in net FTE interest income, we experienced lower interest rate spreads and
compression of our net FTE interest margin in 2009, as compared to 2008. Our net FTE interest
margin decreased 20 basis points to 4.05% in 2009, compared to 4.25% in 2008. Our focus on
balancing growth to improve liquidity combined with weak loan demand during 2009 resulted in higher
federal funds sold balances, which produce lower yields than other interest earnings assets. In
addition, interest-free and low cost funding sources, such as demand deposits, federal funds
purchased and short-term borrowings comprised a smaller percentage of our total funding base, which
further compressed our net FTE interest margin.
Net FTE interest income increased $37.0 million, or 18.2%, to $240.6 million in 2008, from
$203.7 million in 2007, due largely to the net interest income of the acquired First Western
entities. Average earning assets grew 24.0% in 2008, with approximately 78.0% of this growth
attributable to the acquired First Western entities. Despite growth in earning assets and an
increase in the interest rate spread, our net FTE interest margin decreased 21 basis points to
4.25% in 2008, as compared to 4.46% for 2007, largely due to the First Western acquisition. In
conjunction with the acquisition, we incurred indebtedness to acquire non-earning assets, including
goodwill, core deposit intangibles and premises and equipment. In addition, interest free funding
sources, including non-interest bearing deposits and common equity, comprised a smaller percentage
of our funding base during 2008 as compared to 2007. During fourth quarter 2008, the federal funds
rate fell 125 to 150 basis points, with the last decrease taking the rate to between 0 and 25 basis
points, further compressing our net FTE interest margin ratio during fourth quarter 2008.
The table below sets forth, for the periods indicated, a summary of the changes in interest
income and interest expense resulting from estimated changes in average asset and liability
balances (volume) and estimated changes in average interest rates (rate). Changes which are not
due solely to volume or rate have been allocated to these categories based on the respective
percent changes in average volume and average rate as they compare to each other.
Analysis of Interest Changes Due To Volume and Rates
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009 |
|
|
Year Ended December 31, 2008 |
|
|
Year Ended December 31, 2007 |
|
|
|
compared with |
|
|
compared with |
|
|
compared with |
|
|
|
December 31, 2008 |
|
|
December 31, 2007 |
|
|
December 31, 2006 |
|
|
|
Volume |
|
|
Rate |
|
|
Net |
|
|
Volume |
|
|
Rate |
|
|
Net |
|
|
Volume |
|
|
Rate |
|
|
Net |
|
|
Interest earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (1) |
|
$ |
8,963 |
|
|
$ |
(34,140 |
) |
|
$ |
(25,177 |
) |
|
$ |
85,640 |
|
|
$ |
(52,684 |
) |
|
$ |
32,956 |
|
|
$ |
18,599 |
|
|
$ |
8,560 |
|
|
$ |
27,159 |
|
U.S. government agency and
mortgage-backed securities |
|
|
4,349 |
|
|
|
(5,798 |
) |
|
|
(1,449 |
) |
|
|
1,484 |
|
|
|
(798 |
) |
|
|
686 |
|
|
|
(1,029 |
) |
|
|
2,694 |
|
|
|
1,665 |
|
Federal funds sold |
|
|
982 |
|
|
|
(1,809 |
) |
|
|
(827 |
) |
|
|
(1,631 |
) |
|
|
(1,711 |
) |
|
|
(3,342 |
) |
|
|
2,196 |
|
|
|
30 |
|
|
|
2,226 |
|
Other securities |
|
|
(148 |
) |
|
|
(16 |
) |
|
|
(164 |
) |
|
|
15 |
|
|
|
196 |
|
|
|
211 |
|
|
|
(1 |
) |
|
|
(2 |
) |
|
|
(3 |
) |
Tax exempt securities (1) |
|
|
(853 |
) |
|
|
(131 |
) |
|
|
(984 |
) |
|
|
2,330 |
|
|
|
(164 |
) |
|
|
2,166 |
|
|
|
424 |
|
|
|
(40 |
) |
|
|
384 |
|
Interest bearing deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in banks |
|
|
6,212 |
|
|
|
(5,883 |
) |
|
|
329 |
|
|
|
(1,010 |
) |
|
|
(106 |
) |
|
|
(1,116 |
) |
|
|
790 |
|
|
|
157 |
|
|
|
947 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total change |
|
|
19,505 |
|
|
|
(47,777 |
) |
|
|
(28,272 |
) |
|
|
86,828 |
|
|
|
(55,267 |
) |
|
|
31,561 |
|
|
|
20,979 |
|
|
|
11,399 |
|
|
|
32,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
(437 |
) |
|
|
(8,461 |
) |
|
|
(8,898 |
) |
|
|
2,749 |
|
|
|
(13,414 |
) |
|
|
(10,665 |
) |
|
|
2,852 |
|
|
|
4,927 |
|
|
|
7,779 |
|
Savings deposits |
|
|
2,855 |
|
|
|
(11,276 |
) |
|
|
(8,421 |
) |
|
|
5,229 |
|
|
|
(10,878 |
) |
|
|
(5,649 |
) |
|
|
1,947 |
|
|
|
4,732 |
|
|
|
6,679 |
|
Time deposits |
|
|
17,068 |
|
|
|
(23,386 |
) |
|
|
(6,318 |
) |
|
|
27,309 |
|
|
|
(13,681 |
) |
|
|
13,628 |
|
|
|
3,764 |
|
|
|
8,060 |
|
|
|
11,824 |
|
Repurchase agreements |
|
|
(1,640 |
) |
|
|
(5,278 |
) |
|
|
(6,918 |
) |
|
|
(805 |
) |
|
|
(12,713 |
) |
|
|
(13,518 |
) |
|
|
(3,175 |
) |
|
|
(891 |
) |
|
|
(4,066 |
) |
Borrowings (2) |
|
|
(1,726 |
) |
|
|
(37 |
) |
|
|
(1,763 |
) |
|
|
5,940 |
|
|
|
(3,238 |
) |
|
|
2,702 |
|
|
|
(1,913 |
) |
|
|
(17 |
) |
|
|
(1,930 |
) |
Long-term debt |
|
|
(374 |
) |
|
|
(955 |
) |
|
|
(1,329 |
) |
|
|
3,930 |
|
|
|
181 |
|
|
|
4,111 |
|
|
|
(1,215 |
) |
|
|
106 |
|
|
|
(1,109 |
) |
Subordinated debentures held
by subsidiary trusts |
|
|
26 |
|
|
|
(2,023 |
) |
|
|
(1,997 |
) |
|
|
6,956 |
|
|
|
(2,977 |
) |
|
|
3,979 |
|
|
|
495 |
|
|
|
322 |
|
|
|
817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total change |
|
|
15,772 |
|
|
|
(51,416 |
) |
|
|
(35,644 |
) |
|
|
51,308 |
|
|
|
(56,720 |
) |
|
|
(5,412 |
) |
|
|
2,755 |
|
|
|
17,239 |
|
|
|
19,994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in FTE
net interest income (1) |
|
$ |
3,733 |
|
|
$ |
3,639 |
|
|
$ |
7,372 |
|
|
$ |
35,520 |
|
|
$ |
1,453 |
|
|
$ |
36,973 |
|
|
$ |
18,224 |
|
|
$ |
(5,840 |
) |
|
$ |
12,384 |
|
|
|
|
|
(1) |
|
Interest income and average rates for tax exempt loans and securities are presented on a
FTE basis. |
|
(2) |
|
Includes interest on federal funds purchased and other borrowed funds. |
- 38 -
Provision for Loan Losses
The provision for loan losses creates an allowance for loan losses known and inherent in the
loan portfolio at each balance sheet date. We perform a quarterly assessment of the risks inherent
in our loan portfolio, as well as a detailed review of each significant asset with identified
weaknesses. Based on this analysis, we record a provision for loan losses in order to maintain the
allowance for loan losses at appropriate levels. In determining the allowance for loan losses, we
estimate losses on specific loans, or groups of loans, where the probable loss can be identified
and reasonably determined. The balance of the allowance for loan losses is based on internally
assigned risk classifications of loans, historical loan loss rates, changes in the nature of the
loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, current
economic factors and the estimated impact of current economic conditions on certain historical loan
loss rates. Fluctuations in the provision for loan losses result from managements assessment of
the adequacy of the allowance for loan losses. Ultimate loan losses may vary from current
estimates. For additional information concerning the provision for loan losses, see Critical
Accounting Estimates and Significant Accounting Policies included herein.
Effects of the broad recession began to impact our market areas in 2008. Ongoing stress from
weakening economic conditions in 2008 and 2009 resulted in higher levels of non-performing loans,
particularly real estate development loans. Fluctuations in provisions for loan losses reflect our
assessment of the estimated effects of current economic conditions on our loan portfolio. The
provision for loan losses increased $11.9 million, or 35.8%, to $45.3 million in 2009, as compared
to $33.4 million in 2008. Quarterly provisions for loan losses during 2009 increased from $9.6
million during the first quarter to $13.5 million during the fourth quarter. The provision for
loan losses increased $25.6 million, or 330.4%, to $33.4 million in 2008, as compared to $7.8
million in 2007. The majority of the increase in provisions for loan losses in 2008, as compared
to 2007, occurred during the fourth quarter when we recorded provisions of $20.0 million, as
compared to $5.6 million recorded in third quarter 2008 and $2.1 million recorded in fourth quarter
2007. For additional information concerning non-performing assets,
seeFinancial
ConditionNon-Performing Assets herein.
Non-interest Income
Our principal sources of non-interest income include income from the origination and sale of
loans; other service charges, commissions and fees; service charges on deposit accounts; and wealth
management revenues. Non-interest income decreased $27.9 million, or 21.7%, to $100.7 million in
2009, from $128.6 million in 2008. Non-interest income increased $36.2 million, or 39.2%, to
$128.6 million in 2008 from $92.4 million in 2007. Significant components of these fluctuations
are discussed below.
Income from the origination and sale of loans includes origination and processing fees on
residential real estate loans held for sale and gains on residential real estate loans sold to
third parties. Fluctuations in market interest rates have a significant impact on revenues
generated from the origination and sale of loans. Higher interest rates can reduce the demand for
home loans and loans to refinance existing mortgages. Conversely, lower interest rates generally
stimulate refinancing and home loan origination. Income from the origination and sale of loans
increased $18.6 million, or 151.7%, to $30.9 million in 2009, from $12.3 million in 2008, and 9.3%
to $12.3 million in 2008, from $11.2 million in 2007. Low market interest rates increased demand
for residential mortgage loans, which we generally sell into the secondary market with servicing
rights retained. In June 2009, long-term interest rates increased causing a slowdown in
application activity associated with fixed rate secondary market loans during the second half of
2009. If long-term rates remain at their existing levels or increase, income from the origination
and sale of loans will likely decrease in future periods. Approximately $224,000 of the 2008
increase, as compared to 2007, was attributable to the acquired First Western entities.
Other service charges, commissions and fees primarily include debit and credit card
interchange income, mortgage servicing fees, insurance and other commissions and ATM service charge
revenues. Other service charges, commissions and fees increased $554,000, or 2.0%, to $28.7 million
in 2009, from $28.2 million in 2008. The increase was primarily due to additional fee income from
higher volumes of debit card transactions. This increase was partially offset by decreases in
insurance and other commissions of $709,000.
Other service charges, commissions and fees increased $4.0 million, or 16.4%, to $28.2 million
in 2008, from $24.2 million in 2007. Approximately $1.8 million of the 2008 increase was
attributable to the acquired First Western entities. The remaining increase in 2008 was primarily
due to additional fee income from higher volumes of credit and debit card transactions and
increases in insurance commissions.
Service charges on deposit accounts decreased $389,000, or 1.9%, to $20.3 million in 2009,
from $20.7 million in 2008, primarily due to decreases in the number of overdraft fees assessed.
Service charges on deposit accounts increased $2.9 million, or 16.4%, to $20.7 million in 2008,
from $17.8 million in 2007. Substantially all of the 2008 increase was attributable to the
acquired First Western entities.
- 39 -
Wealth management revenues are principally comprised of fees earned for management of trust
assets and investment services revenues. Wealth management revenues decreased $1.5 million, or
12.4%, to $10.8 million in 2009, from $12.4 million in 2008. Approximately 61% of the decrease
occurred in investment services revenues, primarily the result of decreases in brokerage
transaction volumes. In addition, fees earned for management of trust funds, which are generally
based on the market value of trust assets managed, were lower in 2009 due to declines in the market
values of assets under trust administration. Wealth management revenues increased 5.3% to $12.4
million in 2008, from $11.7 million in 2007, due to the addition of new trust and investment
services customers in 2008.
On December 31, 2008, we completed the sale of our technology services subsidiary, i_Tech, to
a national technology services provider. We recorded a $27.1 million net gain on the sale in 2008.
i_Tech provided technology support services to us, our Bank and nonbank subsidiaries and to
non-affiliated customers in our market areas and nine additional states. During 2008 and 2007,
i_Tech generated $17.7 million and $19.1 million, respectively, in non-affiliate revenues.
Subsequent to the sale, we no longer receive technology services revenues from non-affiliates.
Technology services revenues decreased $1.4 million, or 7.2%, to $17.7 million in 2008, from
$19.1 million in 2007. This decrease was primarily due to a $2.0 million contract termination fee
recorded in 2007. In addition, item processing income decreased $718,000 in 2008, as compared to 2007,
primarily due to the introduction of imaging technology that permits items to be captured
electronically rather than through physical processing and transporting of the items. These
decreases were offset by an increase of $1.8 million in core data processing revenues resulting
from increases in the number of core data processing customers and the volume of core data
transactions processed.
Other income primarily includes company-owned life insurance revenues, check printing income,
agency stock dividends and gains on sales of miscellaneous assets. Other income decreased $420,000,
or 4.1%, to $9.7 million in 2009, from $10.2 million in 2008. During third quarter 2009, we
recorded a non-recurring gain of $2.1 million on the sale of our Visa Inc. Class B shares. This
increase was offset by first quarter 2008 non-recurring gains of $1.6 million on the mandatory
redemption of Visa Inc. Class B shares and $1.1 million from the release of escrow funds related to
the December 2006 sale of our interest in an internet bill payment company. For additional
information regarding the conversion and sale of our Visa Inc. Class B shares, see Notes to
Consolidated Financial StatementCommitments and Contingencies included in Part IV,
Item 15 of this report.
Other income increased $1.9 million, or 23.2%, to $10.2 million in 2008, from $8.2 million in
2007. Exclusive of the acquired First Western entities, non-interest income decreased $1.7
million, or 20.2%, in 2008, as compared to 2007. During first quarter 2008, we recorded a gain of
$1.6 million resulting from the mandatory redemption of our class B shares of Visa Inc. The net
gain was split between our community banking and technology services operating segments. In
addition, during first quarter 2008, we recorded a nonrecurring gain of $1.1 million due to the
release of funds escrowed in conjunction with the December 2006 sale of our interest in an
internet bill payment company. These gains were offset by decreases in earnings of securities
held under deferred compensation plans and one-time gains recorded in 2007 of $986,000 on the sale
of mortgage servicing rights and $737,000 from the conversion and subsequent sale of our
MasterCard stock.
Non-interest Expense
Non-interest expense decreased $4.8 million, or 2.2%, to $217.7 million in 2009, from $222.5
million in 2008. Non-interest expense increased $43.8 million, or 24.5%, to $222.5 million in
2008, from $178.8 million in 2007. Significant components of these fluctuations are discussed
below.
Salaries, wages and employee benefits expense decreased $455,000, or less than 1.0%, to $113.6
million in 2009 compared to $114.0 million for the same period in 2008. Normal inflationary and
other increases in salaries, wages and employee benefits were offset by a reduction of
approximately 120 full-time equivalent employees due to the sale of i_Tech in December 2008.
Salaries, wages and employee benefits expense increased $15.9 million, or 16.2%, to $114.0
million in 2008, from $98.1 million in 2007. Approximately $12.2 million of the 2008 increase was
attributable to the acquired First Western entities. The remaining increase was primarily due to
higher group health insurance costs and wage increases. These increases were partially offset by
decreases in incentive bonus and profit sharing accruals to reflect 2008 performance results.
Occupancy expense decreased $463,000, or 2.8%, to $15.9 million in 2009, from $16.4 million in
2008. The decrease in occupancy expense was due to the discontinuation of a building lease in
conjunction with the sale of i_Tech in December 2008. Occupancy expense increased $1.6 million, or
11.0%, to $16.4 million in 2008, from $14.7 million in 2007 due to the acquired First Western
entities.
- 40 -
Furniture and equipment expense decreased $6.5 million, or 34.3%, to $12.4 million in 2009,
from $18.9 million in 2008. The decrease in equipment maintenance and depreciation was due
primarily due to the sale of i_Tech in December 2008. Furniture and equipment expense increased
$2.7 million, or 16.3%, to $18.9 million in 2008, from $16.2 million in 2007. Approximately $1.2
million of the increase was attributable to the acquired First Western entities. The remaining
increase was primarily due to higher depreciation and maintenance expenses resulting from the
addition, replacement and repair of equipment in the ordinary course of business.
FDIC insurance premiums increased $9.2 million, or 316.6%, to $12.1 million in 2009, from $2.9
million in 2008. For the first quarter of 2009 only, the FDIC increased all FDIC
deposit assessment rates by 7 basis points and on February 27, 2009, the FDIC issued a final
rule setting base assessment rates for Risk Category I institutions at 12 to 16 basis points,
beginning April 1, 2009. On May 22, 2009, the FDIC issued a final rule which levied a special
assessment applicable to all insured depository institutions totaling 5 basis points of each
institutions total assets less tier 1 capital as of June 30, 2009, not to exceed 10 basis points
of domestic deposits. Increases in deposit insurance expense were due to increases in fee
assessment rates during 2009 and the special assessment of $3.1 million. The increases were also
partly related to the additional 10 basis point per annum assessment paid on covered transaction
accounts exceeding $250,000 under the deposit insurance coverage guarantee program and the full
utilization of available credits to offset assessments during the first nine months of 2008. We
expect FDIC insurance premiums to remain at their current high levels for the foreseeable future.
FDIC insurance premiums increased $2.5 million, or 555.9%, to $2.9 million in 2008, from
$444,000 in 2007. During the first half of 2008, we fully utilized a one-time credit provided by
the FDIC to offset the cost of FDIC insurance premiums for well-managed banks. In addition, we
elected to participate in the deposit insurance coverage guarantee program during fourth quarter
2008. The fee assessment for deposit insurance coverage on deposits insured under this program is
10 basis points per annum.
Outsourced technology services expense increased $6.6 million, or 163.1%, to $10.6 million in
2009, from $4.0 million in 2008. Concurrent with the December 31, 2008 sale of i_Tech, we entered
into a service agreement with the purchaser to receive data processing, electronic funds transfer
and other technology services previously provided by i_Tech. This increase in outsourced technology
services expense was largely offset by decreases in salaries, wages and benefits; furniture and
equipment; occupancy; and other expenses. Outsourced technology services expense increased
$900,000, or 28.9%, to $4.0 million in 2008, from $3.1 million in 2007, primarily due to increases
in ATM fees resulting from higher transaction volumes.
Mortgage servicing rights are amortized in proportion to and over the period of estimated net
servicing income. Changes in estimated servicing period and growth in the serviced loan portfolio
cause amortization expense to vary between periods. Mortgage servicing rights amortization
increased $1.7 million, or 27.9%, to $7.6 million in 2009, from $5.9 million in 2008 and $1.5
million, or 33.3%, to $5.9 million in 2008, from $4.4 million in 2007.
Mortgage servicing rights are evaluated quarterly for impairment based on the fair value of
the mortgage servicing rights. The fair value of mortgage servicing rights is estimated by
discounting the expected future cash flows, taking into consideration the estimated level of
prepayments based on current industry expectations and the predominant risk characteristics of the
underlying loans. During a period of declining interest rates, the fair value of mortgage servicing
rights is expected to decline due to anticipated prepayments within the portfolio. Alternatively,
during a period of rising interest rates, the fair value of mortgage servicing rights is expected
to increase because prepayments of the underlying loans would be anticipated to decline. Impairment
adjustments are recorded through a valuation allowance. The valuation allowance is adjusted for
changes in impairment through a charge to current period earnings. During 2009, we reversed
previously recorded impairment of $7.2 million, as compared to a recording additional impairment of
$10.9 million in 2008 and $1.7 million in 2007.
OREO expense is recorded net of OREO income. Variations in net OREO expense between periods is
primarily due to write-downs of the estimated fair value of OREO properties, fluctuations in gains
and losses recorded on sales of OREO properties, fluctuations in the number of OREO properties held
and the carrying costs and/or operating expenses associated with those properties. OREO expense was
$6.4 million in 2009, as compared to $215,000 in 2008. This increase was primarily due to a $4.3
million write-down of the carrying value of one real estate development property due to a decline
in the estimated market value of the property. During 2008, we recorded OREO expense of $215,000,
compared to OREO income of $81,000 recorded in 2007.
Core deposit intangibles represent the intangible value of depositor relationships resulting
from deposit liabilities assumed and are amortized based on the estimated useful lives of the
related deposits. We recorded core deposit intangibles of $14.9 million in conjunction with the
acquisition of the First Western entities. These intangibles are being amortized using an
accelerated method over their weighted average expected useful lives of 9.2 years. Core deposit
intangible amortization expense was $2.1 million in 2009, compared to $2.5 million in 2008 and
$174,000 in 2007. Core deposit intangible amortization expense is expected to decrease 18.0% to
$1.7 million in 2010. For additional information regarding core deposit intangibles, see Notes to
Consolidated Financial StatementsSummary of Significant Accounting Policies, included in Part
IV, Item 15.
- 41 -
Other expenses primarily include professional fees; advertising and public relations costs;
office supply, postage, freight, telephone and travel expenses; donations expense; debit and credit
card expenses; board of director fees; and other losses. Other expenses decreased $2.5 million, or
5.4%, to $44.3 million in 2009, from $46.8 million in 2008. This decrease was primarily the result
of a $1.3 million other-than-temporary impairment charge related to an available-for-sale corporate
security and fraud losses of $708,000 recorded during 2008. Also contributing to the decrease in
other expenses were reductions in expense due to the sale of i_Tech in December 2008 and a
continuing focus on reducing targeted controllable expenses during 2009. These reductions were
partially offset by higher debit card expense resulting from higher transaction volumes.
Other expenses increased $6.9 million, or 17.3%, to $46.8 million in 2008, from $39.9 million
in 2007. Exclusive of other expenses of the acquired First Western entities, which included a $1.3
million other-than-temporary impairment charge on an available-for-sale corporate investment
security, other expenses decreased $1.9 million, or 4.9%, in 2008, as compared to 2007. During
2007, we recorded loss contingency accruals of $1.5 million related to an indemnification agreement
with Visa USA and two potential operational losses incurred in the ordinary course of business.
During 2008, we reversed $625,000 of the loss contingency accrual related to our indemnification
agreement with Visa USA. In addition, during 2008 we recorded expenses of $450,000 related to
employee recruitment and relocation and $708,000 related to fraud losses.
Income Tax Expense
Our effective federal tax rate was 29.1% for the year ended December 31, 2009, 30.3% for
the year ended December 31, 2008 and 31.0% for the year ended December 31, 2007.
State income tax applies primarily to pretax earnings generated within Montana and South Dakota.
Our effective state tax rate was 4.2% for the year ended December 31, 2009, 4.4% for the year ended
December 31, 2008 and 3.9% for the year ended December 31, 2007. Changes in effective federal and
state income tax rates are primarily due to fluctuations in tax exempt interest income as a
percentage of total income.
Net Income Available to Common Shareholders
Net income available to common shareholders was $50.4 million, or $6.37 per diluted
share, in 2009, as compared to $67.3 million, or $8.38 per diluted share, in 2008 and $68.6
million, or $8.25 per diluted share in 2007.
- 42 -
Summary of Quarterly Results
The following table presents unaudited quarterly results of operations for the fiscal years
ended December 31, 2009 and 2008.
Quarterly Results
(Dollars in thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
|
Full |
|
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Year |
|
|
Year Ended December 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
81,883 |
|
|
$ |
81,148 |
|
|
$ |
82,325 |
|
|
$ |
82,678 |
|
|
$ |
328,034 |
|
Interest expense |
|
|
22,820 |
|
|
|
21,958 |
|
|
|
21,026 |
|
|
|
19,094 |
|
|
|
84,898 |
|
|
Net interest income |
|
|
59,063 |
|
|
|
59,190 |
|
|
|
61,299 |
|
|
|
63,584 |
|
|
|
243,136 |
|
Provision for loan losses |
|
|
9,600 |
|
|
|
11,700 |
|
|
|
10,500 |
|
|
|
13,500 |
|
|
|
45,300 |
|
|
Net interest income after |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
provision for loan losses |
|
|
49,463 |
|
|
|
47,490 |
|
|
|
50,799 |
|
|
|
50,084 |
|
|
|
197,836 |
|
Non-interest income |
|
|
26,213 |
|
|
|
27,267 |
|
|
|
25,000 |
|
|
|
22,210 |
|
|
|
100,690 |
|
Non-interest expense |
|
|
50,445 |
|
|
|
54,737 |
|
|
|
57,376 |
|
|
|
55,152 |
|
|
|
217,710 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
25,231 |
|
|
|
20,020 |
|
|
|
18,423 |
|
|
|
17,142 |
|
|
|
80,816 |
|
Income tax expense |
|
|
8,543 |
|
|
|
6,684 |
|
|
|
6,105 |
|
|
|
5,621 |
|
|
|
26,953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
16,688 |
|
|
|
13,336 |
|
|
|
12,318 |
|
|
|
11,521 |
|
|
|
53,863 |
|
Preferred stock dividends |
|
|
844 |
|
|
|
853 |
|
|
|
862 |
|
|
|
863 |
|
|
|
3,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common
shareholders |
|
$ |
15,844 |
|
|
$ |
12,483 |
|
|
$ |
11,456 |
|
|
$ |
10,658 |
|
|
$ |
50,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
|
$ |
2.01 |
|
|
$ |
1.59 |
|
|
$ |
1.47 |
|
|
$ |
1.36 |
|
|
$ |
6.44 |
|
Diluted earnings per common share |
|
|
1.98 |
|
|
|
1.57 |
|
|
|
1.46 |
|
|
|
1.35 |
|
|
|
6.37 |
|
Dividends per common share |
|
|
0.65 |
|
|
|
0.45 |
|
|
|
0.45 |
|
|
|
0.45 |
|
|
|
2.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
91,109 |
|
|
$ |
88,068 |
|
|
$ |
89,928 |
|
|
$ |
86,814 |
|
|
$ |
355,919 |
|
Interest expense |
|
|
34,306 |
|
|
|
29,697 |
|
|
|
29,234 |
|
|
|
27,305 |
|
|
|
120,542 |
|
|
Net interest income |
|
|
56,803 |
|
|
|
58,371 |
|
|
|
60,694 |
|
|
|
59,509 |
|
|
|
235,377 |
|
Provision for loan losses |
|
|
2,363 |
|
|
|
5,321 |
|
|
|
5,636 |
|
|
|
20,036 |
|
|
|
33,356 |
|
|
Net interest income after |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
provision for loan losses |
|
|
54,440 |
|
|
|
53,050 |
|
|
|
55,058 |
|
|
|
39,473 |
|
|
|
202,021 |
|
Non-interest income |
|
|
26,383 |
|
|
|
25,240 |
|
|
|
24,389 |
|
|
|
52,585 |
|
|
|
128,597 |
|
Non-interest expense |
|
|
53,169 |
|
|
|
49,677 |
|
|
|
55,190 |
|
|
|
64,505 |
|
|
|
222,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
27,654 |
|
|
|
28,613 |
|
|
|
24,257 |
|
|
|
27,553 |
|
|
|
108,077 |
|
Income tax expense |
|
|
9,578 |
|
|
|
9,988 |
|
|
|
8,362 |
|
|
|
9,501 |
|
|
|
37,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
18,076 |
|
|
|
18,625 |
|
|
|
15,895 |
|
|
|
18,052 |
|
|
|
70,648 |
|
Preferred stock dividends |
|
|
768 |
|
|
|
853 |
|
|
|
863 |
|
|
|
863 |
|
|
|
3,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common
shareholders |
|
$ |
17,308 |
|
|
$ |
17,772 |
|
|
$ |
15,032 |
|
|
$ |
17,189 |
|
|
$ |
67,301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
|
$ |
2.19 |
|
|
$ |
2.27 |
|
|
$ |
1.93 |
|
|
$ |
2.17 |
|
|
$ |
8.55 |
|
Diluted earnings per common share |
|
|
2.14 |
|
|
|
2.22 |
|
|
|
1.89 |
|
|
|
2.13 |
|
|
|
8.38 |
|
Dividends per common share |
|
|
0.65 |
|
|
|
0.65 |
|
|
|
0.65 |
|
|
|
0.65 |
|
|
|
2.60 |
|
|
- 43 -
Financial Condition
Total assets increased $509 million, or 7.7%, to $7,138 million as of December 31, 2009, from
$6,628 million as of December 31, 2008, due to organic growth. Total assets increased $1,412
million, or 27.1%, to $6,628 million as of December 31, 2008, from $5,217 million as of December
31, 2007, primarily due to the First Western acquisition in January 2008. As of the date of
acquisition, the acquired entities had combined total assets of $913 million, combined total loans
of $727 million, combined premises and equipment of $27 million and combined total deposits of $814
million. In connection with the acquisition, we recorded goodwill of $146 million and core deposit
intangibles of $15 million.
Loans
Our loan portfolio consists of a mix of real estate, consumer, commercial, agricultural and
other loans, including fixed and variable rate loans. Fluctuations in the loan portfolio are
directly related to the economies of the communities we serve. While each loan originated generally
must meet minimum underwriting standards established in our credit policies, lending officers are
granted certain levels of authority in approving and pricing loans to assure that the banking
offices are responsive to competitive issues and community needs in each market area.
Total loans decreased $245 million, or 5.1%, to $4,528 million as of December 31, 2009, from
$4,773 million as of December 31, 2008, primarily due to weak loan demand in our market areas.
Total loans increased 34.1% to $4,773 million as of December 31, 2008, from $3,559 million as of
December 31, 2007. Approximately $723 million of the 2008 increase was attributable to the acquired
First Western entities. Excluding loans of the acquired entities, total loans increased $491
million, or 13.8%, in 2008, with the most significant growth occurring in commercial, commercial
real estate, construction and residential real estate loans.
The following table presents the composition of our loan portfolio as of the dates indicated:
Loans Outstanding
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
2009 |
|
|
Percent |
|
|
2008 |
|
|
Percent |
|
|
2007 |
|
|
Percent |
|
|
2006 |
|
|
Percent |
|
|
2005 |
|
|
Percent |
|
|
Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realestate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
1,556,273 |
|
|
|
34.4 |
% |
|
$ |
1,483,967 |
|
|
|
31.1 |
% |
|
$ |
1,018,831 |
|
|
|
28.6 |
% |
|
$ |
937,695 |
|
|
|
28.3 |
% |
|
$ |
926,190 |
|
|
|
30.5 |
% |
Construction |
|
|
636,892 |
|
|
|
14.1 |
|
|
|
790,177 |
|
|
|
16.5 |
|
|
|
664,272 |
|
|
|
18.7 |
|
|
|
579,603 |
|
|
|
17.5 |
|
|
|
403,751 |
|
|
|
13.3 |
|
Residential |
|
|
539,098 |
|
|
|
11.9 |
|
|
|
587,464 |
|
|
|
12.3 |
|
|
|
419,001 |
|
|
|
11.8 |
|
|
|
402,468 |
|
|
|
12.2 |
|
|
|
408,659 |
|
|
|
13.4 |
|
Agricultural |
|
|
195,045 |
|
|
|
4.3 |
|
|
|
191,831 |
|
|
|
4.0 |
|
|
|
142,256 |
|
|
|
4.0 |
|
|
|
137,659 |
|
|
|
4.1 |
|
|
|
116,402 |
|
|
|
3.9 |
|
Other |
|
|
36,430 |
|
|
|
0.8 |
|
|
|
47,076 |
|
|
|
1.0 |
|
|
|
26,080 |
|
|
|
0.7 |
|
|
|
25,360 |
|
|
|
0.8 |
|
|
|
19,067 |
|
|
|
0.6 |
|
Consumer |
|
|
677,548 |
|
|
|
14.9 |
|
|
|
669,731 |
|
|
|
14.0 |
|
|
|
608,002 |
|
|
|
17.1 |
|
|
|
605,858 |
|
|
|
18.3 |
|
|
|
587,895 |
|
|
|
19.4 |
|
Commercial |
|
|
750,647 |
|
|
|
16.6 |
|
|
|
853,798 |
|
|
|
17.9 |
|
|
|
593,669 |
|
|
|
16.7 |
|
|
|
542,325 |
|
|
|
16.4 |
|
|
|
494,848 |
|
|
|
16.3 |
|
Agricultural |
|
|
134,470 |
|
|
|
3.0 |
|
|
|
145,876 |
|
|
|
3.1 |
|
|
|
81,890 |
|
|
|
2.3 |
|
|
|
76,644 |
|
|
|
2.3 |
|
|
|
74,561 |
|
|
|
2.5 |
|
Other loans |
|
|
1,601 |
|
|
|
|
|
|
|
2,893 |
|
|
|
0.1 |
|
|
|
4,979 |
|
|
|
0.1 |
|
|
|
2,751 |
|
|
|
0.1 |
|
|
|
2,981 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
4,528,004 |
|
|
|
100.0 |
% |
|
|
4,772,813 |
|
|
|
100.0 |
% |
|
|
3,558,980 |
|
|
|
100.0 |
% |
|
|
3,310,363 |
|
|
|
100.0 |
% |
|
|
3,034,354 |
|
|
|
100.0 |
% |
Less allowance for
loan losses |
|
|
103,030 |
|
|
|
|
|
|
|
87,316 |
|
|
|
|
|
|
|
52,355 |
|
|
|
|
|
|
|
47,452 |
|
|
|
|
|
|
|
42,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans |
|
$ |
4,424,974 |
|
|
|
|
|
|
$ |
4,685,497 |
|
|
|
|
|
|
$ |
3,506,625 |
|
|
|
|
|
|
$ |
3,262,911 |
|
|
|
|
|
|
$ |
2,991,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of allowance
to total loans |
|
|
2.28 |
% |
|
|
|
|
|
|
1.83 |
% |
|
|
|
|
|
|
1.47 |
% |
|
|
|
|
|
|
1.43 |
% |
|
|
|
|
|
|
1.40 |
% |
|
|
|
|
|
Real Estate Loans. We provide interim construction and permanent financing for both
single-family and multi-unit properties, medium-term loans for commercial, agricultural and
industrial property and/or buildings and equity lines of credit secured by real estate. Residential
real estate loans are typically sold in the secondary market. Those residential real estate loans
not sold are typically secured by first liens on the financed property and generally mature in less
than five years.
- 44 -
Commercial real estate loans. Commercial real estate loans increased $72 million, or
4.9%, to $1,556 million as of December 31, 2009, from $1,484 million as of December 31, 2008.
Management attributes this increase to the current year permanent financing for loans on projects
under construction as of December 31, 2008 combined with increased refinancing activity.
Approximately 53% of our commercial real estate loans as of December 31, 2009 and 2008 were owner
occupied, which typically involves less risk than loans on investment property. Commercial real
estate loans increased 45.7% to $1,484 million as of December 31, 2008, from $1,019 million as of
December 31, 2007. Excluding increases attributable to the acquired First Western entities,
commercial real estate loans increased 15.3% as of December 31, 2008, as compared to December 31,
2007, primarily due to real estate development loans. Demand for improved lots declined in 2008
reducing the cash flow of real estate developers, which resulted in increases in outstanding loan
balances.
Construction loans. Construction loans are primarily to commercial builders for
residential lot development and the construction of single-family residences and commercial real
estate properties. Construction loans are generally underwritten pursuant to the same guidelines
used for originating permanent commercial and residential mortgage loans. Terms and rates typically
match those of permanent commercial and residential mortgage loans, except that during the
construction phase the borrower pays interest only. Construction loans decreased $153 million, or
19.4%, to $637 million as of December 31, 2009, from $790 million as of December 31, 2008.
Management attributes this decrease to general declines in demand for housing, particularly in
markets dependent upon resort communities and second home sales; the movement of lower quality
loans out of our loan portfolio through charge-off, pay-off or foreclosure; and replacement of
construction loans with loans for permanent financing. Construction loans increased 19.0% to $790
million as of December 31, 2008, from $664 million as of December 31, 2007. Excluding increases
attributable to the acquired First Western entities, construction loans increased 2.9% as of
December 31, 2008, as compared to December 31, 2007. Growth in construction loans in 2008 was
primarily the result of demand for housing and overall growth in our market areas.
As of December 31, 2009, our construction loan portfolio was divided among the following
categories: approximately $135 million, or 21.2%, residential construction; approximately $98
million, or 15.4%, commercial construction; and, approximately $404 million, or 63.4%, land
acquisition and development.
Residential real estate loans. Residential real estate loans decreased $48 million,
or 8.2%, to $539 million as of December 31, 2009, from $587 million as of December 31, 2008. The
decrease occurred primarily in 1-4 family residential real estate loans, which decreased $31
million as compared to 2008. In addition, home equity loans and lines of credit, which are
typically secured by first or second liens on residential real estate and generally do not exceed a
loan to value ratio of 80%, decreased $17 million to $364 million as of December 31, 2009, from
$381 million as of December 31, 2008.
Residential real estate loans increased 40.2% to $587 million as of December 31, 2008, from
$419 million as of December 31, 2007. Excluding increases attributable to the acquired First
Western entities, residential real estate loans increased 25.4% as of December 31, 2008, as
compared to December 31, 2007. The 2008 increases in residential real estate loans primarily
occurred in home equity loans and lines of credit. As of December 31, 2008, home equity loans and
lines of credit totaled $381 million.
Agricultural real estate loans. Agricultural real estate loans increased $3 million,
or 1.7%, to $195 million as of December 31, 2009, from $192 million as of December 31, 2008.
Agricultural real estate loans increased 34.8% to $192 million as of December 31, 2008, from $142
million as of December 31, 2007. Excluding increases attributable to the acquired First Western
entities, agricultural real estate loans increased 12.5% as of December 31, 2008, as compared to
December 31, 2007.
Consumer Loans. Our consumer loans include direct personal loans, credit card loans and lines
of credit; and indirect loans created when we purchase consumer loan contracts advanced for the
purchase of automobiles, boats and other consumer goods from the consumer product dealer network
within the market areas we serve. Personal loans and indirect dealer loans are generally secured by
automobiles, boats and other types of personal property and are made on an installment basis.
Credit cards are offered to individual and business customers in our market areas. Lines of credit
are generally floating rate loans that are unsecured or secured by personal property. Approximately
62% and 61% of our consumer loans as of December 31, 2009 and 2008, respectively, were indirect
dealer loans.
Consumer loans increased $8 million, or 1.2%, to $678 million as of December 31, 2009, from
$670 million as of December 31, 2008. Consumer loans increased 10.2% to $670 million as of December
31, 2008, from $608 million as of December 31, 2007. Excluding increases attributable to the
acquired First Western entities, consumer loans increased 4.4% as of December 31, 2008, as compared
to December 31, 2007.
- 45 -
Commercial Loans. We provide a mix of variable and fixed rate commercial loans. The loans are
typically made to small and medium-sized manufacturing, wholesale, retail and service businesses
for working capital needs and business expansions. Commercial loans generally include lines of
credit, business credit cards and loans with maturities of five years or less. The loans are
generally made with business operations as the primary source of repayment, but also include
collateralization by inventory, accounts receivable, equipment and/or personal guarantees.
Commercial loans decreased $103 million, or 12.1%, to $751 million as of December 31, 2009,
from $854 million as of December 31, 2008. Management attributes this decrease to the continuing
impact of the broad recession on borrowers in our market areas and, to a lesser extent, the
movement of lower quality loans out of our loan portfolio through charge-off, pay-off or
foreclosure. Commercial loans increased 43.8% to $854 million as of December 31, 2008, from $594
million as of December 31, 2007. Excluding increases attributable to the acquired First Western
entities, commercial loans increased 23.0% as of December 31, 2008, as compared to December 31,
2007. Management attributes 2008 growth to an overall increase in borrowing activity during most of
2008 due to retail business expansion in our market areas. This expansion began to decline in late
2008 as retail businesses in our market areas were impacted by the effects of the recession.
Agricultural Loans. Our agricultural loans generally consist of short and medium-term loans
and lines of credit that are primarily used for crops, livestock, equipment and general operations.
Agricultural loans are ordinarily secured by assets such as livestock or equipment and are repaid
from the operations of the farm or ranch. Agricultural loans generally have maturities of five
years or less, with operating lines for one production season.
Agricultural loans decreased $11 million, or 7.8%, to $134 million as of December 31, 2009,
from $146 million as of December 31, 2008. Agricultural loans increased 78.1% to $146 million as of
December 31, 2008, from $82 million as of December 31, 2007. Excluding increases attributable to
the acquired First Western entities, agricultural loans increased 16.6% as of December 31, 2008, as
compared to December 31, 2007.
The following table presents the maturity distribution of our loan portfolio and the
sensitivity of the loans to changes in interest rates as of December 31, 2009:
Maturities and Interest Rate Sensitivities
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within |
|
|
One Year to |
|
|
After |
|
|
|
|
|
|
One Year |
|
|
Five Years |
|
|
Five Years |
|
|
Total |
|
| | | | |
Real estate |
|
$ |
1,944,565 |
|
|
$ |
901,020 |
|
|
$ |
118,153 |
|
|
$ |
2,963,738 |
|
Consumer |
|
|
349,664 |
|
|
|
302,390 |
|
|
|
25,494 |
|
|
|
677,548 |
|
Commercial |
|
|
608,652 |
|
|
|
131,102 |
|
|
|
10,893 |
|
|
|
750,647 |
|
Agricultural |
|
|
121,664 |
|
|
|
12,728 |
|
|
|
78 |
|
|
|
134,470 |
|
Other loans |
|
|
1,601 |
|
|
|
|
|
|
|
|
|
|
|
1,601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
3,026,146 |
|
|
$ |
1,347,240 |
|
|
$ |
154,618 |
|
|
$ |
4,528,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans at fixed interest rates |
|
$ |
913,394 |
|
|
$ |
1,332,110 |
|
|
$ |
139,927 |
|
|
$ |
2,385,431 |
|
Loans at variable interest rates |
|
|
1,997,722 |
|
|
|
15,130 |
|
|
|
14,691 |
|
|
|
2,027,543 |
|
Nonaccrual loans |
|
|
115,030 |
|
|
|
|
|
|
|
|
|
|
|
115,030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
3,026,146 |
|
|
$ |
1,347,240 |
|
|
$ |
154,618 |
|
|
$ |
4,528,004 |
|
|
Non-Performing Assets
Non-performing assets include loans past due 90 days or more and still accruing interest,
nonaccrual loans, loans renegotiated in troubled debt restructurings and OREO. Restructured loans
are loans on which we have granted a concession on the interest rate or original repayment terms
due to financial difficulties of the borrower that we would not otherwise consider. OREO consists
of real property acquired through foreclosure on the collateral underlying defaulted loans. We
initially record OREO at fair value less estimated costs to sell by a charge against the allowance
for loan losses, if necessary. Estimated losses that result from the ongoing periodic valuation of
these properties are charged to earnings in the period in which they are identified.
- 46 -
We generally place loans on nonaccrual when they become 90 days past due, unless they are
well secured and in the process of collection. When a loan is placed on nonaccrual status, any
interest previously accrued but not collected is reversed from income. Approximately $6.4 million,
$4.6 million and $1.7 million of gross interest income would have been accrued if all loans on
nonaccrual had been current in accordance with their original terms for the years ended December
31, 2009, 2008 and 2007, respectively.
The following table sets forth information regarding non-performing assets as of the dates
indicated:
Non-Performing Assets
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
Non-performing loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans |
|
$ |
115,030 |
|
|
$ |
85,632 |
|
|
$ |
31,552 |
|
|
$ |
14,764 |
|
|
$ |
17,142 |
|
Accruing loans past due 90 days or more |
|
|
4,965 |
|
|
|
3,828 |
|
|
|
2,171 |
|
|
|
1,769 |
|
|
|
1,001 |
|
Restructured loans |
|
|
4,683 |
|
|
|
1,462 |
|
|
|
1,027 |
|
|
|
1,060 |
|
|
|
1,089 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans |
|
|
124,678 |
|
|
|
90,922 |
|
|
|
34,750 |
|
|
|
17,593 |
|
|
|
19,232 |
|
OREO |
|
|
38,400 |
|
|
|
6,025 |
|
|
|
928 |
|
|
|
529 |
|
|
|
1,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets |
|
$ |
163,078 |
|
|
$ |
96,947 |
|
|
$ |
35,678 |
|
|
$ |
18,122 |
|
|
$ |
20,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans to total loans |
|
|
2.75 |
% |
|
|
1.90 |
% |
|
|
0.98 |
% |
|
|
0.53 |
% |
|
|
0.63 |
% |
Non-performing assets to total loans and
OREO |
|
|
3.57 |
|
|
|
2.03 |
|
|
|
1.00 |
|
|
|
0.55 |
|
|
|
0.67 |
|
Non-performing assets to total assets |
|
|
2.28 |
|
|
|
1.46 |
|
|
|
0.68 |
|
|
|
0.36 |
|
|
|
0.45 |
|
|
Total non-performing assets increased $66 million, or 68.2%, to $163 million as of December
31, 2009, from $97 million as of December 31, 2008. This increase in non-performing assets is
attributable to general declines in markets dependent upon resort communities and second home sales
and declines in real estate prices. In addition, increasing unemployment has negatively impacted
the credit performance of commercial and real estate related loans. This market turmoil and
tightening of credit has led to increased levels of delinquency, a lack of consumer confidence,
increased market volatility and a widespread reduction of general business activities in our market
areas. We expect the continuing impact of the current difficult economic conditions and rising
unemployment levels in our market areas to further increase non-performing loans in future
quarters.
Non-performing assets increased $61 million, or 171.7%, to $97 million as of December 31,
2008, from $36 million as of December 31, 2007. This increase in non-performing assets was
primarily related to land development loans and was reflective of deterioration of economic
conditions in certain of our market areas during 2008, as well as overall growth in our loan
portfolio.
Non-performing loans. The following table sets forth the allocation of our
non-performing loans among our different types of loans as of the dates indicated.
Non-Performing Loans by Loan Type
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
Real estate |
|
$ |
101,751 |
|
|
$ |
79,167 |
|
|
$ |
27,513 |
|
|
$ |
9,645 |
|
|
$ |
8,702 |
|
Consumer |
|
|
2,265 |
|
|
|
2,944 |
|
|
|
1,202 |
|
|
|
1,359 |
|
|
|
1,563 |
|
Commercial |
|
|
19,774 |
|
|
|
8,594 |
|
|
|
5,722 |
|
|
|
5,583 |
|
|
|
8,499 |
|
Agricultural |
|
|
888 |
|
|
|
217 |
|
|
|
313 |
|
|
|
1,006 |
|
|
|
468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans |
|
$ |
124,678 |
|
|
$ |
90,922 |
|
|
$ |
34,750 |
|
|
$ |
17,593 |
|
|
$ |
19,232 |
|
|
As of December 31, 2009, our non-performing real estate loans were divided among the following
categories: $42 million, or 41.5%, land and land development; $29 million, or 28.0%, commercial;
$15 million, or 15.2% residential construction; $10 million, or 10.1%, residential; $4 million, or
4.4% commercial construction; and, $785,000, or less than 1.0%, agricultural.
- 47 -
Total non-performing loans increased $34 million, or 37.1%, to $125 million as of December 31,
2009, from $91 million as of December 31, 2008, and $56 million, or 161.6% to $91 million as of
December 31, 2008, from $35 million as of December 31, 2007. Increases in non-performing loans
during 2009 and 2008 were primarily attributable to higher levels of nonaccrual loans. Nonaccrual
loans increased $29 million, or 34.3%, to $115 million at December 31, 2009, from $86 million at
December 31, 2008. Approximately 69.1% of the increase occurred in commercial and commercial real
estate loans and is primarily attributable to the loans of six borrowers placed on nonaccrual
status in 2009. The remaining increase was spread among the remaining major loan categories.
Nonaccrual loans increased $54 million, or 171.4%, to $86 million as of December 31, 2008, from $32
million as of December 31, 2007. Approximately 50.0% of this increase was related to the loans of
six borrowers adversely affected by weakening demand for residential real estate lots.
In addition to the non-performing loans included in the non-performing assets table above, as
of December 31, 2009, we had potential problem loans of $223 million. Potential problem loans
consist of performing loans that have been internally risk classified due to uncertainties
regarding the borrowers ability to continue to comply with the contractual repayment terms of the
loans. Although these loans have been identified as potential non-performing loans, they may never
become delinquent, non-performing or impaired. As of December 31, 2009, approximately 99% of these
loans were less than 60 days past due. Additionally, these loans are generally secured by
commercial real estate or other assets, thus reducing the potential for loss should they become
non-performing. Potential problem loans are considered in the determination of our allowance for
loan losses.
OREO. OREO increased $32 million, or 537.3%, to $38 million as of December 31, 2009
from $6 million as of December 31, 2008. Approximately 73.4% of this increase relates to the
foreclosure on properties collateralizing the loans of residential real estate developers. The
majority of these loans were included in nonaccrual loans as of December 31, 2008. The remaining
2009 increase, as compared to 2008, occurred in commercial and residential real estate properties.
OREO increased $5 million to $6 million as of December 31, 2008, as compared to $928,000 as of
December 31, 2007. This increase was due to foreclosure on the collateral underlying the loans of
two commercial real estate borrowers during 2008.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan losses based on our
evaluation of known and inherent risk in our loan portfolio at each balance sheet date. In
determining the allowance for loan losses, we estimate losses on specific loans, or groups of
loans, where the probable loss can be identified and reasonably determined. The balance of the
allowance for loan losses is based on internally assigned risk classifications of loans, historical
loan loss rates, changes in the nature of the loan portfolio, overall portfolio quality, industry
concentrations, delinquency trends, current economic factors and the estimated impact of current
economic conditions on certain historical loan loss rates. See the discussion under Critical
Accounting Estimates and Significant Accounting Polices Allowance for Loan Losses above.
The allowance for loan losses is increased by provisions charged against earnings and reduced
by net loan charge-offs. Loans are charged-off when we determine that collection has become
unlikely. Consumer loans are generally charged off when they become 120 days past due. Credit card
loans are generally charged off when they become 180 days past due. Recoveries are recorded only
when cash payments are received.
The allowance for loan losses consists of three elements: (1) historical valuation allowances
based on loan loss experience for similar loans with similar characteristics and trends; (2)
specific valuation allowances based on probable losses on specific loans; and (3) general valuation
allowances determined based on general economic conditions and other qualitative risk factors both
internal and external to us. Historical valuation allowances are determined by applying percentage
loss factors to the credit exposures from outstanding loans. For commercial, agricultural and real
estate loans, loss factors are applied based on the internal risk classifications of these loans.
For consumer loans, loss factors are applied on a portfolio basis. For commercial, agriculture and
real estate loans, loss factor percentages are based on a migration analysis of our historical loss
experience over a ten year period, designed to account for credit deterioration. For consumer
loans, loss factor percentages are based on a one-year loss history. Specific allowances are
established for loans where we have determined that probability of a loss exists and will exceed
the historical loss factors applied based on internal risk classification of the loans. General
valuation allowances are determined by evaluating, on a quarterly basis, changes in the nature and
volume of the loan portfolio, overall portfolio quality, industry concentrations, current economic,
political and regulatory factors and the estimated impact of current economic, political,
environmental and regulatory conditions on historical loss rates.
- 48 -
The following table sets forth information concerning our allowance for loan losses as of
the dates and for the periods indicated.
Allowance for Loan Losses
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the year ended December 31, |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Balance at the beginning of period |
|
$ |
87,316 |
|
|
$ |
52,355 |
|
|
$ |
47,452 |
|
|
$ |
42,450 |
|
|
$ |
42,141 |
|
Allowance of acquired banking offices Charge-offs: |
|
|
|
|
|
|
14,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
5,156 |
|
|
|
995 |
|
|
|
382 |
|
|
|
42 |
|
|
|
560 |
|
Construction |
|
|
14,153 |
|
|
|
3,035 |
|
|
|
|
|
|
|
9 |
|
|
|
15 |
|
Residential |
|
|
1,086 |
|
|
|
325 |
|
|
|
134 |
|
|
|
86 |
|
|
|
382 |
|
Agricultural |
|
|
11 |
|
|
|
642 |
|
|
|
155 |
|
|
|
|
|
|
|
|
|
Consumer |
|
|
8,134 |
|
|
|
5,527 |
|
|
|
3,778 |
|
|
|
4,030 |
|
|
|
4,133 |
|
Commercial |
|
|
3,346 |
|
|
|
3,523 |
|
|
|
643 |
|
|
|
963 |
|
|
|
2,228 |
|
Agricultural |
|
|
92 |
|
|
|
648 |
|
|
|
116 |
|
|
|
80 |
|
|
|
133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs |
|
|
31,978 |
|
|
|
14,695 |
|
|
|
5,208 |
|
|
|
5,210 |
|
|
|
7,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
108 |
|
|
|
88 |
|
|
|
52 |
|
|
|
329 |
|
|
|
44 |
|
Construction |
|
|
7 |
|
|
|
1 |
|
|
|
1 |
|
|
|
10 |
|
|
|
|
|
Residential |
|
|
38 |
|
|
|
67 |
|
|
|
34 |
|
|
|
63 |
|
|
|
13 |
|
Agricultural |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
1,850 |
|
|
|
1,404 |
|
|
|
1,390 |
|
|
|
1,568 |
|
|
|
1,297 |
|
Commercial |
|
|
328 |
|
|
|
211 |
|
|
|
854 |
|
|
|
360 |
|
|
|
552 |
|
Agricultural |
|
|
61 |
|
|
|
66 |
|
|
|
30 |
|
|
|
121 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries |
|
|
2,392 |
|
|
|
1,837 |
|
|
|
2,361 |
|
|
|
2,451 |
|
|
|
1,913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
29,586 |
|
|
|
12,858 |
|
|
|
2,847 |
|
|
|
2,759 |
|
|
|
5,538 |
|
Provision for loan losses |
|
|
45,300 |
|
|
|
33,356 |
|
|
|
7,750 |
|
|
|
7,761 |
|
|
|
5,847 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
103,030 |
|
|
$ |
87,316 |
|
|
$ |
52,355 |
|
|
$ |
47,452 |
|
|
$ |
42,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period end loans |
|
$ |
4,528,004 |
|
|
$ |
4,772,813 |
|
|
$ |
3,558,980 |
|
|
$ |
3,310,363 |
|
|
$ |
3,034,354 |
|
Average loans |
|
|
4,660,189 |
|
|
|
4,527,987 |
|
|
|
3,449,809 |
|
|
|
3,208,102 |
|
|
|
2,874,723 |
|
Net charge-offs to average loans |
|
|
0.63 |
% |
|
|
0.28 |
% |
|
|
0.08 |
% |
|
|
0.09 |
% |
|
|
0.19 |
% |
Allowance to period-end loans |
|
|
2.28 |
% |
|
|
1.83 |
% |
|
|
1.47 |
% |
|
|
1.43 |
% |
|
|
1.40 |
% |
|
The allowance for loan losses was $103 million, or 2.28% of period-end loans, at
December 31, 2009, compared to $87 million, or 1.83% of period-end loans, at December 31, 2008, and
$52 million, or 1.47% of period-end loans, at December 31, 2007. Increases in the allowance for
loan losses as a percentage of total loans were primarily attributable to additional reserves
recorded based on the estimated effects of current economic conditions on our loan portfolio and
increases in past due, non-performing and internally risk classified loans.
Net charge-offs in 2009 increased $17 million to $30 million, or 0.63% of average loans, from
$13 million, or 0.28% of average loans in 2009, primarily due the charge-off of six residential
real estate development projects in our Montana and Wyoming market areas. In addition, we
partially charged-off three land development loan participations acquired in the First Western
acquisition.
Net charge-offs increased $10 million to $13 million, or 0.28% of average loans in 2008, from
$3 million, or 0.08% of average loans in 2007, and remained flat in 2007 as compared to 2006. The
increase in net charge-offs in 2008, as compared to 2007, was primarily due to the loans of two
commercial real estate borrowers and one commercial borrower and was reflective of the increase in
internally classified loans related to the deterioration of economic conditions in 2008, as well as
overall loan growth.
- 49 -
Although we believe that we have established our allowance for loan losses in accordance with
accounting principles generally accepted in the United States and that the allowance for loan
losses was adequate to provide for known and inherent losses in the portfolio at all times during
the five-year period ended December 31, 2009, future provisions will be subject to on-going
evaluations of the risks in the loan portfolio. If the economy continues to decline or asset
quality continues to deteriorate, material additional provisions could be required.
The allowance for loan losses is allocated to loan categories based on the relative risk
characteristics, asset classifications and actual loss experience of the loan portfolio. The
following table provides a summary of the allocation of the allowance for loan losses for specific
loan categories as of the dates indicated. The allocations presented should not be interpreted as
an indication that charges to the allowance for loan losses will be incurred in these amounts or
proportions, or that the portion of the allowance allocated to each loan category represents the
total amount available for future losses that may occur within these categories. The unallocated
portion of the allowance for loan losses and the total allowance are applicable to the entire loan
portfolio.
Allocation of the Allowance for Loan Losses
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
|
Loan |
|
|
|
|
|
|
Loan |
|
|
|
|
|
|
Loan |
|
|
|
|
|
|
Loan |
|
|
|
|
|
|
Loan |
|
|
|
|
|
|
|
Category |
|
|
|
|
|
|
Category |
|
|
|
|
|
|
Category |
|
|
|
|
|
|
Category |
|
|
|
|
|
|
Category |
|
|
|
Allocated |
|
|
to Total |
|
|
Allocated |
|
|
to Total |
|
|
Allocated |
|
|
to Total |
|
|
Allocated |
|
|
to Total |
|
|
Allocated |
|
|
to Total |
|
|
|
Reserves |
|
|
Loans |
|
|
Reserves |
|
|
Loans |
|
|
Reserves |
|
|
Loans |
|
|
Reserves |
|
|
Loans |
|
|
Reserves |
|
|
Loans |
|
Real estate |
|
$ |
76,357 |
|
|
|
65.5 |
% |
|
$ |
69,280 |
|
|
|
64.9 |
% |
|
$ |
39,420 |
|
|
|
63.8 |
% |
|
$ |
33,532 |
|
|
|
62.9 |
% |
|
$ |
22,622 |
|
|
|
61.7 |
% |
Consumer |
|
|
6,220 |
|
|
|
14.9 |
|
|
|
5,092 |
|
|
|
14.0 |
|
|
|
4,838 |
|
|
|
17.1 |
|
|
|
5,794 |
|
|
|
18.3 |
|
|
|
7,544 |
|
|
|
19.4 |
|
Commercial |
|
|
18,608 |
|
|
|
16.6 |
|
|
|
11,021 |
|
|
|
17.9 |
|
|
|
7,170 |
|
|
|
16.7 |
|
|
|
6,746 |
|
|
|
16.4 |
|
|
|
7,607 |
|
|
|
16.3 |
|
Agricultural |
|
|
1,845 |
|
|
|
3.0 |
|
|
|
1,923 |
|
|
|
3.1 |
|
|
|
779 |
|
|
|
2.3 |
|
|
|
908 |
|
|
|
2.3 |
|
|
|
1,147 |
|
|
|
2.5 |
|
Other loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
0.1 |
|
|
|
14 |
|
|
|
0.1 |
|
|
|
15 |
|
|
|
0.1 |
|
Unallocated (1) |
|
|
|
|
|
|
N/A |
|
|
|
|
|
|
|
N/A |
|
|
|
148 |
|
|
|
N/A |
|
|
|
458 |
|
|
|
N/A |
|
|
|
3,515 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
103,030 |
|
|
|
100.0 |
% |
|
$ |
87,316 |
|
|
|
100.0 |
% |
|
$ |
52,355 |
|
|
|
100.0 |
% |
|
$ |
47,452 |
|
|
|
100.0 |
% |
|
$ |
42,450 |
|
|
|
100.0 |
% |
|
|
|
|
(1) |
|
During 2006, we refined the methodology for determining the allocated components of the
allowance for loan losses. This refinement included improved evaluation of qualitative risk
factors internal and external to us and use of a migration analysis of historical loan
losses. This refinement resulted in a reallocation among specific loan categories and the
allocation of previously unallocated allowance amounts to specific loan categories. As a
result, allocation of the allowance for loan losses in 2005 is not directly comparable to
the 2006, 2007, 2008 and 2009 presentation. |
The allocated allowance for loan losses on real estate loans increased 10.2% to $76
million as of December 31, 2009, from $69 million as of December 31, 2008, and 75.7% to $69 million
as of December 31, 2008, from $39 million as of December 31, 2007. Increases in allowance for loan
losses allocated to real estate loans were primarily the result of weakening demand for residential
lots, particularly in three of the communities we serve in Montana and one of the communities we
serve in Wyoming, a general slow down in housing across our market areas, the effect of increases
in net charge-offs on our historical loss factors and the application of historical loss factors to
higher levels of internally risk classified real estate loans, including land development loans and
loans secured by commercial real estate.
The allocated allowance for loan losses on commercial loans increased 68.8% to $19 million as
of December 31, 2009, from $11 million as of December 31, 2008, and 53.7% to $11 million as of December 31, 2008, from $7 million as of
December 31, 2007. Increases in allowance for loan losses allocated to commercial loans were
primarily due to the application of historical loss factors to higher levels of internally risk
classified commercial loans and the effect of increases in net charge-offs on our historical loss
factors.
Investment Securities
We manage our investment portfolio to obtain the highest yield possible, while meeting our
risk tolerance and liquidity guidelines and satisfying the pledging requirements for deposits of
state and political subdivisions and securities sold under repurchase agreements. As of December
31, 2009, our portfolio was principally comprised of mortgage-backed securities, U.S. government
agency securities and tax exempt securities. Federal funds sold are additional investments that
are classified as cash equivalents rather than as investment securities. Investment securities
classified as available-for-sale are recorded at fair value, while investment securities classified
as held-to-maturity are recorded at amortized cost. Unrealized gains or losses, net of the
deferred tax effect, on available-for-sale securities are reported as increases or decreases in
accumulated other comprehensive income or loss, a component of stockholders equity.
- 50 -
Investment securities increased $374 million, or 34.9%, to $1,446 million as of December 31,
2009, from $1,072 million as of December 31, 2008. During third quarter 2009, we began investing
our excess liquidity, as represented by higher levels of federal funds sold, into investment
securities maturing within thirty-six months. Management expects investment securities to continue
to increase in future quarters as excess liquidity continues to be reinvested. Investment
securities decreased 5.0% to $1,072 million as of December 31, 2008, from $1,129 million as of
December 31, 2007. Excluding investment securities of the acquired First Western entities, our
investment securities decreased 11.5% as of December 31, 2008, compared to December 31, 2007.
During 2008, proceeds from maturities, calls and principal paydowns of investment securities were
used to fund loan growth.
In conjunction with the merger of our three bank subsidiaries during third quarter 2009, we
transferred available-for-sale state, county and municipal investment securities with amortized
costs of $28 million and fair market values of $29 million into the held-to-maturity category. This
transfer more closely aligns the investment portfolios of the merged banks with that of First
Interstate Bank, the surviving institution. Unrealized net gains of $1.1 million included in
accumulated other comprehensive income at the time of transfer are being amortized to yield over
the remaining lives of the transferred securities.
As of December 31, 2009, our investments in non-agency mortgage-backed securities totaled $1
million, or less than 1% of our total investment portfolio. As of December 31, 2009, investment
securities with amortized costs and fair values of $1,069 million and $1,095 million, respectively,
were pledged to secure public deposits and securities sold under repurchase agreements, as compared
to $894 million and $907 million, respectively, as of December 31, 2008. The weighted average
yield on investment securities decreased 55 basis points to 4.37% in 2009, from 4.92% in 2008, and
4 basis points to 4.92% in 2008, from 4.96% in 2007. For additional information concerning
securities sold under repurchase agreements, see Federal Funds Purchased and Securities Sold
Under Repurchase Agreements included herein.
- 51 -
The following table sets forth the book value, percentage of total investment securities and
average yield on investment securities as of December 31, 2009:
Securities Maturities and Yield
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total |
|
|
Weighted |
|
|
|
Book |
|
|
Investment |
|
|
Average |
|
|
|
Value |
|
|
Securities |
|
|
Yield (1) |
|
U.S. Government agency securities |
|
|
|
|
|
|
|
|
|
|
|
|
Maturing within one year |
|
$ |
2,679 |
|
|
|
0.2 |
% |
|
|
4.94 |
% |
Maturing in one to five years |
|
|
554,674 |
|
|
|
38.3 |
|
|
|
2.56 |
|
Maturing in five to ten years |
|
|
11,352 |
|
|
|
0.8 |
|
|
|
4.01 |
|
Mark-to-market adjustments on securities available-for-sale |
|
|
2,741 |
|
|
|
0.2 |
|
|
NA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
571,446 |
|
|
|
39.5 |
|
|
|
2.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
Maturing within one year |
|
|
180,768 |
|
|
|
12.5 |
|
|
|
4.72 |
|
Maturing in one to five years |
|
|
325,310 |
|
|
|
22.5 |
|
|
|
4.74 |
|
Maturing in five to ten years |
|
|
86,749 |
|
|
|
6.0 |
|
|
|
4.67 |
|
Maturing after ten years |
|
|
130,124 |
|
|
|
9.0 |
|
|
|
4.73 |
|
Mark-to-market adjustments on securities available-for-sale |
|
|
22,032 |
|
|
|
1.5 |
|
|
NA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
744,983 |
|
|
|
51.5 |
|
|
|
4.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax exempt securities |
|
|
|
|
|
|
|
|
|
|
|
|
Maturing within one year |
|
|
9,648 |
|
|
|
0.7 |
|
|
|
6.21 |
|
Maturing in one to five years |
|
|
31,743 |
|
|
|
2.2 |
|
|
|
6.14 |
|
Maturing in five to ten years |
|
|
41,147 |
|
|
|
2.9 |
|
|
|
6.12 |
|
Maturing after ten years |
|
|
46,843 |
|
|
|
3.2 |
|
|
|
6.02 |
|
Mark-to-market adjustments on securities available-for-sale |
|
NA |
|
NA |
|
NA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
129,381 |
|
|
|
9.0 |
|
|
|
6.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other securities (2) |
|
|
|
|
|
|
|
|
|
|
|
|
No stated maturity |
|
|
470 |
|
|
|
|
|
|
NA |
Mark-to-market adjustments on securities available-for-sale |
|
NA |
|
NA |
|
NA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
470 |
|
|
|
|
|
|
NA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,446,280 |
|
|
|
100.0 |
% |
|
|
3.93 |
% |
|
|
|
|
(1) |
|
Average yields have been calculated on a FTE basis. |
|
(2) |
|
Equity investments in community development entities. Investment income is in the
form of credits that reduce income tax expense. |
Maturities of U.S. government agency securities noted above reflect $383 million of
investment securities at their final maturities although they have call provisions within the next
year. Mortgage-backed securities, and to a limited extent other securities, have uncertain cash
flow characteristics that present additional interest rate risk in the form of prepayment or
extension risk primarily caused by changes in market interest rates. This additional risk is
generally rewarded in the form of higher yields. Maturities of mortgage-backed securities
presented above are based on prepayment assumptions at December 31, 2009.
There were no significant concentrations of investments at December 31, 2009 (greater than 10%
of stockholders equity) in any individual security issuer, except for U.S. government or
agency-backed securities.
As of December 31, 2008, we had U.S. government agency securities with carrying values of $270
million and a weighted average yield of 4.09%; mortgage-backed securities with carrying values of
$655 million and a weighted average yield of 4.85%; tax exempt securities with carrying values of
$143 million and a weighted average yield of 6.22%; other securities with carrying values of $4 million and a weighted average yield of 4.35%; and,
mutual funds with carrying values of $4,000 and a weighted average yield of 1.15%.
- 52 -
As of December 31, 2007, we had U.S. government agency securities with carrying values of $453
million and a weighted average yield of 4.52%; mortgage-backed securities with carrying values of
$562 million and a weighted average yield of 4.90%; tax exempt securities with carrying values of
$114 million and a weighted average yield of 6.43%; other securities with carrying values of
$767,000 and a weighted average yield of 0.00%; and, mutual funds with carrying values of $3,000
and a weighted average yield of 3.62%.
We evaluate our investment portfolio quarterly for other-than-temporary declines in the market
value of individual investment securities. This evaluation includes monitoring credit ratings;
market, industry and corporate news; volatility in market prices; and, determining whether the
market value of a security has been below its cost for an extended period of time.
As of December 31, 2009, we had investment securities with fair values of $3 million that had been
in a continuous loss position more than twelve months. Gross unrealized losses on these securities
totaled $140,000 as of December 31, 2009, and were primarily attributable to changes in interest
rates. No impairment losses were recorded during 2009 or 2007. We recorded impairment losses of
$1.3 million in 2008, all of which was related to one corporate bond. Subsequent to the impairment
loss, the carrying value of this bond was zero.
For additional information concerning investment securities, see Notes to Consolidated
Financial Statements Investment Securities included in Part IV, Item 15.
Cash and Cash Equivalents
Cash and cash equivalents increased $309 million, or 98.5%, to $623 million as of December 31,
2009, from $314 million as of December 31, 2008, largely due to managements focus on increasing
liquidity through balanced internal growth combined with weak loan demand in 2009.
Premises and Equipment
Premises and equipment increased $19 million, or 10.4%, to $196 million as of December 31,
2009, from $178 million as of December 31, 2008. This increase is primarily due to capitalization
of the costs associated with the construction of two new branch banking offices and an operations
center, which were placed into service during fourth quarter 2009. Premises and equipment
increased $54 million, or 43.3% to $178 million in 2008, from $124 million in 2007. Exclusive of
premises and equipment acquired in the First Western acquisition, premises and equipment increased
$12 million, or 9.7%.
Deferred Tax Asset/Liability
As of December 31, 2009, we had a net deferred tax liability of $2 million included in
accounts payable and other accrued expenses, as compared to a deferred tax asset of $7 million as
of December 31, 2008. Changes in net deferred tax asset/liability are primarily due to
fluctuations in net unrealized gains on available-for-sale investment securities, tax amortization
of goodwill and core deposit intangibles and the write-down of OREO to fair value. Net deferred
tax asset increased $660,000, or 9.8%, to $7 million as of December 31, 2008, from $7 million as of
December 31, 2007, primarily due to fluctuations in net unrealized gains on available-for-sale
investment securities.
Other Assets
Other assets increased $38 million, or 77.2%, to $88 million as of December 31, 2009, from $50
million as of December 31, 2008. Approximately $32 million of the increase is due to a required
prepayment of estimated quarterly FDIC insurance assessments for 2010, 2011 and 2012. In addition,
$5 million of the increase relates to the capitalization of costs of two condominium units located
inside one of the newly constructed branch banking offices. We completed the sale of one unit in
January 2010 and are actively marketing the second unit.
Other assets increased $8 million, or 18.7% to $50 million as of December 31, 2008, from $42
million as of December 31, 2007, due to the acquisition of Federal Reserve Bank stock in
conjunction with obtaining Federal Reserve membership for the acquired First Western entities.
Deposits
We emphasize developing total client relationships with our customers in order to
increase our core deposit base, which is our primary funding source. Our deposits consist of
non-interest bearing and interest bearing demand, savings, individual retirement and time deposit
accounts.
- 53 -
The following table summarizes our deposits as of the dates indicated:
Deposits
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
2009 |
|
Percent |
|
2008 |
|
Percent |
|
2007 |
|
Percent |
|
2006 |
|
Percent |
|
2005 |
|
Percent |
|
Non-interest bearing
demand Interest bearing: |
|
$ |
1,026,584 |
|
|
|
17.6 |
% |
|
$ |
985,155 |
|
|
|
19.0 |
% |
|
$ |
836,753 |
|
|
|
20.9 |
% |
|
$ |
888,694 |
|
|
|
24.0 |
% |
|
$ |
864,128 |
|
|
|
24.4 |
% |
Demand |
|
|
1,197,254 |
|
|
|
20.6 |
|
|
|
1,059,818 |
|
|
|
20.5 |
|
|
|
1,019,208 |
|
|
|
25.5 |
|
|
|
964,312 |
|
|
|
26.0 |
|
|
|
792,263 |
|
|
|
22.3 |
|
Savings |
|
|
1,362,410 |
|
|
|
23.4 |
|
|
|
1,198,783 |
|
|
|
23.2 |
|
|
|
992,571 |
|
|
|
24.8 |
|
|
|
798,497 |
|
|
|
21.5 |
|
|
|
879,586 |
|
|
|
24.8 |
|
Time, $100 and over |
|
|
996,839 |
|
|
|
17.1 |
|
|
|
821,437 |
|
|
|
15.9 |
|
|
|
464,560 |
|
|
|
11.6 |
|
|
|
408,813 |
|
|
|
11.0 |
|
|
|
352,324 |
|
|
|
9.9 |
|
Time, other |
|
|
1,240,969 |
|
|
|
21.3 |
|
|
|
1,109,066 |
|
|
|
21.4 |
|
|
|
686,309 |
|
|
|
17.2 |
|
|
|
648,195 |
|
|
|
17.5 |
|
|
|
659,289 |
|
|
|
18.6 |
|
|
Total interest bearing |
|
|
4,797,472 |
|
|
|
82.4 |
|
|
|
4,189,104 |
|
|
|
81.0 |
|
|
|
3,162,648 |
|
|
|
79.1 |
|
|
|
2,819,817 |
|
|
|
76.0 |
|
|
|
2,683,462 |
|
|
|
75.6 |
|
|
Total deposits |
|
$ |
5,824,056 |
|
|
|
100.0 |
% |
|
$ |
5,174,259 |
|
|
|
100.0 |
% |
|
$ |
3,999,401 |
|
|
|
100.0 |
% |
|
$ |
3,708,511 |
|
|
|
100.0 |
% |
|
$ |
3,547,590 |
|
|
|
100.0 |
% |
|
Total deposits increased $650 million, or 12.6%, to $5,824 million as of December 31,
2009, from $5,174 million as of December 31, 2008. All categories of deposits demonstrated growth
during 2009 and there was a shift in the mix of deposits from interest-free deposits to higher
costing savings and time deposits. Management attributes our organic deposit growth to ongoing
business development in our market areas and increases in consumer savings. In addition, we
participate in the Certificate of Deposit Account Registry Service, or CDARS, program, which allows
us to provide competitive certificate of deposit products while maintaining FDIC insurance for
customers with larger balances.
Total deposits increased 29.4% to $5,174 million as of December 31, 2008, from $3,999 million
as of December 31, 2007. Excluding increases attributable to the acquired First Western entities,
total deposits increased 9.1% as of December 31, 2008, as compared to December 31, 2007. All
deposit categories demonstrated growth in 2008, as compared to 2007, and there was a shift in the
mix of deposits, with interest bearing demand deposits decreasing to 20.5% of total deposits in
2008, as compared to 25.5% in 2007, and time deposits increasing to 37.3% of total deposits in
2008, as compared to 28.8% in 2007.
Time deposits of $100,000 or more. Time deposits of $100,000 or more increased 21.4%
to $997 million as of December 31, 2009, from $821 million as of December 31, 2008. Management
attributes this growth to a continued focused effort to grow deposits combined with increases in
deposit insurance coverage to $250,000 per account. As of December 31, 2009, we had no
certificates of deposit issued in brokered transactions.
Time deposits of $100,000 or more increased 76.8% to $821 million as of December 31, 2008,
from $465 million as of December 31, 2007. Excluding increases attributable to the acquired First
Western entities, time deposits of $100,000 or more increased 42.2% as of December 31, 2008, as
compared to December 31, 2007. During third quarter 2008, we issued an aggregate of $100 million
of certificates of deposit in brokered transactions. These certificates, which were included in
time deposits of $100,000 or more, generally matured within four months and were issued to
customers outside of our market areas. As of December 31, 2008, $24 million of these deposits were
outstanding. The remaining increase in time deposits of $100,000 or more was primarily due to
internal growth, the result of managements focus to increase deposits combined with increases in
deposit insurance coverage to $250,000 per account.
Other time deposits. Other time deposits increased $132 million, or 11.9% to $1,241
million as of December 31, 2009, from $1,109 million as of December 31, 2008. Other time deposits
increased 61.6% to $1,109 million as of December 31, 2008, from $686 million as of December 31,
2007. Excluding increases attributable to the acquired First Western entities, other time deposits
increased 24.1% as of December 31, 2008, as compared to December 31, 2007. Increases in other time
deposits in 2009 and 2008 were primarily due increases in CDARS deposits. Under the CDARS program,
large certificates of deposit are exchanged through a network of banks in smaller increments to
ensure they are eligible for full FDIC insurance coverage. As of December 31, 2009, we had CDARS
deposits of $253 million compared to $141 million as of December 31, 2008.
For additional information concerning customer deposits, including the use of repurchase
agreements, see BusinessCommunity BankingDeposit Products, included in Part I, Item 1 and
Notes to Consolidated Financial StatementsDeposits, included in Part IV, Item 15 of this report
Federal Funds Purchased and Securities Sold Under Repurchase Agreements
In addition to deposits, we use federal funds purchased as a source of funds to meet the daily
liquidity needs of our customers, maintain required reserves with the Federal Reserve Bank and fund
growth in earning assets. As of December 31, 2009, our federal funds purchased were zero.
- 54 -
Under repurchase agreements with commercial and municipal depositors, customer deposit
balances are invested in short-term U.S. government agency securities overnight and are then
repurchased the following day. All outstanding repurchase agreements are due in one day. Repurchase
agreements decreased $51 million, or 9.8%, to $474 million as of December 31, 2009, from $526
million as of December 31, 2008, primarily due to fluctuations in the liquidity needs of our
customers and the introduction of full FDIC deposit insurance coverage for certain non-interest
bearing transaction deposits under the TLG Program.
The following table sets forth certain information regarding federal funds purchased and
repurchase agreements as of the dates indicated:
Federal Funds Purchased and Securities Sold Under Repurchase Agreements
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the year ended December 31, |
|
2009 |
|
2008 |
|
2007 |
|
Federal funds purchased: |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at period end |
|
$ |
|
|
|
$ |
30,625 |
|
|
$ |
|
|
Average balance |
|
|
9,323 |
|
|
|
64,994 |
|
|
|
5,172 |
|
Maximum amount outstanding at any month-end |
|
|
57,230 |
|
|
|
121,390 |
|
|
|
29,470 |
|
Average interest rate: |
|
|
|
|
|
|
|
|
|
|
|
|
During the year |
|
|
0.21 |
% |
|
|
2.14 |
% |
|
|
5.17 |
% |
At period end |
|
|
|
|
|
|
0.22 |
|
|
|
|
|
Securities sold under repurchase agreements: |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at period end |
|
$ |
474,141 |
|
|
$ |
525,501 |
|
|
$ |
604,762 |
|
Average balance |
|
|
422,713 |
|
|
|
537,267 |
|
|
|
558,469 |
|
Maximum amount outstanding at any month-end |
|
|
474,141 |
|
|
|
576,845 |
|
|
|
679,247 |
|
Average interest rate: |
|
|
|
|
|
|
|
|
|
|
|
|
During the year |
|
|
0.18 |
% |
|
|
1.43 |
% |
|
|
3.80 |
% |
At period end |
|
|
0.38 |
|
|
|
0.34 |
|
|
|
3.09 |
|
|
Other Borrowed Funds
Other borrowed funds decreased $74 million, or 93.2% to $5 million as of December 31, 2009,
from $79 million as of December 31, 2008, primarily due to scheduled repayments and maturities of
short-term borrowings from the FHLB. Other borrowed funds increased $70 million to $79 million as
of December 31, 2008, from $9 million as of December 31, 2007, primarily due to short-term
borrowings from the FHLB. On September 11, 2008, we borrowed $25 million on a note bearing interest
of 2.96% that matured and was repaid on March 11, 2009 and on September 22, 2008, we borrowed $50
million on a note maturing September 22, 2009 bearing interest of 3.57%. Proceeds from these
borrowings were used to fund growth in earning assets. For additional information on other
borrowed funds, see Notes to Consolidated Financial StatementsLong-Term Debt and Other Borrowed
Funds, included in Part IV, Item 15 of this report.
Long-Term Debt
Long-term debt decreased $11 million, or 12.8%, to $73 million as of December 31, 2009, from
$84 million as of December 31, 2008 primarily due to scheduled repayments of term notes under our
syndicated credit agreement and, to a lesser extent, scheduled repayments of long-term FHLB
borrowings.
Long-term debt increased $79 million to $84 million as of December 31, 2008, from $5 million
as of December 31, 2007. In conjunction with the First Western acquisition, on January 10, 2008 we
entered into a credit agreement with four syndicated banks. The syndicated credit agreement is
secured by all of the outstanding stock of First Interstate Bank. As of December 31, 2009, $34
million was outstanding on variable rate term notes issued under the syndicated credit agreement.
The term notes are payable in equal quarterly principal installments of $2 million, with one final
installment of $29 million due at maturity on December 31, 2010. Interest on the term notes is
payable quarterly. As of December 31, 2009, the term notes had a weighted average interest rate
3.75%.
- 55 -
The syndicated credit agreement contains various covenants that, among other things, establish
minimum capital and financial performance ratios; and place certain restrictions on capital
expenditures, indebtedness, redemptions or repurchases of common stock and the amount of dividends
payable to shareholders. During 2008 and 2009, we entered into amendments to our syndicated credit
agreement that, among other things, eliminated the revolving credit facility, changed the maturity
date on the term notes to December 31, 2010 from January 10, 2013, changed the interest rate
charged on the term notes to a maximum non-default rate of LIBOR plus 3.75%, modified certain
definitions and debt covenants and waived debt covenant violations existing as of the dates of the
amendments. In connection with the amendments, we paid aggregate amendment and waiver fees of
$259,000 and $85,000 in 2009 and 2008, respectively.
The debt covenant ratios included in the syndicated credit agreement, as last amended, require
us to, among other things, (1) maintain our ratio of non-performing assets to primary equity
capital at a percentage not greater than 45.0%, (2) maintain our allowance for loan and lease
losses in an amount not less than 65.0% of non-performing loans, (3) maintain our return on average
assets at not less than 0.70% through March 30, 2010 and 0.65% thereafter, (4) maintain a
consolidated total risk-based capital ratio of not less than 11.00% and a total risk-based capital
ratio at the Bank of not less than 10.00%, (5) limit cash dividends to shareholders such that the
aggregate amount of cash dividends in any four consecutive fiscal quarters does not exceed 37.5% of
net income during such four-quarter period and (6) limit repurchases of our common stock, less cash
proceeds from the issuance of our common stock, in any period of four consecutive fiscal quarters,
as a percentage of consolidated book net worth as of the end of that period to 2.75% through March
31, 2010 and 2.25% thereafter.
Also in conjunction with the First Western acquisition, on January 10, 2008 we entered into a
subordinated credit agreement and borrowed $20 million on a 6.81% unsecured subordinated term loan
maturing January 9, 2018. Interest on the subordinated term loan is payable quarterly and principal
is due at maturity.
Unrelated to the First Western acquisition, in February 2008 we borrowed $15 million on a
variable rate unsecured subordinated term loan maturing February 28, 2018, with interest payable
quarterly and principal due at maturity. The interest rate on the subordinated term loan was 2.26%
as of December 31, 2009.
For additional information regarding long-term debt, see Notes to Consolidated Financial
StatementsLong- Term Debt and Other Borrowed Funds, included in Part IV, Item 15 of this report.
Subordinated Debentures Held by Subsidiary Trusts
Subordinated debentures held by subsidiary trusts were $124 million as of December 31, 2009
and December 31, 2008. Subordinated debentures held by subsidiary trusts increased $21 million to
$124 million as of December 31, 2008, from $103 million as of December 31, 2007. During fourth
quarter 2007, we completed a series of four financings involving the sale of Trust Preferred
Securities to third-party investors and the issuance of 30-year junior subordinated deferrable
interest debentures, or Subordinated Debentures, in the aggregate amount of $62 million to
wholly-owned business trusts. During January 2008, we completed two additional financings involving
the sale of Trust Preferred Securities to third-party investors and the issuance of Subordinated
Debentures in the aggregate amount of $21 million to wholly-owned business trusts. All of the
Subordinated Debentures are unsecured with interest payable quarterly at various interest rates and
may be redeemed, subject to approval of the Federal Reserve Bank of Minneapolis, at our option on
or after five years from the date of issue, or at any time in the event of unfavorable changes in
laws or regulations. Proceeds from these issuances, together with the financing obtained under the
syndicated credit agreement and unsecured subordinated term loan agreement described above, were
used to fund the First Western acquisition. For additional information regarding the Subordinated
Debentures, see Notes to Consolidated Financial StatementsSubordinated Debentures Held by
Subsidiary Trusts, included in Part IV, Item 15 of this report. For additional information
regarding the First Western acquisition see Notes to Consolidated Financial
StatementsAcquisitions and Dispositions, included in Part IV, Item 15 of this report.
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses decreased $6 million, or 12.4% to $45 million as of
December 31, 2009, from $51 million as of December 31, 2008, primarily due to the timing of
corporate tax payments. Accounts payable and accrued expenses increased 70.3% to $51 million as of
December 31, 2008, from $30 million as of December 31, 2007. Excluding increases attributable to
the acquired First Western entities, accounts payable and accrued expenses increased 51.2% as of
December 31, 2008, compared to December 31, 2007, primarily due to the timing of corporate income
tax payments and the deferral of a portion of the gain recognized on the sale of i_Tech.
- 56 -
Contractual Obligations
Contractual obligations as of December 31, 2009 are summarized in the following table.
Contractual Obligations
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due |
|
|
Within |
|
One Year to |
|
Three Years |
|
After |
|
|
|
|
One Year |
|
Three Years |
|
to Five Years |
|
Five Years |
|
Total |
|
Deposits without a stated maturity |
|
$ |
3,586,248 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,586,248 |
|
Time deposits |
|
|
1,882,363 |
|
|
|
281,425 |
|
|
|
73,995 |
|
|
|
25 |
|
|
|
2,237,808 |
|
Securities sold under repurchase
agreements |
|
|
474,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
474,141 |
|
Other borrowed funds (1) |
|
|
5,423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,423 |
|
Long-term debt obligation (2) |
|
|
35,816 |
|
|
|
216 |
|
|
|
218 |
|
|
|
35,256 |
|
|
|
71,506 |
|
Capital lease obligations |
|
|
34 |
|
|
|
77 |
|
|
|
93 |
|
|
|
1,643 |
|
|
|
1,847 |
|
Operating lease obligations |
|
|
3,258 |
|
|
|
5,785 |
|
|
|
4,344 |
|
|
|
6,860 |
|
|
|
20,247 |
|
Purchase obligations (3) |
|
|
14,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,779 |
|
Subordinated debentures held by
subsidiary trusts (4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123,715 |
|
|
|
123,715 |
|
|
Total contractual obligations |
|
$ |
6,002,062 |
|
|
$ |
287,503 |
|
|
$ |
78,650 |
|
|
$ |
167,499 |
|
|
$ |
6,535,714 |
|
|
|
|
|
(1) |
|
Included in other borrowed funds are tax deposits made by customers pending subsequent
withdrawal by the federal government and borrowings with original maturities of less than
one year. For additional information concerning other borrowed funds, see Notes to
Consolidated Financial Statements Long Term Debt and Other Borrowed Funds included in
Part IV, Item 15. |
|
(2) |
|
Long-term debt consists of various notes payable to FHLB at various rates with
maturities through October 31, 2017; variable rate term notes under our syndicated credit
agreement maturing on December 31, 2010; a fixed rate subordinated term loan bearing
interest of 6.81% and maturing January 9, 2018; and a variable rate subordinated term loan
maturing February 28, 2018. For additional information concerning long-term debt, see
Notes to Consolidated Financial Statements Long Term Debt and Other Borrowed Funds
included in Part IV, Item 15. |
|
(3) |
|
Purchase obligations relate to obligations under construction contracts to build or
renovate banking offices and obligations to purchase investment securities. |
|
(4) |
|
The subordinated debentures are unsecured, with various interest rates and maturities
from March 26, 2033 through April 1, 2038. Interest distributions are payable quarterly;
however, we may defer interest payments at any time for a period not exceeding 20
consecutive quarters. For additional information concerning the subordinated debentures,
see Notes to Consolidated Financial Statements Subordinated Debentures Held by
Subsidiary Trusts included in Part IV, Item 15. |
We also have obligations under a postretirement healthcare benefit plan. These
obligations represent actuarially determined future benefit payments to eligible plan participants.
See Notes to Consolidated Financial Statements Employee Benefit Plans included in Part IV,
Item 15.
In addition, on December 31, 2008 we entered into a contractual obligation pursuant to a
technology services agreement maturing December 31, 2015. Amounts payable under the service
agreement are primarily based on the number of transactions or accounts processed. Payments made
under the service agreement in 2009 were approximately $8.5 million, net of deferred gain
amortization of $643,000.
Off-Balance Sheet Arrangements
We have entered into various arrangements not reflected on the consolidated balance sheet that
have or are reasonably likely to have a current or future effect on our financial condition,
results of operations or liquidity. These include guarantees, commitments to extend credit and
standby letters of credit.
We guarantee the distributions and payments for redemption or liquidation of capital trust
preferred securities issued by our wholly-owned subsidiary business trusts to the extent of funds
held by the trusts. Although the guarantees are not separately recorded, the obligations
underlying the guarantees are fully reflected on our consolidated balance sheets as subordinated
debentures held by subsidiary trusts. The subordinated debentures currently qualify as tier 1
capital under the
Federal Reserve capital adequacy guidelines. For additional information regarding the
subordinated debentures, see Notes to Consolidated Financial Statements Subordinated Debentures
Held by Subsidiary Trusts included in Part IV, Item 15.
- 57 -
We are a party to financial instruments with off-balance sheet risk in the normal course of
business to meet the financing needs of our customers. These financial instruments include
commitments to extend credit and standby letters of credit. For additional information regarding
our off-balance sheet arrangements, see Notes to Consolidated Financial Statements Financial
Instruments with Off-Balance Sheet Risk included in Part IV, Item 15.
Capital Resources and Liquidity Management
Capital Resources
Stockholders equity is influenced primarily by earnings, dividends, sales and redemptions of
common stock and, to a lesser extent, changes in the unrealized holding gains or losses, net of
taxes, on available-for-sale investment securities. Stockholders equity increased $35 million, or
6.6%, to $574 million as of December 31, 2009 from $539 million as of December 31, 2008, due to the
retention of earnings and fluctuations in unrealized gains on available-for-sale investment
securities. In addition, we raised capital through our annual stock offering to our employees and
directors. The 2009 annual offering resulted in the issuance of 62,828 shares of common stock with
an aggregate value of $4 million. We paid aggregate cash dividends of $15.7 million to common
shareholders and $3.0 million to preferred shareholders during 2009.
Stockholders equity increased 21.3% to $539 million as of December 31, 2008, from $444
million as of December 31, 2007, and 8.3% to $444 million as of December 31, 2007, primarily due to retention of earnings and the issuance of capital
stock. In January 2008, we issued 5,000 shares of 6.75% Series A noncumulative redeemable
preferred stock, or Series A Preferred Stock, with an aggregate value of $50 million in partial
consideration for the First Western acquisition. For more information regarding the Series A
Preferred Stock, see Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities Description of Our Capital Stock, included in Part II, Item 5.
In addition, during 2008 we raised capital of $12 million through the sale of 153,662 shares of our
common stock, including 58,799 shares sold in a private placement to members or affiliates of the
Scott family and 94,863 shares sold to our employees and directors pursuant to our annual stock
offering. The remaining increase in stockholders equity was primarily due to the retention of
earnings, net of stock redemptions and dividends.
Approximately 92% of our existing
common stock is subject to shareholder agreements that give us a right of first refusal to
repurchase the restricted stock. In response to the current recession and uncertain market conditions, we implemented changes
to our capital management practices to conserve capital. Beginning with second quarter 2009, we paid quarterly dividends to $0.45 per common share, a decrease of
$0.20 per common share from quarterly dividends paid during 2008 and first quarter 2009. In
addition, during 2009 we limited repurchase of common stock outside of our 401(k) retirement plan.
During 2009, we repurchased 160,688 shares of common stock with an aggregate value of $11 million
compared to repurchases of 333,393 shares with an aggregate value of $28 million in 2008 and
294,760 shares with an aggregate value of $26 million in 2007. We intend to continue to limit repurchases of common stock in 2010.
During second quarter 2009, we received notification that our application for participation in
the TARP Capital Purchase Program was approved though we elected not to participate in this capital
program.
On January 15, 2010, we filed a registration statement with the SEC for a proposed initial
public offering of shares of our Class A common stock. The offering is expected to consist of
shares of Class A common stock to be sold by us and may include shares of Class A common stock to
be sold by certain existing shareholders. The consummation of the proposed offering is subject to
market conditions and other factors.
Pursuant to the FDICIA, the Federal Reserve and FDIC have adopted regulations setting forth a
five-tier system for measuring the capital adequacy of the financial institutions they supervise.
At December 31, 2009 and 2008, our Bank had capital levels that, in all cases, exceeded the well
capitalized guidelines. For additional information concerning our capital levels, see Notes to
Consolidated Financial StatementsRegulatory Capital contained in Part IV, Item 15 of this
report.
- 58 -
Liquidity
Liquidity measures our ability to meet current and future cash flow needs on a timely basis
and at a reasonable cost. We manage our liquidity position to meet the daily cash flow needs of
customers, while maintaining an appropriate balance between assets and liabilities to meet the
return on investment objectives of our shareholders. Our liquidity position is supported by
management of liquid assets and liabilities and access to alternative sources of funds. Liquid
assets include cash, interest bearing deposits in banks, federal funds sold, available-for-sale
investment securities and maturing or prepaying balances in our held-to-maturity investment and
loan portfolios. Liquid liabilities include core deposits, federal funds purchased, securities sold
under repurchase agreements and borrowings. Other sources of liquidity include the sale of loans,
the ability to acquire additional national market, non-core deposits, the issuance of additional
collateralized borrowings such as FHLB advances, the issuance of debt securities, additional
borrowings through the Federal Reserves discount window and the issuance of preferred or common
securities. We do not engage in derivatives or hedging activities to support our liquidity
position.
Our short-term and long-term liquidity requirements are primarily to fund on-going operations,
including payment of interest on deposits and debt, extensions of credit to borrowers, capital
expenditures and shareholder dividends. These liquidity requirements are met primarily through cash
flow from operations, redeployment of prepaying and maturing balances in our loan and investment
portfolios, debt financing and increases in customer deposits. For additional information regarding
our operating, investing and financing cash flows, see Consolidated Financial
StatementsConsolidated Statements of Cash Flows, included in Part IV, Item 15 of this report.
As a holding company, we are a corporation separate and apart from our subsidiary Bank and,
therefore, we provide for our own liquidity. Our main sources of funding include management fees
and dividends declared and paid by our subsidiaries and access to capital markets. There are
statutory, regulatory and debt covenant limitations that affect the ability of our Bank to pay
dividends to us. Management believes that such limitations will not impact our ability to meet our
ongoing short-term cash obligations. For additional information regarding dividend restrictions,
see Financial ConditionLong-Term Debt and Capital Resources and Liquidity Management
above and BusinessRegulation and SupervisionRestrictions on Transfers of Funds to Us and the
Bank and Risk FactorsOur Banks ability to pay dividends to us is subject to regulatory
limitations, which, to the extent we are not able to receive such dividends, may impair our ability
to grow, pay dividends, cover operating expenses and meet debt service requirements.
Asset Liability Management
The goal of asset liability management is the prudent control of market risk, liquidity and
capital. Asset liability management is governed by policies, goals and objectives adopted and
reviewed by the Banks board of directors. The Board delegates its responsibility for development
of asset liability management strategies to achieve these goals and objectives to the Asset
Liability Committee, or ALCO, which is comprised of members of senior management.
Interest Rate Risk
Interest rate risk is the risk of loss of future earnings or long-term value due to changes in
interest rates. Our primary source of earnings is the net interest margin, which is affected by
changes in interest rates, the relationship between rates on interest bearing assets and
liabilities, the impact of interest rate fluctuations on asset prepayments and the mix of interest
bearing assets and liabilities.
The ability to optimize the net interest margin is largely dependent upon the achievement of
an interest rate spread that can be managed during periods of fluctuating interest rates. Interest
sensitivity is a measure of the extent to which net interest income will be affected by market
interest rates over a period of time. Interest rate sensitivity is related to the difference
between amounts of interest earning assets and interest bearing liabilities which either reprice or
mature within a given period of time. The difference is known as interest rate sensitivity gap.
- 59 -
The following table shows interest rate sensitivity gaps and the earnings sensitivity ratio
for different intervals as of December 31, 2009. The information presented in the table is based
on our mix of interest earning assets and interest bearing liabilities and historical experience
regarding their interest rate sensitivity.
Interest Rate Sensitivity Gaps
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected Maturity or Repricing |
|
|
Three |
|
Three |
|
One |
|
|
|
|
|
|
Months |
|
Months to |
|
Year to |
|
After |
|
|
|
|
or Less |
|
One Year |
|
Five Years |
|
Five Years |
|
Total |
|
Interest earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (1) |
|
$ |
1,765,672 |
|
|
$ |
732,447 |
|
|
$ |
1,750,533 |
|
|
$ |
164,322 |
|
|
$ |
4,412,974 |
|
Investment securities (2) |
|
|
168,566 |
|
|
|
330,452 |
|
|
|
667,101 |
|
|
|
280,161 |
|
|
|
1,446,280 |
|
Interest bearing deposits in banks |
|
|
398,979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
398,979 |
|
Federal funds sold |
|
|
11,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,474 |
|
|
Total interest earning assets |
|
$ |
2,344,691 |
|
|
$ |
1,062,899 |
|
|
$ |
2,417,634 |
|
|
$ |
444,483 |
|
|
$ |
6,269,707 |
|
|
Interest bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand accounts (3) |
|
$ |
89,794 |
|
|
$ |
269,382 |
|
|
$ |
838,078 |
|
|
$ |
|
|
|
$ |
1,197,254 |
|
Savings deposits (3) |
|
|
239,862 |
|
|
|
845,291 |
|
|
|
277,257 |
|
|
|
|
|
|
|
1,362,410 |
|
Time deposits, $100 or more (4) |
|
|
279,903 |
|
|
|
573,098 |
|
|
|
143,838 |
|
|
|
|
|
|
|
996,839 |
|
Other time deposits |
|
|
389,681 |
|
|
|
639,624 |
|
|
|
211,639 |
|
|
|
25 |
|
|
|
1,240,969 |
|
Securities sold under repurchase
agreements |
|
|
474,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
474,141 |
|
Other borrowed funds |
|
|
5,423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,423 |
|
Long-term debt |
|
|
49,320 |
|
|
|
1,535 |
|
|
|
630 |
|
|
|
21,868 |
|
|
|
73,353 |
|
Subordinated debentures held by
subsidiary trusts |
|
|
77,322 |
|
|
|
|
|
|
|
46,393 |
|
|
|
|
|
|
|
123,715 |
|
|
Total interest bearing liabilities |
|
$ |
1,605,446 |
|
|
$ |
2,328,930 |
|
|
$ |
1,517,835 |
|
|
$ |
21,893 |
|
|
$ |
5,474,104 |
|
|
Rate gap |
|
$ |
739,245 |
|
|
$ |
(1,266,031 |
) |
|
$ |
899,799 |
|
|
$ |
422,590 |
|
|
$ |
795,603 |
|
Cumulative rate gap |
|
|
739,245 |
|
|
|
(526,786 |
) |
|
|
373,013 |
|
|
|
795,603 |
|
|
|
|
|
Cumulative rate gap as a percentage
of total interest earning assets |
|
|
11.79 |
% |
|
|
-8.40 |
% |
|
|
5.95 |
% |
|
|
12.69 |
% |
|
|
12.69 |
% |
|
|
|
|
(1) |
|
Does not include nonaccrual loans of $115,030. |
|
(2) |
|
Adjusted to reflect: (a) expected shorter maturities based upon our historical
experience of early prepayments of principal, and (b) the redemption of callable
securities on their next call date. |
|
(3) |
|
Includes savings deposits paying interest at market rates in the three month or less
category. All other deposit categories, while technically subject to immediate
withdrawal, actually display sensitivity characteristics that generally fall within one to
five years. Their allocation is presented based on that historical analysis. If these
deposits were included in the three month or less category, the above table would reflect
a negative three month gap of $1,491 million, a negative cumulative one year gap of $1,692
million and a positive cumulative one to five year gap of $323 million. |
|
(4) |
|
Included in the three month to one year category are deposits of $212 million
maturing in three to six months. |
Net Interest Income Sensitivity
The view presented in the preceding interest rate sensitivity gap table illustrates a static
view of the effect on our net interest margin of changing interest rate scenarios. We believe net
interest income sensitivity provides the best perspective of how day-to-day decisions affect our
interest rate risk profile. We monitor net interest margin sensitivity by utilizing an income
simulation model to subject twelve month net interest income to various rate movements.
Simulations modeled quarterly include scenarios where market rates change suddenly up or down in a
parallel manner and scenarios where market rates
gradually change up or down at nonparallel rates resulting in a change in the slope of the
yield curve. Estimates produced by our income simulation model are based on numerous assumptions
including, but not limited to, the nature and timing of changes in interest rates, prepayments of
loans and investment securities, volume of loans originated, level and composition of deposits,
ability of borrowers to repay adjustable or variable rate loans and reinvestment opportunities for
cash flows. Given these various assumptions, the actual effect of interest rate changes on our net
interest margin may be materially different than estimated.
- 60 -
We target a mix of interest earning assets and interest bearing liabilities such that no more
than 5% of the net interest margin will be at risk over a one-year period should short-term
interest rates shift up or down 2%. As of December 31, 2009, our income simulation model predicted
net interest income would decrease $3.0 million, or 1.1%, assuming a 2% increase in short-term
market interest rates and 1.0% increase in long-term interest rates over a twelve-month period.
This scenario predicts that our funding sources will reprice faster than our interest earning
assets.
We did not simulate a decrease in interest rates due to the extremely low rate environment as
of December 31, 2009. Prime rate has historically been set at a rate of 300 basis points over the
targeted federal funds rate, which is currently set between 0 and 25 basis points. Our income
simulation model has an assumption that prime will continue to be set at a rate of 300 basis points
over the targeted federal funds rate. Additionally, rates that are currently below 2% are modeled
not to fall below 0% with an overall decrease of 2% in interest rates. In a declining rate
environment, our income simulation model predicts our net interest income and net interest rate
spread will decrease and our net interest margin will compress because interest expense will not
decrease in direct proportion to a simulated downward shift in interest rates.
The preceding interest rate sensitivity analysis does not represent a forecast and should not
be relied upon as being indicative of expected operating results. In addition, if the actual
prime rate falls below a 300 basis point spread to targeted federal funds rates, we could
experience a continued decrease in net interest income as a result of falling yields on earning
assets tied to prime rate.
Recent Accounting Pronouncements
The expected impact of accounting standards recently issued but not yet adopted are discussed
in Notes to Consolidated Financial StatementsAuthoritative Accounting Guidance included in Part
IV, Item 15 of this report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our primary market risk exposure is interest rate risk. Our business and the composition of
our balance sheet consists of investments in interest earning assets (principally loans and
investment securities) which are primarily funded by interest bearing liabilities (deposits and
indebtedness). Such financial instruments have varying levels of sensitivity to changes in market
interest rates. Interest rate risk results when, due to different maturity dates and repricing
intervals, interest rate indices for interest earning assets decrease relative to interest bearing
liabilities, thereby creating a risk of decreased net earnings and cash flow.
Although we characterize some of our interest-sensitive assets as securities
available-for-sale, such securities are not purchased with a view to sell in the near term.
Rather, such securities may be sold in response to or in anticipation of changes in interest rates
and resulting prepayment risk. See Notes to Consolidated Financial StatementsSummary of
Significant Accounting Policies included in Part IV, Item 15 of this report.
- 61 -
The following table provides information about our market sensitive financial instruments,
categorized by expected maturity, principal repayment or repricing and fair value at December 31,
2009. The table constitutes a forward-looking statement. For a description of our policies for
managing risks associated with changing interest rates, see Part II, Item 7, Managements
Discussion and Analysis of Financial Condition and Results of OperationsAsset Liability
ManagementInterest Rate Risk.
Market Sensitive Financial Instruments Maturities
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 Expected Maturity, Principal Repayment or Repricing |
|
|
2010 |
|
2011 |
|
2012 |
|
2013 |
|
2014 |
|
Thereafter |
|
Total |
|
Interest-sensitive assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and short-term
investments |
|
$ |
623,482 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
623,482 |
|
Net loans |
|
|
3,056,528 |
|
|
|
531,957 |
|
|
|
373,510 |
|
|
|
275,905 |
|
|
|
111,351 |
|
|
|
73,037 |
|
|
|
4,422,288 |
|
Securities available-for-sale |
|
|
188,807 |
|
|
|
180,109 |
|
|
|
289,694 |
|
|
|
277,767 |
|
|
|
145,223 |
|
|
|
234,829 |
|
|
|
1,316,429 |
|
Securities held-to-maturity |
|
|
9,610 |
|
|
|
9,010 |
|
|
|
7,656 |
|
|
|
7,294 |
|
|
|
8,073 |
|
|
|
89,212 |
|
|
|
130,855 |
|
Accrued interest receivable |
|
|
37,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,123 |
|
Mortgage servicing rights |
|
|
3,441 |
|
|
|
2,987 |
|
|
|
2,396 |
|
|
|
1,855 |
|
|
|
1,456 |
|
|
|
5,611 |
|
|
|
17,746 |
|
|
Total interest-sensitive assets |
|
$ |
3,918,991 |
|
|
$ |
724,063 |
|
|
$ |
673,256 |
|
|
$ |
562,821 |
|
|
$ |
266,103 |
|
|
$ |
402,689 |
|
|
$ |
6,547,923 |
|
|
Interest-sensitive liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits, excluding time |
|
$ |
1,861,658 |
|
|
$ |
369,555 |
|
|
$ |
369,555 |
|
|
$ |
985,480 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,586,248 |
|
Time deposits |
|
|
1,895,727 |
|
|
|
213,914 |
|
|
|
68,245 |
|
|
|
38,881 |
|
|
|
29,436 |
|
|
|
20 |
|
|
|
2,246,223 |
|
Federal funds purchased |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements |
|
|
474,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
474,141 |
|
Derivative contract |
|
|
245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
245 |
|
Accrued interest payable |
|
|
17,585 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,585 |
|
Other borrowed funds |
|
|
5,423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,423 |
|
Long-term debt |
|
|
36,029 |
|
|
|
381 |
|
|
|
169 |
|
|
|
351 |
|
|
|
147 |
|
|
|
37,836 |
|
|
|
74,913 |
|
Subordinated debentures
held by subsidiary trusts |
|
|
80,597 |
|
|
|
3,101 |
|
|
|
2,937 |
|
|
|
42,167 |
|
|
|
|
|
|
|
|
|
|
|
128,802 |
|
|
Total interest-sensitive liabilities |
|
$ |
4,371,405 |
|
|
$ |
586,951 |
|
|
$ |
440,906 |
|
|
$ |
1,066,879 |
|
|
$ |
29,583 |
|
|
$ |
37,856 |
|
|
$ |
6,533,580 |
|
|
The prepayment projections for net loans are based upon experience and do not take into
account any allowance for loan losses. The expected maturities of securities are based upon
contractual maturities adjusted for projected prepayments of principal, assuming no reinvestment of
proceeds. Actual maturities of these instruments could vary substantially if future prepayments
differ from our historical experience. All other financial instruments are stated at contractual
maturities.
Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements of First Interstate BancSystem, Inc. and
subsidiaries are contained in Part IV, Item 15 of this report and are incorporated herein by
reference.
Report of McGladrey & Pullen LLP, Independent Registered Public Accounting Firm
Consolidated Balance Sheets December 31, 2009 and 2008
Consolidated Statements of Income Years Ended December 31, 2009, 2008 and 2007
Consolidated Statements of Stockholders Equity Years Ended December 31, 2009, 2008 and 2007
Consolidated Statements of Cash Flows Years Ended December 31, 2009, 2008 and 2007
Notes to Consolidated Financial Statements
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There have been no disagreements with accountants on accounting and financial disclosure.
- 62 -
Item 9A(T). Controls and Procedures
Disclosure Controls and Procedures
We have established and maintain disclosure controls and procedures, as defined under
Rules 13a-15(e) and 15d-15(e) of the Exchange Act. As of December 31, 2009, our management
evaluated, under the supervision and with the participation of the Chief Executive Officer and
Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls
and procedures. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures, as of December 31, 2009, were effective in
ensuring that information required to be disclosed by us in reports that we file or submit under
the Exchange Act is recorded, processed, summarized, and reported within the time periods required
by the SECs rules and forms and is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.
Managements Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting. Our system of internal control over financial reporting within the meaning of
Rules 13a-15(f) and 15d-15(f) of the Exchange Act is designed to provide reasonable assurance to
our management and board of directors regarding the preparation and fair presentation of our
published financial statements in accordance with U.S. generally accepted accounting principles.
Our management, including the Chief Executive Officer and the Chief Financial Officer, assessed the
effectiveness of our system of internal control over financial reporting as of December 31, 2009.
In making this assessment, we used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control-Integrated Framework. Based on our
assessment, we believe that, as of December 31, 2009, our system of internal control over financial
reporting was effective to provide reasonable assurance regarding the reliability of our financial
reporting and the preparation of our financial statements for external purposes in accordance with
U.S. generally accepted accounting principles.
This annual report does not include an attestation report of our registered public accounting
firm regarding internal control over financial reporting. Managements report was not subject to
attestation by our registered public accounting firm pursuant to temporary rules of the SEC that
permit us to provide only managements report in this annual report.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter
ended December 31, 2009 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Limitations on Controls and Procedures
The effectiveness of our disclosure controls and procedures and our internal control over
financial reporting is subject to various inherent limitations, including cost limitations,
judgments used in decision making, assumptions about the likelihood of future events, the soundness
of our systems, the possibility of human error and the risk of fraud. Moreover, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions and the risk that the degree of compliance with
policies or procedures may deteriorate over time. Because of these limitations, any system of
disclosure controls and procedures or internal control over financial reporting may not be
successful in preventing all errors or fraud or in making all material information known in a
timely manner to the appropriate levels of management.
Item 9B. Other Information
There were no items required to be disclosed in a report on Form 8-K during the fourth quarter
of 2009 that were not reported.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Information concerning Directors, Executive Officers and Corporate Governance is set forth
under the heading Directors and Executive Officers in our Proxy Statement relating to our 2010
annual meeting of shareholders and is herein incorporated by reference.
- 63 -
Information concerning Compliance With Section 16(a) of the Securities Exchange Act of 1934
is set forth under the heading Section 16(a) Beneficial Ownership Reporting Compliance in our
Proxy Statement relating to our 2010 annual meeting of shareholders and is herein incorporated by
reference.
Item 11. Executive Compensation
Information concerning Executive Compensation is set forth under the headings Compensation
of Executive Officers Compensation Discussion and Analysis and Compensation of Executive Officers
and Directors in our Proxy Statement relating to our 2010 annual meeting of shareholders and is
herein incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information concerning Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters is set forth under the heading Security Ownership of Certain
Beneficial Owners and Management and Securities Authorized for Issuance under Equity Compensation
Plans in our Proxy Statement relating to our 2010 annual meeting of shareholders and is herein
incorporated by reference.
Item 13. Certain Relationships and Related Transactions and Director Independence
Information concerning Certain Relationships and Related Transactions and Director
Independence is set forth under the headings Directors and Executive Officers and Certain
Relationships and Related Transactions in our Proxy Statement relating to our 2010 annual meeting
of shareholders and is herein incorporated by reference. In addition, see Notes to Consolidated
Financial Statements Related Party Transactions included in Part IV, Item 15.
Item 14. Principal Accountant Fees and Services
Information concerning Principal Accountant Fees and Services is set forth under the heading
Directors and Executive Officers Principal Accounting Fees and Services in our Proxy Statement
relating to our 2010 annual meeting of shareholders and is herein incorporated by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) 1. Our audited consolidated financial statements follow.
- 64 -
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
First Interstate BancSystem, Inc.
We have audited the accompanying consolidated balance sheets of First Interstate BancSystem, Inc.
and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of
income, stockholders equity and cash flows for each of the three years in the period ended
December 31, 2009. These financial statements are the responsibility of the Companys management.
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 audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as 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 First Interstate BancSystem, Inc. and subsidiaries as
of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted
accounting principles.
We were not engaged to examine managements assessment of the effectiveness of First Interstate
BancSystems internal control over financial reporting as of December 31, 2009 included in
Managements Report on Internal Control Over Financial Reporting and, accordingly, we do not
express an opinion thereon.
/s/ MCGLADREY & PULLEN, LLP
Des Moines, Iowa
February 19, 2010
- 65 -
First Interstate BancSystem, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
December 31, |
|
2009 |
|
2008 |
|
Assets |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
213,029 |
|
|
$ |
205,070 |
|
Federal funds sold |
|
|
11,474 |
|
|
|
107,502 |
|
Interest bearing deposits in banks |
|
|
398,979 |
|
|
|
1,458 |
|
|
Total cash and cash equivalents |
|
|
623,482 |
|
|
|
314,030 |
|
|
Investment securities: |
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
1,316,429 |
|
|
|
961,914 |
|
Held-to-maturity (estimated fair values of $130,855 and
$109,809 at December 31, 2009 and 2008, respectively) |
|
|
129,851 |
|
|
|
110,362 |
|
|
Total investment securities |
|
|
1,446,280 |
|
|
|
1,072,276 |
|
|
Loans |
|
|
4,528,004 |
|
|
|
4,772,813 |
|
Less allowance for loan losses |
|
|
103,030 |
|
|
|
87,316 |
|
|
Net loans |
|
|
4,424,974 |
|
|
|
4,685,497 |
|
|
Premises and equipment, net |
|
|
196,307 |
|
|
|
177,799 |
|
Goodwill |
|
|
183,673 |
|
|
|
183,673 |
|
Company-owned life insurance |
|
|
71,374 |
|
|
|
69,515 |
|
Other real estate owned (OREO) |
|
|
38,400 |
|
|
|
6,025 |
|
Accrued interest receivable |
|
|
37,123 |
|
|
|
38,694 |
|
Mortgage servicing rights, net of accumulated amortization and impairment reserve |
|
|
17,325 |
|
|
|
11,002 |
|
Core deposit intangibles, net of accumulated amortization |
|
|
10,551 |
|
|
|
12,682 |
|
Net deferred tax asset |
|
|
|
|
|
|
7,401 |
|
Other assets |
|
|
88,164 |
|
|
|
49,753 |
|
|
Total assets |
|
$ |
7,137,653 |
|
|
$ |
6,628,347 |
|
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
Non-interest bearing |
|
$ |
1,026,584 |
|
|
$ |
985,155 |
|
Interest bearing |
|
|
4,797,472 |
|
|
|
4,189,104 |
|
|
Total deposits |
|
|
5,824,056 |
|
|
|
5,174,259 |
|
|
Federal funds purchased |
|
|
|
|
|
|
30,625 |
|
Securities sold under repurchase agreements |
|
|
474,141 |
|
|
|
525,501 |
|
Accounts payable and accrued expenses |
|
|
44,946 |
|
|
|
51,290 |
|
Accrued interest payable |
|
|
17,585 |
|
|
|
20,531 |
|
Other borrowed funds |
|
|
5,423 |
|
|
|
79,216 |
|
Long-term debt |
|
|
73,353 |
|
|
|
84,148 |
|
Subordinated debentures held by subsidiary trusts |
|
|
123,715 |
|
|
|
123,715 |
|
|
Total liabilities |
|
|
6,563,219 |
|
|
|
6,089,285 |
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Nonvoting noncumulative preferred stock without par value;
authorized 100,000 shares; issued and outstanding 5,000 as of December 31, 2009
and December 31, 2008 |
|
|
50,000 |
|
|
|
50,000 |
|
Common stock without par value; authorized 20,000,000 shares;
issued and outstanding 7,837,397 shares and 7,887,519 shares
as of December 31, 2009 and 2008, respectively |
|
|
112,135 |
|
|
|
117,613 |
|
Retained earnings |
|
|
397,224 |
|
|
|
362,477 |
|
Accumulated other comprehensive income, net |
|
|
15,075 |
|
|
|
8,972 |
|
|
Total stockholders equity |
|
|
574,434 |
|
|
|
539,062 |
|
|
Total liabilities and stockholders equity |
|
$ |
7,137,653 |
|
|
$ |
6,628,347 |
|
|
See accompanying notes to consolidated financial statements.
- 66 -
First
Interstate BancSystem, Inc. and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
2009 |
|
2008 |
|
2007 |
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans |
|
$ |
279,985 |
|
|
$ |
305,152 |
|
|
$ |
272,482 |
|
Interest and dividends on investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
41,978 |
|
|
|
43,583 |
|
|
|
42,660 |
|
Exempt from federal taxes |
|
|
5,298 |
|
|
|
5,913 |
|
|
|
4,686 |
|
Interest on deposits in banks |
|
|
520 |
|
|
|
191 |
|
|
|
1,307 |
|
Interest on federal funds sold |
|
|
253 |
|
|
|
1,080 |
|
|
|
4,422 |
|
|
Total interest income |
|
|
328,034 |
|
|
|
355,919 |
|
|
|
325,557 |
|
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest on deposits |
|
|
73,226 |
|
|
|
96,863 |
|
|
|
99,549 |
|
Interest on federal funds purchased |
|
|
20 |
|
|
|
1,389 |
|
|
|
267 |
|
Interest on securities sold under repurchase agreements |
|
|
776 |
|
|
|
7,694 |
|
|
|
21,212 |
|
Interest on other borrowed funds |
|
|
1,347 |
|
|
|
1,741 |
|
|
|
161 |
|
Interest on long-term debt |
|
|
3,249 |
|
|
|
4,578 |
|
|
|
467 |
|
Interest on subordinated debentures held by subsidiary trusts |
|
|
6,280 |
|
|
|
8,277 |
|
|
|
4,298 |
|
|
Total interest expense |
|
|
84,898 |
|
|
|
120,542 |
|
|
|
125,954 |
|
|
Net interest income |
|
|
243,136 |
|
|
|
235,377 |
|
|
|
199,603 |
|
Provision for loan losses |
|
|
45,300 |
|
|
|
33,356 |
|
|
|
7,750 |
|
|
Net interest income after provision for loan losses |
|
|
197,836 |
|
|
|
202,021 |
|
|
|
191,853 |
|
|
Non-interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
Income from the origination and sale of loans |
|
|
30,928 |
|
|
|
12,290 |
|
|
|
11,245 |
|
Other service charges, commissions and fees |
|
|
28,747 |
|
|
|
28,193 |
|
|
|
24,221 |
|
Service charges on deposit accounts |
|
|
20,323 |
|
|
|
20,712 |
|
|
|
17,787 |
|
Wealth managment revenues |
|
|
10,821 |
|
|
|
12,352 |
|
|
|
11,734 |
|
Investment securities gains, net |
|
|
137 |
|
|
|
101 |
|
|
|
59 |
|
Gain on sale of nonbank subsidiary |
|
|
|
|
|
|
27,096 |
|
|
|
|
|
Technology services revenues |
|
|
|
|
|
|
17,699 |
|
|
|
19,080 |
|
Other income |
|
|
9,734 |
|
|
|
10,154 |
|
|
|
8,241 |
|
|
Total non-interest income |
|
|
100,690 |
|
|
|
128,597 |
|
|
|
92,367 |
|
|
Non-interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and employee benefits |
|
|
113,569 |
|
|
|
114,024 |
|
|
|
98,134 |
|
Occupancy, net |
|
|
15,898 |
|
|
|
16,361 |
|
|
|
14,741 |
|
Furniture and equipment |
|
|
12,405 |
|
|
|
18,880 |
|
|
|
16,229 |
|
FDIC insurance premiums |
|
|
12,130 |
|
|
|
2,912 |
|
|
|
444 |
|
Outsourced technology services |
|
|
10,567 |
|
|
|
4,016 |
|
|
|
3,116 |
|
Mortgage servicing rights amortization |
|
|
7,568 |
|
|
|
5,918 |
|
|
|
4,441 |
|
Mortgage servicing rights impairment (recovery) |
|
|
(7,224 |
) |
|
|
10,940 |
|
|
|
1,702 |
|
OREO expense, net of income |
|
|
6,397 |
|
|
|
215 |
|
|
|
(81 |
) |
Core deposit intangibles amortization |
|
|
2,131 |
|
|
|
2,503 |
|
|
|
174 |
|
Other expenses |
|
|
44,269 |
|
|
|
46,772 |
|
|
|
39,886 |
|
|
Total non-interest expense |
|
|
217,710 |
|
|
|
222,541 |
|
|
|
178,786 |
|
|
Income before income tax expense |
|
|
80,816 |
|
|
|
108,077 |
|
|
|
105,434 |
|
Income tax expense |
|
|
26,953 |
|
|
|
37,429 |
|
|
|
36,793 |
|
|
Net income |
|
|
53,863 |
|
|
|
70,648 |
|
|
|
68,641 |
|
Preferred stock dividends |
|
|
3,422 |
|
|
|
3,347 |
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
50,441 |
|
|
$ |
67,301 |
|
|
$ |
68,641 |
|
|
Basic earnings per common share |
|
$ |
6.44 |
|
|
$ |
8.55 |
|
|
$ |
8.45 |
|
Diluted earnings per common share |
|
|
6.37 |
|
|
|
8.38 |
|
|
|
8.25 |
|
|
See accompanying notes to consolidated financial statements.
- 67 -
First
Interstate BancSystem, Inc. and Subsidiaries
Consolidated Statements of Stockholders Equity
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Total |
|
|
|
Preferred |
|
|
Common |
|
|
Retained |
|
|
Comprehensive |
|
|
Stockholders |
|
|
|
Stock |
|
|
Stock |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Equity |
|
|
Balance at December 31, 2006 |
|
$ |
|
|
|
$ |
45,477 |
|
|
$ |
372,039 |
|
|
$ |
(7,141 |
) |
|
$ |
410,375 |
|
Cumulative effect of adoption of new accounting
principle related to post-retirement benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(274 |
) |
|
|
(274 |
) |
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
68,641 |
|
|
|
|
|
|
|
68,641 |
|
Other comprehensive income, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,660 |
|
|
|
5,660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74,301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
294,760 common shares purchased and retired |
|
|
|
|
|
|
(25,887 |
) |
|
|
|
|
|
|
|
|
|
|
(25,887 |
) |
17,248 common shares issued |
|
|
|
|
|
|
1,497 |
|
|
|
|
|
|
|
|
|
|
|
1,497 |
|
138,765 stock options exercised, net of 21,309
shares tendered in payment of option price
and income tax withholding amounts |
|
|
|
|
|
|
5,074 |
|
|
|
|
|
|
|
|
|
|
|
5,074 |
|
Tax benefit of stock-based compensation |
|
|
|
|
|
|
2,519 |
|
|
|
|
|
|
|
|
|
|
|
2,519 |
|
Stock-based compensation expense |
|
|
|
|
|
|
1,093 |
|
|
|
|
|
|
|
|
|
|
|
1,093 |
|
Cash dividends declared: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common ($2.97 per share) |
|
|
|
|
|
|
|
|
|
|
(24,255 |
) |
|
|
|
|
|
|
(24,255 |
) |
|
Balance at December 31, 2007 |
|
|
|
|
|
|
29,773 |
|
|
|
416,425 |
|
|
|
(1,755 |
) |
|
|
444,443 |
|
Cumulative effect of adoption of new accounting
principle related to deferred compensation
and split-dollar life insurance policies |
|
|
|
|
|
|
|
|
|
|
(633 |
) |
|
|
|
|
|
|
(633 |
) |
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
70,648 |
|
|
|
|
|
|
|
70,648 |
|
Other comprehensive income, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,727 |
|
|
|
10,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000 preferred shares issued |
|
|
50,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000 |
|
Preferred stock issuance costs |
|
|
|
|
|
|
|
|
|
|
(38 |
) |
|
|
|
|
|
|
(38 |
) |
Common stock transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
333,393 common shares purchased and retired |
|
|
|
|
|
|
(27,912 |
) |
|
|
|
|
|
|
|
|
|
|
(27,912 |
) |
154,288 common shares issued |
|
|
|
|
|
|
11,884 |
|
|
|
|
|
|
|
|
|
|
|
11,884 |
|
60,583 stock options exercised, net of 32,510
shares tendered in payment of option price
and income tax withholding amounts |
|
|
|
|
|
|
1,779 |
|
|
|
|
|
|
|
|
|
|
|
1,779 |
|
Tax benefit of stock-based compensation |
|
|
|
|
|
|
1,178 |
|
|
|
|
|
|
|
|
|
|
|
1,178 |
|
Stock-based compensation expense |
|
|
|
|
|
|
911 |
|
|
|
|
|
|
|
|
|
|
|
911 |
|
Transfer from retained earnings to common stock |
|
|
|
|
|
|
100,000 |
|
|
|
(100,000 |
) |
|
|
|
|
|
|
|
|
Cash dividends declared: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common ($2.60 per share) |
|
|
|
|
|
|
|
|
|
|
(20,578 |
) |
|
|
|
|
|
|
(20,578 |
) |
Preferred (6.75% per share) |
|
|
|
|
|
|
|
|
|
|
(3,347 |
) |
|
|
|
|
|
|
(3,347 |
) |
|
Balance at December 31, 2008 |
|
$ |
50,000 |
|
|
$ |
117,613 |
|
|
$ |
362,477 |
|
|
$ |
8,972 |
|
|
|
$539,062 |
|
|
- 68 -
First Interstate BancSystem, Inc. and Subsidiaries
Consolidated Statements of Stockholders Equity (Continued)
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Total |
|
|
|
Preferred |
|
|
Common |
|
|
Retained |
|
|
Comprehensive |
|
|
Stockholders |
|
|
|
Stock |
|
|
Stock |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Equity |
|
Balance at December 31, 2008 |
|
$ |
50,000 |
|
|
$ |
117,613 |
|
|
$ |
362,477 |
|
|
$ |
8,972 |
|
|
$ |
539,062 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
53,863 |
|
|
|
|
|
|
|
53,863 |
|
Other comprehensive income, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,103 |
|
|
|
6,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59,966 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
160,688 common shares purchased and retired |
|
|
|
|
|
|
(11,052 |
) |
|
|
|
|
|
|
|
|
|
|
(11,052 |
) |
63,539 common shares issued |
|
|
|
|
|
|
3,813 |
|
|
|
|
|
|
|
|
|
|
|
3,813 |
|
16,034 restricted common shares issued |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74,859 stock options exercised, net of
43,866
shares tendered in payment of option
price
and income tax withholding amounts |
|
|
|
|
|
|
144 |
|
|
|
|
|
|
|
|
|
|
|
144 |
|
Tax benefit of stock-based compensation |
|
|
|
|
|
|
742 |
|
|
|
|
|
|
|
|
|
|
|
742 |
|
Stock-based compensation expense |
|
|
|
|
|
|
875 |
|
|
|
|
|
|
|
|
|
|
|
875 |
|
Cash dividends declared: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common ($2.00 per share) |
|
|
|
|
|
|
|
|
|
|
(15,694 |
) |
|
|
|
|
|
|
(15,694 |
) |
Preferred (6.75% per share) |
|
|
|
|
|
|
|
|
|
|
(3,422 |
) |
|
|
|
|
|
|
(3,422 |
) |
|
Balance at December 31, 2009 |
|
$ |
50,000 |
|
|
$ |
112,135 |
|
|
$ |
397,224 |
|
|
$ |
15,075 |
|
|
$ |
574,434 |
|
|
See accompanying notes to consolidated financial statements.
- 69 -
First Interstate BancSystem, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
53,863 |
|
|
$ |
70,648 |
|
|
$ |
68,641 |
|
Adjustments to reconcile net income from operations to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Provisions for loan losses |
|
|
45,300 |
|
|
|
33,356 |
|
|
|
7,750 |
|
Depreciation and amortization |
|
|
22,286 |
|
|
|
23,622 |
|
|
|
19,083 |
|
Net premium amortization (discount accretion) on investment
securities |
|
|
1,293 |
|
|
|
728 |
|
|
|
(2,393 |
) |
Net gains on investment securities transactions |
|
|
(137 |
) |
|
|
(101 |
) |
|
|
(59 |
) |
Net gains on sales of loans held for sale |
|
|
(18,315 |
) |
|
|
(7,068 |
) |
|
|
(6,701 |
) |
Other than temporary impairment of investment securitites |
|
|
|
|
|
|
1,286 |
|
|
|
|
|
Gain on sale of nonbank subsidiary |
|
|
|
|
|
|
(27,096 |
) |
|
|
|
|
Write-down of OREO and equipment pending disposal |
|
|
5,895 |
|
|
|
34 |
|
|
|
164 |
|
Net increase (decrease) in valuation reserve for mortgage
servicing rights |
|
|
(7,224 |
) |
|
|
10,940 |
|
|
|
1,702 |
|
Deferred income tax expense (benefit) |
|
|
5,547 |
|
|
|
(7,578 |
) |
|
|
(2,180 |
) |
Earnings on company-owned life insurance policies |
|
|
(1,859 |
) |
|
|
(2,439 |
) |
|
|
(2,371 |
) |
Stock-based compensation expense |
|
|
1,024 |
|
|
|
911 |
|
|
|
1,093 |
|
Tax benefits from stock-based compensation |
|
|
742 |
|
|
|
1,178 |
|
|
|
2,519 |
|
Excess tax benefits from stock-based compensation |
|
|
(719 |
) |
|
|
(1,140 |
) |
|
|
(2,508 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in loans held for sale |
|
|
19,280 |
|
|
|
(20,039 |
) |
|
|
(529 |
) |
Decrease (increase) in accrued interest receivable |
|
|
1,571 |
|
|
|
1,502 |
|
|
|
(1,302 |
) |
Decrease (increase) in other assets |
|
|
(35,766 |
) |
|
|
(8,842 |
) |
|
|
3,672 |
|
Increase (decrease) in accrued interest payable |
|
|
(2,946 |
) |
|
|
(3,207 |
) |
|
|
2,232 |
|
Increase (decrease) in accounts payable and accrued expenses |
|
|
(8,043 |
) |
|
|
10,784 |
|
|
|
(5,704 |
) |
|
Net cash provided by operating activities |
|
|
81,792 |
|
|
|
77,479 |
|
|
|
83,109 |
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity |
|
|
(9,910 |
) |
|
|
(16,831 |
) |
|
|
(17,995 |
) |
Available-for-sale |
|
|
(868,917 |
) |
|
|
(341,587 |
) |
|
|
(1,936,961 |
) |
Proceeds from maturities, paydowns and calls of investment
securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity |
|
|
19,785 |
|
|
|
20,684 |
|
|
|
15,300 |
|
Available-for-sale |
|
|
493,389 |
|
|
|
505,870 |
|
|
|
1,947,408 |
|
Net decrease
in cash equivalent mutual funds classified as available-for-sale investment securities |
|
|
|
|
|
|
|
|
|
|
37 |
|
Proceeds from sales of mortgage servicing rights, net of
acquisitions |
|
|
2,051 |
|
|
|
(34 |
) |
|
|
2,292 |
|
Extensions of credit to customers, net of repayments |
|
|
146,943 |
|
|
|
(492,297 |
) |
|
|
(254,240 |
) |
Recoveries of loans charged-off |
|
|
2,392 |
|
|
|
1,837 |
|
|
|
2,361 |
|
Proceeds from sales of OREO |
|
|
10,849 |
|
|
|
623 |
|
|
|
705 |
|
Proceeds from sale of nonbank subsidiary, net of cash payments |
|
|
|
|
|
|
40,766 |
|
|
|
|
|
Capital expenditures, net of sales |
|
|
(26,393 |
) |
|
|
(32,852 |
) |
|
|
(17,957 |
) |
Capital contributions to unconsolidated subsidiaries and joint
ventures |
|
|
|
|
|
|
(620 |
) |
|
|
(1,857 |
) |
Acquisition of banks and data services company, net of cash and
cash
equivalents received |
|
|
|
|
|
|
(135,706 |
) |
|
|
|
|
|
Net cash used in investing activities |
|
$ |
(229,811 |
) |
|
$ |
(450,147 |
) |
|
$ |
(260,907 |
) |
|
- 70 -
First Interstate BancSystem, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in deposits |
|
$ |
649,797 |
|
|
$ |
362,931 |
|
|
$ |
290,890 |
|
Net increase (decrease) in short-term borrowings |
|
|
(155,778 |
) |
|
|
16,189 |
|
|
|
(123,750 |
) |
Borrowings of long-term debt |
|
|
|
|
|
|
113,500 |
|
|
|
|
|
Repayments of long-term debt |
|
|
(10,795 |
) |
|
|
(38,107 |
) |
|
|
(16,456 |
) |
Debt issuance costs |
|
|
(261 |
) |
|
|
(609 |
) |
|
|
(225 |
) |
Proceeds from issuance of subordinated debentures held by subsidiary
trusts |
|
|
|
|
|
|
20,620 |
|
|
|
61,857 |
|
Preferred stock issuance costs |
|
|
|
|
|
|
(38 |
) |
|
|
|
|
Proceeds from issuance of common stock |
|
|
3,957 |
|
|
|
13,663 |
|
|
|
6,571 |
|
Excess tax benefits from stock-based compensation |
|
|
719 |
|
|
|
1,140 |
|
|
|
2,508 |
|
Purchase and retirement of common stock |
|
|
(11,052 |
) |
|
|
(27,912 |
) |
|
|
(25,887 |
) |
Dividends paid to common stockholders |
|
|
(15,694 |
) |
|
|
(20,578 |
) |
|
|
(24,255 |
) |
Dividends paid to preferred stockholders |
|
|
(3,422 |
) |
|
|
(3,347 |
) |
|
|
|
|
|
Net cash provided by financing activities |
|
|
457,471 |
|
|
|
437,452 |
|
|
|
171,253 |
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
309,452 |
|
|
|
64,784 |
|
|
|
(6,545 |
) |
Cash and cash equivalents at beginning of year |
|
|
314,030 |
|
|
|
249,246 |
|
|
|
255,791 |
|
|
Cash and cash equivalents at end of year |
|
$ |
623,482 |
|
|
$ |
314,030 |
|
|
$ |
249,246 |
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for income taxes |
|
$ |
25,813 |
|
|
$ |
35,376 |
|
|
$ |
45,233 |
|
Cash paid during the year for interest expense |
|
|
87,844 |
|
|
|
121,115 |
|
|
|
123,722 |
|
|
See accompanying notes to consolidated financial statements.
- 71 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
(1) |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
|
|
|
|
Business. First Interstate BancSystem, Inc. (the Parent Company and collectively with its
subsidiaries, the Company) is a financial and bank holding company that, through the branch
offices of its bank subsidiary, provides a comprehensive range of banking products and
services to individuals, businesses, municipalities and other entities throughout Montana,
Wyoming and western South Dakota. In addition to its primary emphasis on commercial and
consumer banking services, the Company also offers trust, employee benefit and investment and
insurance services through its bank subsidiaries. The Company is subject to competition from
other financial institutions and nonbank financial companies, and is also subject to the
regulations of various government agencies and undergoes periodic examinations by those
regulatory authorities. |
|
|
|
|
Basis of Presentation. The Companys consolidated financial statements include the accounts
of the Parent Company and its operating subsidiaries. As of December 31, 2009, the Companys
subsidiaries were First Interstate Bank (FIB), First Western Data, Inc. (Data), First
Interstate Insurance Agency, Inc., Commerce Financial, Inc., FIB, LLC and FIBCT, LLC. All
significant intercompany balances and transactions have been eliminated in consolidation.
Certain reclassifications have been made in the consolidated financial statements for 2008 and
2007 to conform to the 2009 presentation. No changes were made in the current year to
previously reported net income or stockholders equity. |
|
|
|
|
Merger of Bank Subsidiaries. On September 25, 2009, the Company merged First Western Bank
(Wall) and The First Western Bank Sturgis (Sturgis) into FIB. Subsequent to the merger,
FIB is the Companys only bank subsidiary. |
|
|
|
|
Sale of Nonbank Subsidiary. On December 31, 2008, the Company sold its technology services
subsidiary, i_Tech Corporation (i_Tech). Concurrent with the sale, the Company entered into
a service agreement with the purchaser to receive certain technology services previously
provided by i_Tech. The assets, liabilities and results of operations and cash flows of
i_Tech are not presented as discontinued operations due to the continuation of cash flows
between the Company and i_Tech under the terms of the service agreement. Subsequent to the
sale, the Company no longer receives technology services revenues from non-affiliated
customers of i_Tech. |
|
|
|
|
Equity Method Investments. The Company has an investment in a joint venture that is not
consolidated because the Company does not own a majority voting interest, control the
operations or receive a majority of the losses or earnings of the joint venture. This joint
venture is accounted for using the equity method of accounting whereby the Company initially
records its investment at cost and then subsequently adjusts the cost for the Companys
proportionate share of distributions and earnings or losses of the joint venture. |
|
|
|
|
Variable Interest Entities. The Companys wholly-owned business trusts, First Interstate
Statutory Trust (FIST), FI Statutory Trust I (Trust I), FI Capital Trust II (Trust II),
FI Statutory Trust III (Trust III), FI Capital Trust IV (Trust IV), FI Statutory Trust V
(Trust V) and FI Statutory Trust VI (Trust VI) are variable interest entities for which
the Company is not a primary beneficiary. Accordingly, the accounts of FIST, Trust I, Trust
II, Trust III, Trust IV, Trust V and Trust VI are not included in the accompanying
consolidated financial statements, and are instead accounted for using the equity method of
accounting. |
|
|
|
|
Assets Held in Fiduciary or Agency Capacity. The Company holds certain trust assets in a
fiduciary or agency capacity. The Company also purchases and sells federal funds as an agent.
These and other assets held in an agency or fiduciary capacity are not assets of the Company
and, accordingly, are not included in the accompanying consolidated financial statements. |
|
|
|
|
Use of Estimates. The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of the financial
statements and income and expenses during the reporting period. Actual results could differ
from those estimates. Material estimates that are particularly susceptible to change relate
to the determination of the allowance for loan losses, the valuation of goodwill, other real
estate owned, mortgage servicing rights and the fair values of other financial instruments. |
- 72 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
|
|
Cash and Cash Equivalents. For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks, federal funds sold for one day periods and
interest bearing deposits in banks with original maturities of less than three months. As of
December 31, 2009, the Company had cash of $397,474 on deposit with the Federal Reserve Bank
to meet regulatory reserve and clearings requirements. No such reserve requirements existed
as of December 31, 2008. In addition, the Company maintained compensating balances with the
Federal Reserve Bank of approximately $65,000 as of December 31, 2009 and 2008 to reduce
service charges for check clearing services. |
|
|
|
Investment Securities. Investments in debt securities that the Company has the positive
intent and ability to hold to maturity are classified as held-to-maturity and carried at
amortized cost. Investments in debt securities that may be sold in response to or in
anticipation of changes in interest rates and resulting prepayment risk, or other factors, and
marketable equity securities are classified as available-for-sale and carried at fair value.
The unrealized gains and losses on these securities are reported, net of applicable income
taxes, as a separate component of stockholders equity and comprehensive income. Management
determines the appropriate classification of securities at the time of purchase and at each
reporting date management reassesses the appropriateness of the classification. |
|
|
|
The amortized cost of debt securities classified as held-to-maturity or available-for-sale is
adjusted for accretion of discounts to maturity and amortization of premiums over the
estimated average life of the security, or in the case of callable securities, through the
first call date, using the effective yield method. Such amortization and accretion is
included in interest income. Realized gains and losses are included in investment securities
gains (losses). Declines in the fair value of securities below their cost that are judged to
be other-than-temporary are included in other expenses. In estimating other-than-temporary
impairment losses, the Company considers, among other things, the length of time and the
extent to which the fair value has been less than cost, the financial condition and near-term
prospects of the issuer and the intent and ability of the Company to retain its investment in
the issuer for a period of time sufficient to allow for any anticipated recover in fair vale.
The cost of securities sold is based on the specific identification method. |
|
|
|
The Company invests in securities on behalf of certain officers and directors of the Company
who have elected to participate in the Companys deferred compensation plans. These
securities are included in other assets and are carried at their fair value based on quoted
market prices. Net realized and unrealized holding gains and losses are included in other
non-interest income. |
|
|
|
Loans. Loans are reported at the principal amount outstanding. Interest is calculated using
the simple interest method on the daily balance of the principal amount outstanding. |
|
|
|
Loans on which the accrual of interest has been discontinued are designated as nonaccrual
loans. Accrual of interest on loans is discontinued either when reasonable doubt exists as to
the full, timely collection of interest or principal or when a loan becomes contractually past
due by ninety days or more with respect to interest or principal, unless such past due loan is
well secured and in the process of collection. When a loan is placed on nonaccrual status,
interest previously accrued but not collected is reversed against current period interest
income. 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. Loans renegotiated in
troubled debt restructurings are those loans on which concessions in terms have been granted
because of a borrowers financial difficulty. |
|
|
|
Loan origination fees, prepaid interest and certain direct origination costs are deferred, and
the net amount is amortized as an adjustment of the related loans yield using a level yield
method over the expected lives of the related loans. The amortization of deferred loan fees
and costs and the accretion of unearned discounts on non-performing loans is discontinued
during periods of nonperformance. |
|
|
|
Included in loans are certain residential mortgage loans originated for sale. These loans are
carried at the lower of aggregate cost or estimated market value. Loans sold are subject to
standard representations and warranties.
Market value is estimated based on binding contracts or quotes or bids from third party
investors. Residential mortgages held for sale were $36,430 and $47,076 as of December 31,
2009 and 2008, respectively. |
- 73 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
|
|
Gains and losses on sales of mortgage loans are determined using the specific identification
method and are included in income from the origination and sale of loans. These gains and
losses are adjusted to recognize the present value of future servicing fee income over the
estimated lives of the related loans. |
|
|
|
Allowance for Loan Losses. The allowance for loan losses is established through a provision
for loan losses which is charged to expense. Loans, or portions thereof, are charged against
the allowance for loan losses when management believes that the collectibility of the
principal is unlikely or, with respect to consumer installment loans, according to an
established delinquency schedule. The allowance balance is an amount that management believes
will be adequate to absorb known and inherent losses in the loan portfolio based upon
quarterly analyses of the size and current risk characteristics of the loan portfolio, an
assessment of individual problem loans and actual loss experience, industry concentrations,
current economic, political and regulatory factors and the estimated impact of current
economic, political, regulatory and environmental conditions on historical loss rates. |
|
|
|
A loan is considered impaired when, based upon current information and events, it is probable
that the Company will be unable to collect, on a timely basis, all amounts due according to
the contractual terms of the loans original agreement. The amount of the impairment is
measured using cash flows discounted at the loans effective interest rate, except when it is
determined that the primary source of repayment for the loan is the operation or liquidation
of the underlying collateral. In such cases, the current value of the collateral, reduced by
anticipated selling costs, is used to measure impairment. The Company considers impaired
loans to be those non-consumer loans which are nonaccrual or have been renegotiated in a
troubled debt restructuring. |
|
|
|
Goodwill. The excess purchase price over the fair value of net assets from acquisitions, or
goodwill, is evaluated for impairment at least annually and on an interim basis if an event or
circumstance indicates that it is likely an impairment has occurred. In testing for
impairment, the fair value of net assets is estimated based on an analysis of market-based
trading and transaction multiples of selected peer banks; and, if required, the estimated fair
value is allocated to the acquired assets and liabilities comprising the goodwill. The
determination of goodwill is sensitive to market-based trading and transaction multiples.
Variability in market conditions could result in impairment of goodwill, which is recorded as
a non-cash adjustment to income. As of December 31, 2009, we had goodwill of $184 million,
all of which was attributable to FIB. No impairment losses were recognized during 2009, 2008
or 2007. |
|
|
|
Core Deposit Intangibles. Core deposit intangibles represent the intangible value of
depositor relationships resulting from deposit liabilities assumed and are amortized using an
accelerated method based on the estimated weighted average useful lives of the related
deposits of 9.5 years. Accumulated core deposit intangibles amortization was $16,369 as of
December 31, 2009 and $14,238 as of December 31, 2008. Amortization expense related to core
deposit intangibles recorded as of December 31, 2009 is expected to total $1,748, $1,446,
$1,421, $1,417 and $1,417 in 2010, 2011, 2012, 2013 and 2014, respectively. |
|
|
|
Mortgage Servicing Rights. The Company recognizes the rights to service mortgage loans for
others, whether acquired or internally originated. Mortgage servicing rights are initially
recorded at fair value based on comparable market quotes and are amortized in proportion to
and over the period of estimated net servicing income. Mortgage servicing rights are
evaluated quarterly for impairment by discounting the expected future cash flows, taking into
consideration the estimated level of prepayments based on current industry expectations and
the predominant risk characteristics of the underlying loans including loan type, note rate
and loan term. Impairment adjustments, if any, are recorded through a valuation allowance. |
|
|
|
Premises and Equipment. Buildings, furniture and equipment are stated at cost less
accumulated depreciation. Depreciation expense is computed using straight-line methods over
estimated useful lives of 5 to 50 years for buildings and improvements and 2.5 to 15 years for
furniture and equipment. Leasehold improvements and assets acquired under capital lease are
amortized over the shorter of their estimated useful lives or the terms of the related leases.
Land is recorded at cost. |
- 74 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
|
|
Company-Owned Life Insurance. Key executive life insurance policies are recorded at their
cash surrender value. Group life insurance policies are subject to a stable value contract
that offsets the impact of interest rate fluctuations on the market value of the policies.
Group life insurance policies are recorded at the stabilized investment value. Increases in
the cash surrender or stabilized investment value of insurance policies, as well as insurance
proceeds received, are recorded as other non-interest income, and are not subject to income
taxes. |
|
|
|
Impairment of Long-Lived Assets. Long-lived assets, including premises and equipment and
certain identifiable intangibles, are reviewed for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable. The amount of
the impairment loss, if any, is based on the assets fair value. Impairment losses of $350
were recognized in other non-interest expense in 2009. No impairment losses were recognized
during 2008 or 2007. |
|
|
|
Other Real Estate Owned. Real estate acquired in satisfaction of loans is initially carried
at current fair value less estimated selling costs. The value of the underlying loan is
written down to the fair value of the real estate acquired by charge to the allowance for loan
losses, if necessary, at or within 90 days of foreclosure. Subsequent declines in fair value
less estimated selling costs are included in OREO expense. Subsequent increases in fair value
less estimated selling costs are recorded as a reduction in OREO expense to the extent of
recognized losses. Carrying costs, operating expenses, net of related income, and gains or
losses on sales are included in OREO expense. Write-downs of $5,545, $34 and $164 were
recorded in 2009, 2008 and 2007 respectively. The valuation of OREO is subjective and may be
adjusted in the future to changes in economic conditions. |
|
|
|
Restricted Equity Securities. The Company, as a member of the Federal Reserve Bank and the
Federal Home Loan Bank (FHLB), is required to maintain investments in each of the
organizations capital stock. As of December 31, 2009, restricted equity securities of the
Federal Reserve Bank and the Federal Home Loan Bank of $13,338 and $6,886, respectively, were
included in other assets at cost. As of December 31, 2008, restricted equity securities of
the Federal Reserve Bank and the Federal Home Loan Bank were $13,332 and $8,079, respectively.
Restricted equity securities are periodically reviewed for impairment based on ultimate
recovery of par value. The determination of whether a decline affects the ultimate recovery
of par value is influenced by the significance of the decline compared to the cost basis of
the restricted equity securities, the length of time a decline has persisted, the impact of
legislative and regulatory changes on the issuing organizations and the liquidity positions of
the issuing organizations. Although the FHLB was classified as undercapitalized by its
regulator in 2009, the Company does not believe its investment in FHLB restricted equity
securities was impaired as of December 31, 2009. No impairment losses were recorded on
restricted equity securities during 2009, 2008 or 2007. |
|
|
|
Income from Fiduciary Activities. Consistent with industry practice, income for trust
services is recognized on the basis of cash received. However, use of this method in lieu of
accrual basis accounting does not materially affect reported earnings. |
|
|
|
Income Taxes. The Parent Company and its subsidiaries have elected to be included in a
consolidated federal income tax return. For state income tax purposes, the combined taxable
income of the Parent Company and its subsidiaries is apportioned among the states in which
operations take place. Federal and state income taxes attributable to the subsidiaries,
computed on a separate return basis, are paid to or received from the Parent Company. |
|
|
|
The Company accounts for income taxes using the liability method. Under the liability method,
deferred tax assets and liabilities are determined based on enacted income tax rates which
will be in effect when the differences between the financial statement carrying values and tax
bases of existing assets and liabilities are expected to be reported in taxable income.
|
- 75 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
|
|
Positions taken in the Companys tax returns may be subject to challenge by the taxing
authorities upon examination. Uncertain tax positions are initially recognized in the
financial statements when it is more likely than not the position will be sustained upon
examination by the tax authorities. Such tax positions are both initially and subsequently
measured as the largest amount of tax benefit that is greater than 50% likely of being
realized upon settlement with the tax authority, assuming full knowledge of the position and
all relevant facts. The Company provides for interest and, in some cases, penalties on tax
positions that may be challenged by the taxing authorities. Interest expense is recognized
beginning in the first period that such interest would begin accruing. Penalties are
recognized in the period that the Company claims the position in the tax return. Interest and
penalties on income tax uncertainties are classified within income tax expense in the income
statement. With few exceptions, the Company is no longer subject to U.S. federal and state
examinations by tax authorities for years before 2006. |
|
|
|
Earnings Per Common Share. Basic earnings per common share is calculated by dividing net
income available to common shareholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per common share is calculated by dividing
net income available to common shareholders by the weighted average number of common shares
and potential common shares outstanding during the period. |
|
|
|
Comprehensive Income. Comprehensive income includes net income, as well as other changes in
stockholders equity that result from transactions and economic events other than those with
shareholders. In addition to net income, the Companys comprehensive income includes the
after tax effect of changes in unrealized gains and losses on available-for-sale investment
securities and changes in net actuarial gains and losses on defined benefit post-retirement
benefits plans. |
|
|
|
Segment Reporting. An operating segment is defined as a component of a business for which
separate financial information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and evaluate performance. Beginning
January 1, 2009, the Company has one operating segment, community banking, which encompasses
commercial and consumer banking services offered to individuals, businesses, municipalities
and other entities. Prior to 2009, the Company reported two operating segments, community
banking and technology services. Technology services encompassed services provided through
i_Tech to affiliated and non-affiliated customers. On December 31, 2008, the Company sold
i_Tech and moved certain operational functions previously provided by i_Tech to FIB. |
|
|
|
Advertising Costs. Advertising costs are expensed as incurred. Advertising expense was
$3,422, $3,447, and $2,892 in 2009, 2008 and 2007, respectively. |
|
|
|
Transfers of Financial Assets. Transfers of financial assets are accounted for as sales when
control over the assets has been surrendered. Control over transferred assets is deemed to be
surrendered when the assets have been isolated from the Company; the transferee obtains the
right, free of conditions that constrain it from taking advantage of that right, to pledge or
exchange the transferred assets; and, the Company does not maintain effective control over the
transferred assets through an agreement to repurchase them before their maturity. |
|
|
|
Technology Services Revenue Recognition. Revenues from technology services are
transaction-based and are recognized as transactions are processed or services are rendered. |
|
|
|
Stock-Based Compensation. Compensation cost for all stock-based awards is measured at fair
value on the date of grant and is recognized over the requisite service period for awards
expected to vest. Stock-based compensation expense of $1,024, $911 and $1,093 for the
years ended December 31, 2009, 2008 and 2007, respectively, is included in salaries, wages
and benefits expense in the Companys consolidated statements of income. Related income tax
benefits recognized for the years ended December 31, 2009, 2008 and 2007 were $392, $348 and
$418, respectively. |
|
|
|
Fair Value Measurements. In general, fair value measurements are based upon quoted market
prices, where available. If quoted market prices are not available, fair value measurements
are estimated using relevant market information and other assumptions. Fair value estimates
involve uncertainties and require some degree of |
- 76 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
|
|
|
judgment regarding interest rates, credit risk, prepayments and other factors. The use of
different assumptions or estimation techniques may have a significant effect on the fair value amounts reported. |
(2) INVESTMENT SECURITIES
|
|
|
The amortized cost and approximate fair values of investment securities are summarized as
follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
Gross |
|
Estimated |
Available-for-Sale |
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
December 31, 2009 |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
Obligations of U.S. government agencies |
|
$ |
568,705 |
|
|
$ |
4,207 |
|
|
$ |
(1,466 |
) |
|
$ |
571,446 |
|
Residential mortgage-backed securities |
|
|
721,555 |
|
|
|
23,212 |
|
|
|
(1,127 |
) |
|
|
743,640 |
|
Private mortgage-backed securities |
|
|
1,396 |
|
|
|
|
|
|
|
(53 |
) |
|
|
1,343 |
|
Other securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,291,656 |
|
|
$ |
27,419 |
|
|
$ |
(2,646 |
) |
|
$ |
1,316,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
Gross |
|
Estimated |
Held-to-Maturity |
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
December 31, 2009 |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
State, county and municipal securities |
|
$ |
129,381 |
|
|
$ |
1,439 |
|
|
$ |
(435 |
) |
|
$ |
130,385 |
|
Other securities |
|
|
470 |
|
|
|
|
|
|
|
|
|
|
|
470 |
|
|
Total |
|
$ |
129,851 |
|
|
$ |
1,439 |
|
|
$ |
(435 |
) |
|
$ |
130,855 |
|
|
|
|
|
Gross gains of $138 and gross losses of $1 were realized on the disposition of available-for-sale securities in 2009. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
Gross |
|
Estimated |
Available-for-Sale |
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
December 31, 2008 |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
Obligations of U.S. government agencies |
|
$ |
264,008 |
|
|
$ |
6,371 |
|
|
$ |
|
|
|
$ |
270,379 |
|
Residential mortgage-backed securities |
|
|
646,456 |
|
|
|
9,891 |
|
|
|
(1,088 |
) |
|
|
655,259 |
|
State, county and municipal securities |
|
|
33,287 |
|
|
|
107 |
|
|
|
(8 |
) |
|
|
33,386 |
|
Other securities |
|
|
2,891 |
|
|
|
1 |
|
|
|
(6 |
) |
|
|
2,886 |
|
Mutual funds |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
Total |
|
$ |
946,646 |
|
|
$ |
16,370 |
|
|
$ |
(1,102 |
) |
|
$ |
961,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
Gross |
|
Estimated |
Held-to-Maturity |
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
December 31, 2008 |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
State, county and municipal securities |
|
$ |
109,744 |
|
|
$ |
856 |
|
|
$ |
(1,409 |
) |
|
$ |
109,191 |
|
Other securities |
|
|
618 |
|
|
|
|
|
|
|
|
|
|
|
618 |
|
|
Total |
|
$ |
110,362 |
|
|
$ |
856 |
|
|
$ |
(1,409 |
) |
|
$ |
109,809 |
|
|
|
|
|
Gross gains of $102 and gross losses of $1 were realized on the disposition of available-for-sale securities in 2008. |
|
|
|
|
Gross gains of $59 were realized on the disposition of available-for-sale securities in
2007. No gross losses were realized on disposition of available-for-sale securities in 2007. |
- 77 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
|
|
|
In conjunction with the merger of the Companys bank subsidiaries on September 25, 2009, the
Company transferred available-for-sale investment state, county and municipal investment
securities with amortized costs and fair values of $28,288 and $29,426, respectively, into
the held-to-maturity category. Unrealized net gains of $1,138 included in accumulated other
comprehensive income at the time of the transfer are being amortized to yield over the
remaining lives of the transferred securities of 3.4 years. |
|
|
|
|
The following table shows the gross unrealized losses and fair values of investment
securities, aggregated by investment category, and the length of time individual investment
securities have been in a continuous unrealized loss position, as of December 31, 2009 and
2008. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months |
|
12 Months or More |
|
Total |
|
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
December 31, 2009 |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Available-for-Sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. government
agencies |
|
$ |
185,376 |
|
|
$ |
(1,466 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
185,376 |
|
|
$ |
(1,466 |
) |
Residential mortgage-backed securities |
|
|
92,918 |
|
|
|
(1,127 |
) |
|
|
10 |
|
|
|
|
|
|
|
92,928 |
|
|
|
(1,127 |
) |
Private mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
1,337 |
|
|
|
(53 |
) |
|
|
1,337 |
|
|
|
(53 |
) |
|
Total |
|
$ |
278,294 |
|
|
$ |
(2,593 |
) |
|
$ |
1,347 |
|
|
$ |
(53 |
) |
|
$ |
279,641 |
|
|
$ |
(2,646 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months |
|
12 Months or More |
|
Total |
|
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
December 31, 2009 |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Held-to-Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State, county and municipal securities |
|
$ |
16,641 |
|
|
$ |
(348 |
) |
|
$ |
1,409 |
|
|
$ |
(87 |
) |
|
$ |
18,050 |
|
|
$ |
(435 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months |
|
12 Months or More |
|
Total |
|
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
December 31, 2008 |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Available-for-Sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities |
|
$ |
102,193 |
|
|
$ |
(699 |
) |
|
$ |
61,782 |
|
|
$ |
(389 |
) |
|
$ |
163,975 |
|
|
$ |
(1,088 |
) |
State, county and municipal securities |
|
|
1,862 |
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
1,862 |
|
|
|
(8 |
) |
Other securities |
|
|
997 |
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
997 |
|
|
|
(6 |
) |
|
Total |
|
$ |
105,052 |
|
|
$ |
(713 |
) |
|
$ |
61,782 |
|
|
$ |
(389 |
) |
|
$ |
166,834 |
|
|
$ |
(1,102 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months |
|
12 Months or More |
|
Total |
|
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
December 31, 2008 |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Held-to-Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State, county and municipal securities |
|
$ |
28,537 |
|
|
$ |
(1,002 |
) |
|
$ |
11,278 |
|
|
$ |
(407 |
) |
|
$ |
39,815 |
|
|
$ |
(1,409 |
) |
|
- 78 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars
in thousands, except share and per share data)
|
|
|
The investment portfolio is evaluated quarterly for other-than-temporary declines in the
market value of each individual investment security. Consideration is given to the length of
time and the extent to which the fair value has been less than cost; the financial condition
and near term prospects of the issuer; and, the intent and ability of the Company to retain
its investment in the issuer for a period of time sufficient to allow for any anticipated
recovery in fair value. As of December 31, 2009, the Company had 75 individual investment
securities that were in an unrealized loss position. As of December 31, 2008, the Company
had 155 individual investment securities that were in an unrealized loss position.
Unrealized losses as of December 31, 2009 and 2008 related primarily to fluctuations in the
current interest rates. As of December 31, 2009, the Company had the intent and ability to
hold these investment securities for a period of time sufficient to allow for an anticipated
recovery. Furthermore, the Company does not have the intent to sell any of the
available-for-sale securities in the above table and it is more likely than not that the
Company will not have to sell any such securities before a recovery in cost. No impairment
losses were recorded during 2009 or 2007. Impairment losses of $1,286 were recorded in other
expenses in 2008. |
|
|
|
|
Maturities of investment securities at December 31, 2009 are shown below. Maturities of
mortgage-backed securities have been adjusted to reflect shorter maturities based upon
estimated prepayments of principal. All other investment securities maturities are shown at
contractual maturity dates. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale |
|
Held-to-Maturity |
|
|
Amortized |
|
Estimated |
|
Amortized |
|
Estimated |
December 31, 2009 |
|
Cost |
|
Fair Value |
|
Cost |
|
Fair Value |
|
Within one year |
|
$ |
183,447 |
|
|
$ |
263,305 |
|
|
$ |
9,648 |
|
|
$ |
9,139 |
|
After one year but within five years |
|
|
879,984 |
|
|
|
870,444 |
|
|
|
31,743 |
|
|
|
32,034 |
|
After five years but within ten years |
|
|
98,101 |
|
|
|
108,182 |
|
|
|
41,147 |
|
|
|
41,924 |
|
After ten years |
|
|
130,124 |
|
|
|
74,498 |
|
|
|
46,843 |
|
|
|
47,288 |
|
|
Total |
|
|
1,291,656 |
|
|
|
1,316,429 |
|
|
|
129,381 |
|
|
|
130,385 |
|
Investments with no stated maturity |
|
|
|
|
|
|
|
|
|
|
470 |
|
|
|
470 |
|
|
Total |
|
$ |
1,291,656 |
|
|
$ |
1,316,429 |
|
|
$ |
129,851 |
|
|
$ |
130,855 |
|
|
|
|
|
At December 31, 2009, the Company had investment securities callable within one year with
amortized costs and estimated fair values of $382,723 and $383,382, respectively. These
investment securities are primarily classified as available-for-sale and included in the
after one year but within five years category in the table above. |
|
|
|
|
Maturities of securities do not reflect rate repricing opportunities present in adjustable
rate mortgage-backed securities. At December 31, 2009 and 2008, the Company had variable
rate securities with amortized costs of $336 and $1,558, respectively. |
|
|
|
|
There are no significant concentrations of investments at December 31, 2009, (greater than 10
percent of stockholders equity) in any individual security issuer, except for U.S.
government or agency-backed securities. |
|
|
|
|
Investment securities with amortized cost of $1,069,191 and $894,045 at December 31, 2009 and
2008, respectively, were pledged to secure public deposits and securities sold under
repurchase agreements. The approximate fair value of securities pledged at December 31,
2009 and 2008 was $1,095,068 and $907,156, respectively. All securities sold under
repurchase agreements are with customers and mature on the next banking day. The Company
retains possession of the underlying securities sold under repurchase agreements. |
- 79 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
(3) LOANS
Major categories and balances of loans included in the loan portfolios are as follows:
|
|
|
|
|
|
|
|
|
December 31, |
|
2009 |
|
|
2008 |
|
|
Real estate loans: |
|
|
|
|
|
|
|
|
Commercial |
|
$ |
1,556,273 |
|
|
$ |
1,483,967 |
|
Construction |
|
|
636,892 |
|
|
|
790,177 |
|
Residential |
|
|
539,098 |
|
|
|
587,464 |
|
Agricultural |
|
|
195,045 |
|
|
|
191,831 |
|
Mortgage loans originated for sale |
|
|
36,430 |
|
|
|
47,076 |
|
|
Total real estate loans |
|
|
2,963,738 |
|
|
|
3,100,515 |
|
|
Consumer: |
|
|
|
|
|
|
|
|
Indirect consumer loans |
|
|
423,104 |
|
|
|
417,243 |
|
Other consumer loans |
|
|
195,331 |
|
|
|
198,324 |
|
Credit card loans |
|
|
59,113 |
|
|
|
54,164 |
|
|
Total consumer loans |
|
|
677,548 |
|
|
|
669,731 |
|
|
Commercial |
|
|
750,647 |
|
|
|
853,798 |
|
Agricultural |
|
|
134,470 |
|
|
|
145,876 |
|
Other loans, including overdrafts |
|
|
1,601 |
|
|
|
2,893 |
|
|
Total loans |
|
$ |
4,528,004 |
|
|
$ |
4,772,813 |
|
|
At December 31, 2009, the Company had no concentrations of loans which exceeded 10% of total
loans other than the categories disclosed above.
Nonaccrual loans were $115,030 and $85,632 at December 31, 2009 and 2008, respectively. If
interest on nonaccrual loans had been accrued, such income would have approximated $6,448,
$4,632 and $1,712 during the years ended December 31, 2009, 2008 and 2007, respectively.
Loans contractually past due ninety days or more aggregating $4,965 on December 31, 2009 and
$3,828 on December 31, 2008 were on accrual status. These loans are deemed adequately secured
and in the process of collection.
Impaired loans include non-consumer loans placed on nonaccrual or renegotiated in a troubled
debt restructuring. The following table sets forth information on impaired loans at the dates
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
2009 |
|
|
2008 |
|
|
|
Recorded |
|
|
Specific |
|
|
Recorded |
|
|
Specific |
|
|
|
Loan |
|
|
Loan Loss |
|
|
Loan |
|
|
Loan Loss |
|
|
|
Balance |
|
|
Reserves |
|
|
Balance |
|
|
Reserves |
|
|
Impaired loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With specific loan loss reserves assigned |
|
$ |
52,446 |
|
|
$ |
20,182 |
|
|
$ |
17,749 |
|
|
$ |
8,015 |
|
With no specific loan loss reserves assigned |
|
|
61,529 |
|
|
|
|
|
|
|
66,667 |
|
|
|
|
|
|
Total impaired loans |
|
$ |
113,975 |
|
|
$ |
20,182 |
|
|
$ |
84,416 |
|
|
$ |
8,015 |
|
|
- 80 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
Impaired loans included in the above table primarily include collateral dependent commercial
and commercial real estate loans. The Company experienced declines in current valuations for
real estate supporting its loan collateral in 2009. If real estate values continue to
decline, the Company may have to increase its allowance for loan losses. The average recorded
investment in impaired loans for the years ended December 31, 2009, 2008 and 2007 was
approximately $106,048, $60,728 and $22,065, respectively. If interest on impaired loans had
been accrued, interest income on impaired loans during 2009, 2008 and 2007 would have been
approximately $6,384, $4,069 and $1,728, respectively. At December 31, 2009, there were no
material commitments to lend additional funds to borrowers whose existing loans have been
renegotiated or are classified as nonaccrual.
Most of the Companys business activity is with customers within the states of Montana,
Wyoming and South Dakota. Loans where the customers or related collateral are out of the
Companys trade area are not significant.
(4) ALLOWANCE FOR LOAN LOSSES
A summary of changes in the allowance for loan losses follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
Balance at beginning of year |
|
$ |
87,316 |
|
|
$ |
52,355 |
|
|
$ |
47,452 |
|
Allowance of acquired banking offices |
|
|
|
|
|
|
14,463 |
|
|
|
|
|
Provision charged to operating expense |
|
|
45,300 |
|
|
|
33,356 |
|
|
|
7,750 |
|
Less loans charged-off |
|
|
(31,978 |
) |
|
|
(14,695 |
) |
|
|
(5,208 |
) |
Add back recoveries of loans previously charged-off |
|
|
2,392 |
|
|
|
1,837 |
|
|
|
2,361 |
|
|
Balance at end of year |
|
$ |
103,030 |
|
|
$ |
87,316 |
|
|
$ |
52,355 |
|
|
(5) PREMISES AND EQUIPMENT
Premises and equipment and related accumulated depreciation are as follows:
|
|
|
|
|
|
|
|
|
December 31, |
|
2009 |
|
|
2008 |
|
|
Land |
|
$ |
36,388 |
|
|
$ |
31,934 |
|
Buildings and improvements |
|
|
187,471 |
|
|
|
171,668 |
|
Furniture and equipment |
|
|
65,985 |
|
|
|
57,802 |
|
|
|
|
|
289,844 |
|
|
|
261,404 |
|
Less accumulated depreciation |
|
|
(93,537 |
) |
|
|
(83,605 |
) |
|
Premises and equipment, net |
|
$ |
196,307 |
|
|
$ |
177,799 |
|
|
The Parent Company and a FIB branch office lease premises from an affiliated partnership. See
Note 15Commitments and Contingencies.
(6) COMPANY-OWNED LIFE INSURANCE
Company-owned life insurance consists of the following:
|
|
|
|
|
|
|
|
|
December 31, |
|
2009 |
|
|
2008 |
|
|
Key executive, principal shareholder |
|
$ |
4,480 |
|
|
$ |
4,359 |
|
Key executive split dollar |
|
|
4,212 |
|
|
|
4,088 |
|
Group life |
|
|
62,682 |
|
|
|
61,068 |
|
|
Total |
|
$ |
71,374 |
|
|
$ |
69,515 |
|
|
- 81 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
The Company maintains key executive life insurance policies on certain principal shareholders.
Under these policies, the Company receives benefits payable upon the death of the insured.
The net cash surrender value of key executive, principal shareholder insurance policies was
$4,480 and $4,359 at December 31, 2009 and 2008, respectively.
The Company also has life insurance policies covering selected other key officers. The net
cash surrender value of these policies was $4,212 and $4,088 at December 31, 2009 and 2008,
respectively. Under these policies, the Company receives benefits payable upon death of the
insured. An endorsement split dollar agreement has been executed with the selected key
officers whereby a portion of the policy death benefit is payable to their designated
beneficiaries. The endorsement split dollar agreement will provide postretirement coverage
for those selected key officers meeting specified retirement qualifications. The Company
expenses the earned portion of the post-employment benefit through the vesting period.
The Company has a group life insurance policy covering selected officers of FIB. The net cash
surrender value of the policy was $62,682 and $61,068 at December 31, 2009 and 2008,
respectively. Under the policy, the Company receives benefits payable upon death of the
insured. An endorsement split dollar agreement has been executed with the insured officers
whereby a portion of the policy death benefit is payable to their designated beneficiaries if
they are employed by the Company at the time of death. The marginal income produced by the
policy is used to offset the cost of employee benefit plans of FIB.
(7) OTHER REAL ESTATE OWNED
Information with respect to the Companys other real estate owned follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
Balance at beginning of year |
|
$ |
6,025 |
|
|
$ |
928 |
|
|
$ |
529 |
|
Additions |
|
|
42,212 |
|
|
|
5,810 |
|
|
|
1,135 |
|
Capitalized improvements |
|
|
6,515 |
|
|
|
|
|
|
|
|
|
Valuation adjustments |
|
|
(5,545 |
) |
|
|
(34 |
) |
|
|
(164 |
) |
Dispositions |
|
|
(10,807 |
) |
|
|
(679 |
) |
|
|
(572 |
) |
|
Balance at end of year |
|
|
38,400 |
|
|
|
6,025 |
|
|
|
928 |
|
Less valuation reserve |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
38,400 |
|
|
$ |
6,025 |
|
|
$ |
928 |
|
|
(8) MORTGAGE SERVICING RIGHTS
Information with respect to the Companys mortgage servicing rights follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
Balance at beginning of year |
|
$ |
27,788 |
|
|
$ |
27,561 |
|
|
$ |
26,788 |
|
Sales of mortgage servicing rights |
|
|
(3,022 |
) |
|
|
|
|
|
|
(1,607 |
) |
Purchases of mortgage servicing rights |
|
|
8 |
|
|
|
34 |
|
|
|
311 |
|
Originations of mortgage servicing rights |
|
|
9,681 |
|
|
|
6,111 |
|
|
|
6,510 |
|
Amortization expense |
|
|
(7,568 |
) |
|
|
(5,918 |
) |
|
|
(4,441 |
) |
Write-off of permanent impairment |
|
|
(8,155 |
) |
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
|
18,732 |
|
|
|
27,788 |
|
|
|
27,561 |
|
Less valuation reserve |
|
|
(1,407 |
) |
|
|
(16,786 |
) |
|
|
(5,846 |
) |
|
Balance at end of year |
|
$ |
17,325 |
|
|
$ |
11,002 |
|
|
$ |
21,715 |
|
|
- 82 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
At December 31, 2009, the estimated fair value and weighted average remaining life of the
Companys mortgage servicing rights were $17,746 and 4.5 years, respectively. The fair value
of mortgage servicing rights was determined using discount rates ranging from 8.75% to 21.00%
and monthly prepayment speeds ranging from 0.6% to 5.5% depending upon the risk
characteristics of the underlying loans. The Company recorded as other expense impairment
charges of $10,940 and $1,702 in 2008 and 2007, respectively, and impairment reversals of
$7,224 in 2009. Permanent impairment of $8,155 was charged against the carrying value of
mortgage servicing rights in 2009. No permanent impairment was recorded in 2008 or 2007.
Principal balances of mortgage loans underlying mortgage servicing rights of approximately
$2,394,331 and $2,077,131 at December 31, 2009 and 2008, respectively, are not included in the
accompanying consolidated financial statements.
(9) DEPOSITS
Deposits are summarized as follows:
|
|
|
|
|
|
|
|
|
December 31, |
|
2009 |
|
|
2008 |
|
|
Non-interest bearing demand |
|
$ |
1,026,584 |
|
|
$ |
985,155 |
|
|
Interest bearing: |
|
|
|
|
|
|
|
|
Demand |
|
|
1,197,254 |
|
|
|
1,059,818 |
|
Savings |
|
|
1,362,410 |
|
|
|
1,198,783 |
|
Time, $100 and over |
|
|
996,839 |
|
|
|
821,437 |
|
Time, other |
|
|
1,240,969 |
|
|
|
1,109,066 |
|
|
Total interest bearing |
|
|
4,797,472 |
|
|
|
4,189,104 |
|
|
Total deposits |
|
$ |
5,824,056 |
|
|
$ |
5,174,259 |
|
|
Time deposits $100 and over include deposits obtained through brokered transactions. Brokered
time deposits totaled $0 and $23,500 as of December 31, 2009 and 2008, respectively.
Other time deposits include deposits obtained through the Companys participation in the
Certificate of Deposit Account Registry Service (CDARS). CDARS deposits totaled $253,344
and $140,935 as of December 31, 2009 and 2008, respectively.
Maturities of time deposits at December 31, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Time, $100 |
|
|
|
|
|
|
and Over |
|
|
Total Time |
|
|
2010 |
|
$ |
853,001 |
|
|
$ |
1,882,363 |
|
2011 |
|
|
100,863 |
|
|
|
212,921 |
|
2012 |
|
|
17,682 |
|
|
|
68,504 |
|
2013 |
|
|
13,825 |
|
|
|
41,060 |
|
2014 |
|
|
11,468 |
|
|
|
32,935 |
|
Thereafter |
|
|
|
|
|
|
25 |
|
|
Total |
|
$ |
996,839 |
|
|
$ |
2,237,808 |
|
|
Interest expense on time deposits of $100 or more was $25,212, $28,794 and $21,634 for the
years ended December 31, 2009, 2008 and 2007, respectively.
- 83 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
(10) LONG-TERM DEBT AND OTHER BORROWED FUNDS
A summary of long-term debt follows:
|
|
|
|
|
|
|
|
|
December 31, |
|
2009 |
|
|
2008 |
|
|
Parent Company: |
|
|
|
|
|
|
|
|
6.81% subordinated term loan maturing January 9, 2018, principal
due at maturity, interest payable quarterly |
|
$ |
20,000 |
|
|
$ |
20,000 |
|
Variable rate term notes, principal and interest due quarterly,
balloon payment due at maturity on December 31, 2010 (weighted
average rate of 3.75% at December 31, 2009) |
|
|
33,929 |
|
|
|
42,857 |
|
Subsidiaries: |
|
|
|
|
|
|
|
|
Variable rate subordinated term loan maturing February 28, 2018,
principal due at maturity, interest payable quarterly (rate of 2.26%
at December 31, 2009) |
|
|
15,000 |
|
|
|
15,000 |
|
Various notes payable to FHLB, interest due monthly at various
rates and maturities through October 31, 2017 (weighted average
rate of 4.56% at December 31, 2009) |
|
|
2,577 |
|
|
|
4,413 |
|
8.00% capital lease obligation with term ending October 25, 2029 |
|
|
1,847 |
|
|
|
1,878 |
|
|
Total long-term debt |
|
$ |
73,353 |
|
|
$ |
84,148 |
|
|
Maturities of long-term debt at December 31, 2009 are as follows:
|
|
|
|
|
2010 |
|
$ |
35,850 |
|
2011 |
|
|
245 |
|
2012 |
|
|
49 |
|
2013 |
|
|
253 |
|
2014 |
|
|
58 |
|
Thereafter |
|
|
36,898 |
|
|
Total |
|
$ |
73,353 |
|
|
Proceeds from the variable rate term notes and the 6.81% subordinated term loan were used to
fund the First Western acquisition. See Note 23Acquisitions and Dispositions.
On January 10, 2008, the Company entered into a credit agreement (Credit Agreement) with
four syndicated banks. The Credit Agreement supersedes the Companys unsecured revolving term
loan with its primary lender and is secured by all of the outstanding stock of FIB. Under the
original terms of the Credit Agreement, the Company borrowed $50,000 on variable rate term
notes (Term Notes) maturing January 10, 2013 and $9,000 on a $25,000 revolving credit
facility.
The syndicated credit agreement contains various covenants that, among other things,
establish minimum capital and financial performance ratios; and place certain restrictions on
capital expenditures, indebtedness, redemptions or repurchases of common stock and the amount
of dividends payable to shareholders. During 2008 and 2009, we entered into amendments to our
syndicated credit agreement that, among other things, eliminated the revolving credit
facility, changed the maturity date on the term notes to December 31, 2010 from January 10,
2013, changed the interest rate changed on the term notes to a maximum non-default rate of
LIBOR plus 3.75%, modified certain definitions and debt covenants and waived debt covenant
violations existing as of the dates of the amendments. In connection
with the amendments, we paid aggregate amendment and waiver fees of $259,000 and $85,000 in
2009 and 2008, respectively.
- 84 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
|
|
|
The debt covenant ratios included in the syndicated credit agreement, as last amended, require
us to, among other things, (1) maintain our ratio of non-performing assets to primary equity
capital at a percentage not greater than 45.0%, (2) maintain our allowance for loan and lease
losses in an amount not less than 65.0% of non-performing loans, (3) maintain our return on
average assets at not less than 0.70% through March 30, 2010 and 0.65% thereafter, (4)
maintain a consolidated total risk-based capital ratio of not less than 11.00% and a total
risk-based capital ratio at the Bank of not less than 10.00%, (5) limit cash dividends to
shareholders such that the aggregate amount of cash dividends in any four consecutive fiscal
quarters does not exceed 37.5% of net income during such four-quarter period and (6) limit
repurchases of our common stock, less cash proceeds from the issuance of our common stock, in
any period of four consecutive fiscal quarters, as a percentage of consolidated book net worth
as of the end of that period to 2.75% through March 31, 2010 and 2.25% thereafter. The
Company was in compliance with all existing and amended debt covenants as of December 31,
2009. |
|
|
|
|
As of December 31, 2009, $33,929 was outstanding on the Term Notes bearing interest at a
weighted average rate of 3.75%. The Term Notes are payable in equal quarterly principal
installments of $1,786, with one final installment of $28,571 due at maturity on December 31,
2010. Interest on the Term Notes is payable quarterly. |
|
|
|
|
On January 10, 2008, the Company borrowed $20,000 on a 6.81% unsecured subordinated term loan
maturing January 9, 2018, with interest payable quarterly and principal due at maturity. The
unsecured subordinated term loan qualifies as tier 2 capital under regulatory capital adequacy
guidelines. |
|
|
|
|
During February 2008, the Company borrowed $15,000 on a variable rate unsecured subordinated
term loan maturing February 28, 2018, with interest payable quarterly and principal due at
maturity. The Company may elect at various dates either prime or LIBOR plus 2.00%. The
interest rate on the subordinated term loan was 2.26% as of December 31, 2009. The unsecured
subordinated term loan qualifies as tier 2 capital under regulatory capital adequacy
guidelines. |
|
|
|
|
The notes payable to FHLB are secured by a blanket assignment of the Companys qualifying
residential and commercial real estate loans. The Company has available lines of credit with
the FHLB of approximately $138,607, subject to collateral availability. As of December 31,
2009 and 2008, FHLB advances of $2,577 and $4,413, respectively, were included in long-term
debt. As of December 31, 2009 there were no short-term advances outstanding with the FHLB.
As of December 31, 2008, short-term FHLB advances of $75,000 were included in other borrowed
funds. |
|
|
|
|
The Company has a capital lease obligation on a banking office. The balance of the obligation
was $1,847 and $1,878 as of December 31, 2009 and 2008, respectively. Assets acquired under
capital lease, consisting solely of a building and leasehold improvements, are included in
premises and equipment and are subject to depreciation. |
|
|
|
|
Other borrowed funds consist of overnight and term borrowings with original maturities of less
than one year. Following is a summary of other borrowed funds: |
|
|
|
|
|
|
|
|
|
December 31, |
|
2009 |
|
|
2008 |
|
|
Interest bearing demand notes issued to the United
States Treasury, secured by investment securities (0.0% interest rate at December 31, 2009) |
|
$ |
5,423 |
| |
$ |
4,216 |
|
|
Various notes payable to the FHLB |
|
|
|
|
|
|
75,000 |
|
|
|
|
$ |
5,423 |
|
|
$ |
79,216 |
|
|
|
|
|
The Company has federal funds lines of credit with third parties amounting to $185,000,
subject to funds availability. These lines are subject to cancellation without notice. The
Company also has a line of credit with the Federal Reserve Bank for borrowings up to $278,180
secured by a blanket pledge of indirect consumer loans. |
- 85 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
(11) SUBORDINATED DEBENTURES HELD BY SUBSIDIARY TRUSTS
|
|
|
The Company sponsors seven wholly-owned business trusts, FIST, Trust I, Trust II, Trust
III, Trust IV, Trust V and Trust VI (collectively, the Trusts). The Trusts were formed
for the exclusive purpose of issuing an aggregate of $120,000 of 30-year floating rate
mandatorily redeemable capital trust preferred securities (Trust Preferred Securities)
to third-party investors. The Trusts also issued, in aggregate, $3,715 of common equity
securities to the Parent Company. Proceeds from the issuance of the Trust Preferred
Securities and common equity securities were invested in 30-year junior subordinated
deferrable interest debentures (Subordinated Debentures) issued by the Parent Company. |
|
|
|
|
A summary of Subordinated Debenture issuances follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Amount Outstanding |
|
|
|
|
|
as of December 31, |
|
Issuance |
|
Maturity Date |
|
2009 |
|
|
2008 |
|
|
March 2003 |
|
March 26, 2033 |
|
$ |
41,238 |
|
|
$ |
41,238 |
|
October 2007 |
|
January 1, 2038 |
|
|
10,310 |
|
|
|
10,310 |
|
November 2007 |
|
December 15, 2037 |
|
|
15,464 |
|
|
|
15,464 |
|
December 2007 |
|
December 15, 2037 |
|
|
20,619 |
|
|
|
20,619 |
|
December 2007 |
|
April 1, 2038 |
|
|
15,464 |
|
|
|
15,464 |
|
January 2008 |
|
April 1, 2038 |
|
|
10,310 |
|
|
|
10,310 |
|
January 2008 |
|
April 1, 2038 |
|
|
10,310 |
|
|
|
10,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total subordinated debentures
held by subsidiary trusts |
|
|
|
$ |
123,715 |
|
|
$ |
123,715 |
|
|
|
|
|
In March 2003, the Company issued $41,238 of Subordinated Debentures to FIST. The
Subordinated Debentures bear a cumulative floating interest rate equal to LIBOR plus 3.15% per
annum. As of December 31, 2009 the interest rate on the Subordinated Debentures was 3.40%. |
|
|
|
|
In October 2007, the Company issued $10,310 of Subordinated Debentures to Trust II. The
Subordinated Debentures bear a cumulative floating interest rate equal to LIBOR plus 2.25% per
annum. As of December 31, 2009 the interest rate on the Subordinated Debentures was 2.54%. |
|
|
|
|
In November 2007, the Company issued $15,464 of Subordinated Debentures to Trust I. The
Subordinated Debentures bear interest at a fixed rate of 7.50% for five years after issuance,
and thereafter at a variable rate equal to LIBOR plus 2.75% per annum. |
|
|
|
|
In December 2007, the Company issued $20,619 of Subordinated Debentures to Trust III. The
Subordinated Debentures bear interest at a fixed rate of 6.88% for five years after issuance,
and thereafter at a variable rate equal to LIBOR plus 2.40% per annum. |
|
|
|
|
In December 2007, the Company issued $15,464 of Subordinated Debentures to Trust IV. The
Subordinated Debentures bear a cumulative floating interest rate equal to LIBOR plus 2.70% per
annum. As of December 31, 2009 the interest rate on the Subordinated Debentures was 2.99%. |
|
|
|
|
In January 2008, the Company issued $10,310 of Subordinated Debentures to Trust V. The
Subordinated Debentures bear interest at a fixed rate of 6.78% for five years after issuance,
and thereafter at a variable rate equal to LIBOR plus 2.75% per annum. |
|
|
|
|
In January 2008, the Company issued $10,310 of Subordinated Debentures to Trust VI. The
Subordinated Debentures bear a cumulative floating interest rate equal to LIBOR plus 2.75% per
annum. As of December 31, 2009, the interest rate on the Subordinated Debentures was 3.04%. |
- 86 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
|
|
|
The Subordinated Debentures are unsecured with interest distributions payable quarterly. The
Company may defer the payment of interest at any time 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 Companys ability to pay dividends on
its common and preferred shares is restricted. The Subordinated Debentures may be redeemed, subject to
approval by the Federal Reserve Bank, at the Companys option on or after five years from the
date of issue, or at any time in the event of unfavorable changes in laws or regulations.
Debt issuance costs consisting primarily of underwriting discounts and professional fees were
capitalized and are being amortized through maturity to interest expense using the
straight-line method, which approximates level yield. |
|
|
|
|
The terms of the Trust Preferred Securities are identical to those of the Subordinated
Debentures. The Trust Preferred Securities are subject to mandatory redemption upon repayment
of the Subordinated Debentures at their stated maturity dates or earlier redemption in an
amount equal to their liquidation amount plus accumulated and unpaid distributions to the date
of redemption. The Company guarantees the payment of distributions and payments for
redemption or liquidation of the Trust Preferred Securities to the extent of funds held by the
Trusts. |
|
|
|
|
The Trust Preferred Securities qualify as tier 1 capital of the Parent Company under the
Federal Reserve Boards capital adequacy guidelines. Proceeds from the issuance of the Trust
Preferred Securities were used to fund acquisitions. For additional information regarding
acquisitions, see Note 23 Acquisitions and Dispositions. |
(12) CAPITAL STOCK AND DIVIDEND RESTRICTIONS
|
|
|
On January 10, 2008, the Company issued 5,000 shares of 6.75% Series A noncumulative
redeemable preferred stock (Series A Preferred Stock) with an aggregate value of $50,000 as
partial consideration for the acquisition of the First Western entities, see Note 23
Acquisitions and Dispositions. The Series A Preferred Stock was issued to the former owner of
the First Western entities, an accredited investor, in a private placement transaction made in
reliance upon exemptions from registration pursuant to Section 4(2) under the Securities Act
of 1933, as amended, and Rule 506 promulgated thereunder. The Series A Preferred Stock ranks
senior to the Companys common stock with respect to dividend and liquidation rights and has
no voting rights. Holders of the Series A Preferred Stock are entitled to receive, if and
when declared, noncumulative dividends at an annual rate of $675 per share, based on a 360 day
year. The Company may redeem all or part of the Series A Preferred Stock at any time after
the fifth anniversary of the date issued at a redemption price of $10,000 per share plus all
accrued and unpaid dividends. Following the tenth anniversary of the date issued, the Series
A Preferred Stock may be converted, at the option of the holder, into shares of the Companys
common stock at a ratio of 80 shares of common stock for every one share of Series A Preferred
Stock. |
|
|
|
At December 31, 2009, 91.9% of common shares held by shareholders were subject to
shareholders agreements (Agreements). Under the Agreements, shares may not be sold or
transferred, except in limited circumstances, without triggering the Companys right of
first refusal to repurchase shares from the shareholder at fair
value. Additionally, shares held under the Agreements are subject to repurchase under certain conditions. |
|
|
|
The payment of dividends by subsidiary banks is subject to various federal and state
regulatory limitations. In general, a bank is limited, without the prior consent of its
regulators, to paying dividends that do not exceed current year net profits together with
retained earnings from the two preceding calendar years. The Companys debt instruments also
include limitations on the payment of dividends. For additional information regarding
dividend restrictions, see Note 10 Long-Term Debt and Other Borrowed Funds. |
- 87 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
(13) EARNINGS PER COMMON SHARE
|
|
|
The following table sets forth the computation of basic and diluted earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
Net income |
|
$ |
53,863 |
|
|
$ |
70,648 |
|
|
$ |
68,641 |
|
Less preferred stock dividends |
|
|
3,422 |
|
|
|
3,347 |
|
|
|
|
|
|
Net income available to common shareholders, basic and diluted |
|
$ |
50,441 |
|
|
$ |
67,301 |
|
|
$ |
68,641 |
|
|
|
Weighted average common shares outstanding |
|
|
7,833,917 |
|
|
|
7,871,034 |
|
|
|
8,126,804 |
|
Weighted average commons shares issuable upon exercise
of stock options and restricted stock awards |
|
|
85,708 |
|
|
|
157,134 |
|
|
|
195,676 |
|
|
Weighted average common and common equivalent
shares outstanding |
|
|
7,919,625 |
|
|
|
8,028,168 |
|
|
|
8,322,480 |
|
|
Basic earnings per common share |
|
$ |
6.44 |
|
|
$ |
8.55 |
|
|
$ |
8.45 |
|
Diluted earnings per common share |
|
$ |
6.37 |
|
|
$ |
8.38 |
|
|
$ |
8.25 |
|
|
|
|
|
The Company had 483,383, 284,583 and 137,092 stock options outstanding that were antidilutive
as of December 31, 2009, 2008 and 2007, respectively. |
(14) REGULATORY CAPITAL
|
|
|
The Company is subject to the regulatory capital requirements
administered by federal banking regulators and the Federal Reserve.
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
Companys financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the
Company must meet specific capital guidelines that involve
quantitative measures of the Companys assets, liabilities and
certain off-balance sheet items as calculated under regulatory
accounting practices. The Parent Company, like all bank holding
companies, is not subject to the prompt corrective action provisions.
Capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and
other factors. |
|
|
|
|
Quantitative measures established by regulation to ensure capital
adequacy require the Company to maintain minimum amounts and ratios
of total and tier 1 capital to risk-weighted assets, and of tier 1
capital to average assets, as defined in the regulations. As of
December 31, 2009, the Company exceeded all capital adequacy
requirements to which it is subject. |
- 88 -
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
|
|
|
The Companys actual capital amounts and ratios and selected minimum regulatory thresholds as
of December 31, 2009 and 2008 are presented in the following table: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual |
|
|
Adequately Capitalized |
|
|
Well Capitalized |
|
|
&n |