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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, 2010,
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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: 001-34653
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:
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Class A common stock
(Title of each class)
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NASDAQ Stock Market
(Name of each exchange on which registered) |
Securities registered pursuant to Section 12(g) of the Act:
Class B common stock
(Title of class)
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):
o Large accelerated filer |
þ Accelerated filer |
o Non-accelerated filer (Do not check if a smaller reporting company) |
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 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 $296,741,762.
Indicate the number of shares outstanding of each of the registrants classes of common stock as of
January 31, 2011:
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Class A common stock |
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15,610,989 |
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Class B common sock |
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27,188,660 |
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Documents Incorporated by Reference
The registrant intends to file a definitive Proxy Statement for the Annual Meeting of
Shareholders scheduled to be held May 24, 2011. 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, 2011, we had consolidated assets of $7.5
billion, deposits of $6.0 billion, loans of $4.3 billion and total stockholders equity of $735
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 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, 2011, the estimated fair value of trust assets held in a fiduciary or agent capacity
was in excess of $2.5 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, 2011, we employed 1,723 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
material laws and regulations applicable to us is summarized below. This description is not
intended to include a summary of all laws and regulations applicable to us. 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, or the Bank Holding Company Act, and to supervision, regulation
and regular examination by the Federal Reserve. Because we are a public company, we are also
subject to the disclosure and regulatory requirements of the Securities Exchange Act of 1934, as
amended, or Exchange Act, 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 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.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act,
enacts significant changes in federal statutes governing banks and bank holding companies generally
as well as other entities. Some of the significant changes are already in effect, additional
significant changes will become effective in the near-term and other significant changes require
action by federal banking agencies, including the Federal Reserve, the principal federal regulator
of the Company. Except as otherwise noted, the following discussion assumes that provisions of the
Dodd-Frank Act applicable to banks and bank holding companies to become effective in the near-term
are currently in effect.
Financial and Bank Holding Company
The Company is a bank holding company and has registered as a financial holding company under
regulations issued by the Federal Reserve. Under federal law, the Company is required to serve as a
source of financial strength to the Bank, including providing financial assistance to the Bank if
the Bank experiences financial distress. The federal banking agencies are required under the
Dodd-Frank Act to issue joint rules to carry out the source of strength requirements. As of
December 31, 2010, the federal banking agencies had not issued rules establishing such source of
strength requirements. Under existing Federal Reserve source of strength policies, 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.
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. Under the Dodd-Frank
Act, when acting on an application for approval the Federal Reserve is required to consider whether
the transaction would result in greater or more concentrated risks to the United States banking or
financial system. Under federal law and regulations, including the Dodd-Frank Act, a bank holding
company may acquire banks in states other than its home state if the bank holding company is both
well-capitalized and well-managed both before and after the acquisition. The interstate
acquisitions are 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.
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With additional changes made to federal statutes under the Dodd-Frank Act, banks are also
permitted to establish new branches in a state if a bank located in that state could establish a
new branch at the proposed location without regard to state laws limiting interstate de novo
branching. Banks may also merge across state lines. A state can prohibit interstate mergers
entirely or prohibit them if the continuing bank would control insured bank deposits in excess of a
specified percentage of total insured bank deposits in the state, 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.
We have voluntarily registered with the Federal Reserve as a financial holding company. 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 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. The federal banking agencies, including the Federal Reserve, may also
require additional information and reports from us. In addition, the Federal Reserve may examine,
and require reports and information regarding, any entity that we control, including entities other
than banks or entities engaged in financial activities. In certain circumstances, the Federal
Reserve may require us to divest of non-bank entities or limit the activities of those entities
even if the activities are otherwise permitted to bank holding companies under governing law.
With limited exceptions, we are not permitted after July 21, 2011 to engage in proprietary
trading, or invest in, or serve as an advisor to, hedge funds or private equity funds. We have not
historically engaged in any of those activities.
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. 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 that may exist 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.
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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.
Restrictions on Transactions with Affiliates, Directors and Officers
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. The limitation on lending 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.
Federal Reserve Regulation O restricts loans to the Bank and Company insiders, which includes
directors, officers and principal stockholders and their respective related interests. All
extensions of credit to the insiders and their related interests must be on the same terms as, and
subject to the same loan underwriting requirements as, loans to persons who are not insiders. In
addition, Regulation O imposes lending limits on loans to insiders and their related interests and
imposes, in certain circumstances, requirements for prior approval of the loans by the Bank board
of directors.
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.
Under the Dodd-Frank Act, the federal banking agencies are required to establish, by
regulation or order, minimum capital requirements for insured depository organizations and the
Federal Reserve is permitted to establish capital requirements, by regulation or order, for bank
holding companies. The minimum capital requirements to be established cannot be less than the
minimum capital guidelines in effect when the Dodd-Frank Act was enacted. The Federal Reserve is
required to seek to make capital requirements countercyclical by increasing the amount of required
capital during times of economic expansion and decreasing the amount of required capital during
times of economic contraction. The provisions of the Dodd-Frank Act, together with actions taken
by the Basel Committee for the Basel III accords, may result in future regulatory minimum capital
requirements that will exceed the regulatory minimum capital guidelines to which we are currently
subject.
Currently, the Federal Reserve Board and the FDIC have substantially similar risk-based
capital ratio and leverage ratio guidelines for banks. The guidelines are intended to ensure that
banks 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 (adjusted for
associated deferred tax liability) 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.
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The Dodd-Frank Act provisions relating to required minimum capital also limit, in certain
circumstances, the use of hybrid capital instruments in meeting regulatory capital requirements,
including instruments similar to those which we currently have issued and outstanding. However,
because our total consolidated assets are substantially less than $15 billion, the limitations on
use of hybrid capital instruments are not expected to apply to us for the foreseeable future.
We, like other bank holding companies, are required under current guidelines 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 current
guidelines require 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, 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.
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.
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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.
A bank that is not well-capitalized as defined by applicable regulations may, among other
regulatory requirements or limitations, be prohibited under federal law and regulation from
accepting or renewing brokered deposits.
The capital stock of banks organized under Montana law, such as the Bank, may be subject to
assessment upon the direction of the Montana Department of Administration under the Montana Bank
Act. Under the Montana Bank Act, if the Department of Administration determines an impairment of a
banks capital exists, it may notify the banks board of directors of the impairment and require
the impairment be made good by an assessment on the bank stock. If the bank fails to make good the
impairment, the Department of Administration may, among other things, take charge of the bank and
proceed to liquidate the bank.
Under FDIA, the appropriate federal banking agency may take certain actions with respect to
significantly or critically undercapitalized institutions. The actions may include requiring the
sale of additional shares of the institutions stock or other actions deemed appropriate by the
federal banking agency, which could include assessment on the institutions stock.
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 deposit insurance fund, or 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.
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. The maximum deposit insurance amount has been permanently
increased from $100,000 to $250,000 per depositor. In addition, certain non-interest bearing
deposit accounts are accorded unlimited insurance until 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.
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 1.05% of insured deposits in fiscal 2010. 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 FDIC is required to change its method of assessment of insurance premiums to an assessment
based on the average total consolidated assets of the insured depository institution less the
institutions average tangible equity for the assessment period. Currently, we do not anticipate
that the future change in the assessment base will materially increase the deposit insurance
premium from the amounts paid under the current assessment method based on total deposits.
The FDIC is also required to set its designated reserve ratio for each year at 1.35% of
estimated insured deposits and take actions necessary to reach a reserve ratio of 1.35% of total
estimated insured deposits by September 30, 2020. The FDIC may be required to increase deposit
insurance premium assessments to meet the reserve ratio requirements. However, under the
Dodd-Frank Act, the effects of any increases in deposit insurance premium assessments are to be
offset for the benefit of depository institutions with total consolidated assets of less than $10
billion. The Bank currently has total consolidated assets of less than $10 billion.
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
Federal law 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, regulations and reporting
obligations aimed at protecting consumers and Bank customers. Failure to comply with these laws and
regulations may, among other things, impair the collection of loans made in violation of the laws
and regulations, provide borrowers or other customers certain rights and remedies or result in the
imposition of penalties on the Bank.
The Equal Credit Opportunity Act generally prohibits discrimination in credit transactions on,
among other things, the basis of race, color, religion, national origin, sex, marital status or age
and, in certain circumstances, limits the Banks ability to require co-obligors or guarantors as a
condition to the extension of credit to an individual.
The Real Estate Settlement Procedures Act, or RESPA, requires certain disclosures be provided
to borrowers in real estate loan closings or other real estate settlements. In addition, RESPA
limits or prohibits certain settlement practices, fee sharing, kickbacks and similar practices that
are considered to be abusive.
The Truth in Lending Act, or TILA, and Regulation Z require disclosures to borrowers and other
parties in consumer loans including, among other things, disclosures relating to interest rates and
other finance charges, payments and payment schedules and annual percentage rates. TILA provides
remedies to borrowers upon certain failures in compliance by a lender.
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The Fair Housing Act regulates, among other things, lending practices in residential lending
and prohibits discrimination in housing related lending activities on the basis of race, color,
religion, national origin, sex, handicap, disability or familial status.
The Home Mortgage Disclosure Act requires certain lenders and other firms engaged in the
home mortgage industry to collect and report information relating to applicants, borrowers and home
mortgage lending activities in which they engage in their market areas or communities. The
information is used for, among other purposes, evaluation of discrimination or other impermissible
acts in home mortgage lending.
The Home Ownership and Equity Protection Act regulates terms and disclosures of certain
closed end home mortgage loans that are not purchase money loans and includes loans classified as
high cost loans.
The Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions
Act, generally limits lenders and other financial firms in their collection, use or dissemination
of customer credit information, gives customers some access to, and control over, their credit
information and requires financial firms to establish policies and procedures intended to deter
identity theft and related frauds.
The Fair Debt Collection Practices Act regulates actions that may be taken in the
collection of consumer debts and provides consumers with certain rights of access to information
related to collection actions.
The Electronic Fund Transfer Act regulates fees and other terms on electronic funds
transactions. On November 17, 2009, the Federal Reserve Board published a final rule amending
Regulation E, which implements the Electronic Fund Transfer Act. Effective July 1, 2010 for new
accounts and August 15, 2010 for existing accounts, this rule generally prohibits financial
institutions from charging an overdraft fee for automated teller machine and one-time debit card
transactions that overdraw a consumer deposit account, unless the customer opts in to having the
overdrafts authorized and paid. The Federal Reserve recently issued proposed regulations relating
to fees and charges in debit card transactions intended to implement provisions of the Dodd-Frank
Act requiring such fees to be reasonable and proportional to costs incurred by card issuers.
Federal consumer protection laws have been expanded by the Dodd-Frank Act, pursuant to which a
Bureau of Consumer Protection has been created with authority to regulate consumer financial
products and services and to implement and enforce federal consumer financial laws. Although the
Bureau is accorded examination and enforcement authority, the Bureaus authority does not generally
extend to depository institutions with total assets of less than $10 billion. The Bank currently
has total assets of less than $10 billion.
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.
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 the Money Laundering
Control Act of 1986 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. The USA PATRIOT Act
includes the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 and
also amends laws relating to currency control and regulation. The laws and related 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.
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Office of Foreign Asset Control
The United States Treasury Office of Foreign Asset Control enforces economic and trade
sanctions imposed by the United States on foreign persons and governments. Among other authorities,
the Office of Foreign Asset Control may require United States financial institutions to block or
freeze assets of identified foreign persons or governments which come within the control of the
financial institution. Financial institutions are required to adopt procedures for identification
of new and existing deposit accounts and other relationships with persons or governments identified
by the Office of Foreign Asset Control and to timely report the accounts or relationships to the
Office of Foreign Asset Control.
Basel III Reform
On December 16, 2010, the Basel Committee on Banking Supervision, or Basel Committee, released
the final text of its reforms to strengthen global capital and liquidity rules designed to create a
more resilient banking industry. These reforms, known as Basel III, are intended to strengthen the
regulatory capital framework by, among other things, (1) raising the quality, consistency and
transparency of an institutions capital base, (2) reducing procyclicality and promoting counter
cyclical buffers, (3) enhancing risk coverage, (4) supplementing the risk-based capital requirement
with a leverage ratio, and (5) introducing a global liquidity standard.
On January 13, 2011, the Basel Committee issued additional criteria to Basel III. This
criteria provides that for instruments issued by a bank to be included in Tier 1 or Tier 2 capital,
they must meet or exceed minimum requirements designed to require such instruments to fully absorb
losses before taxpayers are exposed to loss.
Basel III, as supplemented, has not yet been adopted by the U.S. federal banking authorities.
Although the Secretary of the United States Department of the Treasury and federal banking
regulators have expressed support for Basel III, the timing and scope of its implementation, as
well as any potential modifications that may result during the implementation process, are not yet
known. Therefore, the short-term and long-term impact of the Basel III capital standards and the
forthcoming new capital rules to be proposed for U.S. banks is uncertain.
If Basel III is adopted by U.S. federal banking authorities as agreed upon by the Basel
Committee, the minimum common equity requirements would increase from 2.0% to 4.5% of risk-weighted
assets. In addition, banks would be required to hold a capital conservation buffer of 2.5% to
withstand future periods of stress bringing the total common equity requirements to 7.0% of
risk-weighted assets. In addition, Basel III would increase Tier 1 capital requirements from 4.0%
to 6.0%. The new minimums would be phased in between January 1, 2013 and January 1, 2015, while
the capital conservation buffer would be phased in between January 1, 2016 and December 31, 2018.
Under Basel III, an additional capital buffer of up to 2.5% would also be imposed under certain
circumstances. Basel III would also narrow the definition of capital, excluding instruments that
no longer qualify as Tier 1 common equity as of January 1, 2013, and phasing out other instruments
over several years. In addition, a new rule requiring banks to hold enough liquid capital to meet
needs over a 30-day period would be introduced on January 1, 2015, and a longer-term liquidity
rule, called the net stable funding ratio, would be applied starting January 1, 2018.
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.
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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.FIBK.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.
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 occurs, 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
2009 and 2010, 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, or OREO, and internally risk classified
loans, thereby increasing our provision for loan losses and decreasing our operating income in 2009
and 2010. As of December 31, 2010, we had total non-performing assets of approximately $244
million, compared with approximately $163 million as of December 31, 2009 and approximately $97
million as of December 31, 2008. In the first two months of 2011, levels of non-performing assets
and provisions for loan losses have remained elevated, which will continue to affect our earnings.
Although current economic conditions are trending upwards, management believes we will continue to
experience credit impairments 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, 2010, we had approximately $2.9 billion of commercial, agricultural,
construction, residential and other real estate loans, representing approximately 66% of our total
loan portfolio. The recent 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.
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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 writedowns 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 writedowns. 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 regulatory 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.
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, 2010, we had approximately $2.3 billion of commercial
loans, including approximately $1.6 billion of commercial real estate loans, representing
approximately 53% 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, 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, 2010, our allowance for loan losses was approximately $120 million, which
represented 2.76% 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.
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Our goodwill may become impaired, which may adversely impact our results of operations and
financial condition and may limit our Banks ability 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 impairment has occurred. In testing for impairment, the fair value of
net assets will be estimated based on an analysis of our market value. Consequently, the
determination of goodwill will be sensitive to market-based trading of our Class A common stock. 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, 2010, our Bank had goodwill of approximately
$184 million, which was 2.4% 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 our 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.
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, negotiable order of withdrawal, or 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 our 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 substantially reduced the DIFs reserves. The
FDIC has published and amended a restoration plan designed to replenish the DIF and to increase the
deposit insurance reserve ratio through 2015. To implement the restoration plan, the FDIC has
adopted a series of initiatives that have changed its risk-based assessment system, increased its
base assessment rates and imposed special assessments.
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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.
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 $7.5 billion as of
December 31, 2010. 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 recent economic recession has adversely affected the real
estate and business environment in certain areas in Montana and Wyoming, 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 regulatory 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 stockholders. 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, employment, monetary and other 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 and changes, particularly given the recent market developments in the banking
and financial services industries and the recent enactment of the Dodd-Frank Act.
Recent events have resulted in legislators, regulators and authoritative bodies, such as
the Financial Accounting Standards Board, the Securities and Exchange Commission, or 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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The Dodd-Frank Act will result in sweeping changes in the regulation of financial
institutions and could significantly harm our business.
On July 21, 2010, the Dodd-Frank Act was signed into law. The Dodd-Frank Act will result
in sweeping changes in the regulation of financial institutions. The Dodd-Frank Act contains
numerous provisions that will affect all banks and bank holding companies. The Dodd-Frank Act
includes provisions that, among other things:
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change the assessment base for federal deposit insurance from the amount of insured
deposits to total consolidated assets less tangible capital, eliminate the ceiling
on the size of the DIF, and increase the floor of the size of the DIF; |
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repeal the federal prohibitions on the payment of interest on demand deposits,
thereby generally permitting the payment of interest on all deposit accounts; |
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centralize responsibility for promulgating regulations under and enforcing federal
consumer financial protection laws in a new bureau of consumer financial protection
that will have direct supervision and examination authority over banks with more
than $10 billion in assets; |
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require the FDIC to seek to make its capital requirements for banks countercyclical; |
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impose comprehensive regulation of the over-the-counter derivatives market, which
would include certain provisions that would effectively prohibit insured depository
institutions from conducting certain derivatives businesses in the institution
itself; |
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implement corporate governance revisions, including with regard to executive
compensation and proxy access by shareholders; |
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establish new rules and restrictions regarding the origination of mortgages; and |
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permit the Federal Reserve to prescribe regulations regarding interchange
transaction fees, and limit them to an amount reasonable and proportional to the
cost incurred by the issuer for the transaction in question. |
Many of these and other provisions in the Dodd-Frank Act remain subject to regulatory
rule-making and implementation, the effects of which are not yet known. Although we cannot predict
the specific impact and long-term effects that the Dodd-Frank Act will have on us and the financial
industry in general, we believe the Dodd-Frank Act and the regulations promulgated thereunder will
result in additional administrative burdens that will obligate us to incur additional costs and
expenses. Provisions of the Act that affect deposit insurance assessments, payment of interest on
demand deposits and interchange fees could increase the costs associated with deposits as well as
place limitations on certain revenues those deposits may generate. Although the treatment of our
existing trust preferred securities as Tier 1 capital will be grandfathered under the Act,
provisions of the Act that revoke Tier 1 capital treatments of trust preferred securities and
otherwise require revisions to capital requirements may cause us to seek other sources of capital
in the future. Furthermore, the Dodd-Frank Act could limit the types of financial services and
products we may offer, increase the ability of non-banks to offer competing financial services and
products, reduce interchange fees, require us to renegotiate payment network agreements or enter
into multiple payment network agreements, require a significant amount of managements time and
attention, and otherwise adversely impact our business, financial condition, results of operations
and prospects.
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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-15-
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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 over the past two and a half years, legislators and
financial regulators have implemented a number of initiatives designed to stabilize and improve the
financial markets. These efforts have included:
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direct and indirect assistance to distressed financial institutions and the
provision of assistance by the banking authorities in arranging acquisitions of
weakened banks and broker-dealers; |
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legislation that provided economic stimulus funding and liquidity to the financial
markets, including the Troubled Asset Relief Program Capital Purchase Program; |
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programs by the Federal Reserve to provide liquidity to the commercial paper
markets, stimulus to increase commercial and consumer based lending, and successive
rounds of quantitative easing; |
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proposed guidance by the Federal Reserve on incentive compensation policies at
banking organizations; |
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proposals and recent judicial decisions limiting a lenders ability to foreclose on
mortgages or make such foreclosures less economically viable, including by 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 debtors to remain in their home; |
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acceleration of 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
exceptions); |
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adoption of new rules by the Federal Reserve under Regulation E, effective July 1,
2010 for new accounts and August 15, 2010 for existing accounts, generally prohibiting
financial institutions from charging overdraft fees for ATM and one-time debit card
transactions that overdraw consumer deposit accounts, unless the consumer opts in to
having such overdrafts authorized and paid; and |
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enactment of the Dodd-Frank Act. |
These initiatives may increase our expenses or decrease our income by, among other
things, making it harder for us to foreclose on mortgages and impacting the amount of overdraft
fees we will be able to charge. 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
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.
-16-
We are dependent upon the services of our management team.
Our future success and profitability is substantially dependent 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, Edward Garding, Executive
Vice President and Chief Operating Officer, and Julie A. Castle, Executive Vice President and
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 declining in Montana and Wyoming, 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 prospects.
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.
Our operations rely on certain external vendors.
We are reliant upon certain external vendors to provide products and services necessary to
maintain our day-to-day operations. In addition, we are subject to certain long-term vendor
contracts that limit our flexibility and increase our dependence on third party vendors. Failure
of certain external vendors to perform in accordance with contractual arrangements could be
disruptive to our operations and limit our ability to provide certain products and services
demanded by our customers, which could have material adverse impact on our financial condition or
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.
-17-
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, has 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. Existing or future 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.
-18-
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
competitors; |
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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, control deficiencies and losses from operational
malfunctions or fraud have occurred and may occur in the future. Any future deficiencies,
weaknesses or 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.
-19-
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.
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.
-20-
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 III capital standards and the forthcoming
new capital rules to be proposed for U.S. banks is uncertain.
On December 16, 2010, the Basel Committee on Banking Supervision, or Basel Committee, released
the final text of its reforms to strengthen global capital and liquidity rules designed to create a
more resilient banking industry. These reforms, known as Basel III, are intended to strengthen the
regulatory capital framework by, among other things, (1) raising the quality, consistency and
transparency of an institutions capital base, (2) reducing procyclicality and promoting counter
cyclical buffers, (3) enhancing risk coverage, (4) supplementing the risk-based capital requirement
with a leverage ratio, and (5) introducing a global liquidity standard.
On January 13, 2011, the Basel Committee issued additional criteria to Basel III. This
criteria provides that for instruments issued by a bank to be included in Tier 1 or Tier 2 capital,
they must meet or exceed minimum requirements designed to require such instruments to fully absorb
losses before taxpayers are exposed to loss.
Basel III, as supplemented, has not yet been adopted by the U.S. federal banking authorities.
Although the Secretary of the United States Department of the Treasury and federal banking
regulators have expressed support for Basel III, the timing and scope of its implementation, as
well as any potential modifications that may result during the implementation process, are not yet
known. Therefore, the short-term and long-term impact of the Basel III capital standards and the
forthcoming new capital rules to be proposed for U.S. banks is uncertain.
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, 2010, 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. Any reduction or elimination of our common stock dividend in the
future could adversely affect the market price of our common stock.
Risks Relating to Our Class A Common Stock
Our dividend policy may change.
Although we have historically paid dividends to our stockholders, we have no obligation to
continue doing so and may change our dividend policy at any time without notice to our
stockholders. Holders of our common stock are only entitled to receive such cash dividends as our
Board 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 stockholders.
-21-
The trading volume in our Class A Common Stock has been limited, and an active trading market
may not develop.
Our Class A common stock is currently traded on The NASDAQ Global Select Market. Our Class A
common stock is thinly-traded and has substantially less liquidity than the average trading market
for many other publicly-traded financial institutions and other companies. Therefore, investors
have limited opportunities to sell their shares of Class A common stock in the open market.
Limited trading of our Class A common stock also contributes to more volatile price fluctuations.
An active trading market for our Class A common stock may never develop or be sustained, which
could affect your ability to sell your shares and could depress the market price of your shares.
Approximately 70% of our outstanding common stock is owned by members of the Scott family, our
executive officers and directors and current and former employees. This substantial amount of stock
that is owned by these individuals may adversely affect the development of an active and liquid
trading market.
Our Class A common stock share price could be volatile and could decline.
The market price of our Class A common stock is volatile and could be subject to wide
fluctuations in price in response to various factors, some of which are beyond our control. These
factors include:
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prevailing market conditions; |
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our historical performance and capital structure; |
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estimates of our business potential and earnings prospects; |
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an overall assessment of our management; and |
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the consideration of these factors in relation to market valuation of companies in
related businesses. |
At times the stock markets, including the NASDAQ Stock Market, on which our Class A common
stock is listed, may experience significant price and volume fluctuations. As a result, the market
price of our Class A common stock is likely to be similarly volatile and investors in our Class A
common stock may experience a decrease in the value of their shares, including decreases unrelated
to our operating performance or prospects. In addition, in the past, following periods of
volatility in the overall market and the market price of a companys securities, securities class
action litigation has often been instituted against these companies. This litigation, if instituted
against us, could result in substantial costs and a diversion of our managements attention and
resources.
Holders of the Class B common stock have voting control of our company and are able to
determine virtually all matters submitted to stockholders, including potential change in control
transactions.
Members of the Scott family control in excess of 65% of the voting power of our outstanding
common stock. Due to their holdings of common stock, members of the Scott family are able to
determine the outcome of virtually all matters submitted to stockholders 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 stockholder 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 your interests. Further, because of our dual class structure, members of the Scott
family will continue to be able to control all matters submitted to our stockholder for approval
even if they come to own less than 50% of the total outstanding shares of our common stock. The
Scott family members have entered into a stockholder agreement giving family members a right of
first refusal to purchase shares of Class B common stock that are intended to be sold or
transferred, subject to certain exceptions, by other family members. This agreement may have the
effect of continuing ownership of the Class B common stock and control within the Scott family.
This concentrated control will limit your ability to influence corporate matters. As a result, the
market price of our Class A common stock could be adversely affected.
-22-
Future equity issuances could result in dilution, which could cause our Class A common stock
price to decline.
We are not restricted from issuing additional Class A common stock, including any securities
that are convertible into or exchangeable for, or that represent the right to receive, Class A
common stock. We may issue additional Class A 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 Class A common stock for any reason, the issuance
would have a dilutive effect on the holders of our Class A common stock and could have a material
negative effect on the market price of our Class A common stock.
An investment in our Class A common stock is not an insured deposit.
Our Class A 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.
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 stockholders.
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 stockholders from receiving a premium for
their shares of our Class A common stock. These provisions could adversely affect the market price
of our Class A common stock and could reduce the amount that stockholders might receive if we are
sold.
Our articles of incorporation provide that our board of directors, or Board, may issue up to
95,000 additional shares of preferred stock, in one or more series, without stockholder approval
and with such terms, conditions, rights, privileges and preferences as the Board may deem
appropriate. In addition, our articles of incorporation provide for staggered terms for our Board
and limitations on persons authorized to call a special meeting of stockholders. 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 Class A common stock with the opportunity to realize a premium over the
then-prevailing market price of such Class A common stock.
Further, the acquisition of specified amounts of our common stock (in some cases, the
acquisition or control of more than 5% of our voting 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 holders of the Class B
common stock will 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 stockholders.
We qualify as a controlled company under the NASDAQ Marketplace Rules and may rely on
exemptions from certain corporate governance requirements.
As a result of the combined voting power of the members of the Scott family described above,
we qualify as a controlled company under the NASDAQ Marketplace Rules. As a controlled company,
we may rely on exemptions from certain NASDAQ corporate governance standards that are available to
controlled companies, including the requirements that:
|
|
|
a majority of the board of directors consist of independent directors; |
|
|
|
|
the compensation of officers be determined, or recommended to the board of directors
for determination, by a majority of the independent directors or a compensation
committee comprised solely of independent directors; and |
|
|
|
|
director nominees be selected, or recommended for the board of directors selection,
by a majority of the independent directors or a nominating committee comprised solely
of independent directors with a written charter or board resolution addressing the
nomination process. |
As a result, in the future, our compensation and governance & nominating committees may not
consist entirely of independent directors. As long as we choose to rely on these exemptions from
NASDAQ Marketplace Rules in the future, you will not have the same protections afforded to
stockholders of companies that are subject to all of the NASDAQ corporate governance requirements.
-23-
The Class A common stock is equity and is subordinate to our existing and future indebtedness
and to our existing Series A preferred stock.
Shares of our Class A common stock are equity interests and do not constitute indebtedness. As
such, shares of our Class A common stock 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 Class A 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 stockholders or reduce the market price of
our Class A 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 Class A common
stock are not entitled to preemptive rights or other protections against dilution.
Item 1B. Unresolved Staff Comments
We are an accelerated filer, as defined in Rule 12b-2 of the Exchange 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 95,605 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.
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. [Removed and Reserved]
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
Description of Our Capital Stock
Our articles provide for two classes of common stock: Class A common stock, which has one vote
per share, and Class B common stock, which has five votes per share. Class B common stock is
convertible into Class A common stock as described below. Our common stock is uncertificated.
Our authorized capital stock consists of 200,100,000 shares, each with no par value per share,
of which:
|
|
|
100,000,000 shares are designated as Class A common stock; |
|
|
|
|
100,000,000 shares are designated as Class B common stock; and |
|
|
|
|
100,000 shares are designated as preferred stock. |
-24-
At December 31, 2010, we had issued and outstanding 15,598,632 shares of Class A common stock,
27,202,062 shares of Class B common stock and 5,000 shares of preferred stock that have been
designated as Series A preferred stock. At December 31, 2010, we also had outstanding stock
options to purchase an aggregate of 31,624 shares of our Class A common stock and 3,553,228 shares
of our Class B common stock.
Members of the Scott family control in excess of 65% of the voting power of our outstanding
common stock. The Scott family members have entered into a stockholder agreement giving family
members a right of first refusal to purchase shares of Class B common stock that are intended to be
sold or transferred, subject to certain exceptions, by other family members. This agreement may
have the effect of continuing ownership of the Class B common stock and control of our Company
within the Scott family.
Due to the ownership and control of our Company by members of the Scott family, we are a
controlled company as that term is used under the NASDAQ Marketplace Rules. As a controlled
company, we may rely on exemptions from certain NASDAQ corporate governance requirements,
including those regarding independent director requirements for the Board and committees of the
Board.
Preferred Stock
Our Board is authorized, without approval of the holders of Class A common stock or Class B
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 may
cause us to issue preferred stock with voting, conversion and other rights that could adversely
affect the holders of Class A common stock or Class B 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 authorized the
issuance of 5,000 shares of 6.75% Series A noncumulative redeemable preferred stock, which ranks
senior to our Class A common stock and Class B common stock 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, noncumulative cash
dividends at an annual rate of $675 per share (based on a 360 day year). In the event full
dividends are not paid for three consecutive quarters, the Series A preferred stock holders are
entitled to elect two members to our Board. 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 Class B common stock at a ratio of 320 shares of Class B common
stock for every one share of Series A preferred stock.
Common Stock
The holders of our Class A common stock are entitled to one vote per share and the holders of
our Class B common stock are entitled to five votes per share on any matter to be voted upon by the
stockholders. Holders of Class A common stock and Class B common stock vote together as a single
class on all matters (including the election of directors) submitted to a vote of stockholders,
unless otherwise required by law.
The holders of common stock are not entitled to cumulative voting rights with respect to the
election of directors, which means that the holders of a majority of the shares voted can elect all
of the directors then standing for election. Directors are elected by a majority of the voting
power present in person or represented by proxy at a shareholder meeting rather than by a plurality
vote.
The holders of our Class A common stock and Class B common stock are entitled to share equally
in any dividends that our Board may declare from time to time from legally available funds and
assets, subject to limitations under Montana law and the preferential rights of holders of any
outstanding shares of preferred stock. If a dividend is paid in the form of shares of common stock
or rights to acquire shares of common stock, the holders of Class A common stock will be entitled
to receive Class A common stock, or rights to acquire Class A common stock, as the case may be and
the holders of Class B common stock will be entitled to receive Class B common stock, or rights to
acquire Class B common stock, as the case may be.
-25-
Upon any voluntary or involuntary liquidation, dissolution, distribution of assets or winding
up of our company, the holders of our Class A common stock and Class B common stock are entitled to
share equally, on a per share basis, in all our assets available for distribution, after payment to
creditors and subject to any prior distribution rights granted to holders of any outstanding shares
of preferred stock.
Our Class A common stock is not convertible into any other shares of our capital stock. Any
holder of Class B common stock may at any time convert his or her shares into shares of Class A
common stock on a share-for-share basis. The shares of Class B common stock will automatically
convert into shares of Class A common stock on a share-for-share basis:
|
|
|
when the aggregate number of shares of our Class B common stock
is less than 20% of the aggregate number of shares of our Class A common stock
and Class B common stock then outstanding; or |
|
|
|
upon any transfer, whether or not for value, except for transfers
to the holders spouse, certain of the holders relatives, the trustees of
certain trusts established for their benefit, corporations and partnerships
wholly-owned by the holders and their relatives, the holders estate and other
holders of Class B common stock. |
Once converted into Class A common stock, the Class B common stock cannot be reissued. No
class of common stock may be subdivided or combined unless the other class of common stock
concurrently is subdivided or combined in the same proportion and in the same manner.
Other than in connection with dividends and distributions, subdivisions or combinations, or
certain other circumstances, we are not authorized to issue additional shares of Class B common
stock.
Class A and Class B common stock do not have any preemptive rights.
The Class B common stock is not and will not be listed on the NASDAQ Stock Market or any other
exchange. Therefore, no trading market is expected to develop in the Class B common stock. Class A
common stock is listed on the NASDAQ Stock Market under the symbol FIBK.
The table below sets forth, for each calendar quarter end in 2009, the minority appraised
value of our Class B common stock as determined by an independent valuation expert prior to the
Companys initial public offering, or IPO, in March 2010.
|
|
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|
|
|
|
|
|
Valuation Based on |
|
|
|
|
|
Appraised |
Financial Data as of |
|
Valuation Effective Date |
|
Minority Value |
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
May 15, 2009 |
|
$ |
15.250 |
|
June 30, 2009 |
|
August 17, 2009 |
|
|
15.000 |
|
September 30, 2009 |
|
November 16, 2009 |
|
|
15.375 |
|
December 31, 2009 |
|
February 5, 2010 |
|
|
15.000 |
|
The table below sets forth, for each quarter in 2010, the quarterly high and low closing sales
prices per share of the Class A common stock, as reported by the NASDAQ Stock Market.
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
High |
|
Low |
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
$ |
16.97 |
|
|
$ |
15.40 |
|
June 30, 2010 |
|
|
16.80 |
|
|
|
15.05 |
|
September 30, 2010 |
|
|
15.83 |
|
|
|
11.07 |
|
December 31, 2010 |
|
|
15.39 |
|
|
|
12.00 |
|
As of December 31, 2010, we had 495 record shareholders, including the Wealth Management
division of First Interstate Bank as trustee for 1,786,288 shares of Class A common stock held on
behalf of 1,144 individual participants in the Savings and Profit Sharing Plan for Employees of
First Interstate BancSystem, Inc., or 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.
-26-
Dividends
It is our policy to pay a dividend to all common shareholders quarterly. We currently intend
to continue paying quarterly dividends; however, the Board may change or eliminate the payment of
future dividends.
Recent quarterly dividends follow:
|
|
|
|
|
|
|
|
|
|
|
Amount |
|
Total Cash |
Dividend Payment |
|
Per Share |
|
Dividends |
|
|
|
|
|
|
|
|
|
First quarter 2009 |
|
$ |
0.1625 |
|
|
$ |
5,127,714 |
|
Second quarter 2009 |
|
$ |
0.1125 |
|
|
|
3,522,836 |
|
Third quarter 2009 |
|
$ |
0.1125 |
|
|
|
3,513,986 |
|
Fourth quarter 2009 |
|
$ |
0.1125 |
|
|
|
3,528,996 |
|
First quarter 2010 |
|
$ |
0.1125 |
|
|
|
3,519,163 |
|
Second quarter 2010 |
|
$ |
0.1125 |
|
|
|
4,792,655 |
|
Third quarter 2010 |
|
$ |
0.1125 |
|
|
|
4,796,025 |
|
Fourth quarter 2010 |
|
$ |
0.1125 |
|
|
|
4,796,835 |
|
First quarter 2011 |
|
$ |
0.1125 |
|
|
|
4,797,595 |
|
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 2010.
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, 2010.
Purchases of Equity Securities by Issuer
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
Paid Per Share |
|
Plans or Programs |
|
Plans or Programs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2010 |
|
|
|
|
|
$ |
|
|
|
Not Applicable |
|
Not Applicable |
|
|
|
|
November 2010 |
|
|
|
|
|
|
|
|
|
Not Applicable |
|
Not Applicable |
|
|
|
|
December 2010 |
|
|
|
|
|
|
|
|
|
Not Applicable |
|
Not Applicable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
Not Applicable |
|
Not Applicable |
|
|
|
|
|
-27-
Performance Graph
The performance graph below compares the cumulative total shareholder return on our Class A
common stock since our Class A common stock began trading on the Nasdaq Global Select Market on
March 23, 2010 as compared with the cumulative total return on equity securities of companies
included in the Nasdaq Composite Index and the Nasdaq Bank Index over the same period. 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. This graph assumes
a $100.00 investment in our common stock on the first day of trading, 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. The performance graph represents past performance, which may
not be indicative of the future performance of our common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ending |
Index |
|
03/23/10 |
|
04/30/10 |
|
06/30/10 |
|
08/31/10 |
|
10/31/10 |
|
12/31/10 |
|
First INterstate BancSystem, Inc.
|
|
|
100.00 |
|
|
|
112.50 |
|
|
|
110.02 |
|
|
|
79.87 |
|
|
|
91.40 |
|
|
|
108.27 |
|
NASDAQ Composite
|
|
|
100.00 |
|
|
|
101.96 |
|
|
|
87.56 |
|
|
|
87.92 |
|
|
|
104.44 |
|
|
|
110.78 |
|
NASDAQ Bank
|
|
|
100.00 |
|
|
|
104.85 |
|
|
|
89.04 |
|
|
|
82.31 |
|
|
|
87.79 |
|
|
|
98.86 |
|
-28-
Item 6. Selected Consolidated Financial Data
The following selected consolidated financial data with respect to our consolidated financial
position as of December 31, 2010 and 2009, and the results of our operations for the fiscal years
ended December 31, 2010, 2009 and 2008, 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,
2008, 2007 and 2006, and the results of our operations for the fiscal years ended December 31, 2007
and 2006, has been derived from our audited consolidated financial statements not included herein.
Five Year Summary
(Dollars in thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of or for the year ended December 31, |
|
2010 |
|
2009 |
|
2008 |
|
2007 |
|
2006 |
|
Selected Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans |
|
$ |
4,247,429 |
|
|
$ |
4,424,974 |
|
|
$ |
4,685,497 |
|
|
$ |
3,506,625 |
|
|
$ |
3,262,911 |
|
Investment securities |
|
|
1,933,403 |
|
|
|
1,446,280 |
|
|
|
1,072,276 |
|
|
|
1,128,657 |
|
|
|
1,124,598 |
|
Total assets |
|
|
7,500,970 |
|
|
|
7,137,653 |
|
|
|
6,628,347 |
|
|
|
5,216,797 |
|
|
|
4,974,134 |
|
Deposits |
|
|
5,925,713 |
|
|
|
5,824,056 |
|
|
|
5,174,259 |
|
|
|
3,999,401 |
|
|
|
3,708,511 |
|
Securities sold under repurchase agreements |
|
|
620,154 |
|
|
|
474,141 |
|
|
|
525,501 |
|
|
|
604,762 |
|
|
|
731,548 |
|
Long-term debt |
|
|
37,502 |
|
|
|
73,353 |
|
|
|
84,148 |
|
|
|
5,145 |
|
|
|
21,601 |
|
Subordinated debentures held by subsidiary
trusts |
|
|
123,715 |
|
|
|
123,715 |
|
|
|
123,715 |
|
|
|
103,095 |
|
|
|
41,238 |
|
Preferred stockholders equity |
|
|
50,000 |
|
|
|
50,000 |
|
|
|
50,000 |
|
|
|
|
|
|
|
|
|
Common stockholders equity |
|
|
686,802 |
|
|
|
524,434 |
|
|
|
489,062 |
|
|
|
444,443 |
|
|
|
410,375 |
|
|
Selected Income Statement Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
314,546 |
|
|
$ |
328,034 |
|
|
$ |
355,919 |
|
|
$ |
325,557 |
|
|
$ |
293,423 |
|
Interest expense |
|
|
63,107 |
|
|
|
84,898 |
|
|
|
120,542 |
|
|
|
125,954 |
|
|
|
105,960 |
|
|
Net interest income |
|
|
251,439 |
|
|
|
243,136 |
|
|
|
235,377 |
|
|
|
199,603 |
|
|
|
187,463 |
|
Provision for loan losses |
|
|
66,900 |
|
|
|
45,300 |
|
|
|
33,356 |
|
|
|
7,750 |
|
|
|
7,761 |
|
|
Net interest income after
provision for loan losses |
|
|
184,539 |
|
|
|
197,836 |
|
|
|
202,021 |
|
|
|
191,853 |
|
|
|
179,702 |
|
Non-interest income |
|
|
90,911 |
|
|
|
100,690 |
|
|
|
128,597 |
|
|
|
92,367 |
|
|
|
102,181 |
|
Non-interest expense |
|
|
221,004 |
|
|
|
217,710 |
|
|
|
222,541 |
|
|
|
178,786 |
|
|
|
164,775 |
|
|
Income before income taxes |
|
|
54,446 |
|
|
|
80,816 |
|
|
|
108,077 |
|
|
|
105,434 |
|
|
|
117,108 |
|
Income tax expense |
|
|
17,090 |
|
|
|
26,953 |
|
|
|
37,429 |
|
|
|
36,793 |
|
|
|
41,499 |
|
|
Net income |
|
|
37,356 |
|
|
|
53,863 |
|
|
|
70,648 |
|
|
|
68,641 |
|
|
|
75,609 |
|
Preferred stock dividends |
|
|
3,422 |
|
|
|
3,422 |
|
|
|
3,347 |
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
33,934 |
|
|
$ |
50,441 |
|
|
$ |
67,301 |
|
|
$ |
68,641 |
|
|
$ |
75,609 |
|
|
Common Share Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.85 |
|
|
$ |
1.61 |
|
|
$ |
2.14 |
|
|
$ |
2.11 |
|
|
$ |
2.33 |
|
Diluted |
|
|
0.85 |
|
|
|
1.59 |
|
|
|
2.10 |
|
|
|
2.06 |
|
|
|
2.28 |
|
Dividends per share |
|
|
0.45 |
|
|
|
0.50 |
|
|
|
0.65 |
|
|
|
0.74 |
|
|
|
0.57 |
|
Book value per share (1) |
|
|
16.05 |
|
|
|
16.73 |
|
|
|
15.50 |
|
|
|
13.88 |
|
|
|
12.60 |
|
Tangible book value per share (2) |
|
|
11.55 |
|
|
|
10.53 |
|
|
|
9.27 |
|
|
|
12.70 |
|
|
|
11.44 |
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
39,907,640 |
|
|
|
31,335,668 |
|
|
|
31,484,136 |
|
|
|
32,507,216 |
|
|
|
32,450,440 |
|
Diluted |
|
|
40,127,365 |
|
|
|
31,678,500 |
|
|
|
32,112,672 |
|
|
|
33,289,920 |
|
|
|
33,215,960 |
|
|
-29-
Five Year Summary (continued)
(Dollars in thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of or for the year ended December 31, |
|
2010 |
|
2009 |
|
2008 |
|
2007 |
|
2006 |
|
Financial Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets |
|
|
0.52 |
% |
|
|
0.79 |
% |
|
|
1.12 |
% |
|
|
1.37 |
% |
|
|
1.60 |
% |
Return on average common stockholders equity |
|
|
5.22 |
|
|
|
9.98 |
|
|
|
14.73 |
|
|
|
16.14 |
|
|
|
20.38 |
|
Average stockholders equity to average assets |
|
|
9.67 |
|
|
|
8.16 |
|
|
|
7.98 |
|
|
|
8.52 |
|
|
|
7.85 |
|
Yield on average earning assets |
|
|
4.85 |
|
|
|
5.44 |
|
|
|
6.37 |
|
|
|
7.21 |
|
|
|
6.94 |
|
Cost of average interest bearing liabilities |
|
|
1.15 |
|
|
|
1.63 |
|
|
|
2.50 |
|
|
|
3.43 |
|
|
|
3.05 |
|
Interest rate spread |
|
|
3.70 |
|
|
|
3.81 |
|
|
|
3.87 |
|
|
|
3.78 |
|
|
|
3.89 |
|
Net interest margin (3) |
|
|
3.89 |
|
|
|
4.05 |
|
|
|
4.25 |
|
|
|
4.46 |
|
|
|
4.47 |
|
Efficiency ratio (4) |
|
|
64.55 |
|
|
|
63.32 |
|
|
|
61.14 |
|
|
|
61.23 |
|
|
|
56.89 |
|
Common stock dividend payout ratio (5) |
|
|
52.94 |
|
|
|
31.06 |
|
|
|
30.37 |
|
|
|
35.07 |
|
|
|
24.46 |
|
Loan to deposit ratio |
|
|
73.71 |
|
|
|
77.75 |
|
|
|
92.24 |
|
|
|
88.99 |
|
|
|
89.26 |
|
|
Asset Quality Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans to total loans (6) |
|
|
4.82 |
% |
|
|
2.75 |
% |
|
|
1.90 |
% |
|
|
0.98 |
% |
|
|
0.53 |
% |
Non-performing assets to total loans and
other real estate owned (OREO) (7) |
|
|
5.55 |
|
|
|
3.57 |
|
|
|
2.03 |
|
|
|
1.00 |
|
|
|
0.55 |
|
Non-performing assets to total assets |
|
|
3.26 |
|
|
|
2.28 |
|
|
|
1.46 |
|
|
|
0.68 |
|
|
|
0.36 |
|
Allowance for loan losses to total loans |
|
|
2.76 |
|
|
|
2.28 |
|
|
|
1.83 |
|
|
|
1.47 |
|
|
|
1.43 |
|
Allowance for loan losses to non-performing loans |
|
|
57.19 |
|
|
|
82.64 |
|
|
|
96.03 |
|
|
|
150.66 |
|
|
|
269.72 |
|
Net charge-offs to average loans |
|
|
1.01 |
|
|
|
0.63 |
|
|
|
0.28 |
|
|
|
0.08 |
|
|
|
0.09 |
|
|
Capital Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible common stockholders equity to tangible assets (8) |
|
|
6.76 |
% |
|
|
4.76 |
% |
|
|
4.55 |
% |
|
|
7.85 |
% |
|
|
7.55 |
% |
Net tangible common stockholders equity to tangible
assets (9) |
|
|
7.59 |
% |
|
|
5.63 |
% |
|
|
5.49 |
% |
|
|
7.95 |
% |
|
|
7.65 |
% |
Tier 1 common capital to total risk weighted
assets (10) |
|
|
10.12 |
|
|
|
6.43 |
|
|
|
5.35 |
|
|
|
9.95 |
|
|
|
9.68 |
|
Leverage ratio |
|
|
9.27 |
|
|
|
7.30 |
|
|
|
7.13 |
|
|
|
9.92 |
|
|
|
8.61 |
|
Tier 1 risk-based capital |
|
|
13.53 |
|
|
|
9.74 |
|
|
|
8.57 |
|
|
|
12.39 |
|
|
|
10.71 |
|
Total risk-based capital |
|
|
15.50 |
|
|
|
11.68 |
|
|
|
10.49 |
|
|
|
13.64 |
|
|
|
11.93 |
|
|
|
|
|
(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) |
|
Net tangible common equity to tangible assets is a non-GAAP financial measure that
management uses to evaluate our capital adequacy. For purposes of computing net tangible
common equity to tangible assets, net tangible common equity is calculated as common
stockholders equity less goodwill (adjusted for associated deferred tax liability) 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. |
|
(10) |
|
For purposes of computing tier 1 common capital to total risk-weighted assets, tier 1
common capital excludes preferred stock and trust preferred securities. |
-30-
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, tangible common equity to tangible assets and net 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. Net tangible
common equity to tangible assets is calculated as net 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 net 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, |
|
2010 |
|
2009 |
|
2008 |
|
2007 |
|
2006 |
|
Preferred stockholders equity |
|
$ |
50,000 |
|
|
$ |
50,000 |
|
|
$ |
50,000 |
|
|
$ |
|
|
|
$ |
|
|
Common stockholders equity |
|
|
686,802 |
|
|
|
524,434 |
|
|
|
489,062 |
|
|
|
444,443 |
|
|
|
410,375 |
|
|
Total stockholders equity |
|
|
736,802 |
|
|
|
574,434 |
|
|
|
539,062 |
|
|
|
444,443 |
|
|
|
410,375 |
|
Less goodwill and other intangible assets |
|
|
192,518 |
|
|
|
194,273 |
|
|
|
196,667 |
|
|
|
37,637 |
|
|
|
37,812 |
|
Less preferred stock |
|
|
50,000 |
|
|
|
50,000 |
|
|
|
50,000 |
|
|
|
|
|
|
|
|
|
|
Tangible common stockholders equity |
|
$ |
494,284 |
|
|
$ |
330,161 |
|
|
$ |
292,395 |
|
|
$ |
406,806 |
|
|
$ |
372,563 |
|
Add deferred tax liability for deductible
goodwill |
|
|
60,499 |
|
|
|
60,499 |
|
|
|
60,499 |
|
|
|
4,907 |
|
|
|
4,907 |
|
|
Net tangible common stockholders equity |
|
$ |
554,783 |
|
|
$ |
390,660 |
|
|
$ |
352,894 |
|
|
$ |
411,713 |
|
|
$ |
377,470 |
|
|
Number of common shares outstanding |
|
|
42,800,694 |
|
|
|
31,349,588 |
|
|
|
31,550,076 |
|
|
|
32,024,164 |
|
|
|
32,579,152 |
|
Book value per common share |
|
$ |
16.05 |
|
|
$ |
16.73 |
|
|
$ |
15.50 |
|
|
$ |
13.88 |
|
|
$ |
12.60 |
|
Tangible book value per common share |
|
|
11.55 |
|
|
|
10.53 |
|
|
|
9.27 |
|
|
|
12.70 |
|
|
|
11.44 |
|
|
Total assets |
|
$ |
7,500,970 |
|
|
$ |
7,137,653 |
|
|
$ |
6,628,347 |
|
|
$ |
5,216,797 |
|
|
$ |
4,974,134 |
|
Less goodwill and other intangible assets |
|
|
192,518 |
|
|
|
194,273 |
|
|
|
196,667 |
|
|
|
37,637 |
|
|
|
37,812 |
|
|
Tangible assets |
|
$ |
7,308,452 |
|
|
$ |
6,943,380 |
|
|
$ |
6,431,680 |
|
|
$ |
5,179,160 |
|
|
$ |
4,936,322 |
|
|
Tangible common stockholders equity to
tangible assets |
|
|
6.76 |
% |
|
|
4.76 |
% |
|
|
4.55 |
% |
|
|
7.85 |
% |
|
|
7.55 |
% |
Net tangible common stockholders equity to
tangible assets |
|
|
7.59 |
% |
|
|
5.63 |
% |
|
|
5.49 |
% |
|
|
7.95 |
% |
|
|
7.65 |
% |
|
-31-
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. 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. The following factors, among others, may cause actual results to differ materially
from current expectations in the forward-looking statements, including those set forth in this
report:
|
|
|
credit losses; |
|
|
|
|
concentrations of real estate loans; |
|
|
|
|
economic and market developments, including inflation; |
|
|
|
|
commercial loan risk; |
|
|
|
|
adequacy of the 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 business; |
|
|
|
|
adverse economic conditions affecting Montana, Wyoming and western South Dakota; |
|
|
|
|
governmental regulation and changes in regulatory, tax and accounting rules and
interpretations; |
|
|
|
|
sweeping changes in regulation of financial institutions due to passage of the
Dodd-Frank Act; |
|
|
|
|
changes in or noncompliance with governmental regulations; |
|
|
|
|
effects of recent legislative and regulatory efforts to stabilize financial markets; |
|
|
|
|
dependence on the Companys management team; |
|
|
|
|
ability to attract and retain qualified employees; |
|
|
|
|
failure of technology; |
|
|
|
|
reliance on external vendors; |
|
|
|
|
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; |
|
|
|
|
competition; |
|
|
|
|
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 the Companys bank subsidiary; |
|
|
|
|
soundness of other financial institutions; |
|
|
|
|
impact of Basel III capital standards and forthcoming new capital rules proposed for
U.S. banks; |
|
|
|
|
inability of our bank subsidiary to pay dividends; |
|
|
|
|
change in dividend policy; |
|
|
|
|
lack of public market for our Class A common stock; |
|
|
|
|
volatility of Class A common stock; |
|
|
|
|
voting control of Class B stockholders; |
|
|
|
|
decline in market price of Class A common stock; |
|
|
|
|
dilution as a result of future equity issuances; |
|
|
|
|
uninsured nature of any investment in Class A common stock; |
|
|
|
|
anti-takeover provisions; |
|
|
|
|
controlled company status; and |
|
|
|
|
subordination of common stock to Company debt. |
-32-
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.
Executive Overview
We are a financial and bank holding company headquartered in Billings, Montana. As of December
31, 2010, we had consolidated assets of $7.5 billion, deposits of $5.9 billion, loans of $4.4
billion and total stockholders equity of $737 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, tourism, agriculture, healthcare and professional services, education
and governmental services, construction, mining and retail and wholesale trade.
Our Business
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
StatementsSummary of Significant Accounting Policies and Notes to Consolidated Financial
StatementsAcquisitions and Dispositions included in Part IV, Item 15 of this report.
Recent 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. Many of our local economies have not been impacted as
severely by the national economic and real estate downturn, sub-prime mortgage crisis and related
financial market conditions as many areas of the United States. Although the impacts of the
national economic and financial market conditions are uncertain, these factors affect our business
and could have a material negative effect on our cash flows, results of operations, financial
condition and prospects.
-33-
In April 2010, the FDIC approved an interim rule that extends the Transaction Account
Guarantee (TAG) component of the Temporary Liquidity Guarantee Program. The TAG program provided
full FDIC insurance coverage for non-interest bearing transaction deposit accounts, certain
Negotiable Order of Withdrawal (NOW) accounts and Interest on Lawyers Trust accounts through
December 31, 2010. Participants in the TAG program had a one-time, irrevocable opportunity to opt
out of the TAG extension by notifying the FDIC by April 30, 2010. We opted out of the TAG
extension effective July 1, 2010. Management does not expect deposits will be adversely affected
by discontinuation of the TAG program.
In July 2010, the Dodd-Frank Act was signed into law and will result in significant changes in
the regulation of financial institutions. Although we cannot predict the specific impact and
long-term effects that the Dodd-Frank Act will have on us and the financial industry in general, we
believe the Dodd-Frank Act and the regulations promulgated thereunder will result in additional
administrative burdens that will obligate us to incur additional costs and expenses. Provisions of
the Act that affect deposit insurance assessments, payment of interest on demand deposits and
interchange fees could increase the costs associated with deposits as well as place limitations on
certain revenues those deposits may generate. Although the treatment as Tier 1 capital of our
existing trust preferred securities will be grandfathered under the Act, provisions of the Act that
revoke Tier 1 capital treatments of trust preferred securities and otherwise require revisions to
capital requirements may cause us to seek other sources of capital in the future. Furthermore, the
Dodd-Frank Act could limit the types of financial services and products we may offer, increase the
ability of non-banks to offer competing financial services and products, reduce interchange fees,
require us to renegotiate payment network agreements or enter into multiple payment network
agreements, require a significant amount of managements time and attention, and otherwise
adversely impact our business, financial condition, results of operations and prospects.
In September 2010, the Small Business Jobs Act of 2010, or the Jobs Act, was signed into
legislation. The Jobs Act, among other things, creates a $30 billion fund, the Small Business
Lending Fund, to provide capital for banks with assets under $10 billion to increase their small
business lending. Management believes our current capital and liquidity is sufficient to fund loan
demand in our market areas. As such, we do not anticipate we will participate in the Small
Business Lending Fund program.
In November 2010, the FDIC issued a final rule to implement provisions of the Dodd-Frank Act
that provide for temporary unlimited coverage for non-interest bearing transaction accounts, which
became effective on December 31, 2010 and terminates on December 31, 2012.
Capital Resources
On March 5, 2010, our shareholders approved proposals to recapitalize our existing common
stock. The recapitalization included a redesignation of existing common stock as Class B common
stock with five votes per share, convertible into Class A common stock on a share for share basis;
a four-for-one stock split of the Class B common stock; an increase in the authorized number of
Class B common shares from 20,000,000 to 100,000,000; and the creation of a new class of common
stock designated as Class A common stock, with one vote per share, with 100,000,000 shares
authorized.
On March 29, 2010, we concluded our IPO, of 10,000,000 shares of Class A common stock, and an
additional 1,500,000 shares of Class A common stock pursuant to the full exercise of the
underwriters option to purchase Class A common shares in the offering. We received net proceeds
of $153 million from the offering, after deducting the underwriting discount, commissions and
other offering expenses.
Asset Quality
Challenging economic conditions continue to have a negative impact on businesses and consumers
in some of our market areas. General declines in the real estate and housing markets resulted in
continued 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 $244 million, or 5.55% of total loans and OREO, as of December 31, 2010, from $163
million, or 3.57% of total loans and OREO, as of December 31, 2009. Loan charge-offs, net of
recoveries, totaled $49 million during 2010, as compared to $30 million during 2009, 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 $66.9 million during 2010, compared to $45.3
million during 2009. 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 high 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.
-34-
Goodwill
During third quarter 2010, we conducted our annual testing of goodwill for impairment and
determined that goodwill was not impaired as of July 1, 2010. 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, 2010 was $184 million. Approximately $159 million of our goodwill is
deductible for tax purposes, of which $52 million has been recognized for tax purposes through
December 31, 2010, resulting in a deferred tax liability of $20 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 $5 million to a secondary market investor
during fourth quarter 2010 at a loss of approximately $1.5 million. Management will continue to
evaluate opportunities for additional sales of mortgage servicing rights in the future.
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.
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.
-35-
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 probable 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.
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.
Allowance 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. The allowance for loan losses represents managements
estimate of probable credit losses inherent in the loan portfolio.
-36-
We perform a quarterly assessment of the risks inherent in our loan portfolio, as well as a
detailed review of each significant loan 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.
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, historical loan loss rates,
changes in the nature of the loan portfolio, overall portfolio quality, industry concentrations,
delinquency trends 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 possible and may have
a material impact on our allowance, and therefore 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, and fluctuations in the provision for loan losses result from managements assessment of the
adequacy of the allowance for loan losses. Management 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 our market value. Determining the fair value of
goodwill is considered a critical accounting estimate because of its sensitivity to market-based
trading of our Class A common stock. 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 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 based on current industry expectations, costs to service, predominant
risk characteristics of the underlying loans as well as interest rate assumptions that contemplate
the risk involved. 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. 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. 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.
-37-
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. 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. Determining the fair value of OREO is considered a critical accounting
estimate due to the assets sensitivity to changes in estimates and assumptions used. 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. 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.
Results of Operations
The following discussion of our results of operations compares the years ended
December 31, 2010 to December 31, 2009 and the years ended December 31, 2009 to December 31,
2008.
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.
-38-
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, |
|
|
2010 |
|
2009 |
|
2008 |
|
|
Average |
|
|
|
|
|
Average |
|
Average |
|
|
|
|
|
Average |
|
Average |
|
|
|
|
|
Average |
|
|
Balance |
|
Interest |
|
Rate |
|
Balance |
|
Interest |
|
Rate |
|
Balance |
|
Interest |
|
Rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (1) (2) |
|
$ |
4,482,219 |
|
|
$ |
268,279 |
|
|
|
5.99 |
% |
|
$ |
4,660,189 |
|
|
$ |
281,799 |
|
|
|
6.05 |
% |
|
$ |
4,527,987 |
|
|
$ |
306,976 |
|
|
|
6.78 |
% |
U.S. government agency and
mortgage-backed securities |
|
|
1,529,628 |
|
|
|
41,824 |
|
|
|
2.73 |
|
|
|
1,016,632 |
|
|
|
41,887 |
|
|
|
4.12 |
|
|
|
923,912 |
|
|
|
43,336 |
|
|
|
4.69 |
|
Federal funds sold |
|
|
6,238 |
|
|
|
22 |
|
|
|
0.35 |
|
|
|
105,423 |
|
|
|
253 |
|
|
|
0.24 |
|
|
|
55,205 |
|
|
|
1,080 |
|
|
|
1.96 |
|
Other securities |
|
|
376 |
|
|
|
|
|
|
|
|
|
|
|
1,556 |
|
|
|
50 |
|
|
|
3.21 |
|
|
|
5,020 |
|
|
|
214 |
|
|
|
4.26 |
|
Tax exempt securities (2) |
|
|
133,207 |
|
|
|
7,802 |
|
|
|
5.86 |
|
|
|
134,373 |
|
|
|
8,398 |
|
|
|
6.25 |
|
|
|
147,812 |
|
|
|
9,382 |
|
|
|
6.35 |
|
Interest bearing deposits in banks |
|
|
429,657 |
|
|
|
1,093 |
|
|
|
0.25 |
|
|
|
199,316 |
|
|
|
520 |
|
|
|
0.26 |
|
|
|
5,946 |
|
|
|
191 |
|
|
|
3.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earnings assets |
|
|
6,581,325 |
|
|
|
319,020 |
|
|
|
4.85 |
|
|
|
6,117,489 |
|
|
|
332,907 |
|
|
|
5.44 |
|
|
|
5,665,882 |
|
|
|
361,179 |
|
|
|
6.37 |
|
Non-earning assets |
|
|
665,012 |
|
|
|
|
|
|
|
|
|
|
|
687,110 |
|
|
|
|
|
|
|
|
|
|
|
667,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
7,246,337 |
|
|
|
|
|
|
|
|
|
|
$ |
6,804,599 |
|
|
|
|
|
|
|
|
|
|
$ |
6,333,088 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
$ |
1,135,208 |
|
|
$ |
3,430 |
|
|
|
0.30 |
% |
|
$ |
1,083,054 |
|
|
$ |
4,068 |
|
|
|
0.38 |
% |
|
$ |
1,120,807 |
|
|
$ |
12,966 |
|
|
|
1.16 |
% |
Savings deposits |
|
|
1,530,844 |
|
|
|
8,934 |
|
|
|
0.58 |
|
|
|
1,321,625 |
|
|
|
10,033 |
|
|
|
0.76 |
|
|
|
1,144,553 |
|
|
|
18,454 |
|
|
|
1.61 |
|
Time deposits |
|
|
2,143,899 |
|
|
|
41,585 |
|
|
|
1.94 |
|
|
|
2,129,313 |
|
|
|
59,125 |
|
|
|
2.78 |
|
|
|
1,688,859 |
|
|
|
65,443 |
|
|
|
3.87 |
|
Repurchase agreements |
|
|
480,276 |
|
|
|
879 |
|
|
|
0.18 |
|
|
|
422,713 |
|
|
|
776 |
|
|
|
0.18 |
|
|
|
537,267 |
|
|
|
7,694 |
|
|
|
1.43 |
|
Borrowings (3) |
|
|
5,779 |
|
|
|
3 |
|
|
|
0.05 |
|
|
|
57,016 |
|
|
|
1,367 |
|
|
|
2.40 |
|
|
|
126,941 |
|
|
|
3,130 |
|
|
|
2.47 |
|
Long-term debt |
|
|
46,024 |
|
|
|
2,433 |
|
|
|
5.29 |
|
|
|
79,812 |
|
|
|
3,249 |
|
|
|
4.07 |
|
|
|
86,909 |
|
|
|
4,578 |
|
|
|
5.27 |
|
Subordinated debentures held by
by subsidiary trusts |
|
|
123,715 |
|
|
|
5,843 |
|
|
|
4.72 |
|
|
|
123,715 |
|
|
|
6,280 |
|
|
|
5.08 |
|
|
|
123,327 |
|
|
|
8,277 |
|
|
|
6.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities |
|
|
5,465,745 |
|
|
|
63,107 |
|
|
|
1.15 |
|
|
|
5,217,248 |
|
|
|
84,898 |
|
|
|
1.63 |
|
|
|
4,828,663 |
|
|
|
120,542 |
|
|
|
2.50 |
|
Non-interest bearing deposits |
|
|
1,021,409 |
|
|
|
|
|
|
|
|
|
|
|
965,226 |
|
|
|
|
|
|
|
|
|
|
|
940,968 |
|
|
|
|
|
|
|
|
|
Other non-interest bearing liabilities |
|
|
58,778 |
|
|
|
|
|
|
|
|
|
|
|
66,862 |
|
|
|
|
|
|
|
|
|
|
|
57,922 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
700,405 |
|
|
|
|
|
|
|
|
|
|
|
555,263 |
|
|
|
|
|
|
|
|
|
|
|
505,535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity |
|
$ |
7,246,337 |
|
|
|
|
|
|
|
|
|
|
$ |
6,804,599 |
|
|
|
|
|
|
|
|
|
|
$ |
6,333,088 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net FTE interest income |
|
|
|
|
|
$ |
255,913 |
|
|
|
|
|
|
|
|
|
|
$ |
248,009 |
|
|
|
|
|
|
|
|
|
|
$ |
240,637 |
|
|
|
|
|
Less FTE adjustments (2) |
|
|
|
|
|
|
(4,474 |
) |
|
|
|
|
|
|
|
|
|
|
(4,873 |
) |
|
|
|
|
|
|
|
|
|
|
(5,260 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income from consolidated statements of income |
|
|
|
|
|
$ |
251,439 |
|
|
|
|
|
|
|
|
|
|
$ |
243,136 |
|
|
|
|
|
|
|
|
|
|
$ |
235,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread |
|
|
|
|
|
|
|
|
|
|
3.70 |
% |
|
|
|
|
|
|
|
|
|
|
3.81 |
% |
|
|
|
|
|
|
|
|
|
|
3.87 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net FTE interest margin (4) |
|
|
|
|
|
|
|
|
|
|
3.89 |
% |
|
|
|
|
|
|
|
|
|
|
4.05 |
% |
|
|
|
|
|
|
|
|
|
|
4.25 |
% |
|
|
|
|
|
(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. |
-39-
Deposit growth combined with corresponding increases in interest earning assets resulted
in increases in net interest income, on a fully taxable equivalent, or FTE, basis. Our FTE net
interest income increased $7.9 million, or 3.2%, to $255.9 million in 2010, compared to $248.0
million in 2009. Despite growth in net FTE interest income, our net FTE interest margin decreased
16 basis points to 3.89% in 2010, compared to 4.05% in 2009. Deposit growth coupled with low
demand for loans resulted in a shift in the mix of interest earning assets from higher-yielding
loans to lower-yielding investment securities and interest bearing deposits in banks, which
compressed our FTE net interest margin ratio. Average loans decreased $178 million, or 3.8%, to
$4,482 million as of December 31, 2010, from $4,660 million as of December 31, 2009. The remaining
compression in net interest margin ratio was attributable to lower yields earned on our investment
security and loan portfolios, and was partially offset by a 48 basis point reduction in funding
costs during 2010. IPO proceeds of $119 million, net of IPO costs and after the repayment of our
variable rate term notes, received during the second quarter of 2010 were initially invested in
interest bearing deposits in banks, which yielded 25 basis points during 2010.
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. 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 ratio.
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, 2010 |
|
Year Ended December 31, 2009 |
|
Year Ended December 31, 2008 |
|
|
compared with |
|
compared with |
|
compared with |
|
|
December 31, 2009 |
|
December 31, 2008 |
|
December 31, 2007 |
|
|
Volume |
|
Rate |
|
Net |
|
Volume |
|
Rate |
|
Net |
|
Volume |
|
Rate |
|
Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (1) |
|
$ |
(10,762 |
) |
|
$ |
(2,758 |
) |
|
$ |
(13,520 |
) |
|
$ |
8,963 |
|
|
$ |
(34,140 |
) |
|
$ |
(25,177 |
) |
|
$ |
85,640 |
|
|
$ |
(52,684 |
) |
|
$ |
32,956 |
|
U.S. government agency and
mortgage-backed securities |
|
|
21,136 |
|
|
|
(21,199 |
) |
|
|
(63 |
) |
|
|
4,349 |
|
|
|
(5,798 |
) |
|
|
(1,449 |
) |
|
|
1,484 |
|
|
|
(798 |
) |
|
|
686 |
|
Federal funds sold |
|
|
(238 |
) |
|
|
7 |
|
|
|
(231 |
) |
|
|
982 |
|
|
|
(1,809 |
) |
|
|
(827 |
) |
|
|
(1,631 |
) |
|
|
(1,711 |
) |
|
|
(3,342 |
) |
Other securities |
|
|
(38 |
) |
|
|
(12 |
) |
|
|
(50 |
) |
|
|
(148 |
) |
|
|
(16 |
) |
|
|
(164 |
) |
|
|
15 |
|
|
|
196 |
|
|
|
211 |
|
Tax exempt securities (1) |
|
|
(73 |
) |
|
|
(523 |
) |
|
|
(596 |
) |
|
|
(853 |
) |
|
|
(131 |
) |
|
|
(984 |
) |
|
|
2,330 |
|
|
|
(164 |
) |
|
|
2,166 |
|
Interest bearing deposits
in banks |
|
|
601 |
|
|
|
(28 |
) |
|
|
573 |
|
|
|
6,212 |
|
|
|
(5,883 |
) |
|
|
329 |
|
|
|
(1,010 |
) |
|
|
(106 |
) |
|
|
(1,116 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total change |
|
|
10,626 |
|
|
|
(24,513 |
) |
|
|
(13,887 |
) |
|
|
19,505 |
|
|
|
(47,777 |
) |
|
|
(28,272 |
) |
|
|
86,828 |
|
|
|
(55,267 |
) |
|
|
31,561 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
196 |
|
|
|
(834 |
) |
|
|
(638 |
) |
|
|
(437 |
) |
|
|
(8,461 |
) |
|
|
(8,898 |
) |
|
|
2,749 |
|
|
|
(13,414 |
) |
|
|
(10,665 |
) |
Savings deposits |
|
|
1,588 |
|
|
|
(2,687 |
) |
|
|
(1,099 |
) |
|
|
2,855 |
|
|
|
(11,276 |
) |
|
|
(8,421 |
) |
|
|
5,229 |
|
|
|
(10,878 |
) |
|
|
(5,649 |
) |
Time deposits |
|
|
405 |
|
|
|
(17,945 |
) |
|
|
(17,540 |
) |
|
|
17,068 |
|
|
|
(23,386 |
) |
|
|
(6,318 |
) |
|
|
27,309 |
|
|
|
(13,681 |
) |
|
|
13,628 |
|
Repurchase agreements |
|
|
106 |
|
|
|
(3 |
) |
|
|
103 |
|
|
|
(1,640 |
) |
|
|
(5,278 |
) |
|
|
(6,918 |
) |
|
|
(805 |
) |
|
|
(12,713 |
) |
|
|
(13,518 |
) |
Borrowings (2) |
|
|
(1,228 |
) |
|
|
(136 |
) |
|
|
(1,364 |
) |
|
|
(1,724 |
) |
|
|
(39 |
) |
|
|
(1,763 |
) |
|
|
5,953 |
|
|
|
(3,251 |
) |
|
|
2,702 |
|
Long-term debt |
|
|
(1,375 |
) |
|
|
559 |
|
|
|
(816 |
) |
|
|
(374 |
) |
|
|
(955 |
) |
|
|
(1,329 |
) |
|
|
3,930 |
|
|
|
181 |
|
|
|
4,111 |
|
Subordinated debentures held
by subsidiary trusts |
|
|
|
|
|
|
(437 |
) |
|
|
(437 |
) |
|
|
26 |
|
|
|
(2,023 |
) |
|
|
(1,997 |
) |
|
|
6,956 |
|
|
|
(2,977 |
) |
|
|
3,979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total change |
|
|
(308 |
) |
|
|
(21,483 |
) |
|
|
(21,791 |
) |
|
|
15,774 |
|
|
|
(51,418 |
) |
|
|
(35,644 |
) |
|
|
51,321 |
|
|
|
(56,733 |
) |
|
|
(5,412 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in FTE
net interest income (1) |
|
$ |
10,934 |
|
|
$ |
(3,030 |
) |
|
$ |
7,904 |
|
|
$ |
3,731 |
|
|
$ |
3,641 |
|
|
$ |
7,372 |
|
|
$ |
35,507 |
|
|
$ |
1,466 |
|
|
$ |
36,973 |
|
|
|
|
|
|
(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. |
-40-
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 through 2010 resulted in higher levels of non-performing loans,
particularly real estate 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 $21.6 million, or 47.7%, to $66.9 million in 2010, as compared to $45.3
million in 2009, and increased $11.9 million, or 35.8%, to $45.3 million in 2009, as compared to
$33.4 million in 2008. For additional information concerning non-performing assets, see
Financial ConditionNon-Performing Assets herein.
Non-interest Income
Our principal sources of non-interest income include other service charges, commissions and
fees; income from the origination and sale of loans; service charges on deposit accounts; and
wealth management revenues. Non-interest income decreased $9.8 million, or 9.7%, to $90.9 million
in 2010, from $100.7 million in 2009. Non-interest income decreased $27.9 million, or 21.7%, to
$100.7 million in 2009, from $128.6 million in 2008. Significant components of these decreases are
discussed below.
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 $747,000, or 2.6%, to $29.4 million
in 2010, from $28.7 million in 2009, and $554,000, or 2.0%, to $28.7 million in 2009, from $28.2
million in 2008. These increases were primarily due to higher debit card interchange income
resulting from increased volumes of debit card transactions. Increases in debit card interchange
income in 2009, as compared to 2008, were partially offset by decreases in insurance and other
commissions of $709,000.
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
decreased $8.1 million, or 26.1%, to $22.9 million in 2010, from $30.9 million in 2009, due to a
substantial decline in refinancing activity from early 2009. Refinancing activity accounted for
approximately 60% of the Companys residential real estate loan originations during 2010, as
compared to 71% during 2009. Decreases in refinancing activity were partially offset by increases
in originations of new loans to purchase homes, which increased 1.6% during 2010, as compared 2009.
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. Low market interest rates increased demand for
residential mortgage loans in 2009, as compared to 2008.
Service charges on deposit accounts decreased $2.1 million, or 10.5%, to $18.2 million in
2010, from $20.3 million in 2009 and 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. Management attributes the
decline in overdraft fees to changes in consumer behavior. The Federal Reserve Board issued a
final rule that became effective on July 1, 2010 prohibiting financial institutions from charging
consumers fees for paying overdrafts on automated teller machine and debit card transactions,
unless the consumer consents, or opts in, to the overdraft service for those types of transactions.
Management does not expect this rule will have a significant impact because we generally did not
assess overdraft fees on automated teller machine and one-time debit card transactions.
Wealth management revenues are principally comprised of fees earned for management of trust
assets and investment services revenues. Wealth management revenues increased $1.6 million, or
14.5% to $12.4 million in 2010, from $10.8 million in 2009, due to higher trust management fees
resulting from the introduction of revised fee schedules in April 2009, the addition of new trust
customers and increases in the market values of new and existing assets under trust management.
-41-
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.
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 $1.9
million, or 19.8%, to $7.8 million in 2010, from $9.7 million in 2009, primarily due to the
recognition of a $2.1 million one-time gain on the sale of Visa Class B common shares during third
quarter 2009. Decreases in other income were partially offset by a $249 thousand one-time gain on
the sale of our student loan portfolio recognized during third quarter 2010.
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. During first quarter 2008, we recorded 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.
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 i_Tech
generated $17.7 million in non-affiliate revenues. Subsequent to the sale, we no longer receive
technology services revenues from non-affiliates.
Non-interest Expense
Non-interest expense increased $3.3 million, or 1.5%, to $221.0 million in 2010, from $217.7
million in 2009. Non-interest expense decreased $4.8 million, or 2.2%, to $217.7 million in 2009,
from $222.5 million in 2008. Significant components of these fluctuations are discussed below.
Salaries, wages and employee benefits expense decreased $902,000, or less than 1.0%, to $112.7
million in 2010 compared to $113.6 million for the same period in 2009. Normal inflationary wage
increases and increases in group health insurance and stock-based compensation expenses were more
than offset by reductions in sales commissions and bonus accruals in 2010. 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.
Furniture and equipment expense increased $1.0 million, or 8.3%, to $13.4 million in 2010,
from $12.4 million in 2009. The increase is primarily due to higher depreciation and maintenance
expenses resulting from the addition of a new operations building and branch banking office during
fourth quarter 2009. Furniture and equipment expense decreased $6.5 million, or 34.3%, to $12.4
million in 2009, from $18.9 million in 2008, primarily due to decreases in equipment maintenance
and deprecation due to the sale i_Tech in December 2008.
FDIC insurance premiums decreased $2.1 million, or 17.2%, to $10.0 million in 2010, from $12.1
million in 2009. primarily due to a special FDIC insurance assessment levied during second quarter
2009, which was applicable to all insured depository institutions, and resulted in additional FDIC
insurance expense of $3.1 million. In addition, effective July 1, 2010, we opted out of
participation in the Transaction Account Guarantee component of the Temporary Liquidity Guaranty
Program, which provided full FDIC insurance coverage for certain transaction deposit accounts,
which reduced our FDIC insurance premiums during third quarter 2010.
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.
-42-
Outsourced technology services expense decreased $1.1 million, or 10.3%, to $9.5 million in
2010, from $10.6 million in 2009 primarily due to costs associated with the transition from
internal technology processing to outsourced technology processing expensed in 2009. 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.
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
decreased $3.0 million, or 39.0%, to $4.6 million in 2010, from $7.6 million in 2009 and increased
$1.7 million, or 27.9%, to $7.6 million in 2009, from $5.9 million in 2008.
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. Impairment adjustments are recorded through a valuation allowance. The
valuation allowance is adjusted for changes in impairment through a charge to current period
earnings. Fluctuations in the fair value of mortgage servicing rights are primarily due to changes
in assumptions regarding prepayments of the underlying mortgage loans, which typically correspond
with changes in market interest rates. During 2010 we reversed previously recorded impairment of
$787,000 as compared to a reversal of a previously recorded impairment of $7.2 million during 2009
and additional impairment of $10.9 million in 2008.
On December 1, 2010, we sold mortgage servicing rights with a book value of $5 million. A
loss of $1.5 million on the sale was included in other expenses. In conjunction with the sale, we
entered into an agreement with the purchaser whereby we continue to sub-service the loans
underlying the sold mortgage servicing rights. The sub-servicing agreement may by terminated by
the purchaser upon written notice, subject to termination fees during the first three years of the
agreement. Subsequent to the third anniversary of the sub-servicing agreement, either party may
terminate the agreement with written notice.
OREO expense is recorded net of OREO income. Variations in net OREO expense between periods
are 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 increased $1.3 million, or 19.9%, to $7.7 million in 2010, as compared to $6.4 million
in 2009, primarily due to write-downs of the estimated fair value of OREO properties. OREO expense
increased to $6.4 million in 2009, as compared to $215,000 in 2008, 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.
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 $1.7 million in 2010, compared to $2.1 million in 2009 and $2.5
million in 2008. For additional information regarding core deposit intangibles, see Notes to
Consolidated Financial StatementsSummary of Significant Accounting Policies, included in Part
IV, Item 15.
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 increased $1.6 million, or
3.7%, to $45.9 million in 2010, from $44.3 million in 2009, primarily due to a $1.5 million loss on
the sale of mortgage servicing assets recorded during fourth quarter 2010.
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.
Income Tax Expense
Our effective federal tax rate was 26.8% for the year ended December 31, 2010, 29.1% for
the year ended December 31, 2009 and 30.3% for the year ended December 31, 2008.
State income tax applies primarily to pretax earnings generated within Montana and South Dakota.
Our effective state tax rate was 4.6% for the year ended December 31, 2010, 4.2% for the year ended
December 31, 2009 and 4.4% for the year ended December 31, 2008. 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.
-43-
Net Income Available to Common Shareholders
Net income available to common shareholders was $33.9 million, or $0.85 per diluted share, in
2010, as compared to $50.4 million, or $1.59 per diluted share, in 2009 and $67.3 million, or $2.10
per diluted share in 2008.
Summary of Quarterly Results
The following table presents unaudited quarterly results of operations for the fiscal years
ended December 31, 2010 and 2009.
Quarterly Results
(Dollars in thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First |
|
Second |
|
Third |
|
Fourth |
|
Full |
|
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
Year |
|
Year Ended December 31, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
79,499 |
|
|
$ |
79,867 |
|
|
$ |
78,965 |
|
|
$ |
76,215 |
|
|
$ |
314,546 |
|
Interest expense |
|
|
17,830 |
|
|
|
16,691 |
|
|
|
15,221 |
|
|
|
13,365 |
|
|
|
63,107 |
|
|
Net interest income |
|
|
61,669 |
|
|
|
63,176 |
|
|
|
63,744 |
|
|
|
62,850 |
|
|
|
251,439 |
|
Provision for loan losses |
|
|
11,900 |
|
|
|
19,500 |
|
|
|
18,000 |
|
|
|
17,500 |
|
|
|
66,900 |
|
|
Net interest income after
provision for loan losses |
|
|
49,769 |
|
|
|
43,676 |
|
|
|
45,744 |
|
|
|
45,350 |
|
|
|
184,539 |
|
Non-interest income |
|
|
19,508 |
|
|
|
21,037 |
|
|
|
24,855 |
|
|
|
25,511 |
|
|
|
90,911 |
|
Non-interest expense |
|
|
52,745 |
|
|
|
55,426 |
|
|
|
58,010 |
|
|
|
54,823 |
|
|
|
221,004 |
|
|
Income before income taxes |
|
|
16,532 |
|
|
|
9,287 |
|
|
|
12,589 |
|
|
|
16,038 |
|
|
|
54,446 |
|
Income tax expense |
|
|
5,402 |
|
|
|
2,628 |
|
|
|
3,860 |
|
|
|
5,200 |
|
|
|
17,090 |
|
|
Net income |
|
|
11,130 |
|
|
|
6,659 |
|
|
|
8,729 |
|
|
|
10,838 |
|
|
|
37,356 |
|
Preferred stock dividends |
|
|
844 |
|
|
|
853 |
|
|
|
862 |
|
|
|
863 |
|
|
|
3,422 |
|
|
Net income available to common shareholders |
|
$ |
10,286 |
|
|
$ |
5,806 |
|
|
$ |
7,867 |
|
|
$ |
9,975 |
|
|
$ |
33,934 |
|
|
|
Basic earnings per common share |
|
$ |
0.33 |
|
|
$ |
0.14 |
|
|
$ |
0.18 |
|
|
$ |
0.23 |
|
|
$ |
0.85 |
|
Diluted earnings per common share |
|
|
0.32 |
|
|
|
0.14 |
|
|
|
0.18 |
|
|
|
0.23 |
|
|
|
0.85 |
|
Dividends per common share |
|
|
0.1125 |
|
|
|
0.1125 |
|
|
|
0.1125 |
|
|
|
0.1125 |
|
|
|
0.4500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
$ |
0.50 |
|
|
$ |
0.40 |
|
|
$ |
0.37 |
|
|
$ |
0.34 |
|
|
$ |
1.61 |
|
Diluted earnings per common share |
|
|
0.49 |
|
|
|
0.39 |
|
|
|
0.36 |
|
|
|
0.34 |
|
|
|
1.59 |
|
Dividends per common share |
|
|
0.1625 |
|
|
|
0.1125 |
|
|
|
0.1125 |
|
|
|
0.1125 |
|
|
|
0.5000 |
|
|
-44-
Financial Condition
Total assets increased $363 million, or 5.1%, to $7,501 million as of December 31, 2010, from
$7,138 million as of December 31, 2009 and increased $509 million, or 7.7%, to $7,138 million as
of December 31, 2009, from $6,628 million as of December 31, 2008, primarily due to organic
growth. In addition, we received proceeds from our IPO of $119 million, net of IPO costs and
after the repayment of our variable rate term notes.
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 $160 million, or 3.5%, to $4,368 million as of December 31, 2010, from
$4,528 million as of December 31, 2009 and 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.
The following table presents the composition of our loan portfolio as of the dates indicated:
Loans Outstanding
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
2010 |
|
Percent |
|
2009 |
|
Percent |
|
2008 |
|
Percent |
|
2007 |
|
Percent |
|
2006 |
|
Percent |
|
Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
1,565,665 |
|
|
|
35.8 |
% |
|
$ |
1,556,273 |
|
|
|
34.4 |
% |
|
$ |
1,483,967 |
|
|
|
31.1 |
% |
|
$ |
1,018,831 |
|
|
|
28.6 |
% |
|
$ |
937,695 |
|
|
|
28.3 |
% |
Construction |
|
|
527,458 |
|
|
|
12.1 |
|
|
|
636,892 |
|
|
|
14.1 |
|
|
|
790,177 |
|
|
|
16.5 |
|
|
|
664,272 |
|
|
|
18.7 |
|
|
|
579,603 |
|
|
|
17.5 |
|
Residential |
|
|
549,604 |
|
|
|
12.6 |
|
|
|
539,098 |
|
|
|
11.9 |
|
|
|
587,464 |
|
|
|
12.3 |
|
|
|
419,001 |
|
|
|
11.8 |
|
|
|
402,468 |
|
|
|
12.2 |
|
Agricultural |
|
|
182,794 |
|
|
|
4.2 |
|
|
|
195,045 |
|
|
|
4.3 |
|
|
|
191,831 |
|
|
|
4.0 |
|
|
|
142,256 |
|
|
|
4.0 |
|
|
|
137,659 |
|
|
|
4.1 |
|
Other |
|
|
46,408 |
|
|
|
1.0 |
|
|
|
36,430 |
|
|
|
0.8 |
|
|
|
47,076 |
|
|
|
1.0 |
|
|
|
26,080 |
|
|
|
0.7 |
|
|
|
25,360 |
|
|
|
0.8 |
|
Consumer |
|
|
646,580 |
|
|
|
14.8 |
|
|
|
677,548 |
|
|
|
14.9 |
|
|
|
669,731 |
|
|
|
14.0 |
|
|
|
608,002 |
|
|
|
17.1 |
|
|
|
605,858 |
|
|
|
18.3 |
|
Commercial |
|
|
730,471 |
|
|
|
16.7 |
|
|
|
750,647 |
|
|
|
16.6 |
|
|
|
853,798 |
|
|
|
17.9 |
|
|
|
593,669 |
|
|
|
16.7 |
|
|
|
542,325 |
|
|
|
16.4 |
|
Agricultural |
|
|
116,546 |
|
|
|
2.7 |
|
|
|
134,470 |
|
|
|
3.0 |
|
|
|
145,876 |
|
|
|
3.1 |
|
|
|
81,890 |
|
|
|
2.3 |
|
|
|
76,644 |
|
|
|
2.3 |
|
Other loans |
|
|
2,383 |
|
|
|
0.1 |
|
|
|
1,601 |
|
|
|
|
|
|
|
2,893 |
|
|
|
0.1 |
|
|
|
4,979 |
|
|
|
0.1 |
|
|
|
2,751 |
|
|
|
0.1 |
|
|
Total loans |
|
|
4,367,909 |
|
|
|
100.0 |
% |
|
|
4,528,004 |
|
|
|
100.0 |
% |
|
|
4,772,813 |
|
|
|
100.0 |
% |
|
|
3,558,980 |
|
|
|
100.0 |
% |
|
|
3,310,363 |
|
|
|
100.0 |
% |
Less allowance for
loan losses |
|
|
120,480 |
|
|
|
|
|
|
|
103,030 |
|
|
|
|
|
|
|
87,316 |
|
|
|
|
|
|
|
52,355 |
|
|
|
|
|
|
|
47,452 |
|
|
|
|
|
|
Net loans |
|
$ |
4,247,429 |
|
|
|
|
|
|
$ |
4,424,974 |
|
|
|
|
|
|
$ |
4,685,497 |
|
|
|
|
|
|
$ |
3,506,625 |
|
|
|
|
|
|
$ |
3,262,911 |
|
|
|
|
|
|
Ratio of allowance
to total loans |
|
|
2.76 |
% |
|
|
|
|
|
|
2.28 |
% |
|
|
|
|
|
|
1.83 |
% |
|
|
|
|
|
|
1.47 |
% |
|
|
|
|
|
|
1.43 |
% |
|
|
|
|
|
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 fifteen years.
Commercial real estate loans. Commercial real estate loans increased $9 million, or
less than 1.0%, to $1,566 million as of December 31, 2010, from $1,556 million as of December 31,
2009. 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, primarily due to permanent financing for
loans on projects under construction as of December 31, 2008 combined with increased refinancing
activity. Approximately 55% and 53% of our commercial real estate loans as of December 31, 2010
and 2009, respectively, were owner occupied, which typically involves less risk than loans on
investment property.
-45-
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 $109 million, or
17.2%, to $527 million as of December 31, 2010, from $637 million as of December 31, 2009.
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 these decreases to a slow-down in
construction activity during 2009 and 2010 combined with 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.
As of December 31, 2010, our construction loan portfolio was divided among the following
categories: approximately $99 million, or 18.8%, residential
construction; approximately $98 million, or 18.7%, commercial
construction; and, approximately $330 million, or 62.5%, land
acquisition and development.
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 increased $11 million,
or 1.9%, to $550 million as of December 31, 2010, from $539 million as of December 31, 2009. The
increase occurred primarily in 1-4 family 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.
Agricultural real estate loans. Agricultural real estate loans decreased $12 million,
or 6.3%, to $183 million as of December 31, 2010, from $195 million as of December 31, 2009.
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.
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 customers in our market areas. Lines of credit are generally floating
rate loans that are unsecured or secured by personal property. Approximately 66% and 62% of our
consumer loans as of December 31, 2010 and 2009, respectively, were indirect dealer loans.
Consumer loans decreased $31 million, or 4.6%, to $647 million as of December 31, 2010, from
$678 million as of December 31, 2009, primarily due to the third quarter 2010 sale of student loans
of $25 million. Consumer loans increased $8 million, or 1.2%, to $678 million as of December 31,
2009, from $670 million as of December 31, 2008.
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 $20 million, or 2.7%, to $730 million as of December 31, 2010, from
$751 million as of December 31, 2009. 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
these decreases 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.
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.
-46-
Agricultural loans decreased $17 million, or 13.3%, to $117 million as of December 31, 2010,
from $134 million as of December 31, 2009. Agricultural loans decreased $11 million, or 7.8%, to
$134 million as of December 31, 2009, from $146 million as of December 31, 2008.
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, 2010:
Maturities and Interest Rate Sensitivities
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within |
|
One Year to |
|
After |
|
|
|
|
One Year |
|
Five Years |
|
Five Years |
|
Total |
|
Real estate |
|
$ |
1,145,780 |
|
|
$ |
1,140,504 |
|
|
$ |
585,645 |
|
|
$ |
2,871,929 |
|
Consumer |
|
|
298,192 |
|
|
|
327,898 |
|
|
|
20,490 |
|
|
|
646,580 |
|
Commercial |
|
|
438,881 |
|
|
|
220,303 |
|
|
|
71,287 |
|
|
|
730,471 |
|
Agricultural |
|
|
94,216 |
|
|
|
20,345 |
|
|
|
1,985 |
|
|
|
116,546 |
|
Other loans |
|
|
|
|
|
|
|
|
|
|
2,383 |
|
|
|
2,383 |
|
|
Total loans |
|
$ |
1,977,069 |
|
|
$ |
1,709,050 |
|
|
$ |
681,790 |
|
|
$ |
4,367,909 |
|
|
Loans at fixed interest rates |
|
$ |
1,130,432 |
|
|
$ |
1,122,284 |
|
|
$ |
91,293 |
|
|
$ |
2,344,009 |
|
Loans at variable interest rates |
|
|
846,637 |
|
|
|
586,766 |
|
|
|
395,155 |
|
|
|
1,828,558 |
|
Nonaccrual loans |
|
|
|
|
|
|
|
|
|
|
195,342 |
|
|
|
195,342 |
|
|
Total loans |
|
$ |
1,977,069 |
|
|
$ |
1,709,050 |
|
|
$ |
681,790 |
|
|
$ |
4,367,909 |
|
|
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.
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 $8.9 million, $6.4
million and $4.6 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, 2010, 2009 and 2008, 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, |
|
2010 |
|
2009 |
|
2008 |
|
2007 |
|
2006 |
|
Non-performing loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans |
|
$ |
195,342 |
|
|
$ |
115,030 |
|
|
$ |
85,632 |
|
|
$ |
31,552 |
|
|
$ |
14,764 |
|
Accruing loans past due 90 days or more |
|
|
1,852 |
|
|
|
4,965 |
|
|
|
3,828 |
|
|
|
2,171 |
|
|
|
1,769 |
|
Restructured loans |
|
|
13,490 |
|
|
|
4,683 |
|
|
|
1,462 |
|
|
|
1,027 |
|
|
|
1,060 |
|
|
Total non-performing loans |
|
|
210,684 |
|
|
|
124,678 |
|
|
|
90,922 |
|
|
|
34,750 |
|
|
|
17,593 |
|
OREO |
|
|
33,632 |
|
|
|
38,400 |
|
|
|
6,025 |
|
|
|
928 |
|
|
|
529 |
|
|
Total non-performing assets |
|
$ |
244,316 |
|
|
$ |
163,078 |
|
|
$ |
96,947 |
|
|
$ |
35,678 |
|
|
$ |
18,122 |
|
|
Non-performing loans to total loans |
|
|
4.82 |
% |
|
|
2.75 |
% |
|
|
1.90 |
% |
|
|
0.98 |
% |
|
|
0.53 |
% |
Non-performing assets to total loans and OREO |
|
|
5.55 |
|
|
|
3.57 |
|
|
|
2.03 |
|
|
|
1.00 |
|
|
|
0.55 |
|
Non-performing assets to total assets |
|
|
3.26 |
|
|
|
2.28 |
|
|
|
1.46 |
|
|
|
0.68 |
|
|
|
0.36 |
|
|
-47-
Total non-performing assets increased $81 million, or 49.8%, to $244 million as of
December 31, 2010, from $163 million as of December 31, 2009 and increased $66 million, or 68.2%,
to $163 million as of December 31, 2009, from $97 million as of December 31, 2008. Difficult
economic conditions continued to negatively impact businesses and consumers in our market areas,
especially in three market areas with economies dependent upon resort and second home communities.
These market areas include the Flathead area around Kalispell, Montana, the Gallatin Valley area
around Bozeman, Montana and the Jackson, Wyoming market area. Residential and second home
subdivisions in these market areas were overbuilt and these markets are now experiencing severely
depressed real estate values and limited sales activity, which has negatively impacted commercial
real estate values as well. The Flathead, Gallatin Valley and Jackson market areas accounted for
approximately 54% of our non-performing assets as of December 31, 2010 versus only 21% of our
total loans as of the same date.
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, |
|
2010 |
|
2009 |
|
2008 |
|
2007 |
|
2006 |
|
Real estate |
|
$ |
169,961 |
|
|
$ |
101,751 |
|
|
$ |
79,167 |
|
|
$ |
27,513 |
|
|
$ |
9,645 |
|
Consumer |
|
|
2,720 |
|
|
|
2,265 |
|
|
|
2,944 |
|
|
|
1,202 |
|
|
|
1,359 |
|
Commercial |
|
|
36,906 |
|
|
|
19,774 |
|
|
|
8,594 |
|
|
|
5,722 |
|
|
|
5,583 |
|
Agricultural |
|
|
1,093 |
|
|
|
888 |
|
|
|
217 |
|
|
|
313 |
|
|
|
1,006 |
|
Other |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans |
|
$ |
210,684 |
|
|
$ |
124,678 |
|
|
$ |
90,922 |
|
|
$ |
34,750 |
|
|
$ |
17,593 |
|
|
As of December 31, 2010, our non-performing real estate loans were divided among the following
categories: $45 million, or 26.2%, land and land development; $73 million, or 43.2%, commercial;
$17 million, or 9.8% residential construction; $16 million, or 9.5%, residential; $17 million, or
9.8% commercial construction; and, $2 million, or 1.5%, agricultural.
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.
Total non-performing loans increased $86 million, or 69.0%, to $211 million as of December 31,
2010, from $125 million as of December 31, 2009, and $34 million, or 37.1%, to $125 million as of
December 31, 2009, from $91 million as of December 31, 2008. Increases in non-performing loans
during 2010 and 2009 were primarily attributable to higher levels of nonaccrual loans. Nonaccrual
loans increased $80 million, or 69.8%, to $195 million at December 31, 2010, from $115 million at
December 31, 2009, with the largest increases occurring in commercial, commercial real estate and
commercial construction loans. Approximately 82% of the increase in nonaccrual loans were loans to
borrowers in the Flathead, Gallatin Valley and Jackson market areas and were comprised primarily of
commercial, commercial real estate and commercial construction 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% 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.
In addition to the non-performing loans included in the non-performing assets table above, as
of December 31, 2010, we had potential problem loans of $238 million. Potential problem loans
consist of performing loans that have been internally risk classified as substandard 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 substandard, they may never
become delinquent, non-performing or impaired. As of December 31, 2010, approximately 96% 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.
-48-
Restructured loans increased to $13 million as of December 31, 2010, from $5 million as of
December 31, 2009, primarily due to the loans of one commercial and five commercial real estate
borrowers. Approximately 34% of our restructured loans as of December 31, 2010 were located in the
Flathead, Gallatin Valley and Jackson market areas. As of December 31, 2010, all of our
restructured loans were performing in accordance with their modified terms. Non-performing
restructured loans are included in nonaccrual loans in the preceding non-performing assets table.
OREO. OREO decreased $5 million, or 12.4%, to $34 million as of December 31, 2010
from $38 million as of December 31, 2009. During 2010, the Company recorded additions to OREO of
$22 million, wrote down the fair value of OREO properties by $7 million and sold OREO with a book
value of $20 million.
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.
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, or portions thereof, are charged-off when management believes that
the collectibility of the principal is unlikely or, with respect to consumer installment and credit
card loans, according to established delinquency schedules.
The allowance for loan losses consists of three elements: (1) specific valuation allowances
based on probable losses on impaired loans; (2) historical valuation allowances based on loan loss
experience for similar loans with similar characteristics and trends; and (3) general valuation
allowances determined based on general economic conditions and other qualitative risk factors both
internal and external to us.
Specific allowances are established for loans where management has determined that probability
of a loss exists by analyzing the borrowers ability to repay amounts owed, collateral deficiencies
and any relevant qualitative or environmental factors impacting the loan. 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, designed to
account for credit deterioration. For consumer loans, loss factor percentages are based on a
one-year loss history. 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 and regulatory factors and the estimated impact of current
economic, environmental and regulatory conditions on historical loss rates.
-49-
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, |
|
2010 |
|
2009 |
|
2008 |
|
2007 |
|
2006 |
|
Balance at the beginning of period |
|
$ |
103,030 |
|
|
$ |
87,316 |
|
|
$ |
52,355 |
|
|
$ |
47,452 |
|
|
$ |
42,450 |
|
Allowance of acquired banking offices |
|
|
|
|
|
|
|
|
|
|
14,463 |
|
|
|
|
|
|
|
|
|
Charge-offs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
8,980 |
|
|
|
5,156 |
|
|
|
995 |
|
|
|
382 |
|
|
|
42 |
|
Construction |
|
|
19,989 |
|
|
|
14,153 |
|
|
|
3,035 |
|
|
|
|
|
|
|
9 |
|
Residential |
|
|
3,511 |
|
|
|
1,086 |
|
|
|
325 |
|
|
|
134 |
|
|
|
86 |
|
Agricultural |
|
|
2,238 |
|
|
|
11 |
|
|
|
642 |
|
|
|
155 |
|
|
|
|
|
Consumer |
|
|
7,577 |
|
|
|
8,134 |
|
|
|
5,527 |
|
|
|
3,778 |
|
|
|
4,030 |
|
Commercial |
|
|
10,023 |
|
|
|
3,346 |
|
|
|
3,523 |
|
|
|
643 |
|
|
|
963 |
|
Agricultural |
|
|
21 |
|
|
|
92 |
|
|
|
648 |
|
|
|
116 |
|
|
|
80 |
|
|
Total charge-offs |
|
|
52,339 |
|
|
|
31,978 |
|
|
|
14,695 |
|
|
|
5,208 |
|
|
|
5,210 |
|
|
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
34 |
|
|
|
108 |
|
|
|
88 |
|
|
|
52 |
|
|
|
329 |
|
Construction |
|
|
213 |
|
|
|
7 |
|
|
|
1 |
|
|
|
1 |
|
|
|
10 |
|
Residential |
|
|
132 |
|
|
|
38 |
|
|
|
67 |
|
|
|
34 |
|
|
|
63 |
|
Agricultural |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
2,053 |
|
|
|
1,850 |
|
|
|
1,404 |
|
|
|
1,390 |
|
|
|
1,568 |
|
Commercial |
|
|
436 |
|
|
|
328 |
|
|
|
211 |
|
|
|
854 |
|
|
|
360 |
|
Agricultural |
|
|
21 |
|
|
|
61 |
|
|
|
66 |
|
|
|
30 |
|
|
|
121 |
|
|
Total recoveries |
|
|
2,889 |
|
|
|
2,392 |
|
|
|
1,837 |
|
|
|
2,361 |
|
|
|
2,451 |
|
|
Net charge-offs |
|
|
49,450 |
|
|
|
29,586 |
|
|
|
12,858 |
|
|
|
2,847 |
|
|
|
2,759 |
|
Provision for loan losses |
|
|
66,900 |
|
|
|
45,300 |
|
|
|
33,356 |
|
|
|
7,750 |
|
|
|
7,761 |
|
|
Balance at end of period |
|
$ |
120,480 |
|
|
$ |
103,030 |
|
|
$ |
87,316 |
|
|
$ |
52,355 |
|
|
$ |
47,452 |
|
|
Period end loans |
|
$ |
4,367,909 |
|
|
$ |
4,528,004 |
|
|
$ |
4,772,813 |
|
|
$ |
3,558,980 |
|
|
$ |
3,310,363 |
|
Average loans |
|
|
4,882,219 |
|
|
|
4,660,189 |
|
|
|
4,527,987 |
|
|
|
3,449,809 |
|
|
|
3,208,102 |
|
Net charge-offs to average loans |
|
|
1.01 |
% |
|
|
0.63 |
% |
|
|
0.28 |
% |
|
|
0.08 |
% |
|
|
0.09 |
% |
Allowance to period-end loans |
|
|
2.76 |
% |
|
|
2.28 |
% |
|
|
1.83 |
% |
|
|
1.47 |
% |
|
|
1.43 |
% |
|
The allowance for loan losses was $120 million, or 2.76% of period-end loans, at
December 31, 2010, compared to $103 million, or 2.28% of period-end loans, at December 31, 2009,
and $87 million, or 1.83% of period-end loans, at December 31, 2008. 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 2010 increased $20 million to $50 million, or 1.01% of average loans, from
$30 million, or 0.63% of average loans in 2009. Approximately 66.8% of loans charged-off during
2010 were located in the Flathead, Gallatin Valley and Jackson markets areas. Additionally,
approximately 37.5% of loans charged-off during 2010 were related to nine borrowers, consisting of
one commercial, one agricultural, four construction and three commercial real estate borrowers.
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 2008, 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.
-50-
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, 2010, 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, |
|
2010 |
|
2009 |
|
2008 |
|
2007 |
|
2006 |
|
|
|
|
|
|
% 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 |
|
$ |
84,181 |
|
|
|
65.7 |
% |
|
$ |
76,357 |
|
|
|
65.5 |
% |
|
$ |
69,280 |
|
|
|
64.9 |
% |
|
$ |
39,420 |
|
|
|
63.8 |
% |
|
$ |
33,532 |
|
|
|
62.9 |
% |
Consumer |
|
|
9,332 |
|
|
|
14.8 |
|
|
|
6,220 |
|
|
|
14.9 |
|
|
|
5,092 |
|
|
|
14.0 |
|
|
|
4,838 |
|
|
|
17.1 |
|
|
|
5,794 |
|
|
|
18.3 |
|
Commercial |
|
|
25,354 |
|
|
|
16.7 |
|
|
|
18,608 |
|
|
|
16.6 |
|
|
|
11,021 |
|
|
|
17.9 |
|
|
|
7,170 |
|
|
|
16.7 |
|
|
|
6,746 |
|
|
|
16.4 |
|
Agricultural |
|
|
1,613 |
|
|
|
2.7 |
|
|
|
1,845 |
|
|
|
3.0 |
|
|
|
1,923 |
|
|
|
3.1 |
|
|
|
779 |
|
|
|
2.3 |
|
|
|
908 |
|
|
|
2.3 |
|
Other loans |
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
0.1 |
|
|
|
14 |
|
|
|
0.1 |
|
Unallocated |
|
|
|
|
|
|
N/A |
|
|
|
|
|
|
|
N/A |
|
|
|
|
|
|
|
N/A |
|
|
|
148 |
|
|
|
N/A |
|
|
|
458 |
|
|
|
N/A |
|
|
Totals |
|
$ |
120,480 |
|
|
|
100.0 |
% |
|
$ |
103,030 |
|
|
|
100.0 |
% |
|
$ |
87,316 |
|
|
|
100.0 |
% |
|
$ |
52,355 |
|
|
|
100.0 |
% |
|
$ |
47,452 |
|
|
|
100.0 |
% |
|
The allocated allowance for loan losses on real estate loans increased 10.2% to $84
million as of December 31, 2010, from $76 million as of December 31, 2009, and 10.2% to $76 million
as of December 31, 2009, from $69 million as of December 31, 2008. Increases in allowance for loan
losses allocated to real estate loans were primarily the result of weakening demand for residential
lots, particularly in the Flathead, Gallatin Valley and Jackson market areas, 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 36.3% to $25 million as
of December 31, 2010, from $19 million as of December 31, 2009, and 68.8% to $19 million as of
December 31, 2009, from $11 million as of December 31, 2008. 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, 2010, 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.
-51-
Investment securities increased $487 million, or 33.7%, to $1,933 million as of December 31,
2010, from $1,446 million as of December 31, 2009 and increased $374 million, or 34.9%, to $1,446
million as of December 31, 2009, from $1,072 million as of December 31, 2008. Liquidity resulting
from deposit growth combined with weak loan demand was primarily invested into securities. The
estimated duration of the Companys investment securities portfolio was 2.5 years as of December
31, 2010 and 2.6 years as of December 31, 2009.
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, 2010, our investments in non-agency mortgage-backed securities totaled $1
million. As of December 31, 2010, investment securities with amortized costs and fair values of
$1,607 million and $1,625 million, respectively, were pledged to secure public deposits and
securities sold under repurchase agreements, as compared to $1,069 million and $1,095 million,
respectively, as of December 31, 2009. The weighted average yield on investment securities
decreased 139 basis points to 2.98% in 2010, from 4.37% in 2009, and 55 basis points to 4.37% in
2009, from 4.92% in 2008. For additional information concerning securities sold under repurchase
agreements, see Federal Funds Purchased and Securities Sold Under Repurchase Agreements
included herein.
The following table sets forth the book value, percentage of total investment securities and
weighted average yield on investment securities as of December 31, 2010:
Securities Maturities and Yield
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total |
|
Weighted |
|
|
Book |
|
Investment |
|
Average |
|
|
Value |
|
Securities |
|
FTE Yield |
|
U.S. Government agency securities |
|
|
|
|
|
|
|
|
|
|
|
|
Maturing within one year |
|
$ |
196,239 |
|
|
|
10.15 |
% |
|
|
0.35 |
% |
Maturing in one to five years |
|
|
759,778 |
|
|
|
39.30 |
|
|
|
0.87 |
|
Maturing in five to ten years |
|
|
|
|
|
|
|
|
|
|
|
|
Mark-to-market adjustments on securities available-for-sale |
|
|
(2,597 |
) |
|
|
(0.13 |
) |
|
NA |
|
|
Total |
|
|
953,420 |
|
|
|
49.32 |
|
|
|
0.77 |
|
|
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
Maturing within one year |
|
|
252,164 |
|
|
|
13.04 |
|
|
|
3.94 |
|
Maturing in one to five years |
|
|
341,640 |
|
|
|
17.67 |
|
|
|
3.67 |
|
Maturing in five to ten years |
|
|
73,209 |
|
|
|
3.79 |
|
|
|
3.15 |
|
Maturing after ten years |
|
|
146,416 |
|
|
|
7.57 |
|
|
|
3.08 |
|
Mark-to-market adjustments on securities available-for-sale |
|
|
19,486 |
|
|
|
1.01 |
|
|
NA |
|
|
Total |
|
|
832,915 |
|
|
|
43.08 |
|
|
|
3.52 |
|
|
Tax exempt securities |
|
|
|
|
|
|
|
|
|
|
|
|
Maturing within one year |
|
|
7,599 |
|
|
|
0.39 |
|
|
|
5.59 |
|
Maturing in one to five years |
|
|
26,628 |
|
|
|
1.38 |
|
|
|
5.92 |
|
Maturing in five to ten years |
|
|
51,766 |
|
|
|
2.68 |
|
|
|
5.86 |
|
Maturing after ten years |
|
|
60,857 |
|
|
|
3.15 |
|
|
|
5.68 |
|
Mark-to-market adjustments on securities available-for-sale |
|
NA |
|
|
NA |
|
|
NA |
|
|
Total |
|
|
146,850 |
|
|
|
7.60 |
|
|
|
5.78 |
|
|
Other securities (1) |
|
|
|
|
|
|
|
|
|
|
|
|
No stated maturity |
|
|
218 |
|
|
|
0.01 |
|
|
NA |
|
Mark-to-market adjustments on securities available-for-sale |
|
NA |
|
|
NA |
|
|
NA |
|
|
Total |
|
|
218 |
|
|
|
|
|
|
NA |
|
|
Total |
|
$ |
1,933,403 |
|
|
|
100.00 |
% |
|
|
2.33 |
% |
|
|
|
|
|
(1) |
|
Equity investments in community development entities. Investment income is in the form
of credits that reduce income tax expense. |
-52-
Maturities of U.S. government agency securities noted above reflect $391 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, 2010.
There were no significant concentrations of investments at December 31, 2010 (greater than 10%
of stockholders equity) in any individual security issuer, except for U.S. government or
agency-backed securities.
As of December 31, 2009, we had U.S. government agency securities with carrying values of $571
million and a weighted average yield of 2.59%; mortgage-backed securities with carrying values of
$745 million and a weighted average yield of 4.59%; tax exempt securities with carrying values of
$129 million and a weighted average yield of 6.10%; and other securities with carrying values of
$470,000 and a weighted average yield of 3.93%.
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%.
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, 2010, 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 $133,000 as of December 31, 2010, and were primarily attributable to changes in interest
rates. No impairment losses were recorded during 2010 or 2009. 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 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. Cash and cash equivalents increased $62 million, or 10.0%, to $686 million as of December
31, 2010, from $623 million as of December 31, 2009, largely due to increasing liquidity from
continued weak loan demand. IPO proceeds of $119 million, net of IPO costs and after the repayment
of our variable rate term notes, were included in interest bearing deposits in banks as of December
31, 2010. Increases in interest bearing deposits in banks due to IPO proceeds were offset by
decreases in cash on hand and federal funds sold, as excess liquidity was invested in higher
yielding investment securities.
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.
Premises and Equipment
Premises and equipment decreased $8 million, or 4.2%, to $188 million as of December 31, 2010,
from $196 million as of December 31, 2009, primarily due to depreciation expense in the ordinary
course of business. In addition, during 2010 we transferred a branch bank building and
accompanying land aggregating $2 million to other assets held for sale.
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.
-53-
Mortgage Servicing Rights
Mortgage servicing rights decreased $4 million, or 23.9%, to $13 million as of December 31,
2010, from $17 million as of December 31, 2009. On December 1, 2010, we sold mortgage servicing
rights with a book value of $5 million. A loss of $1.5 million on the sale was included in other
expenses. In conjunction with the sale, we entered into an agreement with the purchaser whereby we
continue to sub-service the loans underlying the sold mortgage servicing rights. The sub-servicing
agreement may by terminated by the purchaser upon written notice, subject to termination fees
during the first three years of the agreement. Subsequent to the third anniversary of the
sub-servicing agreement, either party may terminate the agreement with written notice.
Deferred Tax Asset/Liability
As of December 31, 2010, we had a net deferred tax asset of $18 million, as compared to a
deferred tax liability of $2 million included in accounts payable and other accrued expenses as of
December 31, 2009. Changes in net deferred tax asset/liability are primarily related to timing of
tax deductions for charged-off loans for book versus tax purposes and, to a lesser extent,
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.
Other Assets
Other assets decreased $6 million, or 7.1% to $82 million as of December 31, 2010, from $88
million as of December 31, 2009, primarily due to reductions in prepaid FDIC insurance assessments
and the January 2010 sale of a condominium unit located inside one of our branch banking offices.
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.
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.
The following table summarizes our deposits as of the dates indicated:
Deposits
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
2010 |
|
Percent |
|
2009 |
|
Percent |
|
2008 |
|
Percent |
|
2007 |
|
Percent |
|
2006 |
|
Percent |
|
Non-interest bearing demand |
|
$ |
1,063,869 |
|
|
|
18.0 |
% |
|
$ |
1,026,584 |
|
|
|
17.6 |
% |
|
$ |
985,155 |
|
|
|
19.0 |
% |
|
$ |
836,753 |
|
|
|
20.9 |
% |
|
$ |
888,694 |
|
|
|
24.0 |
% |
Interest bearing: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand |
|
|
1,218,078 |
|
|
|
20.5 |
|
|
|
1,197,254 |
|
|
|
20.6 |
|
|
|
1,059,818 |
|
|
|
20.5 |
|
|
|
1,019,208 |
|
|
|
25.5 |
|
|
|
964,312 |
|
|
|
26.0 |
|
Savings |
|
|
1,718,521 |
|
|
|
29.0 |
|
|
|
1,362,410 |
|
|
|
23.4 |
|
|
|
1,198,783 |
|
|
|
23.2 |
|
|
|
992,571 |
|
|
|
24.8 |
|
|
|
798,497 |
|
|
|
21.5 |
|
Time, $100 and over |
|
|
908,044 |
|
|
|
15.3 |
|
|
|
996,839 |
|
|
|
17.1 |
|
|
|
821,437 |
|
|
|
15.9 |
|
|
|
464,560 |
|
|
|
11.6 |
|
|
|
408,813 |
|
|
|
11.0 |
|
Time, other |
|
|
1,017,201 |
|
|
|
17.2 |
|
|
|
1,240,969 |
|
|
|
21.3 |
|
|
|
1,109,066 |
|
|
|
21.4 |
|
|
|
686,309 |
|
|
|
17.2 |
|
|
|
648,195 |
|
|
|
17.5 |
|
|
Total interest bearing |
|
|
4,861,844 |
|
|
|
82.0 |
|
|
|
4,797,472 |
|
|
|
82.4 |
|
|
|
4,189,104 |
|
|
|
81.0 |
|
|
|
3,162,648 |
|
|
|
79.1 |
|
|
|
2,819,817 |
|
|
|
76.0 |
|
|
Total deposits |
|
$ |
5,925,713 |
|
|
|
100.0 |
% |
|
$ |
5,824,056 |
|
|
|
100.0 |
% |
|
$ |
5,174,259 |
|
|
|
100.0 |
% |
|
$ |
3,999,401 |
|
|
|
100.0 |
% |
|
$ |
3,708,511 |
|
|
|
100.0 |
% |
|
Total deposits increased $102 million, or 1.7%, to $5,925 million as of December 31,
2010, from $5,824 million as of December 31, 2009. All categories of deposits, except time
deposits, demonstrated growth during 2010 and there was a shift in the mix of deposits from higher
costing time deposits to lower costing savings deposits. 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.
Management attributes our organic deposit growth to ongoing business development in our market
areas and increases in consumer savings.
-54-
Time deposits of $100,000 or more. Time deposits of $100,000 or more decreased 8.9%
to $908 million as of December 31, 2010, from $997 million as of December 31, 2009. This decrease
occurred primarily in time deposits with maturities of less than 12 months. 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 focused effort to grow deposits combined
with increases in deposit insurance coverage to $250,000 per account. As of December 31, 2010 and
2009, we had no certificates of deposit issued in brokered transactions.
Other time deposits. Other time deposits decreased 18.0% to $1,017 million as of
December 31, 2010, from $1,241 million as of December 31, 2009. Approximately 51% of this decrease
occurred in Certificate of Deposit Account Registry Service, or CDARS, 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. Increases in other time deposits in 2009 were
primarily due to increases in CDARS deposits.
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, 2010 and 2009, we had no federal
funds purchased balances outstanding.
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 agreement balances increased $146 million, or 30.8%, to $620 million as of December 31,
2010, from $474 million as of December 31, 2009. Management attributes the increase in repurchase
agreement balances to fluctuations in the liquidity of our customers.
Repurchase agreement balances 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
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, |
|
2010 |
|
2009 |
|
2008 |
|
Federal funds purchased: |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at period end |
|
$ |
|
|
|
$ |
|
|
|
$ |
30,625 |
|
Average balance |
|
|
|
|
|
|
9,323 |
|
|
|
64,994 |
|
Maximum amount outstanding at any month-end |
|
|
|
|
|
|
57,230 |
|
|
|
121,390 |
|
Average interest rate: |
|
|
|
|
|
|
|
|
|
|
|
|
During the year |
|
|
0.00 |
% |
|
|
0.21 |
% |
|
|
2.14 |
% |
At period end |
|
|
|
|
|
|
|
|
|
|
0.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold under repurchase agreements: |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at period end |
|
$ |
620,154 |
|
|
$ |
474,141 |
|
|
$ |
525,501 |
|
Average balance |
|
|
480,276 |
|
|
|
422,713 |
|
|
|
537,267 |
|
Maximum amount outstanding at any month-end |
|
|
620,154 |
|
|
|
474,141 |
|
|
|
576,845 |
|
Average interest rate: |
|
|
|
|
|
|
|
|
|
|
|
|
During the year |
|
|
0.18 |
% |
|
|
0.18 |
% |
|
|
1.43 |
% |
At period end |
|
|
0.14 |
|
|
|
0.38 |
|
|
|
0.34 |
|
|
-55-
Other Borrowed Funds
Other borrowed funds decreased $432,000, or 8.0% to $5 million as of December 31, 2010, from
$5 million as of December 31, 2009, and 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. 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 $36 million, or 48.9%, to $38 million as of December 31, 20010, from
$73 million as of December 31, 2009 primarily due to the early repayment of the term
notes under our syndicated credit agreement on March 29, 2010. A loss of $306 on the early
extinguishment of the debt, comprised of unamortized debt issuance costs, was included in other
expenses in the Companys consolidated statement of income.
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.
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, 2010
and 2009. 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 13.4% to $39 million as of
December 31, 2010, from $45 million as of December 31, 2009. 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. Decreases in accounts payable and accrued expenses are primarily due to the
timing and amounts of corporate tax payments.
Contractual Obligations
Contractual obligations as of December 31, 2010 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 |
|
$ |
4,000,468 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
4,000,468 |
|
Time deposits |
|
|
1,564,798 |
|
|
|
265,925 |
|
|
|
94,501 |
|
|
|
21 |
|
|
|
1,925,245 |
|
Securities sold under repurchase agreements |
|
|
620,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
620,154 |
|
Other borrowed funds (1) |
|
|
4,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,991 |
|
Long-term debt obligation (2) |
|
|
208 |
|
|
|
217 |
|
|
|
244 |
|
|
|
35,021 |
|
|
|
35,690 |
|
Capital lease obligations |
|
|
37 |
|
|
|
84 |
|
|
|
109 |
|
|
|
1,582 |
|
|
|
1,812 |
|
Operating lease obligations |
|
|
3,308 |
|
|
|
5,333 |
|
|
|
4,018 |
|
|
|
5,476 |
|
|
|
18,135 |
|
Purchase obligations (3) |
|
|
1,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,389 |
|
Subordinated debentures held by
subsidiary trusts (4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123,715 |
|
|
|
123,715 |
|
|
Total contractual obligations |
|
$ |
6,195,353 |
|
|
$ |
271,559 |
|
|
$ |
98,872 |
|
|
$ |
165,815 |
|
|
$ |
6,731,599 |
|
|
-56-
|
|
|
(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; 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 2010 were approximately $7.8 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.
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
On March 5, 2010, our shareholders approved proposals to recapitalize our existing common
stock. The recapitalization included a redesignation of existing common stock as Class B common
stock with five votes per share, convertible into Class A common stock on a share for share basis;
a four-for-one stock split of the Class B common stock; an increase in the authorized number of
Class B common shares from 20,000,000 to 100,000,000; and, the creation of a new class of common
stock designated as Class A common stock, with one vote per share, with 100,000,000 shares
authorized.
On March 29, 2010, we concluded an IPO of 10,000,000 shares of Class A common stock, and an
additional 1,500,000 shares of Class A common stock pursuant to the full exercise of the
underwriters option to purchase Class A common shares in the offering. We received net proceeds
of $153 million from the sale of the shares, after deducting underwriting discounts, commissions
and other offering expenses of $14 million
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 $162 million, or
28.3%, to $737 million as of December 31, 2010 from $574 million as of December 31, 2009, primarily
due to the completion of our IPO of Class A common stock discussed above.
-57-
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 251,312 shares of common stock with an aggregate value of $4 million.
We paid aggregate cash dividends of $15.7 million to common shareholders and $3.4 million to
preferred shareholders during 2009.
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, 2010 and 2009, 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.
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.
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.
-58-
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.
The following table shows interest rate sensitivity gaps and the earnings sensitivity ratio
for different intervals as of December 31, 2010. 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) |
|
$ |
1,726,553 |
|
|
$ |
870,190 |
|
|
$ |
1,137,140 |
|
|
$ |
438,684 |
|
|
$ |
4,172,567 |
|
Investment securities (2) |
|
|
216,210 |
|
|
|
501,627 |
|
|
|
1,199,815 |
|
|
|
15,751 |
|
|
|
1,933,403 |
|
Interest bearing deposits in banks |
|
|
576,469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
576,469 |
|
Federal funds sold |
|
|
2,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,114 |
|
|
Total interest earning assets |
|
$ |
2,521,346 |
|
|
$ |
1,371,817 |
|
|
$ |
2,336,955 |
|
|
$ |
454,435 |
|
|
$ |
6,684,553 |
|
|
Interest bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand accounts (3) |
|
$ |
91,357 |
|
|
$ |
274,067 |
|
|
$ |
852,654 |
|
|
$ |
|
|
|
$ |
1,218,078 |
|
Savings deposits (3) |
|
|
1,462,981 |
|
|
|
62,158 |
|
|
|
193,382 |
|
|
|
|
|
|
|
1,718,521 |
|
Time deposits, $100 or more (4) |
|
|
260,606 |
|
|
|
510,051 |
|
|
|
102,089 |
|
|
|
35,298 |
|
|
|
908,044 |
|
Other time deposits |
|
|
322,162 |
|
|
|
471,987 |
|
|
|
163,830 |
|
|
|
59,222 |
|
|
|
1,017,201 |
|
Securities sold under repurchase
agreements |
|
|
620,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
620,154 |
|
Other borrowed funds |
|
|
4,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,991 |
|
Long-term debt |
|
|
15,011 |
|
|
|
234 |
|
|
|
655 |
|
|
|
21,602 |
|
|
|
37,502 |
|
Subordinated debentures held by
subsidiary trusts |
|
|
77,322 |
|
|
|
|
|
|
|
46,393 |
|
|
|
|
|
|
|
123,715 |
|
|
Total interest bearing liabilities |
|
$ |
2,854,584 |
|
|
$ |
1,318,497 |
|
|
$ |
1,359,003 |
|
|
$ |
116,122 |
|
|
$ |
5,648,206 |
|
|
Rate gap |
|
$ |
(333,238 |
) |
|
$ |
53,320 |
|
|
$ |
977,952 |
|
|
$ |
338,313 |
|
|
$ |
1,036,347 |
|
Cumulative rate gap |
|
|
(333,238 |
) |
|
|
(279,918 |
) |
|
|
698,034 |
|
|
|
1,036,347 |
|
|
|
|
|
Cumulative rate gap as a percentage
of total interest earning assets |
|
|
-4.99 |
% |
|
|
-4.19 |
% |
|
|
10.44 |
% |
|
|
15.50 |
% |
|
|
15.50 |
% |
|
|
|
|
(1) |
|
Does not include nonaccrual loans of $195,342. |
|
(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. |
-59-
|
|
|
(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 $1,715 million, a negative
cumulative one year gap of $1,326
million and a positive cumulative one to five year gap of $698 million. |
|
(4) |
|
Included in the three month to one year category are deposits of $214 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.
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, 2010, our income simulation model predicted
net interest income would decrease $4.8 million, or 1.8%, assuming a 2% increase in short-term and
long-term interest rates over a twelve-month period. This scenario predicts that our funding
sources will reprice faster than our interest earning assets. During 2009, we began to implement
interest rate floors on certain variable rate loans. Interest rate floors mitigate benefits
obtained in a rising interest rate environment until such time as market interest rates exceed the
interest rate floors established. We do not engage in derivatives or hedging activities to manage
our interest rate risk.
We did not simulate a decrease in interest rates due to the extremely low rate environment as
of December 31, 2010. 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.
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 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, 2010 and 2009
Consolidated Statements of Income Years Ended December 31, 2010, 2009 and 2008
Consolidated Statements of Stockholders Equity Years Ended December 31, 2010, 2009
and 2008
Consolidated Statements of Cash Flows Years Ended December 31, 2010, 2009 and 2008
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.
-60-
Item 9A. 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, 2010, 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, 2010, 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 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, 2010.
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, 2010, 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.
McGladrey & Pullen, LLP, the independent registered public accounting firm that audited our
consolidated financial statements included in this Annual Report on Form 10-K, has issued an
attestation report on the effectiveness of our internal control over financial reporting as of
December 31, 2010. The report, which expresses an unqualified opinion on the effectiveness of our
internal control over financial reporting as of December 31, 2010, is included below.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
First Interstate BancSystem, Inc.
We have audited First Interstate BancSystem Inc. and subsidiaries internal control over
financial reporting as of December 31, 2010, based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. First Interstate BancSystem, Inc. and subsidiaries management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting included in the accompanying
Managements Annual Report on Internal Control Over Financial Reporting. Our responsibility is to
express an opinion on the companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
-61-
A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (b) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (c) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, First Interstate BancSystem, Inc. and subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2010, based on
criteria established in Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of First Interstate BancSystem,
Inc. and subsidiaries as of December 31, 2010 and 2009 and the related consolidated statements of
income, stockholders equity and cash flows for each of the three years in the period ended
December 31, 2010 and our report dated February 28, 2011 expressed an unqualified opinion.
/s/ MCGLADREY & PULLEN, LLP
Des Moines, IA
February 28, 2011
Item 9B. Other Information
There were no items required to be disclosed in a report on Form 8-K during the fourth quarter
of 2010 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 2011
annual meeting of shareholders and is herein incorporated by reference.
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 2011 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 2011 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 2011 annual meeting of shareholders and is herein
incorporated by reference.
-62-
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 2011 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 2011 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. |
-63-
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, 2010 and 2009, and the related consolidated statements of
income, stockholders equity, and cash flows for each of the three years in the period ended
December 31, 2010. 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, 2010 and 2009, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2010, in conformity with U.S. generally accepted
accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States),First Interstate BancSystem, Inc. and subsidiaries internal control over
financial reporting as of December 31, 2010, based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated February 28, 2011 expressed an unqualified opinion on the
effectiveness of First Interstate BancSystem Inc. and subsidiaries internal control over financial
reporting.
/s/ MCGLADREY & PULLEN, LLP
Des Moines, Iowa
February 28, 2011
-64-
First Interstate BancSystem, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
December 31, |
|
2010 |
|
2009 |
|
Assets |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
107,035 |
|
|
$ |
213,029 |
|
Federal funds sold |
|
|
2,114 |
|
|
|
11,474 |
|
Interest bearing deposits in banks |
|
|
576,469 |
|
|
|
398,979 |
|
|
Total cash and cash equivalents |
|
|
685,618 |
|
|
|
623,482 |
|
|
Investment securities: |
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
1,786,335 |
|
|
|
1,316,429 |
|
Held-to-maturity (estimated fair values of $146,508 and
$130,855 at December 31, 2010 and 2009, respectively) |
|
|
147,068 |
|
|
|
129,851 |
|
|
Total investment securities |
|
|
1,933,403 |
|
|
|
1,446,280 |
|
|
Loans |
|
|
4,367,909 |
|
|
|
4,528,004 |
|
Less allowance for loan losses |
|
|
120,480 |
|
|
|
103,030 |
|
|
Net loans |
|
|
4,247,429 |
|
|
|
4,424,974 |
|
|
Premises and equipment, net |
|
|
188,138 |
|
|
|
196,307 |
|
Goodwill |
|
|
183,673 |
|
|
|
183,673 |
|
Company-owned life insurance |
|
|
73,056 |
|
|
|
71,374 |
|
Other real estate owned (OREO), net of write-downs |
|
|
33,632 |
|
|
|
38,400 |
|
Accrued interest receivable |
|
|
33,628 |
|
|
|
37,123 |
|
Deferred tax asset |
|
|
18,472 |
|
|
|
|
|
Mortgage servicing rights, net of accumulated amortization and impairment reserve |
|
|
13,191 |
|
|
|
17,325 |
|
Core deposit intangibles, net of accumulated amortization |
|
|
8,803 |
|
|
|
10,551 |
|
Other assets |
|
|
81,927 |
|
|
|
88,164 |
|
|
Total assets |
|
$ |
7,500,970 |
|
|
$ |
7,137,653 |
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
Non-interest bearing |
|
$ |
1,063,869 |
|
|
$ |
1,026,584 |
|
Interest bearing |
|
|
4,861,844 |
|
|
|
4,797,472 |
|
|
Total deposits |
|
|
5,925,713 |
|
|
|
5,824,056 |
|
|
Securities sold under repurchase agreements |
|
|
620,154 |
|
|
|
474,141 |
|
Accounts payable and accrued expenses |
|
|
38,915 |
|
|
|
44,946 |
|
Accrued interest payable |
|
|
13,178 |
|
|
|
17,585 |
|
Other borrowed funds |
|
|
4,991 |
|
|
|
5,423 |
|
Long-term debt |
|
|
37,502 |
|
|
|
73,353 |
|
Subordinated debentures held by subsidiary trusts |
|
|
123,715 |
|
|
|
123,715 |
|
|
Total liabilities |
|
|
6,764,168 |
|
|
|
6,563,219 |
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Nonvoting noncumulative preferred stock without par value;
authorized 100,000 shares; issued and outstanding 5,000 shares as of
December 31, 2010 and 2009 |
|
|
50,000 |
|
|
|
50,000 |
|
Common stock |
|
|
264,174 |
|
|
|
112,135 |
|
Retained earnings |
|
|
413,253 |
|
|
|
397,224 |
|
Accumulated other comprehensive income, net |
|
|
9,375 |
|
|
|
15,075 |
|
|
Total stockholders equity |
|
|
736,802 |
|
|
|
574,434 |
|
|
Total liabilities and stockholders equity |
|
$ |
7,500,970 |
|
|
$ |
7,137,653 |
|
|
See accompanying notes to consolidated financial statements.
-65-
First Interstate BancSystem, Inc. and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
2010 |
|
2009 |
|
2008 |
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans |
|
$ |
266,472 |
|
|
$ |
279,985 |
|
|
$ |
305,152 |
|
Interest and dividends on investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
42,338 |
|
|
|
41,978 |
|
|
|
43,583 |
|
Exempt from federal taxes |
|
|
4,621 |
|
|
|
5,298 |
|
|
|
5,913 |
|
Interest on deposits in banks |
|
|
1,093 |
|
|
|
520 |
|
|
|
191 |
|
Interest on federal funds sold |
|
|
22 |
|
|
|
253 |
|
|
|
1,080 |
|
|
Total interest income |
|
|
314,546 |
|
|
|
328,034 |
|
|
|
355,919 |
|
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest on deposits |
|
|
53,949 |
|
|
|
73,226 |
|
|
|
96,863 |
|
Interest on federal funds purchased |
|
|
|
|
|
|
20 |
|
|
|
1,389 |
|
Interest on securities sold under repurchase agreements |
|
|
879 |
|
|
|
776 |
|
|
|
7,694 |
|
Interest on other borrowed funds |
|
|
3 |
|
|
|
1,347 |
|
|
|
1,741 |
|
Interest on long-term debt |
|
|
2,433 |
|
|
|
3,249 |
|
|
|
4,578 |
|
Interest on subordinated debentures held by subsidiary trusts |
|
|
5,843 |
|
|
|
6,280 |
|
|
|
8,277 |
|
|
Total interest expense |
|
|
63,107 |
|
|
|
84,898 |
|
|
|
120,542 |
|
|
Net interest income |
|
|
251,439 |
|
|
|
243,136 |
|
|
|
235,377 |
|
Provision for loan losses |
|
|
66,900 |
|
|
|
45,300 |
|
|
|
33,356 |
|
|
Net interest income after provision for loan losses |
|
|
184,539 |
|
|
|
197,836 |
|
|
|
202,021 |
|
|
Non-interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
Other service charges, commissions and fees |
|
|
29,494 |
|
|
|
28,747 |
|
|
|
28,193 |
|
Income from the origination and sale of loans |
|
|
22,868 |
|
|
|
30,928 |
|
|
|
12,290 |
|
Service charges on deposit accounts |
|
|
18,181 |
|
|
|
20,323 |
|
|
|
20,712 |
|
Wealth managment revenues |
|
|
12,387 |
|
|
|
10,821 |
|
|
|
12,352 |
|
Investment securities gains, net |
|
|
170 |
|
|
|
137 |
|
|
|
101 |
|
Gain on sale of nonbank subsidiary |
|
|
|
|
|
|
|
|
|
|
27,096 |
|
Technology services revenues |
|
|
|
|
|
|
|
|
|
|
17,699 |
|
Other income |
|
|
7,811 |
|
|
|
9,734 |
|
|
|
10,154 |
|
|
Total non-interest income |
|
|
90,911 |
|
|
|
100,690 |
|
|
|
128,597 |
|
|
Non-interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and employee benefits |
|
|
112,667 |
|
|
|
113,569 |
|
|
|
114,024 |
|
Occupancy, net |
|
|
16,251 |
|
|
|
15,898 |
|
|
|
16,361 |
|
Furniture and equipment |
|
|
13,434 |
|
|
|
12,405 |
|
|
|
18,880 |
|
FDIC insurance premiums |
|
|
10,044 |
|
|
|
12,130 |
|
|
|
2,912 |
|
Outsourced technology services |
|
|
9,477 |
|
|
|
10,567 |
|
|
|
4,016 |
|
Mortgage servicing rights amortization |
|
|
4,615 |
|
|
|
7,568 |
|
|
|
5,918 |
|
Mortgage servicing rights impairment (recovery) |
|
|
(787 |
) |
|
|
(7,224 |
) |
|
|
10,940 |
|
OREO expense, net of income |
|
|
7,670 |
|
|
|
6,397 |
|
|
|
215 |
|
Core deposit intangibles amortization |
|
|
1,748 |
|
|
|
2,131 |
|
|
|
2,503 |
|
Other expenses |
|
|
45,885 |
|
|
|
44,269 |
|
|
|
46,772 |
|
|
Total non-interest expense |
|
|
221,004 |
|
|
|
217,710 |
|
|
|
222,541 |
|
|
Income before income tax expense |
|
|
54,446 |
|
|
|
80,816 |
|
|
|
108,077 |
|
Income tax expense |
|
|
17,090 |
|
|
|
26,953 |
|
|
|
37,429 |
|
|
Net income |
|
|
37,356 |
|
|
|
53,863 |
|
|
|
70,648 |
|
Preferred stock dividends |
|
|
3,422 |
|
|
|
3,422 |
|
|
|
3,347 |
|
|
Net income available to common shareholders |
|
$ |
33,934 |
|
|
$ |
50,441 |
|
|
$ |
67,301 |
|
|
Basic earnings per common share |
|
$ |
0.85 |
|
|
$ |
1.61 |
|
|
$ |
2.14 |
|
Diluted earnings per common share |
|
|
0.85 |
|
|
|
1.59 |
|
|
|
2.10 |
|
|
See accompanying notes to consolidated financial statements.
-66-
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, 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: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,333,572 common shares purchased and retired |
|
|
|
|
|
|
(27,912 |
) |
|
|
|
|
|
|
|
|
|
|
(27,912 |
) |
617,152 common shares issued |
|
|
|
|
|
|
11,884 |
|
|
|
|
|
|
|
|
|
|
|
11,884 |
|
242,332 stock options exercised, net of
130,040
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 ($0.65 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 |
|
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: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
642,752 common shares purchased and retired |
|
|
|
|
|
|
(11,052 |
) |
|
|
|
|
|
|
|
|
|
|
(11,052 |
) |
254,156 common shares issued |
|
|
|
|
|
|
3,813 |
|
|
|
|
|
|
|
|
|
|
|
3,813 |
|
64,136 restricted common shares issued |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
299,436 stock options exercised, net of
175,464
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 ($0.50 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 |
|
|
-67-
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, 2009 |
|
$ |
50,000 |
|
|
$ |
112,135 |
|
|
$ |
397,224 |
|
|
$ |
15,075 |
|
|
$ |
574,434 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
37,356 |
|
|
|
|
|
|
|
37,356 |
|
Other comprehensive loss, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,700 |
) |
|
|
(5,700 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
246,596 common shares purchased and retired |
|
|
|
|
|
|
(3,699 |
) |
|
|
|
|
|
|
|
|
|
|
(3,699 |
) |
11,506,503 common shares issued |
|
|
|
|
|
|
153,257 |
|
|
|
|
|
|
|
|
|
|
|
153,257 |
|
117,140 non-vested common shares issued |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,821 non-vested common shares forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested common shares vesting during period |
|
|
|
|
|
|
59 |
|
|
|
|
|
|
|
|
|
|
|
59 |
|
92,880 stock options exercised, net of 111,792
shares tendered in payment of option price
and income tax withholding amounts |
|
|
|
|
|
|
649 |
|
|
|
|
|
|
|
|
|
|
|
649 |
|
Tax benefit of stock-based compensation |
|
|
|
|
|
|
239 |
|
|
|
|
|
|
|
|
|
|
|
239 |
|
Stock-based compensation expense |
|
|
|
|
|
|
1,534 |
|
|
|
|
|
|
|
|
|
|
|
1,534 |
|
Cash dividends declared: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common ($0.45 per share) |
|
|
|
|
|
|
|
|
|
|
(17,905 |
) |
|
|
|
|
|
|
(17,905 |
) |
Preferred (6.75% per share) |
|
|
|
|
|
|
|
|
|
|
(3,422 |
) |
|
|
|
|
|
|
(3,422 |
) |
|
Balance at December 31, 2010 |
|
$ |
50,000 |
|
|
$ |
264,174 |
|
|
$ |
413,253 |
|
|
$ |
9,375 |
|
|
$ |
736,802 |
|
|
See accompanying notes to consolidated financial statements.
-68-
First Interstate BancSystem, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
2010 |
|
2009 |
|
2008 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
37,356 |
|
|
$ |
53,863 |
|
|
$ |
70,648 |
|
Adjustments to reconcile net income from operations to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Provisions for loan losses |
|
|
66,900 |
|
|
|
45,300 |
|
|
|
33,356 |
|
Net loss on disposal of property and equipment |
|
|
672 |
|
|
|
306 |
|
|
|
111 |
|
Depreciation and amortization |
|
|
20,136 |
|
|
|
22,286 |
|
|
|
23,622 |
|
Net premium amortization on investment securities |
|
|
6,762 |
|
|
|
1,293 |
|
|
|
728 |
|
Net gains on investment securities transactions |
|
|
(170 |
) |
|
|
(137 |
) |
|
|
(101 |
) |
Net gains on sales of loans held for sale |
|
|
(15,321 |
) |
|
|
(18,315 |
) |
|
|
(7,068 |
) |
Net gains on sales of loans |
|
|
(374 |
) |
|
|
|
|
|
|
|
|
Net loss on sale of mortgage servicing assets |
|
|
1,525 |
|
|
|
48 |
|
|
|
|
|
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 |
|
|
6,724 |
|
|
|
5,895 |
|
|
|
34 |
|
Loss on early extinguishment of debt |
|
|
306 |
|
|
|
|
|
|
|
|
|
Net increase (decrease) in valuation reserve for mortgage servicing rights |
|
|
(787 |
) |
|
|
(7,224 |
) |
|
|
10,940 |
|
Deferred income tax expense (benefit) |
|
|
(17,257 |
) |
|
|
5,547 |
|
|
|
(7,578 |
) |
Net increase in cash surrender value of company-owned life insurance policies |
|
|
(1,682 |
) |
|
|
(1,859 |
) |
|
|
(2,439 |
) |
Stock-based compensation expense |
|
|
1,661 |
|
|
|
1,024 |
|
|
|
911 |
|
Tax benefits from stock-based compensation |
|
|
239 |
|
|
|
742 |
|
|
|
1,178 |
|
Excess tax benefits from stock-based compensation |
|
|
(225 |
) |
|
|
(719 |
) |
|
|
(1,140 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in loans held for sale |
|
|
1,121 |
|
|
|
19,280 |
|
|
|
(20,039 |
) |
Decrease in accrued interest receivable |
|
|
3,495 |
|
|
|
1,571 |
|
|
|
1,502 |
|
Decrease (increase) in other assets |
|
|
7,450 |
|
|
|
(36,120 |
) |
|
|
(8,953 |
) |
Decrease in accrued interest payable |
|
|
(4,407 |
) |
|
|
(2,946 |
) |
|
|
(3,207 |
) |
Increase (decrease) in accounts payable and accrued expenses |
|
|
(4,969 |
) |
|
|
(8,043 |
) |
|
|
10,784 |
|
|
Net cash provided by operating activities |
|
|
109,155 |
|
|
|
81,792 |
|
|
|
77,479 |
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity |
|
|
(33,118 |
) |
|
|
(9,910 |
) |
|
|
(16,831 |
) |
Available-for-sale |
|
|
(1,317,938 |
) |
|
|
(868,917 |
) |
|
|
(341,587 |
) |
Proceeds from maturities, paydowns and calls of investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity |
|
|
15,134 |
|
|
|
19,785 |
|
|
|
20,684 |
|
Available-for-sale |
|
|
833,910 |
|
|
|
493,389 |
|
|
|
505,870 |
|
Proceeds from sales of mortgage servicing rights, net of acquisitions |
|
|
2,480 |
|
|
|
2,051 |
|
|
|
(34 |
) |
Extensions of credit to customers, net of repayments |
|
|
71,762 |
|
|
|
146,943 |
|
|
|
(492,297 |
) |
Proceeds from sales of loans |
|
|
25,032 |
|
|
|
|
|
|
|
|
|
Recoveries of loans charged-off |
|
|
2,889 |
|
|
|
2,392 |
|
|
|
1,837 |
|
Proceeds from sales of OREO |
|
|
20,336 |
|
|
|
10,849 |
|
|
|
623 |
|
Proceeds from sale of nonbank subsidiary, net of cash payments |
|
|
|
|
|
|
|
|
|
|
40,766 |
|
Capital expenditures, net of sales |
|
|
(7,998 |
) |
|
|
(26,393 |
) |
|
|
(32,852 |
) |
Capital contributions to unconsolidated subsidiaries and joint ventures |
|
|
|
|
|
|
|
|
|
|
(620 |
) |
Acquisition of banks and data services company, net of cash and cash
equivalents received |
|
|
|
|
|
|
|
|
|
|
(135,706 |
) |
|
Net cash used in investing activities |
|
$ |
(387,511 |
) |
|
$ |
(229,811 |
) |
|
$ |
(450,147 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-69-
First Interstate BancSystem, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
2010 |
|
2009 |
|
2008 |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in deposits |
|
$ |
101,657 |
|
|
$ |
649,797 |
|
|
$ |
362,931 |
|
Net decrease in federal funds purchased |
|
|
|
|
|
|
(30,625 |
) |
|
|
30,625 |
|
Net increase (decrease) in repurchase agreements |
|
|
146,013 |
|
|
|
(51,360 |
) |
|
|
(84,293 |
) |
Net increase (decrease) in short-term borrowings |
|
|
(432 |
) |
|
|
(73,793 |
) |
|
|
69,857 |
|
Borrowings of long-term debt |
|
|
|
|
|
|
|
|
|
|
113,500 |
|
Repayments of long-term debt |
|
|
(35,851 |
) |
|
|
(10,795 |
) |
|
|
(38,107 |
) |
Debt issuance costs |
|
|
|
|
|
|
(261 |
) |
|
|
(609 |
) |
Proceeds from issuance of subordinated debentures held
by subsidiary trusts |
|
|
|
|
|
|
|
|
|
|
20,620 |
|
Preferred stock issuance costs |
|
|
|
|
|
|
|
|
|
|
(38 |
) |
Proceeds from issuance of common stock |
|
|
167,503 |
|
|
|
3,957 |
|
|
|
13,663 |
|
Common stock issuance costs |
|
|
(13,597 |
) |
|
|
|
|
|
|
|
|
Excess tax benefits from stock-based compensation |
|
|
225 |
|
|
|
719 |
|
|
|
1,140 |
|
Purchase and retirement of common stock |
|
|
(3,699 |
) |
|
|
(11,052 |
) |
|
|
(27,912 |
) |
Dividends paid to common stockholders |
|
|
(17,905 |
) |
|
|
(15,694 |
) |
|
|
(20,578 |
) |
Dividends paid to preferred stockholders |
|
|
(3,422 |
) |
|
|
(3,422 |
) |
|
|
(3,347 |
) |
|
Net cash provided by financing activities |
|
|
340,492 |
|
|
|
457,471 |
|
|
|
437,452 |
|
|
Net increase in cash and cash equivalents |
|
|
62,136 |
|
|
|
309,452 |
|
|
|
64,784 |
|
Cash and cash equivalents at beginning of year |
|
|
623,482 |
|
|
|
314,030 |
|
|
|
249,246 |
|
|
Cash and cash equivalents at end of year |
|
$ |
685,618 |
|
|
$ |
623,482 |
|
|
$ |
314,030 |
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for income taxes |
|
$ |
37,325 |
|
|
$ |
25,813 |
|
|
$ |
35,376 |
|
Cash paid during the year for interest expense |
|
|
67,514 |
|
|
|
87,844 |
|
|
|
121,115 |
|
|
See accompanying notes to consolidated financial statements.
-70-
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 subsidiary. 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, 2010, 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 2009 and
2008 to conform to the 2010 presentation. No changes were made in the current year to
previously reported net income or stockholders equity. |
|
|
|
On March 5, 2010, the Companys shareholders approved proposals to recapitalize the Companys
existing common stock. The recapitalization included, among other things, a redesignation of
existing common stock as Class B common stock; a four-for-one stock split of the Class B
common stock; and, the creation of a new class of common stock designated as Class A common
stock. All share and per share information included in the accompanying consolidated
financial statements, including the notes thereto, has been adjusted to give effect to the
recapitalization of the common stock, including the four-for-one stock split of Class B common
stock, as if the recapitalization had occurred on January 1, 2008, the earliest date
presented. For additional information regarding the recapitalization, see Note 12Capital
Stock and Dividend Restrictions. |
|
|
|
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 real estate 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. |
-71-
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
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.
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, 2010 and 2009, the Company had cash of $576,207 and $397,474, respectively, on
deposit with the Federal Reserve Bank. In addition, the Company maintained compensating
balances with the Federal Reserve Bank of approximately $5,000 as of December 31, 2010 and
$65,000 as of December 31, 2009 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 recovery in fair
value. 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 income on loans is
calculated using the simple interest method on the daily balance of the principal amount
outstanding. Loan origination fees 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.
-72-
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
The accrual of interest on loans is discontinued when, in managements opinion, the borrower
may be unable to meet payment obligations as they become due or when a loan becomes
contractually past due 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 interest accrual is
discontinued, all unpaid accrued interest is reversed against current period interest income.
Interest income is subsequently recognized only to the extent cash payments are received in
excess of principal due. Loans are returned to accrual status when all principal and interest
amounts contractually due are brought current and when, in the opinion of management, the
loans are estimated to be fully collectible as to both principal and interest.
A loan is considered impaired when, based upon current information and events, it is probable
that the Company will be unable to collect, 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 fair 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 on which interest accrual has been discontinued
or have been renegotiated in a troubled debt restructuring.
A loan is considered as a troubled debt restructuring when a borrower is experiencing
financial difficulties that leads to a restructuring of the loan and the Company grants
concessions to the borrower in the restructuring that it not would otherwise consider. These
concessions may include rate reductions, principal forgiveness, extension of maturity date and
other actions to minimize potential losses. A loan that is modified at a market rate of
interest may no longer be classified as a troubled debt restructuring in the calendar year
subsequent to the restructuring if it is in compliance with the modified terms.
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. Market value is estimated
based on binding contracts or quotes or bids from third party investors. Residential
mortgages held for sale were $46,408 and $36,430 as of December 31, 2010 and 2009,
respectively. 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.
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 and credit card loans,
according to established delinquency schedules. 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 and regulatory factors and the estimated impact of current
economic, regulatory and environmental conditions on historical loss rates.
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 impairment has occurred. In testing for impairment,
the fair value of net assets is estimated based on an analysis of our market value. The
determination of goodwill is sensitive to market-based trading values of our Class A common
stock. 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
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 $18,117 as of
December 31, 2010 and $16,369 as of December 31, 2009. Amortization expense related to core
deposit intangibles recorded as of December 31, 2010 is expected to total $1,446, $1,421,
$1,417, $1,417 and $1,417 in 2011, 2012, 2013, 2014 and 2015, respectively.
-73-
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
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 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.
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 2010 or 2008.
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. 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 $6,724, $5,545 and $34 were recorded in 2010, 2009 and 2008
respectively. The valuation of OREO is subjective and may be adjusted in the future due 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, 2010, restricted equity securities of the
Federal Reserve Bank and the Federal Home Loan Bank of $13,357 and $6,819, respectively, were
included in other assets at cost. As of December 31, 2009, restricted equity securities of
the Federal Reserve Bank and the Federal Home Loan Bank were $13,338 and $6,886, respectively.
No ready market exists for these restricted equity securities, and they have no quoted market
values. 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. Based on managements assessment, no impairment losses
were recorded on restricted equity securities during 2010, 2009 or 2008.
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.
-74-
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
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.
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 2007.
Earnings Per Common Share. Basic and diluted earnings per common share are calculated using a
two-class method. Under the two-class method, 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, excluding outstanding participating securities.
Participating securities include non-vested restricted stock awards. Diluted earnings per
common share is calculated by dividing net income available to common shareholders by the
weighted average number of common shares outstanding determined for the basic earnings per
share calculation plus the dilutive effect of stock compensation using the treasury stock
method.
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
$3,200, $3,422, and $3,447 in 2010, 2009 and 2008, 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.
-75-
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
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 $1,660, $1,024 and $911 for the years
ended December 31, 2010, 2009 and 2008, 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, 2010, 2009 and 2008 were $635, $392 and
$348, respectively. All compensation cost for stock-based awards is expensed at the Parent
Company.
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 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, 2010 |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
Obligations of U.S. government agencies |
|
$ |
956,017 |
|
|
$ |
3,337 |
|
|
$ |
(5,934 |
) |
|
$ |
953,420 |
|
U.S. agency mortgage-backed securities |
|
|
812,372 |
|
|
|
24,107 |
|
|
|
(4,619 |
) |
|
|
831,860 |
|
Private mortgage-backed securities |
|
|
1,057 |
|
|
|
10 |
|
|
|
(12 |
) |
|
|
1,055 |
|
|
Total |
|
$ |
1,769,446 |
|
|
$ |
27,454 |
|
|
$ |
(10,565 |
) |
|
$ |
1,786,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
Gross |
|
Estimated |
Held-to-Maturity |
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
December 31, 2010 |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
State, county and municipal securities |
|
$ |
146,850 |
|
|
$ |
1,375 |
|
|
$ |
(1,935 |
) |
|
$ |
146,290 |
|
Other securities |
|
|
218 |
|
|
|
|
|
|
|
|
|
|
|
218 |
|
|
Total |
|
$ |
147,068 |
|
|
$ |
1,375 |
|
|
$ |
(1,935 |
) |
|
$ |
146,508 |
|
|
Gross gains of $173 and gross losses of $3 were realized on the disposition of available-for-sale securities in 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
U.S. agency mortgage-backed securities |
|
|
721,555 |
|
|
|
23,212 |
|
|
|
(1,127 |
) |
|
|
743,640 |
|
Private mortgage-backed securities |
|
|
1,396 |
|
|
|
|
|
|
|
(53 |
) |
|
|
1,343 |
|
|
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 |
|
|
-76-
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
Gross gains of $138 and gross losses of $1 were realized on the disposition of
available-for-sale securities in 2009. Gross gains of $102 and gross losses of $1 were
realized on the disposition of available-for-sale securities in 2008.
In conjunction with the merger of the Companys bank subsidiaries on September 25, 2009, the
Company transferred available-for-sale 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, 2010 and
2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months |
|
12 Months or More |
|
Total |
|
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
December 31, 2010 |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Available-for-Sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. government agencies |
|
$ |
498,344 |
|
|
$ |
(5,934 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
498,344 |
|
|
$ |
(5,934 |
) |
U.S. agency mortgage-backed securities |
|
|
160,161 |
|
|
|
(4,619 |
) |
|
|
|
|
|
|
|
|
|
|
160,161 |
|
|
|
(4,619 |
) |
Private mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
249 |
|
|
|
(12 |
) |
|
|
249 |
|
|
|
(12 |
) |
|
Total |
|
$ |
658,505 |
|
|
$ |
(10,553 |
) |
|
$ |
249 |
|
|
$ |
(12 |
) |
|
$ |
658,754 |
|
|
$ |
(10,565 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months |
|
12 Months or More |
|
Total |
|
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
December 31, 2010 |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Held-to-Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State, county and municipal securities |
|
$ |
42,178 |
|
|
$ |
(1,814 |
) |
|
$ |
3,023 |
|
|
$ |
(121 |
) |
|
$ |
45,201 |
|
|
$ |
(1,935 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
) |
U.S. agency 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 |
) |
|
-77-
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, 2010, the Company had 128 individual investment
securities that were in an unrealized loss position. As of December 31, 2009, the Company had
75 individual investment securities that were in an unrealized loss position. Unrealized
losses as of December 31, 2010 and 2009 related primarily to fluctuations in the current
interest rates. The fair value of these investment securities is expected to recover as the
securities approach their maturity or repricing date or if market yields for such investments
decline. As of December 31, 2010, 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
2010 or 2009. Impairment losses of $1,286 were recorded in other expenses in 2008.
Maturities of investment securities at December 31, 2010 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, 2010 |
|
Cost |
|
Fair Value |
|
Cost |
|
Fair Value |
|
Within one year |
|
$ |
448,403 |
|
|
$ |
455,050 |
|
|
$ |
7,599 |
|
|
$ |
7,328 |
|
After one year but within five years |
|
|
1,101,418 |
|
|
|
1,106,398 |
|
|
|
26,628 |
|
|
|
26,992 |
|
After five years but within ten years |
|
|
73,209 |
|
|
|
74,962 |
|
|
|
51,766 |
|
|
|
52,474 |
|
After ten years |
|
|
146,416 |
|
|
|
149,925 |
|
|
|
60,857 |
|
|
|
59,496 |
|
|
Total |
|
|
1,769,446 |
|
|
|
1,786,335 |
|
|
|
146,850 |
|
|
|
146,290 |
|
Investments with no stated maturity |
|
|
|
|
|
|
|
|
|
|
218 |
|
|
|
218 |
|
|
Total |
|
$ |
1,769,446 |
|
|
$ |
1,786,335 |
|
|
$ |
147,068 |
|
|
$ |
146,508 |
|
|
At December 31, 2010, the Company had investment securities callable within one year with
amortized costs and estimated fair values of $390,964 and $387,575, 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, 2010 and 2009, the Company had variable rate
securities with amortized costs of $15,946 and $336, respectively, classified as
available-for-sale in the table above.
There are no significant concentrations of investments at December 31, 2010, (greater than 10
percent of stockholders equity) in any individual security issuer, except for U.S. government
or agency-backed securities. As of December 31, 2010 and 2009, all mortgage-backed securities
were residential in nature.
Investment securities with amortized cost of $1,606,951 and $1,069,191 at December 31, 2010
and 2009, respectively, were pledged to secure public deposits and securities sold under
repurchase agreements. The approximate fair value of securities pledged at December 31, 2010
and 2009 was $1,624,767 and $1,095,068, 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.
-78-
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
(3) LOANS
The following table presents loans by class as of the dates indicated:
|
|
|
|
|
|
|
|
|
December 31, |
|
2010 |
|
2009 |
|
Real estate loans: |
|
|
|
|
|
|
|
|
Commercial |
|
$ |
1,565,665 |
|
|
$ |
1,556,273 |
|
Construction: |
|
|
|
|
|
|
|
|
Land acquisition & development |
|
|
329,720 |
|
|
|
403,866 |
|
Residential |
|
|
99,196 |
|
|
|
134,970 |
|
Commercial |
|
|
98,542 |
|
|
|
98,056 |
|
|
Total construction loans |
|
|
527,458 |
|
|
|
636,892 |
|
|
Residential |
|
|
549,604 |
|
|
|
539,098 |
|
Agricultural |
|
|
182,794 |
|
|
|
195,045 |
|
Mortgage loans originated for sale |
|
|
46,408 |
|
|
|
36,430 |
|
|
Total real estate loans |
|
|
2,871,929 |
|
|
|
2,963,738 |
|
|
Consumer: |
|
|
|
|
|
|
|
|
Indirect consumer loans |
|
|
423,552 |
|
|
|
423,104 |
|
Other consumer loans |
|
|
162,137 |
|
|
|
195,331 |
|
Credit card loans |
|
|
60,891 |
|
|
|
59,113 |
|
|
Total consumer loans |
|
|
646,580 |
|
|
|
677,548 |
|
|
Commercial |
|
|
730,471 |
|
|
|
750,647 |
|
Agricultural |
|
|
116,546 |
|
|
|
134,470 |
|
Other loans, including overdrafts |
|
|
2,383 |
|
|
|
1,601 |
|
|
Total loans |
|
$ |
4,367,909 |
|
|
$ |
4,528,004 |
|
|
The Company has lending policies and procedures in place that are designed to maximize loan
income within an acceptable level of risk. Management reviews and approves these policies and
procedures on a regular basis. A reporting system supplements the review process by providing
management with frequent reports related to loan production, loan quality, concentrations of
credit, loan delinquencies and internally risk-classified loans.
Real estate loans include 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 home equity loans and lines of credit secured by real estate.
Longer-term residential real estate loans are generally 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 fifteen years. Home equity loans and lines of
credit are typically secured by first or second liens on residential real estate and generally
do not exceed a loan to value ratio of 80%. The Company had home equity loans and lines of
credit of $348,272 and $364,053 as of December 31, 2010 and 2009, respectively. Commercial
and agricultural real estate loans are generally secured by first liens on income-producing
real estate and generally mature in less than five years. Commercial real estate includes
loans of $867,510 and $843,863 as of December 31, 2010 and 2009, respectively, that are owner
occupied, which typically involves less risk than loans on investment property.
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.
-79-
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
Consumer loans include direct personal loans, credit card loans and lines of credit; and
indirect dealer loans for the purchase of automobiles, boats and other consumer goods.
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
individuals in our market areas. Lines of credit are generally floating rate loans that are
unsecured or secured by personal property.
Commercial loans include a mix of variable and fixed rate loans 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.
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.
Loans are considered past due if the required principal and interest payments have not been
received as of the date such payments were due. The following table presents the contractual
aging of the Companys recorded investment in past due loans by class as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Accruing Loans |
|
Nonaccruing Loans |
|
Loans 30 |
|
|
|
|
|
|
30 - 89 |
|
|
|
|
|
30 - 89 |
|
|
|
|
|
or More |
|
|
|
|
|
|
Days Past |
|
Past Due |
|
Days Past |
|
Past Due |
|
Days Past |
|
Current |
|
Total |
Year ended December 31, 2010 |
|
Due |
|
> 90 Days |
|
Due |
|
> 90 Days |
|
Due |
|
Loans |
|
Loans |
|
Real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
17,959 |
|
|
$ |
|
|
|
$ |
7,582 |
|
|
$ |
13,047 |
|
|
$ |
38,588 |
|
|
$ |
1,527,077 |
|
|
$ |
1,565,665 |
|
Construction: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land acquisition & development |
|
|
9,608 |
|
|
|
|
|
|
|
1,559 |
|
|
|
7,462 |
|
|
|
18,629 |
|
|
|
311,091 |
|
|
|
329,720 |
|
Residential |
|
|
3,022 |
|
|
|
|
|
|
|
359 |
|
|
|
992 |
|
|
|
4,373 |
|
|
|
94,823 |
|
|
|
99,196 |
|
Commercial |
|
|
2,794 |
|
|
|
|
|
|
|
1,213 |
|
|
|
3,376 |
|
|
|
7,383 |
|
|
|
91,159 |
|
|
|
98,542 |
|
|
Total construction loans |
|
|
15,424 |
|
|
|
|
|
|
|
3,131 |
|
|
|
11,830 |
|
|
|
30,385 |
|
|
|
497,073 |
|
|
|
527,458 |
|
|
Residential |
|
|
2,192 |
|
|
|
|
|
|
|
160 |
|
|
|
359 |
|
|
|
2,711 |
|
|
|
546,893 |
|
|
|
549,604 |
|
Agricultural |
|
|
4,856 |
|
|
|
|
|
|
|
406 |
|
|
|
392 |
|
|
|
5,654 |
|
|
|
177,140 |
|
|
|
182,794 |
|
Mortgage loans originated for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,408 |
|
|
|
46,408 |
|
|
Total real estate loans |
|
|
40,431 |
|
|
|
|
|
|
|
11,279 |
|
|
|
25,628 |
|
|
|
77,338 |
|
|
|
2,794,591 |
|
|
|
2,871,929 |
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect consumer loans |
|
|
3,717 |
|
|
|
|
|
|
|
81 |
|
|
|
63 |
|
|
|
3,861 |
|
|
|
419,691 |
|
|
|
423,552 |
|
Other consumer loans |
|
|
1,552 |
|
|
|
15 |
|
|
|
87 |
|
|
|
568 |
|
|
|
2,222 |
|
|
|
159,915 |
|
|
|
162,137 |
|
Credit card loans |
|
|
1,005 |
|
|
|
759 |
|
|
|
|
|
|
|
|
|
|
|
1,764 |
|
|
|
59,127 |
|
|
|
60,891 |
|
|
Total consumer loans |
|
|
6,274 |
|
|
|
774 |
|
|
|
168 |
|
|
|
631 |
|
|
|
7,847 |
|
|
|
638,733 |
|
|
|
646,580 |
|
|
Commercial |
|
|
8,069 |
|
|
|
957 |
|
|
|
744 |
|
|
|
8,707 |
|
|
|
18,477 |
|
|
|
711,994 |
|
|
|
730,471 |
|
Agricultural |
|
|
2,114 |
|
|
|
117 |
|
|
|
|
|
|
|
25 |
|
|
|
2,256 |
|
|
|
114,290 |
|
|
|
116,546 |
|
Other loans, including overdrafts |
|
|
123 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
127 |
|
|
|
2,256 |
|
|
|
2,383 |
|
|
Total |
|
$ |
57,011 |
|
|
$ |
1,852 |
|
|
$ |
12,191 |
|
|
$ |
34,991 |
|
|
$ |
106,045 |
|
|
$ |
4,261,864 |
|
|
$ |
4,367,909 |
|
|
Included in current loans in the table above are loans of aggregating $148,160 that were
on nonaccrual status as of December 31, 2010.
-80-
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
The following table presents the Companys recorded investment in nonaccrual loans by class as
of the dates indicated:
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
2010 |
|
2009 |
|
Real estate |
|
|
|
|
|
|
|
|
Commercial |
|
$ |
68,948 |
|
|
$ |
34,477 |
|
Construction: |
|
|
|
|
|
|
|
|
Land acquisition & development |
|
|
41,547 |
|
|
|
38,416 |
|
Residential |
|
|
16,679 |
|
|
|
10,263 |
|
Commercial |
|
|
16,589 |
|
|
|
4,460 |
|
|
Total construction loans |
|
|
74,815 |
|
|
|
53,139 |
|
|
Residential |
|
|
15,222 |
|
|
|
5,861 |
|
Agricultural |
|
|
2,497 |
|
|
|
785 |
|
|
Total real estate loans |
|
|
161,482 |
|
|
|
94,262 |
|
|
Consumer: |
|
|
|
|
|
|
|
|
Indirect consumer loans |
|
|
564 |
|
|
|
268 |
|
Other consumer loans |
|
|
1,337 |
|
|
|
1,119 |
|
Credit card loans |
|
|
30 |
|
|
|
|
|
|
Total consumer loans |
|
|
1,931 |
|
|
|
1,387 |
|
|
Commercial |
|
|
30,953 |
|
|
|
18,818 |
|
Agricultural |
|
|
976 |
|
|
|
563 |
|
|
Total |
|
$ |
195,342 |
|
|
$ |
115,030 |
|
|
If interest on nonaccrual loans had been accrued, such income would have approximated
$8,912, $6,448 and $4,632 during the years ended December 31, 2010, 2009 and 2008,
respectively.
The Company considers impaired loans to include non-consumer loans placed on nonaccrual and
loans renegotiated in troubled debt restructurings. The following table presents information
on the Companys recorded investment in impaired loans as of dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
As of December 31, 2010 |
|
December 31, |
|
|
Unpaid |
|
Recorded |
|
Recorded |
|
|
|
|
|
|
|
|
|
2010 |
|
|
Total |
|
Investment |
|
Investment |
|
Total |
|
|
|
|
|
Average |
|
|
Principal |
|
With No |
|
With |
|
Recorded |
|
Related |
|
Recorded |
|
|
Balance |
|
Allowance |
|
Allowance |
|
Investment |
|
Allowance |
|
Investment |
|
|
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
79,193 |
|
|
$ |
31,925 |
|
|
$ |
41,703 |
|
|
$ |
73,628 |
|
|
$ |
10,315 |
|
|
$ |
49,713 |
|
Construction: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land acquisition & development |
|
|
48,371 |
|
|
|
24,120 |
|
|
|
20,440 |
|
|
|
44,560 |
|
|
|
8,064 |
|
|
|
34,871 |
|
Residential |
|
|
18,632 |
|
|
|
2,993 |
|
|
|
13,721 |
|
|
|
16,714 |
|
|
|
3,431 |
|
|
|
15,097 |
|
Commercial |
|
|
17,458 |
|
|
|
2,976 |
|
|
|
13,578 |
|
|
|
16,554 |
|
|
|
3,877 |
|
|
|
21,086 |
|
|
|
|
|
Total construction loans |
|
|
84,461 |
|
|
|
30,089 |
|
|
|
47,739 |
|
|
|
77,828 |
|
|
|
15,372 |
|
|
|
71,054 |
|
|
|
|
|
Residential |
|
|
8,951 |
|
|
|
1,741 |
|
|
|
7,110 |
|
|
|
8,851 |
|
|
|
1,266 |
|
|
|
10,889 |
|
Agricultural |
|
|
3,045 |
|
|
|
1,065 |
|
|
|
1,432 |
|
|
|
2,497 |
|
|
|
128 |
|
|
|
1,737 |
|
|
|
|
|
Total real estate loans |
|
|
175,650 |
|
|
|
64,820 |
|
|
|
97,984 |
|
|
|
162,804 |
|
|
|
27,081 |
|
|
|
133,393 |
|
|
|
|
|
Commercial |
|
|
36,251 |
|
|
|
11,354 |
|
|
|
24,168 |
|
|
|
35,522 |
|
|
|
14,892 |
|
|
|
22,017 |
|
Agricultural |
|
|
976 |
|
|
|
498 |
|
|
|
478 |
|
|
|
976 |
|
|
|
253 |
|
|
|
974 |
|
|
|
|
|
Total |
|
$ |
212,877 |
|
|
$ |
76,672 |
|
|
$ |
122,630 |
|
|
$ |
199,302 |
|
|
$ |
42,226 |
|
|
$ |
156,384 |
|
|
|
|
|
As of December 31, 2009, the Companys total recorded investment in impaired loans was
$113,975, including $61,529 with no specific allowance for loan loss and $52,446 with an
allowance for loan losses of $20,182. As
-81-
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
of December 31, 2008, the Companys recorded
investment in impaired loans was $84,416, including $66,667 with no specific allowance for
loan loss and $17,749 with an allowance for loan losses of $8,015. For the years ended
December 31, 2009 and 2008, the Companys average recorded investment in impaired loans was
$106,048 and $60,728, respectively.
If interest on impaired loans had been accrued, interest income on impaired loans during 2010,
2009 and 2008 would have been approximately $9,336, $6,384 and $4,069, respectively. At
December 31, 2010, there were no material commitments to lend additional funds to borrowers
whose existing loans have been renegotiated or are classified as nonaccrual.
The Company had loans renegotiated in troubled debt restructurings of $53,700 as of December
31, 2010, of which $40,210 were included in nonaccrual loans and $13,490 were on accrual
status. The Company had loans renegotiated in troubled debt restructurings of $11,413 as of
December 31, 2009, of which $6,730 were included in nonaccrual loans and $4,683 were on
accrual status.
As part of the on-going and continuous monitoring of the credit quality of the Companys loan
portfolio, management tracks internally assigned risk classifications of loans. The Company
adheres to a Uniform Classification System developed jointly by the various bank regulatory
agencies to internally risk rate loans. The Uniform Classification System defines three broad
categories of criticized assets, which the Company uses as credit quality indicators:
Other Assets Especially Mentioned includes loans that exhibit weaknesses in financial
condition, loan structure or documentation, which if not promptly corrected, may lead to
the development of abnormal risk elements.
Substandard includes loans that are inadequately protected by the current sound worth
and paying capacity of the borrower. Although the primary source of repayment for a
Substandard is not currently sufficient; collateral or other sources of repayment are
sufficient to satisfy the debt. Continuance of a Substandard loan is not warranted
unless positive steps are taken to improve the worthiness of the credit.
Doubtful includes loans that exhibit pronounced weaknesses to a point where collection
or liquidation in full, on the basis of currently existing facts, conditions and values,
is highly questionable and improbable. Doubtful loans are required to be placed on
nonaccrual status and are assigned specific loss exposure.
-82-
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
The following table presents the Companys recorded investment in criticized loans by class
and credit quality indicator based on the most recent analysis performed as of December 31,
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Assets |
|
|
|
|
|
|
|
|
|
Total |
|
|
Especially |
|
|
|
|
|
|
|
|
|
Criticized |
|
|
Mentioned |
|
Substandard |
|
Doubtful |
|
Loans |
|
As of December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
133,700 |
|
|
$ |
149,604 |
|
|
$ |
41,662 |
|
|
$ |
324,966 |
|
Construction: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land acquisition & development |
|
|
73,151 |
|
|
|
36,552 |
|
|
|
21,795 |
|
|
|
131,498 |
|
Residential |
|
|
9,083 |
|
|
|
9,842 |
|
|
|
13,721 |
|
|
|
32,646 |
|
Commercial |
|
|
9,025 |
|
|
|
18,611 |
|
|
|
13,598 |
|
|
|
41,234 |
|
|
Total construction loans |
|
|
91,259 |
|
|
|
65,005 |
|
|
|
49,114 |
|
|
|
205,378 |
|
|
Residential |
|
|
13,889 |
|
|
|
18,725 |
|
|
|
11,474 |
|
|
|
44,088 |
|
Agricultural |
|
|
12,683 |
|
|
|
20,885 |
|
|
|
1,432 |
|
|
|
35,000 |
|
|
Total real estate loans |
|
|
251,531 |
|
|
|
254,219 |
|
|
|
103,682 |
|
|
|
609,432 |
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect consumer loans |
|
|
768 |
|
|
|
1,964 |
|
|
|
315 |
|
|
|
3,047 |
|
Other consumer loans |
|
|
903 |
|
|
|
1,499 |
|
|
|
1,131 |
|
|
|
3,533 |
|
Credit card loans |
|
|
|
|
|
|
571 |
|
|
|
3,467 |
|
|
|
4,038 |
|
|
Total consumer loans |
|
|
1,671 |
|
|
|
4,034 |
|
|
|
4,913 |
|
|
|
10,618 |
|
|
Commercial |
|
|
47,307 |
|
|
|
39,145 |
|
|
|
24,280 |
|
|
|
110,732 |
|
Agricultural |
|
|
5,416 |
|
|
|
6,255 |
|
|
|
478 |
|
|
|
12,149 |
|
|
Total |
|
$ |
305,925 |
|
|
$ |
303,653 |
|
|
$ |
133,353 |
|
|
$ |
742,931 |
|
|
The Company maintains an independent credit review function to assess assigned internal risk
classifications and monitor compliance with internal lending policies and procedures. Written
action plans with firm target dates for resolution of identified problems are maintained and
reviewed on a quarterly basis for all categories of criticized loans.
-83-
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
(4) |
|
ALLOWANCE FOR LOAN LOSSES |
|
|
|
The following table presents a summary of changes in the
allowance for loan losses by portfolio segment for the year ended
December 31, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2010 |
|
Real Estate |
|
Consumer |
|
Commercial |
|
Agriculture |
|
Other |
|
Total |
|
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
|
$ |
76,357 |
|
|
$ |
6,220 |
|
|
$ |
18,608 |
|
|
$ |
1,845 |
|
|
$ |
|
|
|
$ |
103,030 |
|
Provision charged to opertating expense |
|
|
42,163 |
|
|
|
8,636 |
|
|
|
16,333 |
|
|
|
(232 |
) |
|
|
|
|
|
|
66,900 |
|
Less loans charged-off |
|
|
(34,718 |
) |
|
|
(7,577 |
) |
|
|
(10,023 |
) |
|
|
(21 |
) |
|
|
|
|
|
|
(52,339 |
) |
Add back recoveries of loans previously charged-off |
|
|
379 |
|
|
|
2,053 |
|
|
|
436 |
|
|
|
21 |
|
|
|
|
|
|
|
2,889 |
|
|
Ending balance |
|
$ |
84,181 |
|
|
$ |
9,332 |
|
|
$ |
25,354 |
|
|
$ |
1,613 |
|
|
$ |
|
|
|
$ |
120,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment |
|
$ |
27,081 |
|
|
$ |
|
|
|
$ |
14,892 |
|
|
$ |
253 |
|
|
$ |
|
|
|
$ |
42,226 |
|
Collectively evaluated for impairment |
|
|
57,100 |
|
|
|
9,314 |
|
|
|
10,480 |
|
|
|
1,360 |
|
|
|
|
|
|
|
78,254 |
|
|
Ending balance |
|
$ |
84,181 |
|
|
$ |
9,314 |
|
|
$ |
25,372 |
|
|
$ |
1,613 |
|
|
$ |
|
|
|
$ |
120,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment |
|
$ |
162,804 |
|
|
$ |
|
|
|
$ |
35,522 |
|
|
$ |
976 |
|
|
$ |
|
|
|
$ |
199,302 |
|
Collectively evaluated for impairment |
|
|
2,709,125 |
|
|
|
646,580 |
|
|
|
694,949 |
|
|
|
115,570 |
|
|
|
2,383 |
|
|
|
4,168,607 |
|
|
Total loans |
|
$ |
2,871,929 |
|
|
$ |
646,580 |
|
|
$ |
730,471 |
|
|
$ |
116,546 |
|
|
$ |
2,383 |
|
|
$ |
4,367,909 |
|
|
|
|
In determining the allowance for loan losses, the Company estimates 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. |
|
|
The allowance for loan losses consists of three elements: (1) specific valuation allowances
based on probable losses on impaired loans; (2) historical valuation allowances based on loan
loss experience for similar loans with similar characteristics and trends; and (3) general
valuation allowances determined based on general economic conditions and other qualitative
risk factors both internal and external to us. |
|
|
Specific allowances are established for loans where management has determined that probability
of a loss exists by analyzing the borrowers ability to repay amounts owed, collateral
deficiencies and any relevant qualitative or environmental factors impacting the loan.
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, designed to account for credit deterioration. For consumer loans, loss factor
percentages are based on a one-year loss history. 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 and regulatory factors
and the estimated impact of current economic, environmental and regulatory conditions on
historical loss rates. |
-84-
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
|
|
The following table presents a summary of changes in the allowance for loan losses for the
years indicated: |
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
2009 |
|
2008 |
|
Balance at beginning of year |
|
$ |
87,316 |
|
|
$ |
52,355 |
|
Allowance of acquired banking offices |
|
|
|
|
|
|
14,463 |
|
Provision charged to operating expense |
|
|
45,300 |
|
|
|
33,356 |
|
Less loans charged-off |
|
|
(31,978 |
) |
|
|
(14,695 |
) |
Add back recoveries of loans previously charged-off |
|
|
2,392 |
|
|
|
1,837 |
|
|
Balance at end of year |
|
$ |
103,030 |
|
|
$ |
87,316 |
|
|
(5) |
|
PREMISES AND EQUIPMENT |
|
|
|
Premises and equipment and related accumulated depreciation are as follows: |
|
|
|
|
|
|
|
|
|
December 31, |
|
2010 |
|
2009 |
|
Land |
|
$ |
35,573 |
|
|
$ |
36,388 |
|
Buildings and improvements |
|
|
185,606 |
|
|
|
187,471 |
|
Furniture and equipment |
|
|
61,689 |
|
|
|
65,985 |
|
|
|
|
|
282,868 |
|
|
|
289,844 |
|
Less accumulated depreciation |
|
|
(94,730 |
) |
|
|
(93,537 |
) |
|
Premises and equipment, net |
|
$ |
188,138 |
|
|
$ |
196,307 |
|
|
|
|
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, |
|
2010 |
|
2009 |
|
Key executive, principal shareholder |
|
$ |
4,680 |
|
|
$ |
4,480 |
|
Key executive split dollar |
|
|
4,330 |
|
|
|
4,212 |
|
Group life |
|
|
64,046 |
|
|
|
62,682 |
|
|
Total |
|
$ |
73,056 |
|
|
$ |
71,374 |
|
|
|
|
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
$4,680 and $4,480 at December 31, 2010 and 2009, respectively. |
|
|
|
The Company also has life insurance policies covering selected other key officers. The net
cash surrender value of these policies was $4,330 and $4,212 at December 31, 2010 and 2009,
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. |
|
|
|
|
-85-
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
|
|
The Company has a group life insurance policy covering selected officers of FIB. The net cash
surrender value of the policy was $64,046 and $62,682 at December 31, 2010 and 2009,
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, |
|
2010 |
|
2009 |
|
2008 |
|
Balance at beginning of year |
|
$ |
38,400 |
|
|
$ |
6,025 |
|
|
$ |
928 |
|
Additions |
|
|
21,314 |
|
|
|
42,212 |
|
|
|
5,810 |
|
Capitalized improvements |
|
|
240 |
|
|
|
6,515 |
|
|
|
|
|
Valuation adjustments |
|
|
(6,724 |
) |
|
|
(5,545 |
) |
|
|
(34 |
) |
Dispositions |
|
|
(19,598 |
) |
|
|
(10,807 |
) |
|
|
(679 |
) |
|
Balance at end of year |
|
$ |
33,632 |
|
|
$ |
38,400 |
|
|
$ |
6,025 |
|
|
(8) |
|
MORTGAGE SERVICING RIGHTS |
|
|
Information with respect to the Companys mortgage servicing rights follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
2010 |
|
2009 |
|
2008 |
|
Balance at beginning of year |
|
$ |
18,732 |
|
|
$ |
27,788 |
|
|
$ |
27,561 |
|
Sales of mortgage servicing rights |
|
|
(4,528 |
) |
|
|
(3,022 |
) |
|
|
|
|
Purchases of mortgage servicing rights |
|
|
|
|
|
|
8 |
|
|
|
34 |
|
Originations of mortgage servicing rights |
|
|
4,222 |
|
|
|
9,681 |
|
|
|
6,111 |
|
Amortization expense |
|
|
(4,615 |
) |
|
|
(7,568 |
) |
|
|
(5,918 |
) |
Write-off of permanent impairment |
|
|
|
|
|
|
(8,155 |
) |
|
|
|
|
|
Balance at end of year |
|
|
13,811 |
|
|
|
18,732 |
|
|
|
27,788 |
|
Less valuation reserve |
|
|
(620 |
) |
|
|
(1,407 |
) |
|
|
(16,786 |
) |
|
Balance at end of year |
|
$ |
13,191 |
|
|
$ |
17,325 |
|
|
$ |
11,002 |
|
|
Principal balances of loans serviced for others |
|
$ |
1,594,697 |
|
|
$ |
2,394,331 |
|
|
$ |
2,077,131 |
|
Mortgage servicing rights as a percentage of
serviced loans |
|
|
0.83 |
% |
|
|
0.72 |
% |
|
|
0.53 |
% |
|
|
|
At December 31, 2010, the estimated fair value and weighted average remaining life of the
Companys mortgage servicing rights were $13,694 and 4.7 years, respectively. The fair value
of mortgage servicing rights was determined using discount rates ranging from 9.25% to 21.00%
and monthly prepayment speeds ranging from 0.7% to 6.2% depending upon the risk
characteristics of the underlying loans. The Company recorded impairment reversals of $787
and $7,224 in 2010 and 2009, respectively and recorded as other expense, impairment charges of
$10,940 in 2008. Permanent impairment of $8,155 was charged against the carrying value of
mortgage servicing rights in 2009. No permanent impairment was recorded in 2010 or 2008. |
|
|
The Company sold mortgage servicing rights with a carrying value of $4,528 and $3,022 in 2010
and 2009, respectively. Losses of $1,525 and $48 on the sales were recorded as other expense
in 2010 and 2009, respectively. In conjunction with the sales, the Company entered into
agreements with the purchaser whereby the Company continues to sub-service the loans
underlying the sold mortgage servicing rights. |
-86-
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
|
|
Deposits are summarized as follows: |
|
|
|
|
|
|
|
|
|
December 31, |
|
2010 |
|
2009 |
|
Non-interest bearing demand |
|
$ |
1,063,869 |
|
|
$ |
1,026,584 |
|
|
Interest bearing: |
|
|
|
|
|
|
|
|
Demand |
|
|
1,218,078 |
|
|
|
1,197,254 |
|
Savings |
|
|
1,718,521 |
|
|
|
1,362,410 |
|
Time, $100 and over |
|
|
908,044 |
|
|
|
996,839 |
|
Time, other |
|
|
1,017,201 |
|
|
|
1,240,969 |
|
|
Total interest bearing |
|
|
4,861,844 |
|
|
|
4,797,472 |
|
|
Total deposits |
|
$ |
5,925,713 |
|
|
$ |
5,824,056 |
|
|
|
|
The Company had no brokered time deposits as of December 31, 2010 and 2009. |
|
|
Other time deposits include deposits obtained through the Companys participation in the
Certificate of Deposit Account Registry Service (CDARS). CDARS deposits totaled $139,431
and $253,344 as of December 31, 2010 and 2009, respectively. |
|
|
Maturities of time deposits at December 31, 2010 are as follows: |
|
|
|
|
|
|
|
|
|
|
|
Time, $100 |
|
|
|
|
and Over |
|
Total Time |
|
2011 |
|
$ |
770,657 |
|
|
$ |
1,564,798 |
|
2012 |
|
|
77,037 |
|
|
|
199,996 |
|
2013 |
|
|
25,052 |
|
|
|
65,929 |
|
2014 |
|
|
14,964 |
|
|
|
41,555 |
|
2015 |
|
|
20,334 |
|
|
|
52,946 |
|
Thereafter |
|
|
|
|
|
|
21 |
|
|
Total |
|
$ |
908,044 |
|
|
$ |
1,925,245 |
|
|
|
|
Interest expense on time deposits of $100 or more was $18,595, $25,212 and $28,794 for the
years ended December 31, 2010, 2009 and 2008, respectively. |
-87-
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, |
|
2010 |
|
2009 |
|
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 |
|
|
|
|
|
|
33,929 |
|
|
|
|
|
|
|
|
|
|
Subsidiaries: |
|
|
|
|
|
|
|
|
Variable rate subordinated term loan maturing February 28, 2018,
principal due at maturity, interest payable quarterly (rate
of 2.29%
at December 31, 2010) |
|
|
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 4.95% at December 31, 2010) |
|
|
690 |
|
|
|
2,577 |
|
8.00% capital lease obligation with term ending October 25, 2029 |
|
|
1,812 |
|
|
|
1,847 |
|
|
Total long-term debt |
|
$ |
37,502 |
|
|
$ |
73,353 |
|
|
|
|
Maturities of long-term debt at December 31, 2010 are as follows: |
|
|
|
|
|
2011 |
|
$ |
245 |
|
2012 |
|
|
49 |
|
2013 |
|
|
252 |
|
2014 |
|
|
58 |
|
2015 |
|
|
295 |
|
Thereafter |
|
|
36,603 |
|
|
Total |
|
$ |
37,502 |
|
|
|
|
Proceeds from the variable rate term notes and the 6.81% subordinated term loan were used to
fund the First Western acquisition in 2008. See Note 23Acquisitions and Dispositions. |
|
|
On January 10, 2008, the Company entered into a credit agreement (Credit Agreement) with
four syndicated banks. Under the original terms of the Credit Agreement, the Company borrowed
$50,000 on variable rate term notes maturing January 10, 2013. On March 29, 2010, the Company
repaid all amounts due under the Credit Agreement. A loss of $306 on the early extinguishment
of debt, comprised of unamortized debt issuance costs, was included in other expenses in the
Companys consolidated statement of income. |
|
|
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 2.29% as of December 31, 2010. 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 $141,064, subject to collateral availability. As of December 31,
2010 and 2009, FHLB advances of $690 and $2,577, respectively, were included in long-term
debt. As of December 31, 2010 and December 31, 2009 there were no short-term advances
outstanding with the FHLB. |
-88-
First Interstate BancSystem, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
|
|
The Company has a capital lease obligation on a banking office. The balance of the obligation
was $1,812 and $1,847 as of December 31, 2010 and 2009, 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. |
|
|
The Company had other borrowed funds of $4,991 and $5,423 as of December 31, 2010 and 2009,
respectively, consisting of demand notes issued to the United States Treasury, secured by
investment securities and bearing no interest. |
|
|
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 $319,900
secured by a blanket pledge of indirect consumer loans. |
(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 |
|
2010 |
|
2009 |
|
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&nb |