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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010
or
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 000-18911
GLACIER BANCORP, INC.
 
(Exact name of registrant as specified in its charter)
     
MONTANA   81-0519541
 
(State or other jurisdiction of incorporation or organization)   (IRS Employer Identification No.)
     
49 Commons Loop, Kalispell, Montana   59901
 
(Address of principal executive offices)   (Zip Code)
     
(406) 756-4200    
 
(Registrant’s telephone number, including area code)    
     
Securities registered pursuant to Section 12(b) of the Act:    
Common Stock, $0.01 par value per share   Nasdaq Global Select Market
 
(Title of Each Class)   (Name of Each Exchange on Which Registered)
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. þ Yes o 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 during the preceding 12 months. þ 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 registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
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):
             
þ Large accelerated filer   o Accelerated filer   o Non-accelerated filer
(Do not check if a smaller reporting company)
  o Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No
The aggregate market value of the voting common equity held by non-affiliates of the Registrant at June 30, 2010 (the last business day of the most recent second quarter), was $1,022,855,305 (based on the average bid and ask price as quoted on the NASDAQ Global Select Market at the close of business on that date).
As of February 15, 2011, there were issued and outstanding 71,915,073 shares of the Registrant’s common stock. No preferred shares are issued or outstanding.
Document Incorporated by Reference
Portions of the 2011 Annual Meeting Proxy Statement dated March 29, 2011 are incorporated by reference into Part III of this Form 10-K.
 
 

 


 

GLACIER BANCORP, INC.
FORM 10-K ANNUAL REPORT
For the Year ended December 31, 2010
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PART I
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about management’s plans, objectives, expectations and intentions that are not historical facts, and other statements identified by words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “should,” “projects,” “seeks,” “estimates” or words of similar meaning. These forward-looking statements are based on current beliefs and expectations of management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company’s control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations in the forward-looking statements, including those set forth in this Annual Report on Form 10-K, or the documents incorporated by reference:
    the risks associated with lending and potential adverse changes of the credit quality of loans in the Company’s portfolio, including as a result of declines in the housing and real estate markets in its geographic areas;
 
    increased loan delinquency rates;
 
    the risks presented by a continued economic downturn, which could adversely affect credit quality, loan collateral values, other real estate owned values, investment values, liquidity and capital levels, dividends and loan originations;
 
    changes in market interest rates, which could adversely affect the Company’s net interest income and profitability;
 
    legislative or regulatory changes that adversely affect the Company’s business, ability to complete pending or prospective future acquisitions, limit certain sources of revenue, or increase cost of operations;
 
    costs or difficulties related to the integration of acquisitions;
 
    the goodwill we have recorded in connection with acquisitions could become impaired, which may have an adverse impact on our earnings and capital;
 
    reduced demand for banking products and services;
 
    the risks presented by public stock market volatility, which could adversely affect the market price of our common stock and our ability to raise additional capital in the future;
 
    competition from other financial services companies in our markets;
 
    loss of services from the senior management team; and
 
    the Company’s success in managing risks involved in the foregoing.
Additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed in Risk Factors in Item 1A. Please take into account that forward-looking statements speak only as of the date of this Annual Report on Form 10-K (or documents incorporated by reference, if applicable). The Company does not undertake any obligation to publicly correct or update any forward-looking statement if it later becomes aware that actual results are likely to differ materially from those expressed in such forward-looking statement.
Item 1. Business
GENERAL DEVELOPMENT OF BUSINESS
Glacier Bancorp, Inc., headquartered in Kalispell, Montana (the “Company”), is a Montana corporation incorporated in 2004 as a successor corporation to the Delaware corporation originally incorporated in 1990. The Company is a regional multi-bank holding company providing commercial banking services from 105 locations in Montana, Idaho, Wyoming, Colorado, Utah and Washington. The Company offers a wide range of banking products and services, including transaction and savings deposits, commercial, consumer, agriculture, and real estate loans, mortgage origination services, and retail brokerage services. The Company serves individuals, small to medium-sized businesses, community organizations and public entities.

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Subsidiaries
The Company includes the parent holding company (“Parent”) and the following nineteen subsidiaries which consist of eleven bank subsidiaries (collectively referred to hereafter as the “Banks”) and eight other subsidiaries.
Bank Subsidiaries

Montana
Glacier Bank (“Glacier”) founded in 1955
First Security Bank of Missoula (“First Security”) founded in 1973
Western Security Bank (“Western”) founded in 2001
Big Sky Western Bank (“Big Sky”) founded in 1990
Valley Bank of Helena (“Valley”) founded in 1978
First Bank of Montana (“First Bank-MT”) founded in 1924
Colorado
Bank of the San Juans (“San Juans”) founded in 1998
Idaho
Mountain West Bank (“Mountain West”) founded in 1993
Citizens Community Bank (“Citizens”) founded in 1996
Wyoming
1st Bank (“1st Bank”) founded in 1989
First National Bank & Trust (“First National”)
founded in 1912


Other Subsidiaries
GBCI Other Real Estate (“GORE”)
Glacier Capital Trust II (“Glacier Trust II”)
Glacier Capital Trust III (“Glacier Trust III”)
Glacier Capital Trust IV (“Glacier Trust IV”)
Citizens (ID) Statutory Trust I (“Citizens Trust I”)
Bank of the San Juans Bancorporation Trust I (“San Juans Trust I”)
First Company Statutory Trust 2001 (“First Co Trust 01”)
First Company Statutory Trust 2003 (“First Co Trust 03”)
In April 2010, the Company formed a wholly-owned subsidiary, GORE, to isolate bank foreclosed properties for legal protection and administrative purposes. During the year, foreclosed properties were sold to GORE from bank subsidiaries at fair market value and such properties remaining are currently held for sale.
The Company formed or acquired First Co Trust 01, First Co Trust 03, San Juans Trust I, Glacier Trust IV, Glacier Trust III, Citizens Trust I, and Glacier Trust II as financing subsidiaries. The trusts were formed for the purpose of issuing trust preferred securities and, in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification™ (“ASC”) Topic 810, Consolidation, the subsidiaries are not consolidated into the Company’s financial statements. The preferred securities entitle the shareholder to receive cumulative cash distributions from payments on subordinated debentures of the Company. For additional information regarding the subordinated debentures, see Note 10 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.”
The Company provides full service brokerage services (selling products such as stocks, bonds, mutual funds, limited partnerships, annuities and other insurance products) through Raymond James Financial Services at Glacier and Big Sky and Morgan Stanley Smith Barney at First National, both non-affiliated companies. The Company shares in the commissions generated, without devoting significant management and staff time to this portion of the business.
Recent Acquisitions
The Company’s strategy has been to profitably grow its business through internal growth and selective acquisitions. The Company continues to look for profitable expansion opportunities in existing markets and new markets in the Rocky Mountain states. During the last five years, the Company has completed the following acquisitions: On October 2, 2009, First Company and its subsidiary, First National Bank & Trust, was acquired by the Company. On December 1, 2008, Bank of the San Juans Bancorporation and its subsidiary, Bank of the San Juans in Durango, Colorado, was acquired by the Company. On April 30, 2007, North Side State Bank (“North Side”) in Rock Springs, Wyoming was acquired and became a part of 1st Bank. On October 1, 2006, Citizens Development Company (“CDC”) and its five bank subsidiaries located across Montana were acquired by the Company. On September 1, 2006, First National Bank of Morgan (“Morgan”) and its one branch office in Mountain Green, Utah was acquired.

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Federal Deposit Insurance Corporation, Federal Home Loan Bank and Federal Reserve Bank
The Federal Deposit Insurance Corporation (“FDIC”) insures each bank subsidiary’s deposit accounts. All bank subsidiaries, except San Juans, are members of the Federal Home Loan Bank (“FHLB”) of Seattle. San Juans is a member of the FHLB of Topeka. FHLB of Seattle and Topeka are two of twelve banks that comprise the FHLB System. All bank subsidiaries, with the exception of Mountain West, Citizens and San Juans, are members of the Federal Reserve Bank (“FRB”).
Bank Locations at December 31, 2010
The following is a list of the Parent and bank subsidiaries’ main office locations as of December 31, 2010. See “Item 2. Properties.”
                     
Glacier Bancorp, Inc.
    49     Commons Loop, Kalispell, MT 59901     (406) 756-4200  
Glacier
    202     Main Street, Kalispell, MT 59901     (406) 756-4200  
Mountain West
    125     Ironwood Drive, Coeur d’Alene, Idaho 83814     (208) 765-0284  
First Security
    1704     Dearborn, Missoula, MT 59801     (406) 728-3115  
Western
    2812     1st Avenue North, Billings, MT 59101     (406) 371-8258  
1st Bank
    1001     Main Street, Evanston, WY 82930     (307) 789-3864  
Valley
    3030     North Montana Avenue, Helena, MT 59601     (406) 495-2400  
Big Sky
    4150     Valley Commons, Bozeman, MT 59718     (406) 587-2922  
First National
    245     East First Street, Powell, WY 82435     (307) 754-2201  
Citizens
    280     South Arthur, Pocatello, ID 83204     (208) 232-5373  
First Bank—MT
    224     West Main, Lewistown, MT 59457     (406) 538-7471  
San Juans
    144     East Eighth Street, Durango, CO 81301     (970) 247-1818  
FINANCIAL INFORMATION ABOUT SEGMENTS
The following abbreviated organizational chart illustrates the various existing parent and subsidiary relationships at December 31, 2010:
(FLOW CHART)
For information regarding the Parent, separate from the subsidiaries, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 17 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.”

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Business Segment Results
The Company defines operating segments and evaluates segment performance internally based on individual bank charters, with the exception of GORE. Centrally provided services to the banks are allocated based on estimated usage of those services. If required, variable interest entities (“VIEs”) are consolidated into the operating segment which invested in such entities. Intersegment revenues primarily represents interest income on intercompany borrowings, management fees, and data processing fees received by individual banks or the Parent. Intersegment revenues, expenses and assets are eliminated in order to report results in accordance with accounting principles generally accepted in the United States of America.
On February 1, 2009, Morgan merged into 1st Bank resulting in operations being conducted under the 1st Bank charter. On April 30, 2008, Glacier Bank of Whitefish merged into Glacier with operations conducted under the Glacier charter. Prior period activity of the merged banks has been combined and included in the acquiring bank subsidiaries’ historical results.
                                                                         
    Glacier   Mountain West   First Security
(Dollars in thousands)   2010   2009   2008   2010   2009   2008   2010   2009   2008
Condensed Income Statements
                                                                       
Net interest income
    50,260       57,139       52,900       47,786       53,302       45,614       35,676       35,788       34,212  
Non-interest income
    15,272       15,387       13,926       26,148       27,882       20,353       7,799       8,103       6,987  
 
                                                                       
Total revenues
    65,532       72,526       66,826       73,934       81,184       65,967       43,475       43,891       41,199  
Provision for loan losses
    (20,050 )     (32,000 )     (8,825 )     (45,000 )     (50,500 )     (11,150 )     (8,100 )     (10,450 )     (1,750 )
Core deposit intangibles amortization
    (192 )     (330 )     (392 )     (172 )     (184 )     (196 )     (425 )     (468 )     (511 )
Other non-interest expense
    (29,113 )     (27,325 )     (27,074 )     (51,203 )     (51,525 )     (41,922 )     (21,842 )     (18,897 )     (17,128 )
 
                                                                       
Earnings (loss) before income taxes
    16,177       12,871       30,535       (22,441 )     (21,025 )     12,699       13,108       14,076       21,810  
Income tax (expense) benefit
    (2,989 )     (2,803 )     (10,910 )     10,262       9,764       (3,628 )     (2,798 )     (3,372 )     (7,282 )
 
                                                                       
Net earnings (loss)
    13,188       10,068       19,625       (12,179 )     (11,261 )     9,071       10,310       10,704       14,528  
 
                                                                       
 
                                                                       
Average Balance Sheet Data
                                                                       
Total assets
    1,331,845       1,249,755       1,165,234       1,198,523       1,219,435       1,105,761       934,513       916,115       862,203  
Total loans and loans held for sale
    889,644       967,239       938,824       906,484       976,132       897,841       574,734       580,401       561,258  
Total deposits
    724,076       605,928       546,569       804,161       709,834       662,505       673,633       567,649       536,400  
Stockholders’ equity
    162,116       137,188       124,163       175,059       135,932       120,606       127,915       122,153       113,653  
 
                                                                       
End of Year Balance Sheet Data
                                                                       
Total assets
    1,374,067       1,325,039       1,250,774       1,164,903       1,172,331       1,226,869       1,004,835       890,672       954,218  
Loans and loans held for sale, net of ALLL
    831,397       903,276       963,107       786,071       919,901       955,486       552,880       548,471       561,691  
Total deposits
    740,391       726,403       609,473       770,058       793,006       680,404       713,098       588,858       545,199  
Stockholders’ equity
    172,224       139,799       129,890       178,765       146,720       124,881       122,807       120,044       116,856  
 
                                                                       
Ratios and Other
                                                                       
Return on average assets
    0.99 %     0.81 %     1.68 %     -1.02 %     -0.92 %     0.82 %     1.10 %     1.17 %     1.68 %
Return on average equity
    8.13 %     7.34 %     15.81 %     -6.96 %     -8.28 %     7.52 %     8.06 %     8.76 %     12.78 %
Tier I risk-based capital ratio
    16.61 %     12.33 %     11.31 %     18.81 %     13.39 %     10.62 %     15.35 %     14.91 %     14.29 %
Total risk-based capital ratio
    17.89 %     13.61 %     12.57 %     20.09 %     14.67 %     11.88 %     16.62 %     16.18 %     15.55 %
Leverage capital ratio
    11.98 %     10.09 %     9.79 %     13.29 %     10.98 %     8.68 %     10.82 %     11.32 %     11.31 %
Full time equivalent employees
    266       274       283       377       376       393       187       178       178  
Locations
    16       17       17       28       29       29       13       13       13  

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    Western   1st Bank   Valley
(Dollars in thousands)   2010   2009   2008   2010   2009   2008   2010   2009   2008
Condensed Income Statements
                                                                       
Net interest income
    20,519       21,233       20,713       22,796       24,057       22,695       13,611       14,051       12,719  
Non-interest income
    9,857       8,631       3,306       4,934       4,628       4,728       6,913       5,717       4,673  
 
                                                                       
Total revenues
    30,376       29,864       24,019       27,730       28,685       27,423       20,524       19,768       17,392  
Provision for loan losses
    (950 )     (3,200 )     (540 )     (2,150 )     (10,800 )     (2,012 )     (500 )     (1,200 )     (810 )
Core deposit intangibles amortization
    (519 )     (571 )     (623 )     (591 )     (652 )     (712 )     (42 )     (42 )     (42 )
Other non-interest expense
    (17,257 )     (16,342 )     (16,151 )     (17,197 )     (14,943 )     (14,143 )     (9,252 )     (9,229 )     (8,770 )
 
                                                                       
Earnings (loss) before income taxes
    11,650       9,751       6,705       7,792       2,290       10,556       10,730       9,297       7,770  
Income tax (expense) benefit
    (3,112 )     (2,813 )     (1,818 )     (2,080 )     (309 )     (3,631 )     (3,272 )     (2,740 )     (2,251 )
 
                                                                       
Net earnings (loss)
    8,538       6,938       4,887       5,712       1,981       6,925       7,458       6,557       5,519  
 
                                                                       
 
                                                                       
Average Balance Sheet Data
                                                                       
Total assets
    662,391       604,020       566,364       653,143       606,649       563,588       351,608       312,273       302,754  
Total loans and loans held for sale
    315,663       344,456       347,075       280,954       312,372       315,007       189,443       195,007       199,080  
Total deposits
    527,135       410,490       342,793       448,003       414,059       416,173       257,660       196,506       186,004  
Stockholders’ equity
    88,276       87,837       83,915       106,426       97,859       87,948       32,240       34,246       29,487  
 
                                                                       
End of Year Balance Sheet Data
                                                                       
Total assets
    766,367       624,077       609,868       717,120       650,072       566,869       394,220       351,228       298,392  
Loans and loans held for sale, net of ALLL
    298,370       314,613       354,199       256,038       286,019       320,370       178,352       182,916       195,504  
Total deposits
    577,147       504,619       357,729       468,966       421,271       418,231       276,567       211,935       185,505  
Stockholders’ equity
    86,606       85,259       83,843       107,234       101,789       95,200       31,784       30,585       31,483  
 
                                                                       
Ratios and Other
                                                                       
Return on average assets
    1.29 %     1.15 %     0.86 %     0.87 %     0.33 %     1.23 %     2.12 %     2.10 %     1.82 %
Return on average equity
    9.67 %     7.90 %     5.82 %     5.37 %     2.02 %     7.87 %     23.13 %     19.15 %     18.72 %
Tier I risk-based capital ratio
    15.30 %     14.67 %     13.26 %     17.60 %     14.99 %     12.58 %     13.82 %     13.11 %     13.65 %
Total risk-based capital ratio
    16.56 %     15.93 %     14.52 %     18.87 %     16.26 %     13.83 %     15.08 %     14.37 %     14.91 %
Leverage capital ratio
    9.21 %     10.19 %     10.71 %     9.42 %     9.74 %     8.08 %     8.05 %     8.57 %     9.11 %
Full time equivalent employees
    163       161       161       144       141       148       85       85       83  
Locations
    8       8       8       12       12       12       6       6       6  
                                                                         
    Big Sky   First National   Citizens
(Dollars in thousands)   2010   2009   2008   2010   20091   2008   2010   2009   2008
Condensed Income Statements
                                                                       
Net interest income
    14,168       15,700       15,595       10,315       3,964               10,591       10,437       7,676  
Non-interest income
    3,427       3,564       3,608       3,072       4,187               5,003       4,235       2,855  
 
                                                                       
Total revenues
    17,595       19,264       19,203       13,387       8,151             15,594       14,672       10,531  
Provision for loan losses
    (3,475 )     (9,200 )     (2,200 )     (1,453 )     (1,683 )             (2,000 )     (2,800 )     (750 )
Core deposit intangibles amortization
    (23 )     (23 )     (23 )     (577 )     (144 )             (93 )     (111 )     (128 )
Other non-interest expense
    (10,411 )     (8,441 )     (7,390 )     (8,752 )     (2,011 )             (8,631 )     (7,992 )     (6,407 )
 
                                                                       
Earnings (loss) before income taxes
    3,686       1,600       9,590       2,605       4,313             4,870       3,769       3,246  
Income tax (expense) benefit
    (945 )     (121 )     (3,587 )     (498 )     (230 )             (1,700 )     (1,332 )     (1,092 )
 
                                                                       
Net earnings (loss)
    2,741       1,479       6,003       2,107       4,083             3,170       2,437       2,154  
 
                                                                       
 
                                                                       
Average Balance Sheet Data
                                                                       
Total assets
    366,749       340,827       325,976       305,977       72,641             263,466       234,382       201,258  
Total loans and loans held for sale
    262,342       287,338       283,512       150,029       39,416             168,498       168,675       143,946  
Total deposits
    209,786       178,465       180,860       245,583       60,832             192,357       146,780       136,997  
Stockholders’ equity
    61,063       45,683       38,220       38,371       7,870             33,627       30,814       28,137  
 
                                                                       
End of Year Balance Sheet Data
                                                                       
Total assets
    362,416       368,571       332,325       351,624       295,953             289,507       241,807       217,697  
Loans and loans held for sale, net of ALLL
    239,629       260,433       287,394       140,697       151,379             163,470       161,182       159,412  
Total deposits
    199,599       184,278       179,834       258,454       247,256             207,473       159,763       135,970  
Stockholders’ equity
    64,656       51,614       40,384       40,322       31,364             34,215       31,969       29,110  
 
                                                                       
Ratios and Other
                                                                       
Return on average assets
    0.75 %     0.43 %     1.84 %     0.69 %     5.62 %           1.20 %     1.04 %     1.07 %
Return on average equity
    4.49 %     3.24 %     15.71 %     5.49 %     51.88 %           9.43 %     7.91 %     7.66 %
Tier I risk-based capital ratio
    21.95 %     16.06 %     11.89 %     18.74 %     15.98 %           11.85 %     11.32 %     10.84 %
Total risk-based capital ratio
    23.23 %     17.34 %     13.15 %     19.98 %     16.89 %           13.12 %     12.59 %     12.10 %
Leverage capital ratio
    17.43 %     13.67 %     11.62 %     11.77 %     10.38 %           8.86 %     9.62 %     9.46 %
Full time equivalent employees
    85       83       83       80       75             71       70       63  
Locations
    5       5       5       4       3             6       6       5  

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Table of Contents

                                                                         
    First Bank-MT     San Juans     GORE  
(Dollars in thousands)   2010     2009     2008     2010     2009     20082     2010     2009     2008  
Condensed Income Statements
                                                                       
Net interest income
    7,457       7,900       6,676       7,562       8,021       575                    
Non-interest income
    1,144       929       768       1,727       1,329       85       258              
 
                                                     
Total revenues
    8,601       8,829       7,444       9,289       9,350       660       258              
Provision for loan losses
    (265 )     (985 )     (390 )     (750 )     (1,800 )     (53 )                  
Core deposit intangibles amortization
    (312 )     (358 )     (405 )     (234 )     (233 )     (19 )                  
Other non-interest expense
    (3,163 )     (3,189 )     (3,083 )     (5,419 )     (5,435 )     (397 )     (2,315 )            
 
                                                     
Earnings (loss) before income taxes
    4,861       4,297       3,566       2,886       1,882       191       (2,057 )            
Income tax (expense) benefit
    (1,590 )     (1,426 )     (1,279 )     (1,045 )     (551 )     (75 )     806              
 
                                                     
Net earnings (loss)
    3,271       2,871       2,287       1,841       1,331       116       (1,251 )            
 
                                                     
 
                                                                       
Average Balance Sheet Data
                                                                       
Total assets
    209,189       179,885       152,354       198,415       175,107       12,983       12,561              
Total loans and loans held for sale
    114,310       119,840       109,706       146,911       149,665       12,172                    
Total deposits
    153,132       121,770       109,067       162,745       140,528       11,292                    
Stockholders’ equity
    33,742       30,955       28,172       25,887       23,396       1,171       12,683              
 
                                                                       
End of Year Balance Sheet Data
                                                                       
Total assets
    239,667       217,379       154,645       230,345       184,528       165,784       20,610              
Loans held for sale, net of ALLL
    106,290       114,113       114,177       139,014       145,015       142,114                    
Total deposits
    165,816       143,552       113,531       184,217       148,474       143,056                    
Stockholders’ equity
    33,151       32,627       29,329       25,595       25,410       21,207       21,199              
 
                                                                       
Ratios and Other
                                                                       
Return on average assets
    1.56 %     1.60 %     1.50 %     0.93 %     0.76 %     0.89 %                        
Return on average equity
    9.69 %     9.27 %     8.12 %     7.11 %     5.69 %     9.91 %                        
Tier I risk-based capital ratio
    13.93 %     12.73 %     11.70 %     11.76 %     11.11 %     9.26 %                        
Total risk-based capital ratio
    15.19 %     13.99 %     12.95 %     13.03 %     12.37 %     10.51 %                        
Leverage capital ratio
    9.18 %     9.19 %     10.17 %     8.83 %     10.33 %     9.66 %                        
Full time equivalent employees
    39       40       37       46       41       31                          
Locations
    3       3       3       3       3       3                          
                                                                         
    Parent   Eliminations   Total Consolidated
(Dollars in thousands)   2010   2009   2008   2010   2009   2008   2010   2009   2008
Condensed Income Statements
                                                                       
Net interest income
    (5,973 )     (6,265 )     (6,762 )                       234,768       245,327       212,613  
Non-interest income
    61,924       52,466       83,891       (59,932 )     (50,584 )     (84,146 )     87,546       86,474       61,034  
 
                                                                       
Total revenues
    55,951       46,201       77,129       (59,932 )     (50,584 )     (84,146 )     322,314       331,801       273,647  
Provision for loan losses
                                        (84,693 )     (124,618 )     (28,480 )
Core deposit intangibles amortization
                                        (3,180 )     (3,116 )     (3,051 )
Other non-interest expense
    (14,613 )     (13,769 )     (13,424 )     14,400       13,396       13,031       (184,768 )     (165,702 )     (142,858 )
 
                                                                       
Earnings (loss) before income taxes
    41,338       32,432       63,705       (45,532 )     (37,188 )     (71,115 )     49,673       38,365       99,258  
Income tax (expense) benefit
    1,374       1,942       1,952       244                   (7,343 )     (3,991 )     (33,601 )
 
                                                                       
Net earnings (loss)
    42,712       34,374       65,657       (45,288 )     (37,188 )     (71,115 )     42,330       34,374       65,657  
 
                                                                       
 
                                                                       
Average Balance Sheet Data
                                                                       
Total assets
    949,597       824,527       689,132       (1,130,937 )     (1,043,687 )     (918,204 )     6,307,040       5,691,929       5,029,403  
Total loans and loans held for sale
                                        3,999,012       4,140,541       3,808,421  
Total deposits
                      (39,887 )     (59,234 )     (28,155 )     4,358,384       3,493,607       3,100,505  
Stockholders’ equity
    817,496       691,922       564,785       (897,405 )     (753,933 )     (655,472 )     817,496       691,922       564,785  
 
                                                                       
End of Year Balance Sheet Data
                                                                       
Total assets
    978,875       832,916       814,883       (1,135,269 )     (962,778 )     (1,038,354 )     6,759,287       6,191,795       5,553,970  
Loans and loans held for sale, net of ALLL
                      (3,813 )                 3,688,395       3,987,318       4,053,454  
Total deposits
                      (39,884 )     (29,263 )     (106,457 )     4,521,902       4,100,152       3,262,475  
Stockholders’ equity
    838,583       685,890       676,940       (918,937 )     (797,180 )     (702,183 )     838,204       685,890       676,940  
 
                                                                       
Ratios and Other
                                                                       
Return on average assets
                                                    0.67 %     0.60 %     1.31 %
Return on average equity
                                                    5.18 %     4.97 %     11.63 %
Tier I risk-based capital ratio
                                                    18.24 %     14.02 %     14.30 %
Total risk-based capital ratio
                                                    19.51 %     15.29 %     15.55 %
Leverage capital ratio
                                                    12.71 %     11.20 %     12.38 %
Full time equivalent employees
    131       119       111                               1,674       1,643       1,571  
Locations
    1       1                                     105       106       101  
 
1   The average balance sheet data is based on daily averages for the entire year, with First National having been acquired October 2, 2009.
 
2   The average balance sheet data is based on daily averages for the entire year, with San Juans having been acquired December 1, 2008.

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INTERNET ACCESS
Copies of the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through the Company’s website (www.glacierbancorp.com) as soon as reasonably practicable after the Company has filed the material with, or furnished it to, the Securities and Exchange Commission (“SEC”). Copies can also be obtained by accessing the SEC’s website (www.sec.gov).
MARKET AREA
The Company has 105 locations, of which 9 are loan or administration offices, in 35 counties within 6 states including Montana, Idaho, Wyoming, Colorado, Utah, and Washington. The Company has 52 locations in Montana. In Idaho there are 29 locations. In Wyoming, there are 14 locations. In Utah, there are 4 locations. In Washington, there are 3 locations. In Colorado, there are 3 locations.
The market area’s economic base primarily focuses on tourism, construction, mining, manufacturing, service industry, and health care. The tourism industry is highly influenced by two national parks, several ski resorts, large lakes, and rural scenic areas.
COMPETITION
Based on the FDIC summary of deposits survey as of June 30, 2010, the Company has approximately 22 percent of the total FDIC insured deposits in the 13 counties that it services in Montana. In Idaho, the Company has approximately 7 percent of the deposits in the 9 counties that it services. In Wyoming, the Company has 24 percent of the deposits in the 6 counties it services. In Colorado, the Company has 12 percent of the deposits in the 2 counties it serves. In Utah, the Company has 3 percent of the deposits in the 3 counties it services.
There are a large number of depository institutions including savings banks, commercial banks, and credit unions in the markets in which the Company has offices. The Banks, like other depository institutions, are operating in a rapidly changing environment. Non-depository financial service institutions, primarily in the securities and insurance industries, have become competitors for retail savings and investment funds. Mortgage banking firms are actively competing for residential mortgage business. In addition to offering competitive interest rates, the principal methods used by banking institutions to attract deposits include the offering of a variety of services including on-line banking and convenient office locations and business hours. The primary factors in competing for loans are interest rates and rate adjustment provisions, loan maturities, loan fees, and the quality of service to borrowers and brokers.

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DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS’ EQUITY
Average Balance Sheet
The following three-year schedule provides 1) the total dollar amount of interest and dividend income of the Company for earning assets and the average yield; 2) the total dollar amount of interest expense on interest-bearing liabilities and the average rate; 3) net interest and dividend income and interest rate spread; and 4) net interest margin and net interest margin tax-equivalent; and 5) return on average assets and return on average equity.
                                                                         
    Year ended December 31, 2010     Year ended December 31, 2009     Year ended December 31, 2008  
                    Average                     Average                     Average  
    Average     Interest &     Yield/     Average     Interest &     Yield/     Average     Interest &     Yield/  
(Dollars in thousands)   Balance     Dividends     Rate     Balance     Dividends     Rate     Balance     Dividends     Rate  
Assets
                                                                       
Residential real estate loans
  $ 772,074     $ 45,401       5.88 %   $ 829,348     $ 54,498       6.57 %   $ 746,135     $ 51,166       6.86 %
Commercial loans
    2,542,186       143,861       5.66 %     2,608,961       151,580       5.81 %     2,390,990       165,119       6.91 %
Consumer and other loans
    684,752       42,130       6.15 %     702,232       44,844       6.39 %     671,296       47,725       7.11 %
 
                                                           
Total loans and loans held for sale
    3,999,012       231,392       5.79 %     4,140,541       250,922       6.06 %     3,808,421       264,010       6.93 %
Tax-exempt investment securities 1
    479,640       23,351       4.87 %     445,063       22,196       4.99 %     282,884       13,901       4.91 %
Taxable investment securities 2
    1,378,468       33,659       2.44 %     707,062       29,376       4.15 %     555,955       25,074       4.51 %
 
                                                           
Total earning assets
    5,857,120       288,402       4.92 %     5,292,666       302,494       5.72 %     4,647,260       302,985       6.52 %
 
                                                           
Goodwill and intangibles
    158,636                       158,896                       152,822                  
Non-earning assets
    291,284                       240,367                       229,321                  
 
                                                                 
Total assets
  $ 6,307,040                     $ 5,691,929                     $ 5,029,403                  
 
                                                                 
 
                                                                       
Liabilities
                                                                       
NOW accounts
  $ 718,175     $ 2,545       0.35 %   $ 572,260     $ 2,275       0.40 %   $ 467,374     $ 3,014       0.64 %
Savings accounts
    345,297       725       0.21 %     303,794       947       0.31 %     272,673       1,865       0.68 %
Money market deposit accounts
    848,495       6,975       0.82 %     768,939       8,436       1.10 %     760,599       17,234       2.27 %
Certificate accounts
    1,082,428       21,016       1.94 %     960,403       24,719       2.57 %     853,076       32,634       3.83 %
Wholesale deposits 3
    533,476       4,337       0.81 %     133,083       2,052       1.54 %     7,704       265       3.44 %
FHLB advances
    691,969       9,523       1.38 %     473,038       7,952       1.68 %     566,933       15,355       2.71 %
Securities sold under agreements to repurchase and other borrowed funds
    407,516       8,513       2.09 %     995,006       10,786       1.08 %     752,958       20,005       2.66 %
 
                                                           
Total interest bearing liabilities
    4,627,356       53,634       1.16 %     4,206,523       57,167       1.36 %     3,681,317       90,372       2.46 %
 
                                                                 
Non-interest bearing deposits
    830,513                       755,128                       739,079                  
Other liabilities
    31,675                       38,356                       44,222                  
 
                                                                 
Total liabilities
    5,489,544                       5,000,007                       4,464,618                  
 
                                                                 
 
                                                                       
Stockholders’ Equity
                                                                       
Common stock
    697                       615                       548                  
Paid-in capital
    611,577                       495,340                       393,158                  
Retained earnings
    196,785                       193,973                       171,385                  
Accumulated other comprehensive income (loss)
    8,437                       1,994                       (306 )                
 
                                                                 
Total stockholders’ equity
    817,496                       691,922                       564,785                  
 
                                                                 
Total liabilities and stockholders’ equity
  $ 6,307,040                     $ 5,691,929                     $ 5,029,403                  
 
                                                                 
Net Interest Income
          $ 234,768                     $ 245,327                     $ 212,613          
 
                                                                 
Net Interest Spread
                    3.76 %                     4.36 %                     4.06 %
Net Interest Margin
                    4.01 %                     4.64 %                     4.58 %
Net Interest Margin
(tax-equivalent)
                    4.21 %                     4.82 %                     4.70 %
 
1   Excludes tax effect of $10,338,000, $9,827,000 and $6,155,000 on tax-exempt investment security income for the years ended December 31, 2010, 2009 and 2008 respectively.
 
2   Excludes tax effect of $1,503,000, $0, and $0 on investment security tax credits for the years ended December 31, 2010, 2009 and 2008 respectively.
 
3   Wholesale deposits include brokered deposits classified as NOW, money market, and Certificate accounts.

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Rate/Volume Analysis
Net interest income can be evaluated from the perspective of relative dollars of change in each period. Interest income and interest expense, which are the components of net interest income, are shown in the following table on the basis of the amount of any increases (or decreases) attributable to changes in the dollar levels of the Company’s interest-earning assets and interest-bearing liabilities (“Volume”) and the yields earned and rates paid on such assets and liabilities (“Rate”). The change in interest income and interest expense attributable to changes in both volume and rates has been allocated proportionately to the change due to volume and the change due to rate.
                         
    Years ended December 31,  
    2010 vs. 2009  
    Increase (Decrease) Due to:  
(Dollars in thousands)   Volume     Rate     Net  
Interest income
                       
Residential real estate loans
  $ (3,764 )   $ (5,333 )   $ (9,097 )
Commercial loans
    (3,880 )     (3,839 )     (7,719 )
Consumer and other loans
    (1,116 )     (1,598 )     (2,714 )
Investment securities
    31,601       (26,163 )     5,438  
 
                 
Total interest income
    22,841       (36,933 )     (14,092 )
 
                       
Interest expense
                       
NOW accounts
    580       (310 )     270  
Savings accounts
    129       (351 )     (222 )
Money market deposit accounts
    873       (2,333 )     (1,460 )
Certificate accounts
    3,141       (6,844 )     (3,703 )
Wholesale deposits
    6,173       (3,889 )     2,284  
FHLB advances
    3,680       (2,109 )     1,571  
Repurchase agreements and other borrowed funds
    (6,368 )     4,095       (2,273 )
 
                 
Total interest expense
    8,208       (11,741 )     (3,533 )
 
                 
 
                       
Net interest income
  $ 14,633     $ (25,192 )   $ (10,559 )
 
                 
Net interest income decreased $11 million in 2010 over 2009. The decrease in net interest income was primarily due to lower yield and lower volume of loans which was partially offset by an increased volume of investments and net decrease in borrowing expense. For additional information, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
INVESTMENT ACTIVITIES
It has generally been the Company’s policy to maintain a liquid portfolio above policy limits. The Company’s investment securities are generally classified as available-for-sale and are carried at estimated fair value with unrealized gains or losses, net of tax, reflected as an adjustment to stockholders’ equity. The Company’s investment portfolio is primarily comprised of residential mortgage-backed securities and state and local government securities which are largely exempt from federal income tax. The Company uses the federal statutory rate of 35 percent in calculating its tax-equivalent yield. The residential mortgage-backed securities are typically short-term and provide the Company with on-going liquidity as scheduled and pre-paid principal payments are made on the securities. The Company assesses individual securities in its investment securities portfolio for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market conditions warrant.
For additional investment activity information, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 3 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.”

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LENDING ACTIVITY
General
The Banks focus their lending activity primarily on the following types of loans: 1) first-mortgage, conventional loans secured by residential properties, particularly single-family, 2) commercial lending that concentrates on targeted businesses , and 3) installment lending for consumer purposes (e.g., auto, home equity, etc.). “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 4 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” provide more information about the loan portfolio.
Loan Portfolio Composition
The following table summarizes the Company’s loan portfolio:
                                                                                 
    December 31, 2010     December 31, 2009     December 31, 2008     December 31, 2007     December 31, 2006  
(Dollars in thousands)   Amount     Percent     Amount     Percent     Amount     Percent     Amount     Percent     Amount     Percent  
Residential real estate loans
    632,877       17.52 %     743,147       18.95 %     783,399       19.59 %     685,731       19.50 %     754,708       24.11 %
 
                                                                               
Commercial loans
                                                                               
Real estate
    1,796,503       49.73 %     1,894,690       48.33 %     1,930,849       48.29 %     1,611,178       45.81 %     1,159,384       37.04 %
Other commercial
    654,588       18.12 %     724,579       18.48 %     644,980       16.13 %     636,125       18.09 %     691,033       22.07 %
 
                                                           
Total
    2,451,091       67.85 %     2,619,269       66.81 %     2,575,829       64.42 %     2,247,303       63.90 %     1,850,417       59.11 %
 
                                                                               
Consumer and other loans
                                                                               
Home equity
    483,137       13.38 %     501,866       12.80 %     507,839       12.70 %     432,002       12.28 %     356,246       11.38 %
Other consumer
    182,184       5.04 %     199,633       5.09 %     208,150       5.21 %     206,376       5.87 %     218,277       6.97 %
 
                                                           
Total
    665,321       18.42 %     701,499       17.89 %     715,989       17.91 %     638,378       18.15 %     574,523       18.35 %
 
                                                           
Loans receivable
    3,749,289       103.79 %     4,063,915       103.65 %     4,075,217       101.92 %     3,571,412       101.55 %     3,179,648       101.57 %
 
                                                                               
Allowance for loan and lease losses
    (137,107 )     -3.79 %     (142,927 )     -3.65 %     (76,739 )     -1.92 %     (54,413 )     -1.55 %     (49,259 )     -1.57 %
 
                                                           
Loans receivable, net
  $ 3,612,182       100.00 %   $ 3,920,988       100.00 %   $ 3,998,478       100.00 %   $ 3,516,999       100.00 %   $ 3,130,389       100.00 %
 
                                                           
Loan Portfolio Maturities or Repricing Term
The stated maturities or first repricing term (if applicable) for the loan portfolio at December 31, 2010 was as follows:
                                 
    Residential             Consumer        
(Dollars in thousands)   Real Estate     Commercial     and Other     Totals  
Variable rate maturing or repricing in
                               
One year or less
  $ 197,087       863,403       294,929       1,355,419  
One to five years
    138,108       753,674       36,465       928,247  
Thereafter
    16,049       146,303       3,117       165,469  
 
                               
Fixed rate maturing or repricing in
                               
One year or less
    165,166       246,507       118,742       530,415  
One to five years
    93,928       305,224       188,300       587,452  
Thereafter
    22,539       135,980       23,768       182,287  
 
                       
Totals
  $ 632,877       2,451,091       665,321       3,749,289  
 
                       

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Residential Real Estate Lending
The Company’s lending activities consist of the origination of both construction and permanent loans on residential real estate. The Company actively solicits residential real estate loan applications from real estate brokers, contractors, existing customers, customer referrals, and on-line applications. The Company’s lending policies generally limit the maximum loan-to-value ratio on residential mortgage loans to 80 percent of the lesser of the appraised value or purchase price or above 80 percent of the loan if insured by a private mortgage insurance company. The Company also provides interim construction financing for single-family dwellings. These loans are supported by a term take-out commitment.
Consumer Land or Lot Loans
The Company originates land and lot acquisition loans to borrowers who intend to construct their primary residence on the respective land or lot. These loans are generally for a term of three to five years and are secured by the developed land or lot with the loan to value limited to the lesser of 75 percent of cost or appraised value.
Unimproved Land and Land Development Loans
Where real estate market conditions warrant, the Company makes land acquisition and development loans on properties intended for residential and commercial use. These loans are generally made for a term of 18 months to two years and secured by the developed property with a loan-to-value not to exceed the lesser of 75 percent of cost or 65 percent of the appraised discounted bulk sale value upon completion of the improvements. The projects under development are inspected on a regular basis and advances are made on a percentage of completion basis. The loans are made to borrowers with real estate development experience and appropriate financial strength. Generally, it is required that a certain percentage of the development be pre-sold or that construction and term take-out commitments are in place prior to funding the loan. Loans made on unimproved land are generally made for a term of five to ten years with a loan-to-value not to exceed the lesser of 50 percent of cost or appraised value.
Residential Builder Guidance Lines
The Company provides Builder Guidance Lines that are comprised of pre-sold and spec-home construction and lot acquisition loans. The spec-home construction and lot acquisition loans are limited to a specific number and maximum amount. Generally the individual loans will not exceed a one year maturity. The homes under construction are inspected on a regular basis and advances made on a percentage of completion basis.
Commercial Real Estate Loans
Loans are made to purchase, construct and finance commercial real estate properties. These loans are generally made to borrowers who own and will occupy the property and generally have a loan-to-value up to the lesser of 75 percent of cost or appraised value and require a minimum 1.2 times debt service coverage margin. Loans to finance investment or income properties are made, but require additional equity and generally have a loan-to-value up to the lesser of 70 percent of cost or appraised value and require a higher debt service coverage margin commensurate with the specific property and projected income.
Consumer Lending
The majority of consumer loans are secured by real estate, automobiles, or other assets. The Banks intend to continue making such loans because of their short-term nature, generally between three months and five years. Moreover, interest rates on consumer loans are generally higher than on residential mortgage loans. The Banks also originate second mortgage and home equity loans, especially to existing customers in instances where the first and second mortgage loans are less than 80 percent of the current appraised value of the property.

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Loan Portfolio by Bank Subsidiary and Regulatory Classification
The following tables summarize selected information by bank and regulatory classification of the Company’s loan portfolio:
                                 
    Loans Receivable and loans held for sale, Gross by Bank  
    Balance     Balance              
(Dollars in thousands)   12/31/10     12/31/09     $ Change     % Change  
Glacier
  $ 866,097       942,254       (76,157 )     -8 %
Mountain West
    821,135       957,451       (136,316 )     -14 %
First Security
    571,925       566,713       5,212       1 %
Western
    305,977       323,375       (17,398 )     -5 %
1st Bank
    266,505       296,913       (30,408 )     -10 %
Valley
    183,003       187,283       (4,280 )     -2 %
Big Sky
    249,593       270,970       (21,377 )     -8 %
First National
    143,224       153,058       (9,834 )     -6 %
Citizens
    168,972       166,049       2,923       2 %
First Bank-MT
    109,310       117,017       (7,707 )     -7 %
San Juans
    143,574       149,162       (5,588 )     -4 %
Eliminations
    (3,813 )           (3,813 )     n/m  
 
                         
Total
  $ 3,825,502       4,130,245       (304,743 )     -7 %
 
                         
                                 
    Land, Lot and Other Construction Loans by Bank  
    Balance     Balance              
(Dollars in thousands)   12/31/10     12/31/09     $ Change     % Change  
Glacier
  $ 148,319       165,734       (17,415 )     -11 %
Mountain West
    147,991       217,078       (69,087 )     -32 %
First Security
    72,409       71,404       1,005       1 %
Western
    29,535       32,045       (2,510 )     -8 %
1st Bank
    29,714       36,888       (7,174 )     -19 %
Valley
    12,816       14,704       (1,888 )     -13 %
Big Sky
    53,648       71,365       (17,717 )     -25 %
First National
    12,341       10,247       2,094       20 %
Citizens
    12,187       13,263       (1,076 )     -8 %
First Bank-MT
    830       1,010       (180 )     -18 %
San Juans
    30,187       39,621       (9,434 )     -24 %
 
                         
Total
  $ 549,977       673,359       (123,382 )     -18 %
 
                         
                                                 
    Land, Lot and Other Construction Loans by Bank, by Type at 12/31/10  
            Consumer             Developed     Commercial        
    Land     Land or     Unimproved     Lots for     Developed     Other  
(Dollars in thousands)   Development     Lot     Land     Operative Builders     Lot     Construction  
Glacier
  $ 62,719       27,686       40,032       8,901       6,686       2,295  
Mountain West
    32,250       61,338       12,225       18,488       8,609       15,081  
First Security
    26,258       6,666       19,327       4,510       497       15,151  
Western
    14,815       5,234       3,929       589       1,815       3,153  
1st Bank
    7,486       9,920       3,494       281       2,046       6,487  
Valley
    2,142       4,925       1,063       55       3,381       1,250  
Big Sky
    19,714       16,115       8,807       651       2,354       6,007  
First National
    1,879       3,906       1,634       407       2,138       2,377  
Citizens
    2,690       2,155       2,438       50       682       4,172  
First Bank-MT
          83       747                    
San Juans
    3,431       15,881       2,163             7,628       1,084  
 
                                   
Total
  $ 173,384       153,909       95,859       33,932       35,836       57,057  
 
                                   

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Table of Contents

                                                 
                                    Custom and        
    Residential Construction Loans by Bank, by Type     Owner     Pre-Sold  
    Balance     Balance                     Occupied     and Spec  
(Dollars in thousands)   12/31/10     12/31/09     $ Change     % Change     12/31/10     12/31/10  
Glacier
  $ 34,526       57,183       (22,657 )     -40 %   $ 6,993       27,533  
Mountain West
    21,375       57,437       (36,062 )     -63 %     7,718       13,657  
First Security
    10,123       19,664       (9,541 )     -49 %     3,890       6,233  
Western
    1,350       2,245       (895 )     -40 %     622       728  
1st Bank
    6,611       17,633       (11,022 )     -63 %     4,342       2,269  
Valley
    4,950       5,170       (220 )     -4 %     3,708       1,242  
Big Sky
    11,004       20,679       (9,675 )     -47 %     459       10,545  
First National
    1,958       2,612       (654 )     -25 %     1,474       484  
Citizens
    9,441       13,211       (3,770 )     -29 %     4,425       5,016  
First Bank-MT
    502       234       268       115 %     502        
San Juans
    7,018       13,811       (6,793 )     -49 %     6,896       122  
 
                                     
Total
  $ 108,858       209,879       (101,021 )     -48 %   $ 41,029       67,829  
 
                                     
                                                 
    Single Family Residential Loans by Bank, by Type     1st     Junior  
    Balance     Balance                     Lien     Lien  
(Dollars in thousands)   12/31/10     12/31/09     $ Change     % Change     12/31/10     12/31/10  
Glacier
  $ 187,683       204,789       (17,106 )     -8 %   $ 166,370       21,313  
Mountain West
    282,429       278,158       4,271       2 %     243,890       38,539  
First Security
    92,011       82,141       9,870       12 %     78,208       13,803  
Western
    42,070       50,502       (8,432 )     -17 %     39,909       2,161  
1st Bank
    59,337       65,555       (6,218 )     -9 %     54,686       4,651  
Valley
    60,085       66,644       (6,559 )     -10 %     49,773       10,312  
Big Sky
    32,496       33,308       (812 )     -2 %     29,239       3,257  
First National
    13,948       19,239       (5,291 )     -28 %     10,678       3,270  
Citizens
    19,885       20,937       (1,052 )     -5 %     18,254       1,631  
First Bank-MT
    8,618       10,003       (1,385 )     -14 %     7,509       1,109  
San Juans
    29,124       22,811       6,313       28 %     27,260       1,864  
 
                                     
Total
  $ 827,686       854,087       (26,401 )     -3 %   $ 725,776       101,910  
 
                                     
                                                 
    Commercial Real Estate Loans by Bank, by Type     Owner     Non-Owner  
    Balance     Balance                     Occupied     Occupied  
(Dollars in thousands)   12/31/10     12/31/09     $ Change     % Change     12/31/10     12/31/10  
Glacier
  $ 224,215       232,552       (8,337 )     -4 %   $ 117,371       106,844  
Mountain West
    206,732       230,383       (23,651 )     -10 %     132,051       74,681  
First Security
    227,662       224,425       3,237       1 %     152,844       74,818  
Western
    103,443       107,173       (3,730 )     -3 %     56,767       46,676  
1st Bank
    58,353       64,008       (5,655 )     -9 %     43,725       14,628  
Valley
    50,325       48,144       2,181       5 %     31,779       18,546  
Big Sky
    88,135       82,303       5,832       7 %     53,420       34,715  
First National
    27,609       26,703       906       3 %     21,967       5,642  
Citizens
    61,737       55,660       6,077       11 %     44,914       16,823  
First Bank-MT
    17,492       18,827       (1,335 )     -7 %     11,085       6,407  
San Juans
    50,066       47,838       2,228       5 %     29,519       20,547  
 
                                     
Total
  $ 1,115,769       1,138,016       (22,247 )     -2 %   $ 695,442       420,327  
 
                                     

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    Consumer Loans by Bank, by Type     Home Equity     Other  
    Balance     Balance                     Line of Credit     Consumer  
(Dollars in thousands)   12/31/10     12/31/09     $ Change     % Change     12/31/10     12/31/10  
Glacier
  $ 150,082       162,723       (12,641 )     -8 %   $ 136,626       13,456  
Mountain West
    70,304       71,702       (1,398 )     -2 %     61,935       8,369  
First Security
    71,677       78,345       (6,668 )     -9 %     46,368       25,309  
Western
    43,081       48,946       (5,865 )     -12 %     30,382       12,699  
1st Bank
    40,021       46,455       (6,434 )     -14 %     16,566       23,455  
Valley
    23,745       24,625       (880 )     -4 %     14,780       8,965  
Big Sky
    27,733       28,903       (1,170 )     -4 %     24,605       3,128  
First National
    24,217       27,320       (3,103 )     -11 %     14,948       9,269  
Citizens
    29,040       29,253       (213 )     -1 %     23,002       6,038  
First Bank-MT
    8,005       7,650       355       5 %     3,940       4,065  
San Juans
    14,848       14,189       659       5 %     13,683       1,165  
 
                                     
Total
  $ 502,753       540,111       (37,358 )     -7 %   $ 386,835       115,918  
 
                                     
 
n/m - not measurable
Credit Risk Management
The Company’s credit risk management includes stringent credit policies, concentration limits, individual loan approval limits and committee approval of larger loan requests. Management practices also include regular internal and external credit examinations and an independent stress testing of the commercial real estate portfolio, including construction loans. On a quarterly basis, both the Banks and Parent management review loans experiencing deterioration of credit quality. A review of loans by concentration limits is performed on a quarterly basis. Federal and state regulatory safety and soundness examinations are conducted annually at Glacier, Mountain West, First Security, 1st Bank and Western and every eighteen months for all other bank subsidiaries.
Loan Approval Limits
Individual loan approval limits have been established for each lender based on the loan types and experience of the individual. Each bank subsidiary has an Officer Loan Committee consisting of senior lenders and members of senior management. The bank subsidiaries’ Officer Loan Committees have loan approval authority between $500,000 and $1,000,000. The bank subsidiaries’ Board of Directors’ have loan approval authority up to $2,000,000. Loans exceeding these limits and up to $10,000,000 are subject to approval by the Company’s Executive Loan Committee consisting of the Banks’ senior loan officers and the Company’s Credit Administrator. Loans greater than $10,000,000 are subject to approval by the Company’s Board of Directors. Under banking laws, loans to one borrower and related entities are limited to a prescribed percentage of the unimpaired capital and surplus of each bank subsidiary.
Interest Reserves
Interest reserves are used to periodically advance loan funds to pay interest charges on the outstanding balance of the related loan. As with any extension of credit, the decision to establish a loan-funded interest reserve upon origination of construction loans, including residential construction and land, lot and other construction loans, is based on prudent underwriting, including the feasibility of the project, expected cash flow, creditworthiness of the borrower and guarantors, and the protection provided by the real estate and other underlying collateral. Interest reserves provide an effective means for addressing the cash flow characteristics of construction loans. In response to the downturn in the housing market and potential impact upon construction lending, the Company discourages the creation or continued use of interest reserves.
The Company’s loan policy and credit administration practices establish standards and limits for all extensions of credit that are secured by interests in or liens on real estate, or made for the purpose of financing the construction of real property or other improvements. Ongoing monitoring and review of the loan portfolio is based on current information, including: the borrowers’ and guarantors’ creditworthiness, value of the real estate and other collateral, the project’s performance against projections, and monthly inspections by employees or external parties until the real estate project is complete.
Interest reserves are advanced provided the related construction loan is performing as expected. Loans with interest reserves may be extended, renewed or restructured only when the related loan continues to perform as expected and meets the prudent underwriting standards identified above. Such renewals, extension or restructuring are not permitted in order to keep the related loan current.

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In monitoring the performance and credit quality of a construction loan, the Company assesses the adequacy of any remaining interest reserve, and whether the use of an interest reserve remains appropriate in the presence of emerging weakness and associated risks in the construction loan.
The ongoing accrual and recognition of uncollected interest as income continues only when facts and circumstances continue to reasonably support the contractual payment of principal or interest. Loans are typically designated as non-accrual when the collection of the contractual principal or interest is unlikely and has remained unpaid for ninety days or more. For such loans, the accrual of interest and its capitalization into the loan balance will be discontinued.
The Company had loans with interest reserves of $141.1 million and $216.4 million of which there were remaining interest reserves of $879 thousand and $3.4 million as of December 31, 2010 and 2009, respectively. During 2010, the Company extended, renewed, or restructured 44 loans with interest reserves, such loans having an aggregate outstanding principal balance of $50.0 million as of December 31, 2010. However, such actions were based on prudent underwriting standards and not to keep the loans current. As of December 31, 2010, the Company had 45 construction loans totaling $65.3 million with interest reserves that are currently non-performing or which are potential problem loans.
Loan Purchases and Sales
Fixed rate, long-term mortgage loans are generally sold in the secondary market. The Company is active in the secondary market, primarily through the origination of conventional, FHA and VA residential mortgages. The sale of loans in the secondary mortgage market reduces the Company’s risk of holding long-term, fixed rate loans during periods of rising rates. The sale of loans also allows the Company to make loans during periods when funds are not otherwise available for lending purposes. In connection with conventional loan sales, the Company typically sells a majority of mortgage loans originated with servicing released. The Company has also been very active in generating commercial SBA loans, and other commercial loans, with a portion of those loans sold to investors. As of December 31, 2010, loans serviced for others totaled $173 million. The Company has not originated any type of subprime mortgages, either for the loan portfolio or for sale to investors. In addition, the Company has not purchased securities that were collateralized with subprime mortgages. The Company has not purchased loans outside the Company or originated loans outside the Company’s geographic market area.
Loan Origination and Other Fees
In addition to interest earned on loans, the Company receives fees for originating loans. Loan fees generally are a percentage of the principal amount of the loan and are charged to the borrower, and are normally deducted from the proceeds of the loan. Loan origination fees are generally 1.0 percent to 1.5 percent on residential mortgages and .5 percent to 1.5 percent on commercial loans. Consumer loans require a fixed fee amount as well as a minimum interest amount. The Company also receives other fees and charges relating to existing loans, which include charges and fees collected in connection with loan modifications.
Appraisal and Evaluation Process
The Company’s Loan Policy and credit administration practices adopt and implement the applicable requirements of the Interagency Appraisal and Evaluation Guidelines (and the Interagency Guidelines for Real Estate Lending Policies in Appendix A to Part 365 of Title 12, CFR) (collectively, the “Guidelines”) and the Uniform Standards of Professional Appraisal Practice (“USPAP”) as established and amended by the Appraisal Standards Board. The Company’s Loan Policy establishes criteria for obtaining appraisals or evaluations, including transactions that are otherwise exempt from the appraisal requirements set forth within the Guidelines.
Each of the Company’s eleven bank subsidiaries monitor conditions, including supply and demand factors, in the real estate markets served so they can react quickly to changing market conditions to mitigate potential losses from specific credit exposures within the loan portfolio. Evidence of the following real estate market conditions and trends is obtained from lending personnel and third party sources:
    demographic indicators, including employment and population trends;
 
    foreclosures, vacancy, construction and absorption rates;
 
    property sales prices, rental rates, and lease terms;
 
    current tax assessments;
 
    economic indicators, including trends within the lending areas; and
 
    valuation trends, including discount and capitalization rates.
Third party information sources include federal, state, and local governments and agencies thereof, private sector economic data vendors, real estate brokers, licensed agents, sales, rental and foreclosure data tracking services.

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The time between ordering an appraisal or evaluation and receipt from third party vendors is typically two to three weeks for residential property and four to six weeks for non-residential property. For real estate properties that are of highly specialized or limited use, significantly complex or large, additional time beyond the typical times may be required for new appraisals or evaluations.
As part of the Company’s credit administration and portfolio monitoring practices, the Company’s regular internal and external credit examinations review a significant number of individual loan files. Appraisals and evaluations are reviewed to determine whether the timeliness, methods, assumptions, and findings are reasonable and in compliance with the Company’s Loan Policy and credit administration practices, the Guidelines and USPAP standards. Such reviews include the adequacy of the steps taken by the Company to ensure that the individuals who perform appraisals and evaluations are appropriately qualified and are not subject to conflicts of interest. Deficiencies, if any, are reported to the Banks’ Board of Directors and prompt corrective action is taken.
Non-Performing Assets
The following tables summarize information regarding non-performing assets at the dates indicated, including breakouts by regulatory and bank subsidiary classification:
                                         
    December 31,  
(Dollars in thousands)   2010     2009     2008     2007     2006  
Non-accrual loans
                                       
Residential real estate
  $ 23,095     $ 20,093     $ 3,575     $ 934     $ 1,806  
Commercial
    161,136       168,328       58,454       7,192       3,721  
Consumer and other
    8,274       9,860       2,272       434       538  
 
                             
Total
    192,505       198,281       64,301       8,560       6,065  
Accruing loans 90 days or more past due
                                       
Residential real estate
    506       1,965       4,103       840       554  
Commercial
    3,051       1,311       2,897       1,216       638  
Consumer and other
    974       2,261       1,613       629       153  
 
                             
Total
    4,531       5,537       8,613       2,685       1,345  
 
                                       
Other real estate owned
    73,485       57,320       11,539       2,043       1,484  
 
                             
Total non-performing loans and other real estate owned
    270,521       261,138       84,453       13,288       8,894  
 
                             
Allowance for loan and lease losses as a percentage of non-performing assets
    51 %     55 %     91 %     409 %     554 %
Non-performing assets as a percentage of total subsidiary assets
    3.91 %     4.13 %     1.46 %     0.27 %     0.19 %
 
                                       
Unrecorded interest income 1
  $ 10,987     $ 11,730     $ 4,434     $ 683     $ 462  
 
1   Amounts represent estimated interest income that would have been recognized on loans accounted for on a non-accrual basis as of the end of each period had such loans performed pursuant to contractual terms.

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    Non-Performing Assets,     Non-     Accruing     Other  
    by Loan Type     Accruing     Loans 90     Real Estate  
    Balance     Balance     Loans     Days or More     Owned  
(Dollars in thousands)   12/31/10     12/31/09     12/31/10     12/31/10     12/31/10  
Custom and owner occupied construction
  $ 2,575       3,281       1,908             667  
Pre-sold and spec construction
    16,071       29,580       10,577             5,494  
Land development
    83,989       88,488       55,938             28,051  
Consumer land or lots
    12,543       10,120       8,150       40       4,353  
Unimproved land
    44,116       32,453       28,958             15,158  
Developed lots for operative builders
    7,429       11,565       5,378             2,051  
Commercial lots
    3,110       909       2,933             177  
Other construction
    3,837             3,837              
Commercial real estate
    36,978       32,300       26,522       731       9,725  
Commercial and industrial
    13,127       12,271       10,997       1,906       224  
Agriculture loans
    5,253       283       4,723       125       405  
1-4 family
    34,791       30,868       28,479       878       5,434  
Home equity lines of credit
    4,805       6,234       3,371       788       646  
Consumer
    446       1,042       150       24       272  
Other
    1,451       1,744       584       39       828  
 
                             
Total
  $ 270,521       261,138       192,505       4,531       73,485  
 
                             
                                         
    Accruing 30 - 89 Days Delinquent           Non-Accrual &        
    Loans and Non-Performing     Accruing     Accruing Loans     Other  
    Assets, by Bank     30-89 Days     90 Days or     Real Estate  
    Balance     Balance     Past Due     More Past Due     Owned  
(Dollars in thousands)   12/31/10     12/31/09     12/31/10     12/31/10     12/31/10  
Glacier
  $ 75,869       97,666       10,188       57,659       8,022  
Mountain West
    83,872       109,187       9,830       65,170       8,872  
First Security
    59,770       59,351       11,493       35,782       12,495  
Western
    11,237       9,315       1,917       6,209       3,111  
1st Bank
    16,686       21,117       4,349       3,468       8,869  
Valley
    1,900       2,542       723       1,049       128  
Big Sky
    21,739       31,711       3,143       10,068       8,528  
First National
    9,901       9,290       694       9,188       19  
Citizens
    8,000       5,340       1,216       4,936       1,848  
First Bank-MT
    553       800       299       254        
San Juans
    6,549       2,310       1,645       3,253       1,651  
GORE
    19,942                         19,942  
 
                             
Total
  $ 316,018       348,629       45,497       197,036       73,485  
 
                             
Non-performing assets as a percentage of the total subsidiary assets at December 31, 2010 were 3.91 percent, down from 4.13 percent at December 31, 2009. The allowance for loan and lease losses (“ALLL” or “allowance”) was 51 percent of non-performing assets at December 31, 2010, down from 55 percent for the prior year end. Most of the Company’s non-performing assets are secured by real estate and, based on the most current information available to management, including updated appraisals or evaluations, the Company believes the value of the underlying real estate collateral is adequate to minimize significant charge-offs or loss to the Company. Each bank subsidiary evaluates the level of its non-performing assets, the values of the underlying real estate and other collateral, and related trends in net charge-offs in determining the adequacy of the ALLL. Through pro-active credit administration, the Banks work closely with borrowers to seek favorable resolution to the extent possible, thereby attempting to minimize net charge-offs or losses to the Company.

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Loans that are thirty days or more past due based on payments received and applied to the loan are considered delinquent. Loans are designated non-accrual and the accrual of interest is discontinued when the collection of the contractual principal or interest is unlikely. A loan is typically placed on non-accrual when principal or interest is due and has remained unpaid for ninety days or more. When a loan is placed on non-accrual status, interest previously accrued but not collected is reversed against current period interest income. Subsequent payments are applied to the outstanding principal balance if doubt remains as to the ultimate collectability of the loan. Interest accruals are not resumed on partially charged-off impaired loans. For other loans on non-accrual, interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest.
Loans are designated impaired when, based upon current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement; and therefore, the Company has serious doubts as to the ability of such borrowers to fulfill the contractual obligation. Impaired loans include non-performing loans (i.e., non-accrual loans and accruing loans 90 days or more past due) and accruing loans under ninety days past due where it is probable payments will not be received according to the loan agreement (e.g., troubled debt restructuring loans). The Company measures impairment on a loan-by-loan basis. An insignificant delay or shortfall in the amounts of payments would not cause a loan or lease to be considered impaired. The Company determines the significance of payment delays and shortfalls on a case-by-case basis, taking into consideration all of the facts and circumstances surrounding the loan and the borrower, including the length and reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest due. At the time a loan is identified as impaired, it is measured for impairment and thereafter reviewed and measured on at least a quarterly basis for additional impairment.
The amount of the impairment is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except when it is determined that repayment of the loan is expected to be provided solely by the underlying collateral. For impairment based on expected future cash flows, the Company considers all information available as of a measurement date, including past events, current conditions, potential prepayments, and estimated cost to sell when such costs are expected to reduce the cash flows available to repay or otherwise satisfy the loan. For alternative ranges of cash flows, the likelihood of the possible outcomes is considered in determining the best estimate of expected future cash flows. The effective interest rate for a loan restructured in a troubled debt restructuring is based on the original contractual rate.
For collateral-dependent loans and real estate loans for which foreclosure or a deed-in-lieu of foreclosure is probable, impairment is measured by the fair value of the collateral, less estimated cost to sell. The fair value of the collateral is determined primarily based upon appraisal or evaluation (new or updated) of the underlying property value. The Company reviews appraisals or evaluations, giving consideration to the highest and best use of the collateral, with values reduced by discounts to consider lack of marketability and estimated cost to sell. Appraisals or evaluations (new or updated) are reviewed at least quarterly and more frequently based on current market conditions, including deterioration in a borrower’s financial condition and when property values may be subject to significant volatility. After review and acceptance of the collateral appraisal or evaluation (new or updated), adjustments to an impaired loan’s value may occur.
In deciding whether to obtain a new or updated appraisal or evaluation, the Company considers the impact of the following factors and environmental events:
    passage of time;
 
    improvements to, or lack of maintenance of, the collateral property;
 
    stressed and volatile economic conditions, including market values;
 
    changes in the performance, risk profile, size and complexity of the credit exposure;
 
    limited or specific use collateral property;
 
    high loan-to-value credit exposures;
 
    changes in the adequacy of the collateral protections, including loan covenants and financially responsible guarantors;
 
    competing properties in the market area;
 
    changes in zoning and environmental contamination;
 
    the nature of subsequent transactions (e.g., modification, restructuring, refinancing); and
 
    the availability of alternative financing sources.
The Company also takes into account (i) the Company’s experience with whether the appraised values of impaired collateral-dependent loans are actually realized, and (ii) the timing of cash flows expected to be received from the underlying collateral to the extent such timing is significantly different than anticipated in the most recent appraisal.

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The Company generally obtains new or updated appraisals or evaluations annually for collateral underlying impaired loans. For collateral-dependent loans for which the appraisal of the underlying collateral is more than twelve months old, the Company updates collateral valuations through procedures that include obtaining current inspections of the collateral property, broker price opinions, comprehensive market analyses and current data for conditions and assumptions (e.g., discounts, comparable sales and trends) underlying the appraisals’ valuation techniques. The Company’s impairment/valuation procedures take into account new and updated appraisals on similar properties in the same area in order to capture current market valuation changes, unfavorable and favorable.
When the ultimate collectability of the total principal of an impaired loan is in doubt and designated as non-accrual, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the total principal on an impaired loan is not in doubt, contractual interest is generally credited to interest income when received under the cash basis method. Impaired loans were $225.1 million and $218.7 million as of December 31, 2010 and 2009, respectively. The ALLL includes valuation allowances of $16.9 million and $19.8 million specific to impaired loans as of December 31, 2010 and 2009, respectively. Of the total impaired loans at December 31, 2010, there were 45 commercial real estate and other commercial loans that accounted for $120.0 million, or 53 percent, of the impaired loans. The 45 loans were collateralized by 125 percent of the loan value, the majority of which had appraisals (new or updated) in 2010, such appraisals reviewed at least quarterly taking into account current market conditions. Of the total impaired loans at December 31, 2010, there were 254 loans aggregating to $133.6 million, or 59 percent, whereby the borrowers had more than one impaired loan. The amount of impaired loans that have had partial charge-offs during the year for which the Company continues to have concern about the collectability of the remaining loan balance was $64.6 million. Of these loans, there were charge-offs of $25.4 million during 2010.
A restructured loan is considered a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The Company made the following types of loan modifications, some of which were considered TDR:
    Reduction of the stated interest rate for the remaining term of the debt;
 
    Extension of the maturity date(s) at a stated rate of interest lower than the current market rate for newly originated debt having similar risk characteristics; and
 
    Reduction of the face amount of the debt as stated in the debt agreements.
Each restructured debt is separately negotiated with the borrower and includes terms and conditions that reflect the borrower’s prospective ability to service the debt as modified. The Company discourages the multiple loan strategy when restructuring loans regardless of whether or not the notes are TDR loans. The Company’s TDR loans are considered impaired loans of which the majority are designated as nonaccrual. The Company does not have any commercial TDR loans as of December 31, 2010 that have repayment dates extended at or near the original maturity date for which the Company has not classified as impaired. The Company had TDR loans of $68.7 million as of December 31, 2010, of which $42.0 million were on non-accrual status. The Company has TDR loans of $19.0 million that are in non-accrual status or that have had partial charge-offs during the year, the borrowers of which continue to have $30.7 million in other loans that are on accrual status.
The Company recognizes that while borrowers may experience deterioration in their financial condition, many continue to be creditworthy customers who have the willingness and capacity for debt repayment. In determining whether non-restructured or unimpaired loans issued to a single or related party group of borrowers should continue to accrue interest when the borrower has other loans that are impaired or troubled debt restructurings, the Company on a quarterly or more frequent basis performs an updated and comprehensive assessment of the willingness and capacity of the borrowers to timely and ultimately repay their total debt obligations, including contingent obligations. Such analysis takes into account current financial information about the borrowers and financially responsible guarantors, if any, including for example:
    analysis of global, i.e., aggregate debt service for total debt obligations;
 
    assessment of the value and security protection of collateral pledged using current market conditions and alternative market assumptions across a variety of potential future situations; and
 
    loan structures and related covenants.
For non-performing construction loans involving residential structures, the percentage of completion exceeds 95% at December 31, 2010. For construction loans involving commercial structures, the percentage of completion ranges from projects not started to projects completed at year end 2010. During the construction loan term, all construction loan collateral properties are inspected at least monthly, or more frequently as needed, until completion. Draws on construction loans are predicated upon the results of the inspection and advanced based upon a percentage of completion basis versus original budget percentages. When construction loans become non-performing and the associated project is not complete, the Company on a case-by-case basis makes the decision to advance additional funds or to initiate collection/foreclosure proceedings. Such decision includes obtaining “as-is” and “at

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completion” appraisals for consideration of potential increases or decreases in the collateral’s value. The Company also considers the increased costs of monitoring progress to completion, and the related collection/holding period costs should collateral ownership be transferred to the Company. With very limited exception, the Company does not disburse additional funds on non-performing loans; instead, the Company has proceeded to collection and foreclosure actions in order to reduce the Company’s exposure to loss on such loans.
Property acquired by foreclosure or deed-in-lieu of foreclosure is carried at the lower of fair value at acquisition date or current estimated fair value, less selling costs. Fair value is determined as the amount that could be reasonably expected in a current sale between a willing buyer and a willing seller in an orderly transaction between market participants at the measurement date. If the fair value of the asset, less selling costs, is less than the cost of the property, a loss is recognized in other expenses and the asset carrying value is reduced. Gain or loss on disposition of real estate owned is recorded in non-interest income or non-interest expense, respectively. The loan book value prior to the acquisition and transfer of the loan into other real estate owned during 2010 was $99.8 million of which $27.5 million was residential real estate, $67.3 million was commercial real estate, and $5.0 million was consumer loans. The loan collateral acquired in foreclosure during 2010 was $72.6 million of which $19.1 million was residential real estate, $49.0 million was commercial real estate, and $4.5 million was consumer loans. The following table sets forth the changes in other real estate owned for the years ended December 31, 2010 and 2009:
                 
    Years ended December 31,  
(Dollars in thousands)   2010     2009  
Balance at beginning of period
  $ 57,320       11,539  
Additions
    72,572       71,967  
Capital improvements
    273       2,403  
Write-downs
    (10,429 )     (2,616 )
Sales
    (46,251 )     (25,973 )
 
           
Balance at end of period
  $ 73,485       57,320  
 
           
In determining the fair value of the properties on the date of transfer and any subsequent estimated losses of net realizable value, the fair value of other real estate acquired by foreclosure or deed-in-lieu of foreclosure is determined primarily based upon appraisal or evaluation of the underlying property value. Although there was an increase in write-downs in 2010 compared to 2009, the majority occurred during the third quarter of 2010 and slowed significantly during the fourth quarter of 2010. The Company believes that the write-downs in 2010 are not indicative of a trend in that several of such properties have characteristics unique to the property, including special or limited use, and locations of such properties. The Company determined that the write-downs were not indicative of a trend continuing beyond 2010 which would likely affect the future operating results in light of the remaining holdings of real property and each particular bank subsidiary’s experience in its particular markets. However, there can be no assurance that future significant write-downs will not occur.
With respect to the $6.7 million of loss realized during 2010 from dispositions of other real estate owned, $3.1 million resulted from the sales of individual or a combination of properties through auctions conducted by several of the bank subsidiaries. Of the other real estate owned properties sold during the third quarter of 2010, whether sold individually or through auction, several were sold at less than fair value, such strategic decisions taking into account the potential for increases or decreases in the property’s value over time and related holding period costs. Costs of the auctions, including property-specific marketing costs and service fees paid to the third-party auction firms, are aggregated with other directly-related selling costs in determining the loss realized from disposition of the other real estate owned.
The use of auctions during the third quarter of 2010 was undertaken by the Company as a step in evaluating strategic alternatives and consideration of more aggressive efforts to market other real estate owned outside of the Company’s geographic operations to attract additional interest. In addition to auctions, the Company utilizes real estate companies (local and national franchises) as well as showcasing select properties through the websites of the bank subsidiaries. Strategies for disposition of other real estate and other assets owned by each subsidiary are developed specific to each property. The Company does not intend to use auctions for disposition of other real estate owned in the future unless it is determined to be beneficial to the Company.
Allowance for Loan and Lease Losses
Determining the adequacy of the ALLL involves a high degree of judgment and is inevitably imprecise as the risk of loss is difficult to quantify. The ALLL methodology is designed to reasonably estimate the probable loan and lease losses within each bank subsidiary’s loan and lease portfolios. Accordingly, the ALLL is maintained within a range of estimated losses. The determination of the ALLL, including the provision for loan losses and net charge-offs, is a critical accounting estimate that involves management’s judgments about all known relevant internal and external environmental factors that affect loan losses, including the credit risk inherent in the loan and lease portfolios,

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economic conditions nationally and in the local markets in which the community bank subsidiaries operate, changes in collateral values, delinquencies, non-performing assets and net charge-offs.
Although the Company and Banks continue to actively monitor economic trends, soft economic conditions combined with potential declines in the values of real estate that collateralize most of the Company’s loan and lease portfolios may adversely affect the credit risk and potential for loss to the Company.
The ALLL evaluation is well documented and approved by each bank subsidiary’s Board of Directors and reviewed by the Parent’s Board of Directors. In addition, the policy and procedures for determining the balance of the ALLL are reviewed annually by each bank subsidiary’s Board of Directors, the Parent’s Board of Directors, the internal audit department, independent credit reviewers and state and federal bank regulatory agencies.
At the end of each quarter, each of the community bank subsidiaries analyzes its loan and lease portfolio and maintain an ALLL at a level that is appropriate and determined in accordance with accounting principles generally accepted in the United States of America. The allowance consists of a specific allocation component and a general allocation component. The specific allocation component relates to loans that are determined to be impaired. A valuation allowance is established when the fair value of a collateral-dependent loan or the present value of the loan’s expected future cash flows (discounted at the loan’s effective interest rate) is lower than the carrying value of the impaired loan. The general allocation component relates to probable credit losses inherent in the balance of the portfolio based on prior loss experience, adjusted for changes in trends and conditions of qualitative or environmental factors. Each of the Bank’s ALLL is considered adequate to absorb losses from any class of its loan and lease portfolio.
Management of each bank subsidiary exercises significant judgment when evaluating the effect of applicable qualitative or environmental factors on each bank subsidiary’s historical loss experience for loans not identified as impaired. Quantification of the impact upon each subsidiary bank’s ALLL is inherently subjective as data for any factor may not be directly applicable, consistently relevant, or reasonably available for management to determine the precise impact of a factor on the collectability of the bank’s unimpaired loan portfolio as of each evaluation date. Bank management documents its conclusions and rationale for changes that occur in each applicable factor’s weight, i.e., measurement and ensures that such changes are directionally consistent based on the underlying current trends and conditions for the factor.
The Company is committed to a conservative management of the credit risk within the loan and lease portfolios, including the early recognition of problem loans. The Company’s credit risk management includes stringent credit policies, individual loan approval limits, limits on concentrations of credit, and committee approval of larger loan requests. Management practices also include regular internal and external credit examinations, identification and review of individual loans and leases experiencing deterioration of credit quality, procedures for the collection of non-performing assets, quarterly monitoring of the loan and lease portfolios, semi-annual review of loans by industry, and periodic stress testing of the loans secured by real estate.
The Company’s model of eleven independent wholly-owned community banks, each with its own loan committee, chief credit officer and Board of Directors, provides substantial local oversight to the lending and credit management function. Unlike a traditional, single-bank holding company, the Company’s decentralized business model affords multiple reviews of larger loans before credit is extended, a significant benefit in mitigating and managing the Company’s credit risk. The geographic dispersion of the market areas in which the Company and the community bank subsidiaries operate further mitigates the risk of credit loss. While this process is intended to limit credit exposure, there can be no assurance that further problem credits will not arise and additional loan losses incurred, particularly in periods of rapid economic downturns.
The primary responsibility for credit risk assessment and identification of problem loans rests with the loan officer of the account. This continuous process, utilizing each of the Banks’ internal credit risk rating process, is necessary to support management’s evaluation of the ALLL adequacy. An independent loan review function verifying credit risk ratings evaluates the loan officer and management’s evaluation of the loan portfolio credit quality. The loan review function also assesses the evaluation process and provides an independent analysis of the adequacy of the ALLL.
The Company considers the ALLL balance of $137 million adequate to cover inherent losses in the loan and lease portfolios as of December 31, 2010. However, no assurance can be given that the Company will not, in any particular period, sustain losses that are significant relative to the ALLL amount, or that subsequent evaluations of the loan and lease portfolios applying management’s judgment about then current factors, including economic and regulatory developments, will not require significant changes in the ALLL. Under such circumstances, this could result in increased provisions for loan losses. See additional risk factors in “Item 1A. Risk Factors.”

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The following table summarizes the allocation of the ALLL:
                                                                                 
    December 31, 2010     December 31, 2009     December 31, 2008     December 31, 2007     December 31, 2006  
    Allowance     Percent     Allowance     Percent     Allowance     Percent     Allowance     Percent     Allowance     Percent  
    for Loan and     of Loans in     for Loan and     of Loans in     for Loan and     of Loans in     for Loan and     of Loans in     for Loan and     of Loans in  
(Dollars in thousands)   Lease Losses     Category     Lease Losses     Category     Lease Losses     Category     Lease Losses     Category     Lease Losses     Category  
Residential real estate
  $ 20,957       16.9 %     13,496       18.3 %     7,233       19.2 %     4,755       19.2 %     5,421       23.7 %
Commercial real estate
    76,147       47.9 %     66,791       46.6 %     35,305       47.4 %     23,010       45.1 %     16,741       36.5 %
Other commercial
    19,932       17.4 %     39,558       17.8 %     21,590       15.8 %     17,453       17.8 %     18,361       21.7 %
Home equity
    13,334       12.9 %     13,419       12.4 %     6,975       12.5 %     4,680       12.1 %     4,087       11.2 %
Other consumer
    6,737       4.9 %     9,663       4.9 %     5,636       5.1 %     4,515       5.8 %     4,649       6.9 %
 
                                                           
Totals
  $ 137,107       100.0 %     142,927       100.0 %     76,739       100.0 %     54,413       100.0 %     49,259       100.0 %
 
                                                           
The following tables summarize the ALLL experience at the dates indicated, including breakouts by regulatory and bank subsidiary classification:
                                         
    Years ended December 31,  
(Dollars in thousands )   2010     2009     2008     2007     2006  
Balance at beginning of period
  $ 142,927       76,739       54,413       49,259       38,655  
Charge-offs
                                       
Residential real estate
    (16,575 )     (18,854 )     (3,233 )     (306 )     (14 )
Commercial loans
    (69,595 )     (35,077 )     (4,957 )     (2,367 )     (1,187 )
Consumer and other loans
    (7,780 )     (6,965 )     (1,649 )     (714 )     (448 )
 
                             
Total charge-offs
    (93,950 )     (60,896 )     (9,839 )     (3,387 )     (1,649 )
 
                             
 
                                       
Recoveries
                                       
Residential real estate
    749       423       23       208       341  
Commercial loans
    2,203       1,636       716       656       331  
Consumer and other loans
    485       407       321       358       298  
 
                             
Total recoveries
    3,437       2,466       1,060       1,222       970  
 
                             
 
                                       
Charge-offs, net of recoveries
    (90,513 )     (58,430 )     (8,779 )     (2,165 )     (679 )
Acquisitions 1
                2,625       639       6,091  
Provision for loan losses
    84,693       124,618       28,480       6,680       5,192  
 
                             
Balance at end of period
  $ 137,107       142,927       76,739       54,413       49,259  
 
                             
 
                                       
Ratio of net charge-offs to average loans outstanding during the period
    2.26 %     1.41 %     0.23 %     0.06 %     0.02 %
 
                                       
Allowance for loan and lease losses as a percentage of total loan and leases
    3.58 %     3.46 %     1.86 %     1.51 %     1.53 %
 
1   Acquisition of San Juans in 2008, North Side in 2007, CDC and Morgan in 2006.

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                            Provision        
    Allowance for Loan     Provision     for Year     ALLL  
    and Lease Losses     for Year     Ended 12/31/10     as a Percent  
    Balance     Balance     Ended     Over Net     of Loans  
(Dollars in thousands)   12/31/10     12/31/09     12/31/10     Charge-Offs     12/31/10  
Glacier
  $ 34,701       38,978       20,050       0.8       4.01 %
Mountain West
    35,064       37,551       45,000       0.9       4.27 %
First Security
    19,046       18,242       8,100       1.1       3.33 %
Western
    7,606       8,762       950       0.5       2.49 %
1st Bank
    10,467       10,895       2,150       0.8       3.93 %
Valley
    4,651       4,367       500       2.3       2.54 %
Big Sky
    9,963       10,536       3,475       0.9       3.99 %
First National
    2,527       1,679       1,453       2.4       1.76 %
Citizens
    5,502       4,865       2,000       1.5       3.26 %
First Bank-MT
    3,020       2,904       265       1.8       2.76 %
San Juans
    4,560       4,148       750       2.2       3.18 %
 
                                 
Total
  $ 137,107       142,927       84,693       0.9       3.58 %
 
                                 
                                 
    Net Charge-Offs,              
    for Year Ended, By Bank              
    Balance     Balance     Charge-Offs     Recoveries  
(Dollars in thousands)   12/31/10     12/31/09     12/31/10     12/31/10  
Glacier
  $ 24,327       12,012       24,783       456  
Mountain West
    47,487       28,931       48,221       734  
First Security
    7,296       3,745       8,509       1,213  
Western
    2,106       1,500       2,202       96  
1st Bank
    2,578       5,917       3,176       598  
Valley
    216       414       229       13  
Big Sky
    4,048       4,896       4,216       168  
First National
    605       4       681       76  
Citizens
    1,363       656       1,379       16  
First Bank-MT
    149       26       165       16  
San Juans
    338       329       389       51  
 
                       
Total
  $ 90,513       58,430       93,950       3,437  
 
                       
                                 
    Net Charge-Offs,              
    for Year Ended, By Loan Type              
    Balance     Balance     Charge-Offs     Recoveries  
(Dollars in thousands)   12/31/10     12/31/09     12/31/10     12/31/10  
Residential construction
  $ 7,147       13,455       7,432       285  
Land, lot and other construction
    51,580       28,310       52,671       1,091  
Commercial real estate
    10,181       1,187       10,404       223  
Commercial and industrial
    5,612       3,610       6,490       878  
1-4 family
    9,897       7,242       10,414       517  
Home equity lines of credit
    4,496       2,357       4,535       39  
Consumer
    951       1,895       1,312       361  
Other
    649       374       692       43  
 
                       
Total
  $ 90,513       58,430       93,950       3,437  
 
                       

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The allowance determined by each of the eleven community bank subsidiaries is combined together into a single allowance for the Company. As of December 31, 2010 and 2009, the Company’s allowance consisted of the following components:
                 
    December 31,  
(Dollars in thousands)   2010     2009  
Specific allocation
  $ 16,871       19,760  
General allocation
    120,236       123,167  
 
           
Total allowance
  $ 137,107       142,927  
 
           
Throughout 2010 and at December 31, 2010, the Company believes the allowance is commensurate with the risk in the Company’s loan and lease portfolio and is directionally consistent with the change in the quality of the Company’s loan and lease portfolio as determined at each bank subsidiary.
In total, the ALLL has decreased $5.8 million, or 4 percent, from a year ago. The ALLL of $137.1 million is 3.58 percent of total loans outstanding at December 31, 2010, up from 3.46 percent of total loans at the prior year end. While the overall amount of the ALLL decreased, the increase in the ALLL as a percent of loans is the result of a continuing overall upward increase in environmental factors upon each bank subsidiary’s historical loss experience. Despite the overall continuing upward increase in environmental factors upon each bank subsidiary’s historical loss experience, the general allocation of the Company’s allowance decrease by $2.9 million due to the decrease of $304.7 million, or 7 percent, in total loans at December 31, 2010 compared to the prior year end. For additional information regarding the trends and conditions impacting the environmental factors, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Presented below are select aggregated statistics that were also considered when determining the adequacy of the Company’s ALLL:
      Positive Trends
 
    The provision for loan losses in 2010 was $84.7 million, a decrease of $39.9 million from 2009.
 
    Non-accrual construction loans (i.e., residential construction and land, lot and other construction) was $117.7 million, or 61 percent, of the $192.5 million of non-accrual loans at year end 2010, a decrease of $9.7 million from the prior year end. Non-accrual construction loans at year end 2009 accounted for 64 percent of the $198.3 million of non-accrual loans.
 
    The allowance as a percent of non-performing loans was 70 percent at year ends 2010 and 2009.
 
    Early stage delinquencies (accruing loans 30-89 days past due) decreased to $45.5 million at year end 2010 from $87.5 million at the prior year end.
 
      Negative Trends
 
    The $37.3 million total of non-accrual loans in the agriculture, 1-4 family, home equity lines of credit, consumer, and other loans at year end 2010 increased by $7.9 million from year end 2009.
 
    Charge-offs, net of recoveries, in 2010 was $90.5 million, an increase of $32.1 million from 2009.
 
    Net charge-offs of construction loans was $58.7 million, or 65 percent, of the $90.5 million of net charge-offs in 2010 compared to net charge-offs of construction loans of $41.8 million, or 71 percent, of the $58.4 million of net charge-offs in 2009.
 
    Impaired loans as a percent of total loans increased to 5.88 percent at year end 2010 as compared to 5.30 percent at year end 2009.
 
    Non-performing loans as a percent of total loans increased to 5.15 percent at year end 2010 as compared to 4.93 percent at year end 2009.
When applied to each bank subsidiary’s historical loss experience, the environmental factors result in the provision for loan losses being recorded in the period in which the loss has probably occurred. When the loss is confirmed at a later date, a charge-off is recorded. The occurrence of confirming events in 2010 for previously recognized provision for loan losses resulted in loan charge-offs, net of recoveries, exceeding the provision for loan losses by $5.8 million. During 2009, the provision for loan losses exceeded loan charge-offs, net of recoveries, by $66.2 million.
The eleven bank subsidiaries provide commercial services to individuals, small to medium size businesses, community organizations and public entities from 105 locations, including 96 branches, across Montana, Idaho, Wyoming, Colorado, Utah, and Washington. The Rocky Mountain areas in which the bank subsidiaries operate have diverse economies and markets that are tied to commodities (crops, livestock, minerals, oil and natural gas), tourism, real estate and land development and an assortment of industries, both manufacturing and service-related. Thus, the downturn in the global, national, and local economies is not uniform across each of the bank subsidiaries.

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The soft economic conditions during much of 2009, though stabilized during 2010, included the declining sales of existing real property (e.g., single family residential, multi-family, commercial buildings and land), an increase in existing inventory of real property, increase in real property delinquencies and foreclosures, and corresponding decrease in absorption rates, and lower values of real property that collateralize most of the Company’s loan and lease portfolios, among other factors. While national unemployment increased steadily from 7.4 percent at the start of 2009 to 10.0 percent at year end 2009 and dropping to 9.4 at December 31, 2010, the unemployment rates for the states in which the community bank subsidiaries conduct operations were significantly lower throughout 2009 and 2010 than the national unemployment percentages. Agricultural price declines in livestock and grain in 2009 have significantly recovered in 2010. Concurrently, prices for oil held strong, while prices for natural gas remain below the exceptionally high price levels of 2008. The decline in the cost of living, as reflected in CPI measures, helped buffer the general softening of the economy nationally, regionally and locally, and the impact of lower real property values. The tourism industry and related lodging continues to be a source of strength for those banks whose market areas have national parks and similar recreational areas in the market areas served. Such changes affected the bank subsidiaries in distinctly different ways as each bank has its own geographic area and local economy influences over both a short-term and long-term horizon.
The specific allowance allocation of $16.9 million pertains to total impaired loans of $225.1 million. Included in the impaired loans is $159.9 million of loans which have no specific allowance allocation since the fair value of collateral-dependent loans or the present value of the loan’s expected future cash flows (discounted at the loan’s effective interest rate) is higher than the carrying value of such impaired loans. In determining the need for a specific allowance allocation on impaired loans, the effects of decreases during 2010 in the fair value of the underlying collateral were considered.
In evaluating the need for a specific or general valuation allowance for impaired and unimpaired loans, respectively, within the Company’s construction loan portfolio, including residential construction and land, lot and other construction loans, the credit risk related to such loans was considered in the ongoing monitoring of such loans, including assessments based on current information, including new or updated appraisals or evaluations of the underlying collateral, expected cash flows and the timing thereof, as well as the estimated costs to sell when such costs are expected to reduce the cash flows available to repay or otherwise satisfy the construction loan. Construction loans are 17% of the Company’s total loan portfolio and account for 61% of the Company’s non-accrual loans at December 31, 2010. Collateral securing construction loans include residential buildings (e.g., single/multi-family and condominiums), commercial buildings, and associated land (multi-acre parcels and individual lots, with and without shorelines). Outstanding balances are centered in Western Montana and Northern Idaho, as well as Boise, Ketchum and Sun Valley, Idaho. None of the individual bank subsidiaries have a concentration of constructions loans exceeding 5% of the Company’s total loan portfolio.
As identified below, the following four bank subsidiaries had non-accrual construction loans that aggregated 5 percent or more of the Company’s $117.7 million of non-accrual construction loans at December 31, 2010. Also identified below are the principal areas of the bank subsidiaries’ operations in which the collateral properties of such non-accrual construction loans are located:
         
Mountain West
  38 percent   Northern Idaho and Boise and Sun Valley, Idaho
Glacier
  31 percent   Western Montana
First Security
  14 percent   Western Montana
Big Sky
  7 percent   Western Montana
Residential non-accrual construction loans are 11 percent of the total construction loans on non-accrual status as of year end 2010. Unimproved land and land development loans collectively account for the bulk of the non-accrual commercial construction loans at each of the four bank subsidiaries. With locations and operations in the contiguous northern Rocky Mountain states of Idaho and Montana, the geography and economies of each of the four bank subsidiaries are predominantly tied to real estate development given the sprawling abundance of timbered valleys and mountainous terrain with significant lakes, streams and watershed areas. Consistent with the general economic downturn, the market for upscale primary, secondary and other housing as well as the associated construction and building industries have stalled after years of significant growth. As the housing market (rental and owner-occupied) and related industries continue to recover from the downturn, the Company continues to reduce its exposure to loss in the construction loan and other segments of the total loan portfolio.
For additional information regarding the ALLL, its relation to the provision for loan losses and risk related to asset quality, see Note 4 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.”

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SOURCES OF FUNDS
General
Deposits obtained through the Banks have traditionally been the principal source of funds for use in lending and other business purposes. The Banks have a number of different deposit programs designed to attract both short-term and long-term deposits from the general public by providing a wide selection of accounts and rates. These programs include non-interest bearing demand accounts, interest-bearing checking, regular statement savings, money market deposit accounts, and fixed rate certificates of deposit with maturities ranging from three months to five years, negotiated-rate jumbo certificates, and individual retirement accounts. In addition, the Banks obtain wholesale deposits through various programs including the Certificate of Deposit Account Registry System (“CDARS”).
The Banks also obtain funds from repayment of loans and investment securities, advances from the FHLB and other borrowings, repurchase agreements, and sale of loans and investment securities. Loan repayments are a relatively stable source of funds, while interest bearing deposit inflows and outflows are significantly influenced by general interest rate levels and market conditions. Borrowings and advances may be used on a short-term basis to compensate for reductions in normal sources of funds such as deposit inflows at less than projected levels. Borrowings also may be used on a long-term basis to support expanded activities and to match maturities of longer-term assets.
Deposits
Deposits are obtained primarily from individual and business residents of the Banks’ market area. The Banks issue negotiated-rate certificate of deposits accounts and have paid a limited amount of fees to brokers to obtain deposits. The following table illustrates the amounts outstanding at December 31, 2010 for deposits of $100,000 and greater, according to the time remaining to maturity. Included in certificates of deposit are brokered certificates of deposit and deposits issued through the CDARS of $386,745,000. Included in Demand Deposits are brokered deposits of $179,422,000.
                         
    Certificates     Demand        
(Dollars in thousands)   of Deposit     Deposits     Totals  
Within three months
  $ 427,436       1,812,587       2,240,023  
Three months to six months
    160,525             160,525  
Seven months to twelve months
    173,215             173,215  
Over twelve months
    150,678             150,678  
 
                 
Totals
  $ 911,854       1,812,587       2,724,441  
 
                 
For additional deposit information, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 7 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.”
Advances and Other Borrowings
As members of the FHLB, the Banks may borrow from such entity on the security of FHLB stock, which the Banks are required to own as a member. The borrowings are collateralized by eligible categories of loans and investment securities (principally, securities which are obligations of, or guaranteed by, the United States and its agencies), provided certain standards related to credit-worthiness have been met. Advances are made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based either on a fixed percentage of an institution’s total assets or on the FHLB’s assessment of the institution’s credit-worthiness. FHLB advances have been used from time to time to meet seasonal and other withdrawals of deposits and to expand lending by matching a portion of the estimated amortization and prepayments of retained fixed rate mortgages.
The Banks also periodically borrow funds from the FRB and from the U.S. Treasury Tax and Loan program. There were no FRB borrowings as of December 31, 2010 as a result of the cessation of the Term Auction Facility program. Both programs require pledging of certain loans or investment securities of the Banks and are generally short term obligations.
The Banks have borrowed money through repurchase agreements. This process involves the “selling” of one or more of the securities in the Banks’ investment portfolios and by entering into an agreement to “repurchase” that same security at an agreed upon later date. A rate of interest is paid for the subject period of time. In addition, although the Banks have offered retail repurchase agreements to its retail customers, the Government Securities Act of 1986 imposed confirmation and other requirements which generally made it impractical for financial institutions to offer such investments on a broad basis. Through policies adopted by each of the Banks’ Board of Directors, the Banks enter into repurchase agreements with local municipalities, and certain customers, and have adopted procedures designed to ensure proper transfer of title and safekeeping of the underlying securities.

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The following chart illustrates the average balances and the maximum outstanding month-end balances for FHLB advances, repurchase agreements and borrowings through the FRB:
                         
    At or for the Years ended December 31,
(Dollars in thousands)   2010   2009   2008
FHLB advances
                       
Amount outstanding at end of period
  $ 965,141       790,367       338,456  
Average balance
  $ 691,969       473,038       566,933  
Maximum outstanding at any month-end
  $ 977,155       790,367       822,107  
Weighted average interest rate
    1.38 %     1.68 %     2.71 %
 
                       
Repurchase agreements
                       
Amount outstanding at end of period
  $ 249,403       212,506       188,363  
Average balance
  $ 227,202       204,503       188,952  
Maximum outstanding at any month-end
  $ 252,083       234,914       196,461  
Weighted average interest rate
    0.71 %     0.98 %     2.02 %
 
                       
FRB discount window
                       
Amount outstanding at end of period
  $       225,000       914,000  
Average balance
  $ 35,630       658,262       277,611  
Maximum outstanding at any month-end
  $ 235,000       1,005,000       928,000  
Weighted average interest rate
    0.25 %     0.26 %     1.76 %
 
                       
Total FHLB advances, repurchase agreements, and FRB discount window
                       
Amount outstanding at end of period
  $ 1,214,544       1,227,873       1,440,819  
Average balance
  $ 954,801       1,335,803       1,033,496  
Maximum outstanding at any month-end
  $ 1,464,238       2,030,281       1,946,568  
Weighted average interest rate
    1.18 %     0.88 %     2.32 %
For additional information concerning the Company’s borrowings and repurchase agreements, see Notes 8 and 9 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.”
Subordinated Debentures
In addition to funds obtained in the ordinary course of business, the Company formed Glacier Trust II, Glacier Trust III, and Glacier Trust IV as financing subsidiaries and obtained Citizens Trust I in connection with the acquisition of Citizens on April 1, 2005, San Juans Trust I in connection with the acquisition of San Juans on December 1, 2008, and First Co Trust 01 and First Co Trust 03 in connection with the acquisition of First National on October 2, 2009. The trusts issued preferred securities that entitle the shareholder to receive cumulative cash distributions from payments thereon. The subordinated debentures outstanding as of December 31, 2010 are $125,132,000, including fair value adjustments from acquisitions. For additional information regarding the subordinated debentures, see Note 10 to the Consolidated Financial Statements “Item 8. Financial Statements and Supplementary Data.”
EMPLOYEES
As of December 31, 2010, the Company employed 1,674 persons, 1,517 of whom were full time, none of whom were represented by a collective bargaining group. The Company provides its employees with a comprehensive benefit program, including medical insurance, dental plan, life and accident insurance, long-term disability coverage, sick leave, profit sharing plan, savings plan and employee stock options. The Company considers its employee relations to be excellent. See Note 15 in the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” for detailed information regarding employee benefit plans and eligibility.

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SUPERVISION AND REGULATION
Introduction
The following discussion provides an overview of certain elements of the extensive regulatory framework applicable to the Company and the Banks. This regulatory framework is primarily designed for the protection of depositors, federal deposit insurance funds and the banking system as a whole, rather than specifically for the protection of shareholders. Due to the breadth and growth of this regulatory framework, the costs of compliance continue to increase in order to monitor and satisfy these requirements.
To the extent that this section describes statutory and regulatory provisions, it is qualified by reference to those provisions. These statutes and regulations, as well as related policies, are subject to change by Congress, state legislatures and federal and state regulators. Changes in statutes, regulations or regulatory policies applicable to the Company, including the interpretation or implementation thereof, could have a material effect on the Company’s business or operations. Recently, in light of the recent financial crisis, numerous proposals to modify or expand banking regulation have surfaced and potentially have unintended consequences. Based on past history, if any are approved, they will add to the complexity and cost of the Company’s business.
Bank Holding Company Regulation
General. The Company is a bank holding company as defined in the Bank Holding Company Act of 1956, as amended (“BHCA”), due to its ownership of the bank subsidiaries. Glacier, First Security, Western, Valley, Big Sky, and First Bank-MT are Montana state-chartered banks and are members of the Federal Reserve System; Mountain West and Citizens are Idaho state-chartered banks; 1st Bank is a Wyoming state-chartered bank and is a member of the Federal Reserve System; First National is a nationally chartered bank and is a member of the Federal Reserve System; and San Juans is a Colorado state-chartered bank. The deposits of the Banks are insured by the FDIC.
As a bank holding company, the Company is subject to regulation, supervision and examination by the Federal Reserve. In general, the BHCA limits the business of bank holding companies to owning or controlling banks and engaging in other activities closely related to banking. The Company must also file reports with and provide additional information to the Federal Reserve. Under the Financial Services Modernization Act of 1999, a bank holding company may apply to the Federal Reserve to become a financial holding company, and thereby engage (directly or through a subsidiary) in certain expanded activities deemed financial in nature, such as securities brokerage and insurance underwriting.
Holding Company Bank Ownership. The BHCA requires every bank holding company to obtain the prior approval of the Federal Reserve before 1) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5 percent of such shares; 2) acquiring all or substantially all of the assets of another bank or bank holding company; or 3) merging or consolidating with another bank holding company.
Holding Company Control of Nonbanks. With some exceptions, the BHCA also prohibits a bank holding company from acquiring or retaining direct or indirect ownership or control of more than 5 percent of the voting shares of any company that is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities that, by federal statute, agency regulation or order, have been identified as activities closely related to the business of banking or of managing or controlling banks.
Transactions with Affiliates. Bank subsidiaries of a bank holding company are subject to restrictions imposed by the Federal Reserve Act on extensions of credit to the holding company or its subsidiaries, on investments in securities, and on the use of securities as collateral for loans to any borrower. These regulations and restrictions may limit the Company’s ability to obtain funds from the bank subsidiaries for its cash needs, including funds for payment of dividends, interest and operational expenses.
Tying Arrangements. The Company is prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, sale or lease of property or furnishing of services. For example, with certain exceptions, neither the Company nor the Banks may condition an extension of credit to a customer on either 1) a requirement that the customer obtain additional services provided by the Company or Banks; or 2) an agreement by the customer to refrain from obtaining other services from a competitor.
Support of Bank Subsidiaries. Under Federal Reserve policy, the Company is expected to act as a source of financial and managerial strength to its banks. This means that the Company is required to commit, as necessary, resources to support the Banks. Any capital loans a bank holding company makes to its bank subsidiaries are subordinate to deposits and to certain other indebtedness of the bank subsidiaries.

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State Law Restrictions. As a Montana corporation, the Company is subject to certain limitations and restrictions under applicable Montana corporate law. For example, state law restrictions in Montana include limitations and restrictions relating to indemnification of directors, distributions to shareholders, transactions involving directors, officers or interested shareholders, maintenance of books, records and minutes, and observance of certain corporate formalities.
The Bank Subsidiaries
Glacier, First Security, Western, Valley, Big Sky, and First Bank-MT are subject to regulation and supervision by the Montana Department of Administration’s Banking and Financial Institutions Division and the Federal Reserve as a result of their membership in the Federal Reserve System.
Mountain West and Citizens are subject to regulation and supervision by the Idaho Department of Finance and by the FDIC. In addition, Mountain West’s Utah and Washington branches are primarily regulated by the Utah Department of Financial Institutions and the Washington Department of Financial Institutions, respectively.
1st Bank is subject to regulation and supervision by the Wyoming Division of Banking and the Federal Reserve. First National is subject to regulation and supervision by the Federal Reserve and also the Office of Comptroller of the Currency (“OCC”) as a nationally chartered bank, and to a certain extent, by the Wyoming Division of Banking.
San Juans is subject to regulation by the Colorado Department of Regulatory Agencies-Division of Banking and by the FDIC.
The federal laws that apply to the Banks regulate, among other things, the scope of their business, their investments, their reserves against deposits, the timing of the availability of deposited funds, and the nature, amount of, and collateral for loans. Federal laws also regulate community reinvestment and insider credit transactions and impose safety and soundness standards.
Community Reinvestment. The Community Reinvestment Act of 1977 requires that, in connection with examinations of financial institutions within their jurisdiction, federal bank regulators must evaluate the record of financial institutions in meeting the credit needs of their local communities, including low and moderate-income neighborhoods, consistent with the safe and sound operation of those banks. A bank’s community reinvestment record is also considered by the applicable banking agencies in evaluating mergers, acquisitions, and applications to open a branch or facility.
Insider Credit Transactions. Banks are also subject to certain restrictions on extensions of credit to executive officers, directors, principal shareholders, and their related interests. Extensions of credit 1) must be made on substantially the same terms, including interest rates and collateral, and follow credit underwriting procedures that are at least as stringent, as those prevailing at the time for comparable transactions with persons not covered above and who are not employees; and 2) must not involve more than the normal risk of repayment or present other unfavorable features. Banks are also subject to certain lending limits and restrictions on overdrafts to insiders. A violation of these restrictions may result in the assessment of substantial civil monetary penalties, the imposition of a cease and desist order, and other regulatory sanctions.
Regulation of Management. Federal law 1) sets forth circumstances under which officers or directors of a bank may be removed by the institution’s federal supervisory agency; 2) places restraints on lending by a bank to its executive officers, directors, principal shareholders, and their related interests; and 3) prohibits management personnel of a bank from serving as a director or in other management positions of another financial institution whose assets exceed a specified amount or which has an office within a specified geographic area.
Safety and Soundness Standards. Federal law imposes upon banks certain non-capital safety and soundness standards. These standards cover, among other things, internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, such other operational and managerial standards as the agency determines to be appropriate, and standards for asset quality, earnings and stock valuation. An institution that fails to meet these standards must develop a plan acceptable to its regulators, specifying the steps that the institution will take to meet the standards. Failure to submit or implement such a plan may subject the institution to regulatory sanctions.

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Interstate Banking and Branching
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Interstate Act”) relaxed prior interstate branching restrictions under federal law by permitting nationwide interstate banking and branching under certain circumstances. Generally, bank holding companies may purchase banks in any state and states may not prohibit these purchases. The Interstate Act requires regulators to consult with community organizations before permitting an interstate institution to close a branch in a low-income area. Federal bank regulations prohibit banks from using their interstate branches primarily for deposit production and federal bank regulatory agencies have implemented a loan-to-deposit ratio screen to ensure compliance with this prohibition. As a result of the Dodd-Frank Act, prior restrictions on de novo branching by out of state banks have been removed. The Dodd-Frank Act generally permits all banks to branch into other states by opening a new branch or purchasing a branch from another financial institution, to the extent that banks chartered under the state in which the new branch is located can do so. In the past, the Interstate Act barred all financial institutions, except for thrifts, from branching into other states unless they purchased or merged with a bank located in the other state.
Dividends
A principal source of the Company’s cash is from dividends received from the Banks, which are subject to government regulation and limitation. Regulatory authorities may prohibit banks and bank holding companies from paying dividends in a manner that would constitute an unsafe or unsound banking practice. In addition, a bank may not pay cash dividends if that payment could reduce the amount of its capital below that necessary to meet minimum applicable regulatory capital requirements. State law and, in the case of First National, national banking laws and related OCC regulations, limit a bank’s ability to pay dividends that are greater than a certain amount without approval of the applicable agency. Additionally, current guidance from the Federal Reserve provides, among other things, that dividends per share on the Company’s common stock generally should not exceed earnings per share, measured over the previous four fiscal quarters.
Capital Adequacy
Regulatory Capital Guidelines. Federal bank regulatory agencies use capital adequacy guidelines in the examination and regulation of bank holding companies and banks. The guidelines are “risk-based,” meaning that they are designed to make capital requirements more sensitive to differences in risk profiles among banks and bank holding companies.
Tier I and Tier II Capital. Under the guidelines, an institution’s capital is divided into two broad categories, Tier I capital and Tier II capital. Tier I capital generally consists of common shareholders’ equity, surplus, undivided profits, and subordinated debentures. Tier II capital generally consists of the allowance for loan and lease losses, hybrid capital instruments, and subordinated debt. The sum of Tier I capital and Tier II capital represents an institution’s total capital. The guidelines require that at least 50 percent of an institution’s total capital consist of Tier I capital.
Risk-based Capital Ratios. The adequacy of an institution’s capital is gauged primarily with reference to the institution’s risk-weighted assets. The guidelines assign risk weightings to an institution’s assets in an effort to quantify the relative risk of each asset and to determine the minimum capital required to support that risk. An institution’s risk-weighted assets are then compared with its Tier I capital and total capital to arrive at a Tier I risk-based ratio and a total risk-based ratio, respectively. The guidelines provide that an institution must have a minimum Tier I risk-based ratio of 4 percent and a minimum total risk-based ratio of 8 percent.
Leverage Ratio. The guidelines also employ a leverage ratio, which is Tier I capital as a percentage of average total assets, less intangibles. The principal objective of the leverage ratio is to constrain the maximum degree to which a bank holding company may leverage its equity capital base. The minimum leverage ratio is 4 percent.
Prompt Corrective Action. Under the guidelines, an institution is assigned to one of five capital categories depending on its total risk-based capital ratio, Tier I risk-based capital ratio, and leverage ratio, together with certain subjective factors. The categories range from “well capitalized” to “critically undercapitalized.” Institutions that are “undercapitalized” or lower are subject to certain mandatory supervisory corrective actions. At each successively lower capital category, an insured bank is subject to increased restrictions on its operations. During these challenging economic times, the federal banking regulators have actively enforced these provisions.
Regulatory Oversight and Examination
The Federal Reserve conducts periodic inspections of bank holding companies, which are performed both onsite and offsite. The supervisory objectives of the inspection program are to ascertain whether the financial strength of the bank holding company is being maintained on an ongoing basis and to determine the effects or consequences of transactions between a holding company or its non-banking subsidiaries and its bank subsidiaries. For holding companies under $10 billion in assets, the inspection type and frequency varies depending on asset size, complexity of the organization, and the holding company’s rating at its last inspection.

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Banks are subject to periodic examinations by their primary regulators. Bank examinations have evolved from reliance on transaction testing in assessing a bank’s condition to a risk-focused approach. These examinations are extensive and cover the entire breadth of operations of the bank. Generally, safety and soundness examinations occur on an 18-month cycle for banks under $500 million in total assets that are well capitalized and without regulatory issues, and 12-months otherwise. Examinations alternate between the federal and state bank regulatory agency or may occur on a combined schedule. The frequency of consumer compliance and CRA examinations is linked to the size of the institution and its compliance and CRA ratings at its most recent examinations. However, the examination authority of the Federal Reserve and the FDIC allows them to examine supervised banks as frequently as deemed necessary based on the condition of the bank or as a result of certain triggering events.
Corporate Governance and Accounting
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 (the “Act”) addresses, among other things, corporate governance, auditing and accounting, enhanced and timely disclosure of corporate information, and penalties for non-compliance. Generally, the Act 1) requires chief executive officers and chief financial officers to certify to the accuracy of periodic reports filed with the Securities and Exchange Commission (the “SEC”); 2) imposes specific and enhanced corporate disclosure requirements; 3) accelerates the time frame for reporting of insider transactions and periodic disclosures by public companies; 4) requires companies to adopt and disclose information about corporate governance practices, including whether or not they have adopted a code of ethics for senior financial officers and whether the audit committee includes at least one “audit committee financial expert;” and 5) requires the SEC, based on certain enumerated factors, to regularly and systematically review corporate filings.
As a publicly reporting company, the Company is subject to the requirements of the Act and related rules and regulations issued by the SEC and NASDAQ. After enactment, the Company updated its policies and procedures to comply with the Act’s requirements and has found that such compliance, including compliance with Section 404 of the Act relating to management control over financial reporting, has resulted in significant additional expense for the Company. The Company anticipates that it will continue to incur such additional expense in its ongoing compliance.
Anti-Terrorism
USA Patriot Act of 2001. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, intended to combat terrorism, was renewed with certain amendments in 2006 (the “Patriot Act”). Certain provisions of the Patriot Act were made permanent and other sections were made subject to extended “sunset” provisions. The Patriot Act, in relevant part, 1) prohibits banks from providing correspondent accounts directly to foreign shell banks; 2) imposes due diligence requirements on banks opening or holding accounts for foreign financial institutions or wealthy foreign individuals; 3) requires financial institutions to establish an anti-money-laundering compliance program; and 4) eliminates civil liability for persons who file suspicious activity reports.
Financial Services Modernization
Gramm-Leach-Bliley Act of 1999. The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 brought about significant changes to the laws affecting banks and bank holding companies. Generally, the Act 1) repeals historical restrictions on preventing banks from affiliating with securities firms; 2) provides a uniform framework for the activities of banks, savings institutions and their holding companies; 3) broadens the activities that may be conducted by national banks and banking subsidiaries of bank holding companies; 4) provides an enhanced framework for protecting the privacy of consumer information and requires notification to consumers of bank privacy policies; and 5) addresses a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions. Bank holding companies that qualify and elect to become financial holding companies can engage in a wider variety of financial activities than permitted under previous law, particularly with respect to insurance and securities underwriting activities.
The Emergency Economic Stabilization Act of 2008
Emergency Economic Stabilization Act of 2008. In response to market turmoil and financial crises affecting the overall banking system and financial markets in the United States, the Emergency Economic Stabilization Act of 2008 (the “EESA”) was enacted on October 3, 2008. EESA provides the United States Treasury Department (the “Treasury”) with broad authority to implement certain actions intended to help restore stability and liquidity to the U.S. financial markets.

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Troubled Asset Relief Program. Under the EESA, the Treasury has authority, among other things, to purchase up to $700 billion in mortgage loans, mortgage-related securities and certain other financial instruments, including debt and equity securities issued by financial institutions pursuant to the Troubled Asset Relief Program (“TARP”). The purpose of TARP is to restore confidence and stability to the U.S. banking system and to encourage financial institutions to increase lending to customers and to each other. Pursuant to the EESA, the Treasury was initially authorized to use $350 billion for TARP. Of this amount, the Treasury allocated $250 billion to the TARP Capital Purchase Program, which funds were used to purchase preferred stock from qualifying financial institutions. After receiving preliminary approval from Treasury to participate in the program, the Company elected not to participate in light of its capital position and due to its ability to raise capital successfully in private equity markets.
Temporary Liquidity Guarantee Program. Another program established pursuant to the EESA is the Temporary Liquidity Guarantee Program (“TLGP”), which 1) removed the limit on FDIC deposit insurance coverage for non-interest bearing transaction accounts through December 31, 2009, and 2) provided FDIC backing for certain types of senior unsecured debt issued from October 14, 2008 through June 30, 2009. The end-date for issuing senior unsecured debt was later extended to October 31, 2009 and the FDIC also extended the Transaction Account Guarantee portion of the TLGP through December 31, 2010. Financial institutions that did not opt out of unlimited coverage for non-interest bearing accounts were initially charged an annualized 10 basis points on individual account balances exceeding $250,000, and those issuing FDIC-backed senior unsecured debt were initially charged an annualized 75 basis points on all such debt, although those rates were subsequently increased.
Deposit Insurance
The bank subsidiaries’ deposits are insured under the Federal Deposit Insurance Act, up to the maximum applicable limits and are subject to deposit insurance assessments designed to tie what banks pay for deposit insurance more closely to the risks they pose. The banks have prepaid their quarterly deposit insurance assessments for 2011 and 2012 pursuant to applicable FDIC regulations, but the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) in July 2010 required the FDIC to amend its regulations to redefine the assessment base used for calculating deposit insurance assessments. As a result, in February 2011, the FDIC approved new rules to, among other things, change the assessment base from one based on domestic deposits (as it has been since 1935) to one based on assets (average consolidated total assets minus average tangible equity). Since the new assessment base is larger than the base used under prior regulations, the rules also lower assessment rates, so that the total amount of revenue collected by the FDIC from the industry is not significantly altered. The rule also revises the deposit insurance assessment system for large financial institutions, defined as institutions with at least $10 billion in assets. The rules revise the assessment rate schedule, effective April 1, 2011, and adopt additional rate schedules that will go into effect when the Deposit Insurance Fund reserve ratio reaches various milestones.
Insurance of Deposit Accounts. The EESA included a provision for a temporary increase from $100,000 to $250,000 per depositor in deposit insurance effective October 3, 2008 through December 31, 2010. On May 20, 2009, the temporary increase was extended through December 31, 2013. The Dodd-Frank Act permanently raises the current standard maximum deposit insurance amount to $250,000. The FDIC insurance coverage limit applies per depositor, per insured depository institution for each account ownership category. EESA also temporarily raised the limit on federal deposit insurance coverage to an unlimited amount for non-interest or low-interest bearing demand deposits. Pursuant to the Dodd-Frank Act, unlimited coverage for non-interest transaction accounts will continue upon expiration of the TLGP until December 31, 2012.
Recent Legislation
Dodd-Frank Wall Street Reform and Consumer Protection Act. As a result of the recent financial crises, on July 21, 2010 the Dodd-Frank Act was signed into law. The Dodd-Frank Act is expected to have a broad impact on the financial services industry, including significant regulatory and compliance changes and changes to corporate governance matters affecting public companies. Many of the requirements called for in the Dodd-Frank Act will be implemented over time and most will be subject to implementing regulations over the course of several years. Among other things, the legislation 1) centralizes responsibility for consumer financial protection by creating a new agency responsible for implementing, examining and enforcing compliance with federal consumer financial laws; 2) applies the same leverage and risk-based capital requirements that apply to insured depository institutions to bank holding companies; 3) requires the FDIC to seek to make its capital requirements for banks countercyclical so that the amount of capital required to be maintained increases in times of economic expansion and decreases in times of economic contraction; 4) changes the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital; 5) requires the SEC to complete studies and develop rules or approve stock exchange rules regarding various investor protection issues, including shareholder access to the proxy process, and various matters pertaining to executive compensation and compensation committee oversight; 6) makes permanent the $250,000 limit for federal deposit insurance and provides unlimited federal deposit insurance until December 31, 2012, for non-interest bearing transaction accounts; 7) removes prior restrictions on interstate de novo branching; and 8) repeals the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts. Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on the Company, the bank subsidiaries and the

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financial services industry more generally. However, based on past experience with new legislation, it can be anticipated that the Dodd-Frank Act, directly and indirectly, will impact the business of the Company and the bank subsidiaries and increase compliance costs.
American Recovery and Reinvestment Act of 2009. On February 17, 2009 the American Recovery and Reinvestment Act of 2009 (“ARRA”) was signed into law. ARRA is intended to help stimulate the economy through a combination of tax cuts and spending provisions applicable to a broad range of areas with an estimated cost of about $780 billion. The impact that ARRA may have on the US economy, the Company and the Banks cannot be predicted with reasonable certainty.
Overdrafts. On November 17, 2009, the Board of Governors of the Federal Reserve System promulgated the Electronic Fund Transfer rule with an effective date of January 19, 2010 and a mandatory compliance date of July 1, 2010. The rule, which applies to all FDIC-regulated institutions, prohibits financial institutions from assessing an overdraft fee for paying automated teller machine (“ATM”) and one-time point-of-sale debit card transactions, unless the customer affirmatively opts in to the overdraft service for those types of transactions. The opt-in provision establishes requirements for clear disclosure of fees and terms of overdraft services for ATM and one-time debit card transactions. Since a percentage of the Company’s service charges on deposits are in the form of overdraft fees on point-of-sale transactions, this could have an adverse impact on the Company’s non-interest income.
Proposed Legislation
Proposed legislation is introduced in almost every legislative session. Such legislation could dramatically affect the regulation of the banking industry. The Company cannot predict if any such legislation will be adopted or if it is adopted how it would affect the business of the Company or the Banks. Past history has demonstrated that new legislation or changes to existing laws or regulations usually results in a greater compliance burden and, therefore, generally increases the cost of doing business.
Effects of Government Monetary Policy
The Company’s earnings and growth are affected not only by general economic conditions, but also by the fiscal and monetary policies of the federal government, particularly the Federal Reserve. The Federal Reserve implements national monetary policy for such purposes as curbing inflation and combating recession, but its open market operations in U.S. government securities, control of the discount rate applicable to borrowings from the Federal Reserve, and establishment of reserve requirements against certain deposits, influence the growth of bank loans, investments and deposits, and also affect interest rates charged on loans or paid on deposits. The nature and impact of future changes in monetary policies and their impact on the Company or the Banks cannot be predicted with certainty.
TAXATION
Federal Taxation
The Company files a consolidated federal income tax return, using the accrual method of accounting. All required tax returns have been timely filed. Financial institutions are subject to the provisions of the Internal Revenue Code of 1986, as amended, in the same general manner as other corporations.
State Taxation
Under Montana, Idaho, Colorado and Utah law, financial institutions are subject to a corporation tax, which incorporates or is substantially similar to applicable provisions of the Internal Revenue Code. The corporation tax is imposed on federal taxable income, subject to certain adjustments. State taxes are incurred at the rate of 6.75 percent in Montana, 7.6 percent in Idaho, 5 percent in Utah and 4.63 percent in Colorado. Wyoming and Washington do not impose a corporate income tax.
Income Tax Expense
Income tax expense for the years ended December 31, 2010 and 2009 was $7.3 million and $4.0 million, respectively. The Company’s effective tax rate for the years ended December 31, 2010 and 2009 was 14.8 percent and 10.4 percent, respectively. The primary reason for the low effective rate is the amount of tax-exempt investment income and federal tax credits. The tax-exempt income was $23.4 million and $22.2 million for the years ended December 31, 2010 and 2009, respectively. The federal tax credit benefits were $3.4 million and $1.2 million for the years ended December 31, 2010 and 2009, respectively. The Company continues its investments in select municipal securities and various VIEs whereby the Company receives federal tax credits.
See Note 13 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” for additional information.

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Item 1A. Risk Factors
The Company and its eleven wholly-owned, independent community bank subsidiaries are exposed to certain risks. The following is a discussion of the most significant risks and uncertainties that may affect the Company’s business, financial condition and future results.
The continued challenging economic environment could have a material adverse effect on the Company’s future results of operations or market price of stock.
The national economy, and the financial services sector in particular, are still facing significant challenges. Substantially all of the Company’s loans are to businesses and individuals in Montana, Idaho, Wyoming, Utah, Colorado and Washington, markets facing many of the same challenges as the national economy, including elevated unemployment and declines in commercial and residential real estate. Although some economic indicators are improving both nationally and in the Company’s markets, unemployment remains high and there remains substantial uncertainty regarding when and how strongly a sustained economic recovery will occur. The inability of borrowers to repay loans can erode earnings by reducing earnings and by requiring the Company to add to its allowance for loan and lease losses. While the Company cannot accurately predict how long these conditions may exist, the economic downturn could continue to present risks for some time for the industry and Company. A further deterioration in economic conditions in the nation as a whole or in the Company’s markets could result in the following consequences, any of which could have an adverse impact, which may be material, on the Company’s business, financial condition, results of operations and prospects, and could also cause the market price of the Company’s stock to decline:
  §   loan delinquencies may increase further;
 
  §   problem assets and foreclosures may increase further;
 
  §   collateral for loans made may decline further in value, in turn reducing customers’ borrowing power, reducing the value of assets and collateral associated with existing loans and increasing the potential severity of loss in the event of loan defaults;
 
  §   demand for banking products and services may decline; and
 
  §   low cost or non-interest bearing deposits may decrease.
The allowance for loan and lease losses may not be adequate to cover actual loan losses, which could adversely affect earnings.
The Company maintains an ALLL in an amount that it believes is adequate to provide for losses in the loan portfolio. While the Company strives to carefully manage and monitor credit quality and to identify loans that may become non-performing, at any time there are loans included in the portfolio that will result in losses, but that have not been identified as non-performing or potential problem loans. By closely monitoring credit quality, the Company attempts to identify deteriorating loans before they become non-performing assets and adjust the ALLL accordingly. However, because future events are uncertain, and if the economic downturn continues or deteriorates further, there may be loans that deteriorate to a non-performing status in an accelerated time frame. As a result, future additions to the ALLL may be necessary. Because the loan portfolio contains a number of loans with relatively large balances, the deterioration of one or a few of these loans may cause a significant increase in non-performing loans, requiring an increase to the ALLL. Additionally, future significant additions to the ALLL may be required based on changes in the mix of loans comprising the portfolio, changes in the financial condition of borrowers, which may result from changes in economic conditions, or changes in the assumptions used in determining the ALLL. Additionally, federal banking regulators, as an integral part of their supervisory function, periodically review the Company’s loan portfolio and the adequacy of the ALLL. These regulatory agencies may require the Company to recognize further loan loss provisions or charge-offs based upon their judgments, which may be different from the Company’s judgments. Any increase in the ALLL would have an adverse effect, which could be material, on the Company’s financial condition and results of operations.
The Company has a high concentration of loans secured by real estate, so any further deterioration in the real estate markets could require material increases in ALLL and adversely affect the Company’s financial condition and results of operations.
The Company has a high degree of concentration in loans secured by real estate. A sluggish recovery, or a continuation of the downturn in the economic conditions or real estate values, of the Company’s market areas could adversely impact borrowers’ ability to repay loans secured by real estate and the value of real estate collateral, thereby increasing the credit risk associated with the loan portfolio. The Company’s ability to recover on these loans by selling or disposing of the underlying real estate collateral is adversely impacted by declining real estate values, which increases the likelihood that the Company will suffer losses on defaulted loans secured by real estate beyond the amounts provided for in the ALLL. This, in turn, could require material increases in the ALLL which would adversely affect the Company’s financial condition and results of operations, perhaps materially.

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A tightening of the credit markets may make it difficult to obtain adequate funding for loan growth, which could adversely affect earnings.
A tightening of the credit markets and the inability to obtain or retain adequate funds for continued loan growth at an acceptable cost may negatively affect the Company’s asset growth and liquidity position and, therefore, earnings capability. In addition to core deposit growth, maturity of investment securities and loan payments, the Company also relies on alternative funding sources through correspondent banking, and borrowing lines with the FRB and FHLB to fund loans. In the event the current economic downturn continues, particularly in the housing market, these resources could be negatively affected, both as to price and availability, which would limit and or raise the cost of the funds available to the Company.
There can be no assurance the Company will be able to continue paying dividends on the common stock at recent levels.
The ability to pay dividends on the Company’s common stock depends on a variety of factors. The Company paid dividends of $0.13 per share in each quarter of 2009 and 2010. There can be no assurance that the Company will be able to continue paying quarterly dividends commensurate with recent levels. In that regard, the Federal Reserve now is requiring the Company to provide prior written notice and related information for staff review before declaring or paying dividends. In addition, current guidance from the Federal Reserve provides, among other things, that dividends per share generally should not exceed earnings per share. As a result, future dividends will depend on sufficient earnings to support them. Furthermore, the Company’s ability to pay dividends depends on the amount of dividends paid to the Company by its subsidiaries, which is also subject to government regulation, oversight and review. In addition, the ability of some of the bank subsidiaries to pay dividends to the Company is subject to prior regulatory approval.
The Company may not be able to continue to grow organically or through acquisitions.
Historically, the Company has expanded through a combination of organic growth and acquisitions. If market and regulatory conditions remain challenging, the Company may be unable to grow organically or successfully complete potential future acquisitions. In particular, while the Company intends to focus any near-term acquisition efforts on FDIC-assisted transactions within its existing market areas, there can be no assurance that such opportunities will become available on terms that are acceptable to the Company. Furthermore, there can be no assurance that the Company can successfully complete such transactions, since they are subject to a formal bid process and regulatory review and approval.
The FDIC has increased insurance premiums to rebuild and maintain the federal deposit insurance fund and there may be additional future premium increases and special assessments.
In 2009, the FDIC imposed a special deposit insurance assessment of five basis points on all insured institutions, and also required insured institutions to prepay estimated quarterly risk-based assessments through 2012.
The Dodd-Frank Act established 1.35% as the minimum deposit insurance fund reserve ratio. The FDIC has determined that the fund reserve ratio should be 2.0% and has adopted a plan under which it will meet the statutory minimum fund reserve ratio of 1.35% by the statutory deadline of September 30, 2020. The Dodd-Frank Act requires the FDIC to offset the effect on institutions with assets less than $10 billion of the increase in the statutory minimum fund reserve ratio to 1.35% from the former statutory minimum of 1.15%. The FDIC has not announced how it will implement this offset or how larger institutions will be affected by it.
Despite the FDIC’s actions to restore the deposit insurance fund, the fund will suffer additional losses in the future due to failures of insured institutions. There can be no assurance that there will not be additional significant deposit insurance premium increases, special assessments or prepayments in order to restore the insurance fund’s reserve ratio. Any significant premium increases or special assessments could have a material adverse effect on the Company’s financial condition and results of operations.
The Company’s loan portfolio mix increases the exposure to credit risks tied to deteriorating conditions.
The loan portfolio contains a high percentage of commercial, commercial real estate, real estate acquisition and development loans in relation to the total loans and total assets. These types of loans have historically been viewed as having more risk of default than residential real estate loans or certain other types of loans or investments. In fact, the FDIC has issued pronouncements alerting banks of its concern about banks with a heavy concentration of commercial real estate loans. These types of loans also typically are larger than residential real estate loans and other commercial loans. Because the Company’s loan portfolio contains a significant number of commercial and commercial real estate loans with relatively large balances, the deterioration of one or more of these loans may cause a significant increase in non-performing loans. An increase in non-performing loans could result in a loss of earnings from these loans, an increase in the provision for loan losses, or an increase in loan charge-offs, which could have an adverse impact on results of operations and financial condition.

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Non-performing assets have increased and could continue to increase, which could adversely affect the Company’s results of operations and financial condition.
Non-performing assets (which include foreclosed real estate) adversely affects the Company’s net income and financial condition in various ways. The Company does not record interest income on non-accrual loans or other real estate owned, thereby adversely affecting its income. When the Company takes collateral in foreclosures and similar proceedings, it is required to mark the related asset to the then fair market value of the collateral, less estimated cost to sell, which may result in a charge-off of the value of the asset and lead the Company to increase the provision for loan losses. An increase in the level of non-performing assets also increases the Company’s risk profile and may impact the capital levels its regulators believe is appropriate in light of such risks. Continued decreases in the value of these assets, or the underlying collateral, or in these borrowers’ performance or financial condition, whether or not due to economic and market conditions beyond the Company’s control, could adversely affect the Company’s business, results of operations and financial condition, perhaps materially. In addition to the carrying costs to maintain other real estate owned, the resolution of non-performing assets increases the Company’s loan administration costs generally, and requires significant commitments of time from management and the Company’s directors, which reduces the time they have to focus on growing the Company’s business. There can be no assurance that the Company will not experience further increases in non-performing assets in the future.
Decline in the fair value of the Company’s investment portfolio could adversely affect earnings.
The fair value of the Company’s investment securities could decline as a result of factors including changes in market interest rates, credit quality and ratings, lack of market liquidity and other economic conditions. Investment securities are impaired if the fair value of the security is less than the carrying value. When a security is impaired, the Company determines whether impairment is temporary or other-than-temporary. If an impairment is determined to be other-than temporary, an impairment loss is recognized by reducing the amortized cost only for the credit loss associated with an other-than-temporary loss with a corresponding charge to earnings for a like amount. Any such impairment charge would have an adverse effect, which could be material, on the Company’s results of operations and financial condition.
Fluctuating interest rates can adversely affect profitability.
The Company’s profitability is dependent to a large extent upon net interest income, which is the difference (or “spread”) between the interest earned on loans, securities and other interest-earning assets and interest paid on deposits, borrowings, and other interest-bearing liabilities. Because of the differences in maturities and repricing characteristics of interest-earning assets and interest-bearing liabilities, changes in interest rates do not produce equivalent changes in interest income earned on interest-earning assets and interest paid on interest-bearing liabilities. Accordingly, fluctuations in interest rates could adversely affect the Company’s interest rate spread, and, in turn, profitability. The Company seeks to manage its interest rate risk within well established guidelines. Generally, the Company seeks an asset and liability structure that insulates net interest income from large deviations attributable to changes in market rates. However, the Company’s structures and practices to manage interest rate risk may not be effective in a highly volatile rate environment.
If the goodwill recorded in connection with acquisitions becomes impaired, it could have an adverse impact on earnings and capital.
Accounting standards require that the Company account for acquisitions using the acquisition method of accounting. Under acquisition accounting, if the purchase price of an acquired company exceeds the fair value of its net assets, the excess is carried on the acquirer’s balance sheet as goodwill. In accordance with generally accepted accounting principles in the United States of America, goodwill is not amortized but rather is evaluated for impairment on an annual basis or more frequently if events or circumstances indicate that a potential impairment exists. Although at the current time the Company has not incurred an impairment of goodwill, there can be no assurance that future evaluations of goodwill will not result in findings of impairment and write-downs, which could be material. An impairment of goodwill could have a material adverse affect on the Company’s business, financial condition and results of operations. Furthermore, an impairment of goodwill could subject the Company to regulatory limitations, including the ability to pay dividends on common stock.
Growth through future acquisitions could, in some circumstances, adversely affect profitability or other performance measures.
The Company has in recent years acquired other financial institutions. The Company may in the future engage in selected acquisitions of additional financial institutions, including transactions that may receive assistance from the FDIC, although there can be no assurance that the Company will be able to successfully complete any such transactions. There are risks associated with any such acquisitions that could adversely affect profitability and other performance measures. These risks include, among other things, incorrectly assessing the asset quality of a financial institution being acquired, encountering greater than anticipated cost of integrating acquired businesses into the Company’s operations, and being unable to profitably deploy funds acquired in an acquisition. The Company cannot provide any assurance as to the extent to which the Company can continue to grow through acquisitions or the impact of such acquisitions on the Company’s operating results or financial condition.

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The Company anticipates that it might issue capital stock in connection with future acquisitions. Acquisitions and related issuances of stock may have a dilutive effect on earnings per share and the percentage ownership of current shareholders.
The Company may pursue additional capital in the future, which could dilute the holders of the Company’s outstanding common stock and may adversely affect the market price of common stock.
In the current economic environment, the Company believes it is prudent to consider alternatives for raising capital when opportunities to raise capital at attractive prices present themselves, in order to further strengthen the Company’s capital and better position itself to take advantage of opportunities that may arise in the future. Such alternatives may include issuance and sale of common or preferred stock, trust preferred securities, or borrowings by the Company, with proceeds contributed to the bank subsidiaries. Any such capital raising alternatives could dilute the holders of the Company’s outstanding common stock, and may adversely affect the market price of the Company’s common stock and performance measures such as earnings per share.
Business would be harmed if the Company lost the services of any of the senior management team.
The Company believes its success to date has been substantially dependent on its Chief Executive Officer and other members of the executive management team, and on the Presidents of its bank subsidiaries. The loss of any of these persons could have an adverse effect on the Company’s business and future growth prospects.
Competition in the Company’s market areas may limit future success.
Commercial banking is a highly competitive business. The Company competes with other commercial banks, savings and loan associations, credit unions, finance, insurance and other non-depository companies operating in its market areas. The Company is subject to substantial competition for loans and deposits from other financial institutions. Some of its competitors are not subject to the same degree of regulation and restriction as the Company. Some of the Company’s competitors have greater financial resources than the Company. If the Company is unable to effectively compete in its market areas, the Company’s business, results of operations and prospects could be adversely affected.
The Company operates in a highly regulated environment and changes of or increases in, or supervisory enforcement of, banking or other laws and regulations or governmental fiscal or monetary policies could adversely affect the Company.
The Company is subject to extensive regulation, supervision and examination by federal and state banking authorities. In addition, as a publicly-traded company, the Company is subject to regulation by the Securities and Exchange Commission. Any change in applicable regulations or federal, state or local legislation or in policies or interpretations or regulatory approaches to compliance and enforcement, income tax laws and accounting principles could have a substantial impact on the Company and its operations. Changes in laws and regulations may also increase expenses by imposing additional fees or taxes or restrictions on operations. Additional legislation and regulations that could significantly affect powers, authority and operations may be enacted or adopted in the future, which could have a material adverse effect on the Company’s financial condition and results of operations. Failure to appropriately comply with any such laws, regulations or principles could result in sanctions by regulatory agencies or damage to the Company’s reputation, all of which could adversely affect the Company’s business, financial condition or results of operations.
In that regard, sweeping financial regulatory reform legislation was enacted in July 2010. Among other provisions, the new legislation 1) creates a new Bureau of Consumer Financial Protection with broad powers to regulate consumer financial products such as credit cards and mortgages, 2) creates a Financial Stability Oversight Council comprised of the heads of other regulatory agencies, 3) will lead to new capital requirements from federal banking agencies, 4) places new limits on electronic debt card interchange fees, and 5) will require the Securities and Exchange Commission and national stock exchanges to adopt significant new corporate governance and executive compensation reforms. The new legislation and regulations are expected to increase the overall costs of regulatory compliance.
Further, regulators have significant discretion and authority to prevent or remedy unsafe or unsound practices or violations of laws or regulations by financial institutions and holding companies in the performance of their supervisory and enforcement duties. Recently, these powers have been utilized more frequently due to the serious national, regional and local economic conditions the Company is facing. The exercise of regulatory authority may have a negative impact on the Company’s financial condition and results of operations. Additionally, the Company’s business is affected significantly by the fiscal and monetary policies of the U.S. federal government and its agencies, including the Federal Reserve Board.
The Company cannot accurately predict the full effects of recent legislation or the various other governmental, regulatory, monetary and fiscal initiatives which have been and may be enacted on the financial markets, on the Company and on its bank subsidiaries. The terms and costs of these activities, or the failure of these actions to help stabilize the financial markets, asset prices, market liquidity and a continuation or worsening of current financial market and economic conditions could materially and adversely affect the Company’s business, financial condition, results of operations, and the trading price of the Company’s common stock.

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The Company has various anti-takeover measures that could impede a takeover.
The Company’s articles of incorporation include certain provisions that could make more difficult the acquisition of the Company by means of a tender offer, a proxy contest, merger or otherwise. These provisions include a requirement that any “Business Combination” (as defined in the articles of incorporation) be approved by at least 80 percent of the voting power of the then-outstanding shares, unless it is either approved by the Board of Directors or certain price and procedural requirements are satisfied. In addition, the authorization of preferred stock, which is intended primarily as a financing tool and not as a defensive measure against takeovers, may potentially be used by management to make more difficult uninvited attempts to acquire control of the Company. These provisions may have the affect of lengthening the time required for a person to acquire control of the Company through a tender offer, proxy contest or otherwise, and may deter any potentially unfriendly offers or other efforts to obtain control of the Company. This could deprive the Company’s shareholders of opportunities to realize a premium for their Glacier common stock, even in circumstances where such action is favored by a majority of the Company’s shareholders.
Item 1B. Unresolved Staff Comments
None
Item 2. Properties
At December 31, 2010, the Company owned 80 of its 105 offices. The remaining 25 offices are leased and include 7 offices in Montana, 13 offices in Idaho, 2 offices in Wyoming, 1 office in Colorado, 1 office in Utah, and 1 office in Washington. Including its headquarters, the aggregate book value of Company-owned offices is $114 million. The following schedule provides property information for the Company’s bank subsidiaries as of December 31, 2010.
                         
    Properties     Properties     Net Book  
(Dollars in thousands)   Leased     Owned     Value  
Glacier
    2       14     $ 22,478  
Mountain West
    15       13       16,012  
First Security
    2       11       13,140  
Western
    1       7       14,228  
1st Bank
    1       11       10,229  
Valley
          6       5,007  
Big Sky
    1       4       10,147  
First National
    1       3       6,459  
Citizens
          6       6,433  
First Bank-MT
    1       2       788  
San Juans
    1       2       4,177  
Parent
          1       4,883  
 
                 
 
    25       80     $ 113,981  
 
                 
The Company believes that all of its facilities are well maintained, generally adequate and suitable for the current operations of its business, as well as fully utilized. In the normal course of business, new locations and facility upgrades occur.
For additional information concerning the Company’s premises and equipment and lease obligations, see Notes 5 and 20 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.”
Item 3. Legal Proceedings
The Company and its subsidiaries are parties to various claims, legal actions and complaints in the ordinary course of their businesses. In the Company’s opinion, all such matters are adequately covered by insurance, are without merit or are of such kind, or involve such amounts, that unfavorable disposition would not have a material adverse effect on the consolidated financial position or results of operations of the Company.

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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s stock trades on the NASDAQ Global Select Market under the symbol: GBCI. The primary market makers during the year are listed below:
         
Barclays Capital Inc./Le
  Citadel Derivatives Group LLC   Credit Suisse Securities USA
D.A. Davidson & Co., Inc.
  Deutsche Banc Alex Brown   Direct Edge ECN LLC
EBX LLC
  Getco Execution Services LLC   Goldman, Sachs & Co.
Instinet, LLC
  Keefe, Bruyette & Woods, Inc.   Knight Equity Markets, L.P.
Liquidnet, Inc.
  Lime Brokerage, LLC   Merrill Lynch, Pierce, Fenner
Morgan Stanley & Co., Inc.
  Octeg, LLC   RBC Capital Markets Corp.
Tradebot Systems, Inc.
  UBS Securities, LLC.   Wedbush Morgan Securities Inc
The market range of high and low closing prices for the Company’s common stock for the periods indicated are shown below. As of December 31, 2010, there were approximately 1,904 shareholders of record for the Company’s common stock.
                                 
    2010   2009
Quarter   High   Low   High   Low
First
  $ 15.94     $ 13.75     $ 19.36     $ 12.15  
Second
    18.88       14.67       18.97       14.67  
Third
    16.73       13.75       16.80       12.92  
Fourth
    15.76       13.00       14.62       11.92  
The Company paid cash dividends on its common stock of $0.52 per share for the years ended December 31, 2010 and 2009.
On March 22, 2010, the Company completed the common stock offering of 10,291,465 shares generating net proceeds, after underwriter discounts and offering expenses, of $145.5 million.
Unregistered Securities
There have been no securities of the Company sold within the last three years which were not registered under the Securities Act.
Issuer Stock Purchases
The Company made no stock repurchases during 2010.
Equity Compensation Plan Information
The Company currently maintains the 2005 Employee Stock Incentive Plan which was approved by the shareholders and provides for the issuance of stock-based compensation to officers and other employees and directors. Although the 1994 Director Stock Option Plan and the 1995 Employee Stock Option Plan expired in March 2009 and April 2005, respectively, there are issued options outstanding under both plans that have not been exercised as of year-end.

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The following table sets forth information regarding outstanding options and shares reserved for future issuance under the foregoing plans as of December 31, 2010:
                         
                    Number of Shares Remaining
                    Available for Future
    Number of Shares to be   Weighted-Average   Issuance Under Equity
    Issued Upon Exercise of   Exercise Price of   Compensation Plans
    Outstanding Options,   Outstanding Options,   (Excluding Shares
    Warrants and Rights   Warrants and Rights   Reflected in Column (a))
Plan Category   (a)   (b)   (c)
Equity compensation plans approved by the shareholders
    2,241,310     $ 20.00       3,067,178  
 
                       
Equity compensation plans not approved by shareholders
        $        
Item 6. Selected Financial Data
The following financial data of the Company are derived from the Company’s historical audited financial statements and related notes. The information set forth below should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and related notes contained elsewhere in this report.

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Summary of Operations and Selected Financial Data
                                                         
                                            Compounded Annual
                                            Growth Rate
    December 31,   1-Year   5-Year
(Dollars in thousands, except per share data)   2010   2009   2008   2007   2006   2010/2009   2010/2006
Summary of financial condition
                                                       
Total assets
  $ 6,759,287       6,191,795       5,553,970       4,817,330       4,471,298       9.2 %     12.8 %
Investment securities, available-for-sale
    2,461,119       1,506,394       990,092       700,324       825,637       63.4 %     20.5 %
Loans receivable and loans held for sale, net
    3,688,395       3,987,318       4,053,454       3,557,122       3,165,524       (7.5 %)     9.0 %
Allowance for loan and lease losses
    (137,107 )     (142,927 )     (76,739 )     (54,413 )     (49,259 )     (4.1 %)     28.8 %
Goodwill and intangibles
    157,016       160,196       159,765       154,264       144,466       (2.0 %)     12.5 %
Deposits
    4,521,902       4,100,152       3,262,475       3,184,478       3,207,533       10.3 %     12.3 %
Federal Home Loan Bank advances
    965,141       790,367       338,456       538,949       307,522       22.1 %     19.1 %
Securities sold under agreements to repurchase and other borrowed funds
    269,408       451,251       1,110,731       401,621       338,986       (40.3 %)     (3.2 %)
Stockholders’ equity
    838,204       685,890       676,940       528,576       456,143       22.2 %     20.3 %
Equity per common share1
    11.66       11.13       11.04       9.85       8.72       4.8 %     11.0 %
Equity as a percentage of total assets
    12.40 %     11.08 %     12.19 %     10.97 %     10.20 %     11.9 %     6.7 %
                                                         
                                            Compounded Annual  
                                            Growth Rate  
    Years ended December 31,     1-Year     5-Year  
(Dollars in thousands, except per share data)   2010     2009     2008     2007     2006     2010/2009     2010/2006  
Summary of operations
                                                       
Interest income
  $ 288,402       302,494       302,985       304,760       253,326       (4.7 %)     8.7 %
Interest expense
    53,634       57,167       90,372       121,291       95,038       (6.2 %)     (2.2 %)
 
                                             
Net interest income
    234,768       245,327       212,613       183,469       158,288       (4.3 %)     12.5 %
Provision for loan losses
    84,693       124,618       28,480       6,680       5,192       (32.0 %)     69.7 %
Non-interest income
    87,546       86,474       61,034       64,818       51,842       1.2 %     14.4 %
Non-interest expense
    187,948       168,818       145,909       137,917       112,550       11.3 %     15.6 %
 
                                             
Earnings before income taxes
    49,673       38,365       99,258       103,690       92,388       29.5 %     (8.6 %)
Income taxes
    7,343       3,991       33,601       35,087       31,257       84.0 %     (21.9 %)
 
                                             
Net earnings
    42,330       34,374       65,657       68,603       61,131       23.1 %     (4.2 %)
 
                                             
Basic earnings per common share1
    0.61       0.56       1.20       1.29       1.23       8.9 %     (11.4 %)
Diluted earnings per common share1
    0.61       0.56       1.19       1.28       1.21       8.9 %     (11.0 %)
Dividends declared per share1
    0.52       0.52       0.52       0.50       0.45       0.0 %     5.4 %
                                         
    At or for the years ended December 31,
    2010   2009   2008   2007   2006
Ratios
                                       
Net earnings as a percent of average assets
    0.67 %     0.60 %     1.31 %     1.49 %     1.52 %
average stockholders’ equity
    5.18 %     4.97 %     11.63 %     13.82 %     16.00 %
Dividend payout ratio
    85.25 %     92.86 %     43.33 %     38.76 %     36.59 %
Average equity to average asset ratio
    12.96 %     12.16 %     11.23 %     10.78 %     9.52 %
Net interest margin on average earning assets (tax equivalent)
    4.21 %     4.82 %     4.70 %     4.50 %     4.44 %
Efficiency ratio
    50.11 %     46.45 %     49.68 %     53.24 %     51.10 %
Allowance for loan and lease losses as a percent of loans
    3.58 %     3.46 %     1.86 %     1.51 %     1.53 %
Allowance for loan and lease losses as a percent of nonperforming assets
    51 %     55 %     91 %     409 %     554 %
                                         
    At or for the years ended December 31,  
(Dollars in thousands)   2010     2009     2008     2007     2006  
Other data
                                       
Loans originated and acquired
  $ 1,935,311       2,430,967       2,456,749       2,576,260       2,389,341  
Loans serviced for others
    173,446       176,231       181,351       177,173       177,518  
Number of full time equivalent employees
    1,674       1,643       1,571       1,480       1,356  
Number of offices
    105       106       101       97       93  
Number of shareholders of record
    1,904       1,979       2,032       1,992       1,973  
 
1   Revised for stock splits and dividends.

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Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Year ended December 31, 2010 Compared to December 31, 2009
The following discussion is intended to provide a more comprehensive review of the Company’s operating results and financial condition than can be obtained from reading the Consolidated Financial Statements alone. The discussion should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in “Item 8. Financial Statements and Supplementary Data.”
Highlights and Overview
Net earnings for 2010 were $42.3 million, which is an increase of $8.0 million, or 23 percent, over the prior year. Diluted earnings per share of $0.61 is an increase of 9 percent from the $0.56 earned in 2009. Included in net earnings for 2010 are $1.2 million ($2.0 million pre-tax) in one-time gains on the sale of a merchant card servicing portfolios. Included in net earnings for 2009 is a $3.5 million one-time bargain purchase gain from the acquisition of First National and a $1.5 million ($2.5 million pre-tax) expense in a FDIC special assessment charge.
The primary reason for the increase in net earnings was a reduction in the provision for loan losses of $39.9 million, which was partially offset by the increase in the other real estate owned expense of $13.1 million. In addition, there was increased pressure on the net interest margin which resulted in a decrease of $10.6 million in net interest income. The net interest margin as a percentage of earning assets, on a tax-equivalent basis, was 4.21 percent, a decrease of 61 basis points from the 4.82 percent for 2009.
The Company’s loan portfolio decreased from the prior year as a result of slowing loan demand, net charged-off loans, and repossession of foreclosed assets. Gross outstanding loans, including loans held for sale, decreased by $305 million, or 7 percent, from the prior year end. The credit quality of the loan portfolio stabilized at a historically high level of $271 million in non-performing assets. The slight increase in non-performing assets of $9.4 million, or 4 percent, from the prior year was primarily the result of an increase in the other real estate owned category. The early stage delinquencies (accruing loans 30-89 days past due) have decreased from $87.5 million in the prior year end to $45.5 million at the end of 2010.
Consistent with the prior year, the Company purchased investment securities throughout the year to offset the decrease in the loan portfolio and to increase earnings. Investment securities, including interest bearing deposits, FHLB and FRB stock, and federal funds sold, increased $898 million, or 56 percent, from the prior year end.
Deposit growth in 2010 has been beneficial for the Company and reduced the reliance upon other borrowings. Non-interest bearing deposits increased $45 million, or 6 percent, during the year. Interest bearing deposits increased by $376 million, or 11 percent, from prior year. FHLB advances increased $175 million during the year, while FRB borrowings decreased $225 million. Repurchase agreements and other borrowed funds increased $43 million from the prior year.
The Company had a successful equity offering in March 2010 which generated $146 million in net proceeds and 10.291 million in common equity shares. Stockholders’ equity increased $152 million, or 22 percent, during the year and the Company and each of the bank subsidiaries have remained above the well capitalized levels required by regulators.
Looking forward, the Company’s future performance will depend on many factors including economic conditions in the markets the Company serves, interest rate changes, increasing competition for deposits and loans, loan quality, and regulatory burden. The Company’s goal of its asset and liability management practices is to maintain or increase the level of net interest income within an acceptable level of interest rate risk.

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Financial Condition Analysis
Assets
The following table summarizes the asset balances as of December 31, 2010 and 2009, the amount of change, and percentage change during 2010:
                                 
    December 31,              
(Dollars in thousands)   2010     2009     $ Change     % Change  
Cash on hand and in banks
  $ 71,465     $ 120,731     $ (49,266 )     -41 %
Investments, interest bearing deposits,
                               
FHLB stock, FRB stock, and federal funds
    2,494,513       1,596,238       898,275       56 %
Loans and loans held for sale
                               
Residential real estate
    709,090       797,626       (88,536 )     -11 %
Commercial
    2,451,091       2,613,218       (162,127 )     -6 %
Consumer and other
    665,321       719,401       (54,080 )     -8 %
 
                       
Loans receivable, gross
    3,825,502       4,130,245       (304,743 )     -7 %
Allowance for loan and lease losses
    (137,107 )     (142,927 )     5,820       -4 %
 
                       
Loans receivable, net
    3,688,395       3,987,318       (298,923 )     -7 %
 
                       
Other assets
    504,914       487,508       17,406       4 %
 
                       
Total assets
  $ 6,759,287     $ 6,191,795     $ 567,492       9 %
 
                       
Total assets at December 31, 2010 were $6.759 billion, which is $567 million, or 9 percent greater than total assets of $6.192 billion at December 31, 2009.
Investment securities, including interest bearing deposits, FHLB and FRB stock, and federal funds sold, have increased $898 million, or 56 percent, since December 31, 2009. The Company continues to purchase investment securities as loan originations slow, such purchases predominately mortgage-backed securities issued by Federal Home Loan Mortgage Corporation (“Freddie Mac”) and Federal National Mortgage Association (“Fannie Mae”) with short weighted-average-lives in the targeted range of two to three years. While mitigating against extension-risk, such securities have lower yields. These security purchases, however, allow the Company to create incremental yield without taking long-term interest rate risk. The Company also continues to selectively purchase tax-exempt investment securities. Investment securities represent 37 percent of total assets at December 31, 2010 versus 26 percent of total assets at December 31, 2009.
At December 31, 2010, gross loans were $3.826 billion, a decrease of $305 million, or 7 percent, compared to gross loans of $4.130 billion at December 31, 2009. The largest decrease in dollars was in commercial loans which decreased $162 million, or 6 percent, from December 31, 2009. In addition, residential real estate loans decreased $89 million, or 11 percent, from December 31, 2009. The decrease in each loan category is due to slower loan demand within the Company’s market areas. Excluding net charge-offs of $91 million, loans transferred to other real estate of $72 million, and an increase in loans held for sale of $10 million, loans decreased $152 million, or 4 percent from December 31, 2009.
The following table summarizes the major asset components as a percentage of total assets as of December 31, 2010, 2009, and 2008:
                         
    December 31,  
    2010     2009     2008  
Cash, cash equivalents and investment securities
    38.0 %     27.7 %     20.3 %
Residential real estate loans
    10.2 %     12.7 %     15.0 %
Commercial loans
    34.8 %     40.5 %     45.3 %
Consumer and other loans
    9.5 %     11.2 %     12.7 %
Other assets
    7.5 %     7.9 %     6.7 %
 
                 
Total assets
    100.0 %     100.0 %     100.0 %
 
                 
The mix of assets from 2008 through 2010 has shifted steadily from the loan portfolio to the investment security portfolio, with the largest increase occurring during 2010 as the Company continued to purchase investment securities as loan demand decreased.

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Liabilities
The following table summarizes the liability balances as of December 31, 2010 and 2009, the amount of change, and percentage change during 2010:
                                 
    December 31,              
(Dollars in thousands)   2010     2009     $ Change     % Change  
Non-interest bearing deposits
  $ 855,829     $ 810,550     $ 45,279       6 %
Interest bearing deposits
    3,666,073       3,289,602       376,471       11 %
FHLB advances
    965,141       790,367       174,774       22 %
FRB discount window
          225,000       (225,000 )     -100 %
Securities sold under agreements to repurchase and other borrowed funds
    269,408       226,251       43,157       19 %
Other liabilities
    39,500       39,147       353       1 %
Subordinated debentures
    125,132       124,988       144       0 %
 
                       
Total liabilities
  $ 5,921,083     $ 5,505,905     $ 415,178       8 %
 
                       
As of December 31, 2010, non-interest bearing deposits of $856 million increased $45 million, or 6 percent, since December 31, 2009. Interest bearing deposits of $3.666 billion at December 31, 2010 includes $203 million issued through the CDARS. Interest bearing deposits increased $376 million, or 11 percent from December 31, 2009, of which $226 million was from wholesale deposits, including CDARS. The increase in non-interest bearing and interest bearing deposits from the prior year end was driven by a greater number of personal and business customers, as well as existing customers retaining cash deposits because of the uncertainty in the current interest rate environment and for liquidity purposes.
Increases in deposits have reduced the Company’s reliance on the amount of borrowings used to fund investment security growth over the prior year end. FHLB advances increased $175 million, or 22 percent, from December 31, 2009. There were no FRB borrowings through the Term Auction Facility (“TAF”) program at December 31, 2010 due to the cessation of the TAF program by the Federal Reserve. Repurchase agreements and other borrowed funds were $269 million at December 31, 2010, an increase of $43 million, or 19 percent, from December 31, 2009.
The following table summarizes the major liability and equity components as a percentage of total liabilities and equity as of December 31, 2010, 2009, and 2008:
                         
    December 31,  
    2010     2009     2008  
Deposit accounts
    66.9 %     66.2 %     58.7 %
FHLB advances
    14.3 %     12.8 %     6.1 %
FRB discount window
    0.0 %     3.6 %     16.5 %
Other borrowed funds and repurchase agreements
    4.0 %     3.7 %     3.5 %
Subordinated debentures
    1.8 %     2.0 %     2.2 %
Other liabilities
    0.6 %     0.6 %     0.8 %
Stockholders’ equity
    12.4 %     11.1 %     12.2 %
 
                 
Total liabilities and stockholders’ equity
    100.0 %     100.0 %     100.0 %
 
                 
The mix of liabilities and stockholders’ equity has remained fairly stable from 2008 through 2010. The deposit component increased slightly from the prior year with a larger increase versus 2008, as the Banks continue to focus on growing and retaining deposits. The increase in deposits allowed the Company to decrease its reliance on the combined FHLB advances, FRB, and other borrowed funds and repurchase agreements. In 2010 those borrowings decreased a combined 1.8 percent from the prior year and 7.8 percent from 2008. The increase in stockholders’ equity from prior year was a result of the public offering of common stock in 2010.

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Stockholders’ Equity
The following table summarizes the stockholders’ equity balances as of December 31, 2010 and 2009, the amount of change, and percentage change during 2010:
                                 
    December 31,              
(Dollars in thousands, except per share data)   2010     2009     $ Change     % Change  
Common equity
  $ 837,676     $ 686,238     $ 151,438       22 %
Accumulated other comprehensive income (loss)
    528       (348 )     876       -252 %
 
                         
Total stockholders’ equity
    838,204       685,890       152,314       22 %
Goodwill and core deposit intangible, net
    (157,016 )     (160,196 )     3,180       -2 %
 
                         
Tangible stockholders’ equity
  $ 681,188     $ 525,694     $ 155,494       30 %
 
                         
 
                               
Stockholders’ equity to total assets
    12.40 %     11.08 %                
Tangible stockholders’ equity to total tangible assets
    10.32 %     8.72 %                
Book value per common share
  $ 11.66     $ 11.13     $ 0.53       5 %
Tangible book value per common share
  $ 9.47     $ 8.53     $ 0.94       11 %
Market price per share at end of year
  $ 15.11     $ 13.72     $ 1.39       10 %
Total stockholders’ equity and book value per share increased $152 million and $0.53 per share, respectively, from December 31, 2009, the increase largely the result of the $146 million in net proceeds from the Company’s March 2010 equity offering of 10.291 million shares. Tangible stockholders’ equity has increased $155 million, or 30 percent, since December 31, 2009 with tangible stockholders’ equity to tangible assets at 10.32 percent and 8.72 percent as of December 31, 2010 and December 31, 2009, respectively.
Results of Operations
The following table summarizes revenue for the years ended December 31, 2010 and 2009, including the amount and percentage change during 2010:
Revenue Summary
                                 
    Years ended December 31,              
(Dollars in thousands)   2010     2009     $ Change     % Change  
Net interest income
                               
Interest income
  $ 288,402     $ 302,494     $ (14,092 )     -5 %
Interest expense
    53,634       57,167       (3,533 )     -6 %
 
                         
Total net interest income
    234,768       245,327       (10,559 )     -4 %
 
                               
Non-interest income
                               
Service charges, loan fees, and other fees
    47,946       45,871       2,075       5 %
Gain on sale of loans
    27,233       26,923       310       1 %
Gain on sale of investments
    4,822       5,995       (1,173 )     -20 %
Other income
    7,545       7,685       (140 )     -2 %
 
                         
Total non-interest income
    87,546       86,474       1,072       1 %
 
                         
 
  $ 322,314     $ 331,801     $ (9,487 )     -3 %
 
                         
 
                               
Net interest margin (tax-equivalent)
    4.21 %     4.82 %                
 
                           
Net Interest Income
Net interest income for the year decreased $10.6 million, or 4 percent, over 2009. Total interest income decreased $14 million, or 5 percent, while total interest expense decreased $3.5 million, or 6 percent. The net interest margin as a percentage of earning assets, on a tax equivalent basis, decreased 61 basis points from 4.82 percent for 2009 to 4.21 percent for 2010, such decrease including a 6 basis points reduction from the reversal of interest on non-accrual loans. The decrease in lower yield and lower volume of loans coupled with an increase in lower yielding investment securities continues to put pressure on both interest income and net interest margin.

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Non-interest Income
Non-interest income increased $1.0 million for the year over the same period in 2009. Fee income for 2010 increased $2.1 million, or 5 percent, compared to the prior year primarily from an increase in debit card income. Gain on sale of loans has remained at historical highs of $27.2 million for the year, which is an increase of $310 thousand, or 1 percent, over last year. Included in current year other income is $2.0 million in one-time gains on merchant card servicing portfolios and included in prior year other income is $3.5 million in a one-time bargain purchase gain from the acquisition of First National. Excluding one-time gains, other income increased $1.3 million over the same period in 2009.
Non-interest Expense
The following table summarizes non-interest expense for the years ended December 31, 2010 and 2009, including the amount and percentage change during 2010:
                                 
    Years ended December 31,              
(Dollars in thousands)   2010     2009     $ Change     % Change  
Compensation, employee benefits and related expense
  $ 87,728     $ 84,965     $ 2,763       3 %
Occupancy and equipment expense
    24,261       23,471       790       3 %
Advertising and promotions
    6,831       6,477       354       5 %
Outsourced data processing expense
    3,057       3,031       26       1 %
Core deposit intangibles amortization
    3,180       3,116       64       2 %
Other real estate owned expense
    22,193       9,092       13,101       144 %
Federal Deposit Insurance Corporation premium
    9,121       8,639       482       6 %
Other expenses
    31,577       30,027       1,550       5 %
 
                         
Total non-interest expense
  $ 187,948     $ 168,818     $ 19,130       11 %
 
                         
Non-interest expense for 2010 increased by $19.1 million, or 11 percent, from the same period last year. Compensation and employee benefits increased $2.8 million, or 3 percent, from 2009 which relates to the increase in full-time equivalent employees including the addition of First National employees in October 2009. Occupancy and equipment expense increased $790 thousand, or 3 percent, from 2009. Advertising and promotion expense increased by $354 thousand, or 5 percent, from 2009. The primary category that saw much higher expense was the other real estate owned which increased $13.1 million, or 144 percent, from the prior year. The other real estate owned expenses of $22.2 million for 2010 included $5.1 million of operating expenses, $10.4 million of fair value write-downs, and $6.7 million of loss on sale of other real estate owned. FDIC premiums increased $482 thousand, or 6 percent, from the prior year which included a second quarter special assessment of $2.5 million. Other expense increased $1.6 million, or 5 percent, from the prior year.
Efficiency Ratio
In 2010, the Company revised its efficiency ratio calculation to be consistent with industry reporting by SNL Financial and has also revised the efficiency ratio reported for all prior periods. The efficiency ratio is now calculated as non-interest expense before other real estate owned expenses, core deposit intangible amortization, and non-recurring expense items as a percentage of fully taxable equivalent net interest income and non-interest income, excluding gains and losses on sale of investment securities, other real estate owned income, and non-recurring income items. The efficiency ratio for 2010 was 50 percent compared to 46 percent for 2009. The increase in efficiency ratio resulted from continuing pressure on net interest income in the current low interest rate environment.

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Credit Quality Summary
The following table summarizes the Company’s credit quality:
                 
    December 31,  
(Dollars in thousands)   2010     2009  
Allowance for loan and lease losses at beginning of year
  $ 142,927       76,739  
Provision for loan losses
    84,693       124,618  
Charge-offs
    (93,950 )     (60,896 )
Recoveries
    3,437       2,466  
 
           
Allowance for loan and lease losses at end of year
    137,107       142,927  
 
           
 
               
Other real estate owned
    73,485       57,320  
Accruing loans 90 days or more past due
    4,531       5,537  
Non-accrual loans
    192,505       198,281  
 
           
Total non-performing assets
    270,521       261,138  
 
           
 
               
Allowance for loan and lease losses as a percentage of non-performing assets
    51 %     55 %
 
               
Non-performing assets as a percentage of total subsidiary assets
    3.91 %     4.13 %
 
               
Allowance for loan and lease losses as a percentage of total loans
    3.58 %     3.46 %
 
               
Net charge-offs as a percentage of loans
    2.37 %     1.42 %
 
               
Accruing loans 30-89 days or more past due
  $ 45,497       87,491  
At December 31, 2010, the ALLL was $137.1 million, a decrease of $5.8 million from the prior year end. The allowance was 3.58 percent of total loans outstanding at December 31, 2010, such percentage up from the 3.46 percent at December 31, 2009. The allowance was 51 percent of non-performing assets at December 31, 2010, compared to 55 percent a year ago. Non-performing assets as a percentage of total subsidiary assets at December 31, 2010 were at 3.91 percent, down from 4.13 percent at prior year end. Early stage delinquencies (accruing loans 30-89 days past due) of $45.5 million at December 31, 2010 improved from prior year’s $87.5 million. Loan portfolio growth, composition, average loan size, credit quality considerations, and other environmental factors will continue to determine the level of additional provision for loan loss expense at each bank subsidiary.
Provision for Loan Losses
                                         
                            Accruing    
                            Loans 30-89   Non-Performing
    Provision           ALLL   Days Past Due   Assets to
    for Loan   Net   as a Percent   as a Percent of   Total Subsidiary
(Dollars in thousands)   Losses   Charge-Offs   of Loans   Loans   Assets
Q4 2010
  $ 27,375       24,525       3.58 %     1.19 %     3.91 %
Q3 2010
    19,162       26,570       3.37 %     1.03 %     4.03 %
Q2 2010
    17,246       19,181       3.51 %     0.90 %     4.01 %
Q1 2010
    20,910       20,237       3.53 %     1.50 %     4.19 %
Q4 2009
    36,713       19,116       3.46 %     2.12 %     4.13 %
Q3 2009
    47,050       19,094       3.10 %     1.08 %     4.10 %
Q2 2009
    25,140       11,543       2.36 %     1.52 %     3.06 %
Q1 2009
    15,715       8,677       2.01 %     1.60 %     1.97 %
The provision for loan losses was $84.7 million for 2010, a decrease of $39.9 million, or 32 percent, from the same period in 2009. Net charged-off loans during the year ended December 31, 2010 was $90.5 million, an increase of $32.1 million from the same period in 2009.

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For additional information regarding the loan portfolio, credit quality, the ALLL and lending practices, see lending activity in “Item 1. Business.”
Management’s Discussion and Analysis of the Results of Operations
Year ended December 31, 2009 Compared to December 31, 2008
Revenue Summary
The following table summarizes revenue for the years ended December 31, 2009 and 2008, including the amount and percentage change during 2009:
                                 
    Years ended December 31,              
(Dollars in thousands)   2009     2008     $ Change     % Change  
Net interest income
                               
Interest income
  $ 302,494     $ 302,985     $ (491 )     0 %
Interest expense
    57,167       90,372       (33,205 )     -37 %
 
                         
Total net interest income
    245,327       212,613       32,714       15 %
 
                               
Non-interest income
                               
Service charges, loan fees, and other fees
    45,871       47,506       (1,635 )     -3 %
Gain on sale of loans
    26,923       14,849       12,074       81 %
Gain (loss) on investments
    5,995       (7,345 )     13,340       -182 %
Other income
    7,685       6,024       1,661       28 %
 
                         
Total non-interest income
    86,474       61,034       25,440       42 %
 
                         
 
  $ 331,801     $ 273,647     $ 58,154       21 %
 
                         
 
                               
Net interest margin (tax-equivalent)
    4.82 %     4.70 %                
 
                           
Net Interest Income
Net interest income for 2009 increased $33 million, or 15 percent, over 2008. Total interest income during 2009 decreased $491 thousand, or less than 1 percent, while total interest expense decreased $33 million, or 37 percent. The decrease in total interest expense from the prior year is primarily attributable to rate decreases in interest bearing deposits and lower cost borrowings. The net interest margin as a percentage of earning assets, on a tax-equivalent basis for the year, was 4.82 percent for the current year, an increase of 12 basis points from the 4.70 percent for 2008.
Non-interest Income
Total non-interest income for 2009 increased $25 million, or 42 percent over 2008. Fee income for 2009 decreased $1.6 million, or 3 percent, as compared to 2008. Gain on sale of loans increased $12 million, or 81 percent, primarily the result of the increase in purchase and refinance residential loans originated and sold in the secondary market. Gain on investments during 2009 of $6.0 million is the net gain from sales of investment securities. Loss from investments during 2008 included a non-recurring $7.6 million other-than-temporary impairment charge on investments in Freddie Mac preferred stock and Fannie Mae common stock. Other income of $7.7 million included a $3.5 million one-time bargain purchase gain from the acquisition of First National in 2009. In 2008, other income of $6.0 million included a $1.7 million gain from the sale and relocation of Mountain West’s office facility in Ketchum, Idaho.

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Non-interest Expense
The following table summarizes non-interest expense for the years ended December 31, 2009 and 2008, including the amount and percentage change during 2009:
                                 
    Years ended December 31,              
(Dollars in thousands)   2009     2008     $ Change     % Change  
Compensation, employee benefits and related expense
  $ 84,965     $ 82,027     $ 2,938       4 %
Occupancy and equipment expense
    23,471       21,674       1,797       8 %
Advertising and promotions
    6,477       6,989       (512 )     -7 %
Outsourced data processing expense
    3,031       2,508       523       21 %
Core deposit intangibles amortization
    3,116       3,051       65       2 %
Other real estate owned expense
    9,092       1,176       7,916       673 %
Federal Deposit Insurance Corporation premium
    8,639       1,377       7,262       527 %
Other expenses
    30,027       27,107       2,920       11 %
 
                         
Total non-interest expense
  $ 168,818     $ 145,909     $ 22,909       16 %
 
                         
Non-interest expense increased by $23 million, or 16 percent, during 2009. Compensation and employee benefit expense increased $2.9 million, or 4 percent, from 2008, due to the increased number of employees from the acquisition of San Juans in December 2008 and First National in October 2009. Occupancy and equipment expense increased $2 million, or 8 percent, over 2008 reflecting the cost of additional locations and facility upgrades in 2009. Advertising and promotion expense decreased $512 thousand, or 7 percent, from 2008 reflecting the Banks’ continuing focus on reducing operating expenses. Outsourced data processing expenses increased $523 thousand, or 21 percent, from 2008 as a result of additional locations and general operating increases. Other expenses increased $18 million, or 61 percent, from 2008. The increase in other expenses includes $7.3 million in FDIC insurance premiums, $5.2 million loss from sales of other real estate owned, $2.7 million expense associated with repossessed assets and $1.4 million in legal and outside firm expense. Of the increase in FDIC insurance premiums, $2.5 million is attributable to the second quarter asset-based special assessment.
Credit Quality Summary
The following table summarizes the Company’s credit quality:
                 
    December 31,  
(Dollars in thousands)   2009     2008  
Allowance for loan and lease losses at beginning of year
  $ 76,739       54,413  
Provision for loan losses
    124,618       28,480  
Acquisition
          2,625  
Charge-offs
    (60,896 )     (9,839 )
Recoveries
    2,466       1,060  
 
           
Allowance for loan and lease losses at end of year
    142,927       76,739  
 
           
 
       
Other real estate owned
    57,320       11,539  
Accruing loans 90 days or more past due
    5,537       8,613  
Non-accrual loans
    198,281       64,301  
 
           
Total non-performing assets
    261,138       84,453  
 
           
 
       
Allowance for loan and lease losses as a percentage of non-performing assets
    55 %     91 %
 
               
Non-performing assets as a percentage of total subsidiary assets
    4.13 %     1.46 %
 
               
Allowance for loan and lease losses as a percentage of total loans
    3.46 %     1.86 %
 
               
Net charge-offs as a percentage of loans
    1.42 %     0.21 %
 
               
Accruing loans 30-89 days or more past due
  $ 87,491       54,787  

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Provision for Loan Losses
The provision for loan losses expense was $125 million for 2009, an increase of $96 million, or 338 percent, from 2008. Net charged-off loans for the year were $58 million compared to $9 million for the prior year. For the year, the provision for loan losses covered net charge-offs 2.1 times.
Additional Management’s Discussion and Analysis
Commitments
In the normal course of business, there are various outstanding commitments to extend credit, such as letters of credit and un-advanced loan commitments, which are not reflected in the accompanying condensed consolidated financial statements. Management does not anticipate any material losses as a result of these transactions. The Company has outstanding debt maturities, the largest of which are FHLB advances. For the maturity schedule of advances and schedule of future minimum lease payments see Notes 8 and 20, respectively, to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.”
The following table represents the Company’s contractual obligations as of December 31, 2010:
                                                                 
            Payments Due by Period  
            Indeterminate                                      
(Dollars in thousands)   Total     Maturity 1     2011     2012     2013     2014     2015     Thereafter  
Deposits
  $ 4,521,902       3,045,233       1,180,365       170,836       74,408       17,787       33,068       205  
FHLB advances
    965,141             761,064       82,000                   75,000       47,077  
Repurchase agreements
    249,403             249,403                                
Subordinated debentures
    125,132                                           125,132  
Other borrowed funds
    18,009             11,764                               6,245  
Capital lease obligations
    2,912             240       242       261       828       195       1,146  
Operating lease obligations
    18,858             2,834       2,345       2,066       1,930       1,765       7,918  
 
                                               
 
  $ 5,901,357       3,045,233       2,205,670       255,423       76,735       20,545       110,028       187,723  
 
                                               
 
1   Represents non-interest bearing deposits and NOW, savings, and money market accounts.
Liquidity
Liquidity risk is the possibility that the Company will not be able to fund present and future obligations as they come due because of an inability to liquidate assets or obtain adequate funding at a reasonable cost. The objective of liquidity management is to maintain cash flows adequate to meet current and future needs for credit demand, deposit withdrawals, maturing liabilities and corporate operating expenses. Effective liquidity management entails three elements:
  1.   Assessing on an ongoing basis, the current and expected future needs for funds, and ensuring that sufficient funds or access to funds exist to meet those needs at the appropriate time.
 
  2.   Providing for an adequate cushion of liquidity to meet unanticipated cash flow needs that may arise from potential adverse circumstances ranging from high probability/low severity events to low probability/high severity.
 
  3.   Balancing the benefits between providing for adequate liquidity to mitigate potential adverse events and the cost of that liquidity.

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     The Banks’ primary sources of funds are deposits, receipts of principal and interest payments on loans and investment securities, proceeds from sale of loans and securities, short and long-term borrowings. In addition, the Company maintains liquidity capacity through secured and unsecured borrowing programs, brokered deposit relationships, and unencumbered securities. The following table identifies certain liquidity sources and capacity available to the Company at December 31, 2010:
         
    December 31,  
(Dollars in thousands)   2010  
FHLB advances
       
Borrowing capacity
  $ 1,102,986  
Amount utilized
    (965,141 )
 
     
Amount available
  $ 137,845  
 
     
 
       
FRB discount window
       
Borrowing capacity
  $ 359,555  
Amount utilized
     
 
     
Amount available
  $ 359,555  
 
     
 
       
Unsecured lines of credit available
  $ 161,760  
 
     
 
       
Unencumbered securities
       
U.S. government and federal agency
  $ 170  
U.S. government sponsored enterprises
    5,188  
State and local governments
    464,828  
Collateralized debt obligations
    3,298  
Residential mortgage-backed securities
    981,545  
 
     
Total unencumbered securities
  $ 1,455,029  
 
     
The Company and each of the bank subsidiaries has a wide range of versatility in managing the liquidity and asset/liability mix across each of the bank subsidiaries as well as the Company as a whole. Asset liability committees (“ALCO”) are maintained at the Parent and bank subsidiary levels with the ALCO committees meeting regularly to assess liquidity risk, among other matters. The Company monitors liquidity and contingency funding alternatives through management reports of liquid assets (e.g., investment securities), both unencumbered and pledged, as well as borrowing capacity, both secured and unsecured.
Capital Resources
Maintaining capital strength continues to be a long-term objective. Abundant capital is necessary to sustain growth, provide protection against unanticipated declines in asset values, and to safeguard the funds of depositors. Capital also is a source of funds for loan demand and enables the Company to effectively manage its assets and liabilities. Stockholders’ equity increased $152 million since prior year end, or 22 percent, primarily the result of a public offering of common stock of $146 million in net proceeds.

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The Federal Reserve Board has adopted capital adequacy guidelines that are used to assess the adequacy of capital in supervising a bank holding company. Each of the bank subsidiaries was considered well capitalized by the respective regulator as of December 31, 2010 and 2009. There are no conditions or events since year end that management believes have changed the Company’s or subsidiaries’ risk-based capital category. The following table illustrates the Federal Reserve Board’s capital adequacy guidelines and the Company’s compliance with those guidelines as of December 31, 2010.
                         
    Tier 1 (Core)     Total     Leverage  
(Dollars in thousands)   Capital     Capital     Capital  
Total stockholders’ equity
  $ 838,204       838,204       838,204  
Less:
                       
Goodwill and intangibles
    (150,470 )     (150,470 )     (150,470 )
Net unrealized gain on AFS debt securities
    (528 )     (528 )     (528 )
Other adjustments
    (88 )     (88 )     (88 )
Plus:
                       
Allowance for loan and lease losses
          56,625        
Subordinated debentures
    124,500       124,500       124,500  
Other adjustments
          2        
 
                 
Regulatory capital
  $ 811,618       868,245       811,618  
 
                 
 
                       
Risk-weighted assets
  $ 4,449,324       4,449,324          
 
                   
 
                       
Total adjusted average assets
                  $ 6,386,400  
 
                     
 
                       
Capital as % of risk weighted assets
    18.24 %     19.51 %     12.71 %
 
                     
Regulatory “well capitalized” requirement
    6.00 %     10.00 %        
 
                   
Excess over “well capitalized” requirement
    12.24 %     9.51 %        
 
                   
For additional information, see Note 11 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.” Dividend payments were $0.52 per share for 2010 and 2009. The payment of dividends is subject to government regulation in that regulatory authorities may prohibit banks and bank holding companies from paying dividends that would constitute an unsafe or unsound banking practice. Additionally, current guidance from the Federal Reserve provides, among other things, that dividends per share on the Company’s common stock generally should not exceed earnings per share, measured over the previous four fiscal quarters.
In addition to the primary and safeguard liquidity sources available, the Company has the capacity to issue 117,187,500 shares of common stock, of which 71,915,073 has been issued as of December 31, 2010. The Company’s capacity to issue additional shares has been demonstrated with the most recent stock issuances in 2010 and 2008, although no assurances can be made that future stock issuances would be as successful. The Company also has the capacity to issue 1,000,000 shares of preferred shares, of which currently none are issued.
Short-term borrowings
A critical component of the Company’s liquidity and capital resources is access to short-term borrowings to fund its operations. Short-term borrowings are accompanied by increased risks managed by ALCO such as rate increases or unfavorable change in terms which would make it more costly to obtain future short-term borrowings. The Company’s short-term borrowing sources include FHLB advances, FRB borrowings, federal funds purchased, brokered deposits, and wholesale repurchase agreements. FHLB advances and certain other short-term borrowings may be extended as long-term borrowings to decrease certain risks such as liquidity or interest rate risk; however, the reduction in risks are weighed against the increased costs of funds.
Market Risk
Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates/prices such as interest rates, foreign currency exchange rates, commodity prices, and equity prices. The Company’s primary market risk exposure is interest rate risk. The ongoing monitoring and management of this risk is an important component of the Company’s asset/liability management process which is governed by policies established by its Board of Directors that are reviewed and approved annually. The Board of Directors delegates responsibility for carrying out the asset/liability management policies to each bank subsidiary and Parent ALCO. In this capacity, ALCO develops guidelines and strategies impacting the Company’s asset/liability management related activities based upon estimated market risk sensitivity, policy limits and overall market interest rate levels and trends.

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Interest Rate Risk
The objective of interest rate risk management is to contain the risks associated with interest rate fluctuations. The process involves identification and management of the sensitivity of net interest income to changing interest rates. Managing interest rate risk is not an exact science. The interval between repricing of interest rates of assets and liabilities changes from day to day as the assets and liabilities change. For some assets and liabilities, contractual maturity and the actual cash flows experienced are not the same. A good example is residential mortgages that have long-term contractual maturities but may be repaid well in advance of the maturity when current prevailing interest rates become lower than the contractual rate. Interest-bearing deposits without a stated maturity could be withdrawn upon demand. However, the Banks’ experience indicates that these funding pools have a much longer duration and are not as sensitive to interest rate changes as other financial instruments. Prime based loans generally have rate changes when the FRB changes short-term interest rates. However, depending on the magnitude of the rate change and the relationship of the current rates to rate floors and rate ceilings that may be in place on the loans, the loan rate may not change.
GAP analysis
The following table gives a description of our GAP position for various time periods. As of December 31, 2010, the Company had a negative GAP position at six months and a negative GAP position at twelve months. The cumulative GAP as a percentage of total assets for six months is a negative 17.77 percent which compares to a negative 14.05 percent at December 31, 2009 and a negative 14.07 percent at December 31, 2008. The table also shows the GAP earnings sensitivity, and earnings sensitivity ratio, along with a brief description as to how they are calculated. The methodology used to compile this GAP information is based on the Company’s mix of assets and liabilities and the historical experience accumulated regarding their rate sensitivity.
                                         
    Projected Maturity or Repricing  
    0-6     6-12     1 - 5     More than        
(Dollars in thousands)   Months     Months     Years     5 Years     Total  
Assets
                                       
Interest bearing deposits and
                                       
federal funds sold
  $ 33,349             45             33,394  
Investment securities
    22,522       20,566       105,209       558,291       706,588  
Residential mortgage-backed securities
    408,652       339,403       895,724       46,323       1,690,102  
FHLB stock and FRB stock
                49,072       15,357       64,429  
Variable rate loans
    1,110,473       244,946       928,247       165,469       2,449,135  
Fixed rate loans
    329,353       201,062       587,452       182,287       1,300,154  
 
                             
Total interest bearing assets
  $ 1,904,349       805,977       2,565,749       967,727       6,243,802  
 
                             
 
       
Liabilities
                                       
Interest bearing deposits
    2,011,827       357,097       292,166       1,004,983       3,666,073  
FHLB advances
    741,064       20,000       157,000       47,077       965,141  
Repurchase agreements and other borrowed funds
    260,802       453       1,028       7,125       269,408  
Subordinated debentures
                      125,132       125,132  
 
                             
Total interest bearing liabilities
  $ 3,013,693       377,550       450,194       1,184,317       5,025,754  
 
                             
 
       
Repricing gap
  $ (1,109,344 )     428,427       2,115,555       (216,590 )     1,218,048  
Cumulative repricing gap
  $ (1,109,344 )     (680,917 )     1,434,638       1,218,048          
Cumulative gap as a % of interest bearing assets
    -17.77 %     -10.91 %     22.98 %     19.51 %        
 
                                       
Gap earnings sensitivity 1
            (4,141 )                        
 
                                       
Gap earnings sensitivity ratio 2
            -9.78 %                        
 
1   Gap Earnings Sensitivity is the estimated effect on earnings, after taxes of 39.19 percent, of a 1 percent increase or decrease in interest rates (1 percent of ($680,917 — $266,851))
 
2   Gap Earnings Sensitivity Ratio is Gap Earnings Sensitivity divided by the 2010 net earnings of $42,330. A 1 percent increase in interest rates has this estimated percentage decrease on annual net earnings.

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This table estimates the repricing and maturities of the contractual characteristics of the assets and liabilities, based upon the Company’s assessment of the repricing characteristics of the various instruments. Interest-bearing checking and regular savings are included in the categories that reflect the interest rate sensitivity of the individual programs and if the deposits are not clearly rate sensitive, the deposits are included in the more than 5 years category. Money market balances are included in the less than 6 months category. Residential mortgage-backed securities are categorized based on the anticipated payments.
Net interest income simulation
The traditional one-dimensional view of GAP is not sufficient to show a bank’s ability to withstand interest rate changes. Because of limitations in GAP modeling the ALCO of the Company uses a detailed and dynamic simulation model to quantify the estimated exposure of net interest income (“NII”) to sustained interest rate changes. While ALCO routinely monitors simulated NII sensitivity over a rolling two-year horizon, it also utilizes additional tools to monitor potential longer-term interest rate risk. The simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all assets and liabilities reflected on the Company’s statement of financial condition. This sensitivity analysis is compared to ALCO policy limits which specify a maximum tolerance level for NII exposure over a one year horizon, assuming no balance sheet growth, given a 200 basis point (bp) upward and 100bp downward shift in interest rates. A parallel and pro rata shift in rates over a 12-month period is assumed as a benchmark. Other non-parallel rate movement scenarios are also modeled to determine the potential impact on net interest income. The following reflects the Company’s NII sensitivity analysis as of December 31, 2010 and 2009 as compared to the 10 percent policy limit approved by the Company’s and Banks’ Board of Directors.
                 
    December 31,
(Dollars in thousands)   2010   2009
+200 bp
               
Estimated sensitivity
    -4.5 %     -3.0 %
Estimated decrease in net interest income
  $ (10,541 )     (7,433 )
 
               
-100 bp
               
Estimated sensitivity
    -2.1 %     0.3 %
Estimated (decrease) increase in net interest income
  $ (4,930 )     613  
The preceding sensitivity analysis does not represent a forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including: the nature and timing of interest rate levels including yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of assets and liability cash flows, and others. While assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurances as to the predictive nature of these assumptions including how customer preferences or competitor influences might change. Also, as market conditions vary from those assumed in the sensitivity analysis, actual results will also differ due to prepayment/refinancing levels likely deviating from those assumed, the varying impact of interest rate change caps or floors on adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early withdrawals and product preference changes, and other internal and external variables. Furthermore, the sensitivity analysis does not reflect actions that ALCO might take in responding to or anticipating changes in interest rates.
Economic value of equity
In addition to the GAP and NII analysis, the Company calculates the economic value of equity (“EVE”) which focuses on longer term interest rate risk. The EVE process models the cash flow of financial instruments to maturity. The model incorporates growth and pricing assumptions to develop a baseline EVE. The interest rates used in the model are then shocked for an immediate increase in interest rates. The results for the shocked model are compared to the baseline results to determine the percentage change in EVE under the various scenarios. The results percentage change in the EVE is an indication of the longer term re-pricing risk and options embedded in the balance sheet. The following includes the Company’s EVE maximum sensitivity policy limits and EVE analysis as of December 31, 2010:
                 
    Policy   Post
Rate Shocks   Limits   Shock Ratio
-100 bp
    15 %     -0.6 %
+100 bp
    15 %     -5.0 %
+200 bp
    25 %     -11.5 %
+300 bp
    35 %     -18.9 %

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Effect of inflation and changing prices
Generally accepted accounting principles often require the measurement of financial position and operating results in terms of historical dollars, without consideration for change in relative purchasing power over time due to inflation. Virtually all assets of the Company and each bank subsidiary are monetary in nature; therefore, interest rates generally have a more significant impact on a company’s performance than does the effect of inflation.
Critical Accounting Policies
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America often requires management to use significant judgments as well as subjective and/or complex measurements in making estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. The Company considers its accounting policy for the ALLL and determination of whether an investment security is temporarily or other-than-temporarily impaired to be critical accounting policies.
Allowance for Loan and Lease Losses Accounting Policy and Analysis
The Banks’ charge-off policy is consistent with bank regulatory standards. Consumer loans generally are charged off when the loan becomes over 120 days delinquent. Real estate acquired as a result of foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned until such time as it is sold. When such property is acquired, it is recorded at estimated fair value, less estimated cost to sell. Any write-down at the time of recording real estate owned is charged to the ALLL. Subsequent write-downs, if any, are charged to current expense.
Based upon management’s analysis of the Company’s loan and lease portfolio, the balance of the ALLL is an estimate of probable credit losses known and inherent within each bank subsidiary’s loan and lease portfolio as of the date of the consolidated financial statements. The ALLL is analyzed at the loan class level and is maintained within a range of estimated losses. Determining the adequacy of the ALLL involves a high degree of judgment and is inevitably imprecise as the risk of loss is difficult to quantify. The determination of the ALLL and the related provision for loan losses is a critical accounting estimate that involves management’s judgments about all known relevant internal and external environmental factors that affect loan losses. The balance of the ALLL is highly dependent upon management’s evaluations of borrowers’ current and prospective performance, appraisals and other variables affecting the quality of the loan and lease portfolio. Individually significant loans and major lending areas are reviewed periodically to determine potential problems at an early date. Changes in management’s estimates and assumptions are reasonably possible and may have a material impact upon the Company’s consolidated financial statements, results of operations or capital.
The ALLL consists of a specific allocation component and a general allocation component. The specific component relates to loans that are determined to be impaired. The Company measures impairment on a loan-by-loan basis based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except when it is determined that repayment of the loan is expected to be provided solely by the underlying collateral. For collateral-dependent loans and real-estate loans for which foreclosure or a deed-in-lieu of foreclosure is probable, impairment is measured by the fair value of the collateral, less estimated cost to sell. The fair value of the collateral is determined primarily based upon appraisal or evaluation of the underlying real property value. The Company’s impaired loans include TDR loans which are individually assessed in the specific allocation component of the ALLL by portfolio class.

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The general allocation component relates to probable credit losses inherent in the balance of the portfolio based on historical loss experience, adjusted for changes in trends and conditions of qualitative or environmental factors. The historical loss experience is based on the previous twelve quarters loss experience by loan class adjusted for risk characteristics in the existing loan portfolio. The same trends and conditions are evaluated for each class within the loan portfolio; however, the risk characteristics are weighted separately at the individual class level based on each of the Banks’ judgment and experience. The changes in trends and conditions of certain items include the following:
    Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses;
 
    Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments;
 
    Changes in the nature and volume of the portfolio and in the terms of loans;
 
    Changes in experience, ability, and depth of lending management and other relevant staff;
 
    Changes in the volume and severity of past due and nonaccrual loans;
 
    Changes in the quality of the Company’s loan review system;
 
    Changes in the value of underlying collateral for collateral-dependent loans;
 
    The existence and effect of any concentrations of credit, and changes in the level of such concentrations;
 
    The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the Company’s existing portfolio.
Each of the bank’s ALLL evaluation is well documented and approved by each bank subsidiary’s Board of Directors and reviewed by the Parent’s Board of Directors. In addition, the policy and procedures for determining the balance of the ALLL are reviewed annually by each bank subsidiary’s Board of Directors, the Parent’s Board of Directors, independent credit reviewers and state and federal bank regulatory agencies.
Management of each bank subsidiary exercises significant judgment when evaluating the effect of applicable qualitative or environmental factors on each bank subsidiary’s historical loss experience for loans not identified as impaired. Quantification of the impact upon each bank’s allowance is inherently subjective as data for any factor may not be directly applicable, consistently relevant, or reasonably available for management to determine the precise impact of a factor on the collectability of each bank’s unimpaired loan and lease portfolio as of each evaluation date. Bank management documents its conclusions and rationale for changes that occur in each applicable factor’s weight, i.e., measurement and ensures that such changes are directionally consistent based on the underlying current trends and conditions for the factor.
The ALLL is increased by charges to earnings and decreased by charge-offs (net of recoveries). For additional information regarding the ALLL, its relation to the provision for loan losses and risk related to asset quality, see Note 4 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.”
Other-Than-Temporary Impairment on Securities Accounting Policy and Analysis
The Company views the determination of whether an investment security is temporarily or other-than-temporarily impaired as a critical accounting policy, as the estimate is susceptible to significant change from period to period because it requires management to make significant judgments, assumptions and estimates in the preparation of its consolidated financial statements. The Company assesses individual securities in its investment securities portfolio for impairment at least on a quarterly basis, and more frequently when economic or market conditions warrant. An investment is impaired if the fair value of the security is less than its carrying value at the financial statement date. If impairment is determined to be other-than-temporary, an impairment loss is recognized by reducing the amortized cost for the credit loss portion of the impairment with a corresponding charge to earnings for a like amount.
For fair value estimates provided by third party vendors, management also considered the models and methodology for appropriate consideration of both observable and unobservable inputs, including appropriately adjusted discount rates and credit spreads for securities with limited or inactive markets, and whether the quoted prices reflect orderly transactions. For certain securities, the Company obtained independent estimates of inputs, including cash flows, in supplement to third party vendor provided information. The Company also reviewed financial statements of select issuers, with follow up discussions with issuers’ management for clarification and verification of information relevant to the Company’s impairment analysis.

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In evaluating impaired securities for other-than-temporary impairment losses, management considers, among other things, 1) the severity and duration of the impairment, 2) the credit ratings of the security, 3) the overall deal structure, including the Company’s position within the structure, the overall and near term financial performance of the issuer and underlying collateral, delinquencies, defaults, loss severities, recoveries, prepayments, cumulative loss projections, discounted cash flows and fair value estimates.
In evaluating equity securities for other-than-temporary impairment losses, the Company assesses impairment to be other-than-temporary when the Company lacks the intent and the ability to retain the equity security for a period of time sufficient to allow for recovery in full of the cost basis of the security. If the Company has decided to sell an impaired equity security and the Company does not expect the fair value of the security to fully recover before the expected time of sale, the security is deemed to have an other-than-temporary impairment in the period in which the decision to sell is made. The Company recognizes an impairment loss when the impairment is deemed other-than-temporary even if a decision to sell has not been made. For other-than-temporary losses on equity securities, the Company recognizes the entire amount of the other-than-temporary impairment in earnings.
In evaluating debt securities for other-than-temporary impairment losses, management assesses whether the Company intends to sell the security or if it is more likely-than-not that the Company will be required to sell the debt security. In so doing, management considers contractual constraints, liquidity, capital, asset / liability management and securities portfolio objectives. If impairment is determined to be other-than-temporary and the Company does not intend to sell a debt security, and it is more likely-than-not the Company will not be required to sell the security before recovery of its cost basis, it recognizes the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion (noncredit portion) in other comprehensive income, net of tax. For held-to-maturity debt securities, the amount of an other-than-temporary impairment recorded in other comprehensive income for the noncredit portion of a previous other-than-temporary impairment is amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security.
If impairment is determined to be other-than-temporary and the Company intends to sell a debt security or it is more likely-than-not the Company will be required to sell the security before recovery of its cost basis, it recognizes the entire amount of the other-than-temporary impairment in earnings.
For debt securities with other-than-temporary impairment, the previous amortized cost basis less the other-than-temporary impairment recognized in earnings shall be the new amortized cost basis of the security. In subsequent periods, the Company accretes into interest income the difference between the new amortized cost basis and cash flows expected to be collected prospectively over the life of the debt security.
Equity securities owned at December 31, 2010 primarily consisted of stock issued by the FHLB of Seattle, FHLB of Topeka and the FRB, such shares are measured at cost for purposes in recognition of the transferability restrictions imposed by the issuers. Other equity securities include Federal Agriculture Mortgage Corporation and Bankers’ Bank of the West Bancorporation, Inc. The fair value of other stock in an unrealized loss position was $7 thousand, with unrealized losses of $4 thousand or 57 percent of fair value, at December 31, 2010.
With respect to FHLB stock, the Company evaluates such stock for other-than-temporary impairment. Such evaluation takes into consideration (1) FHLB deficiency, if any, in meeting applicable regulatory capital targets, including risk-based capital requirements, (2) the significance of any decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the time period for any such decline, (3) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, (4) the impact of legislative and regulatory changes on the FHLB, and (5) the liquidity position of the FHLB.
Based on the analysis of its impaired equity securities as of December 31, 2010, the Company determined that none of such securities had other-than-temporary impairment.
The Company believes that macroeconomic conditions occurring in 2010 and in 2009 have unfavorably impacted the fair value of certain debt securities in its investment portfolio. For debt securities with limited or inactive markets, the impact of these macroeconomic conditions upon fair value estimates includes higher risk-adjusted discount rates and downgrades in credit ratings provided by nationally recognized credit rating agencies, (e.g., Moody’s, S&P, Fitch, and DBRS).

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Debt securities sold during the 2010, included 119 securities of which 108 were sold at a realized gain of $7.8 million and 11 were sold at a realized loss of $3.0 million. The increase in sales activity reflects the Company’s more active management of the portfolio. Such sales were executed with the proceeds used to buy additional investment securities such that the investment portfolio performs well across varying interest rate environments.
During the first half of 2009, the Company sold no investment securities as the Company continued its then historical approach to managing the investment portfolio, i.e., to “buy and hold” securities to maturity, although such securities may be sold given that all of the securities held in the investment portfolio are designated as available-for-sale. During the second half of 2009, the Company sold 59 securities of which 52 were sold at a realized gain of $7.1 million and 7 were sold at a realized loss of $1.1 million.
Of the securities sold at a realized loss, none had previously been subject to an other-than-temporary impairment charge, and none were subject to an expectation or requirement to sell. With respect to its impaired debt securities at December 31, 2010, management determined that it does not intend to sell and that there is no expected requirement to sell any of its impaired debt securities.
As of December 31, 2010, there were 597 investments in an unrealized loss position of which 595 were debt securities and 2 were equity securities. With respect to the 595 debt securities, state and local government securities have the largest unrealized loss. The fair value of the residential mortgage-backed securities, which have underlying collateral consisting of U.S. government sponsored enterprise guaranteed mortgages and non-guaranteed private label whole loan mortgages, were $384.2 million at December 31, 2010 of which $325.1 million was purchased during 2010, the remainder of which had a fair market value of $59.2 million at December 31, 2009. For the securities purchased in 2010, there has been an unrealized loss of $1.5 million since purchase. Of the remaining residential mortgage-backed securities in a loss position, the unrealized loss decreased from 4.51 percent of fair value at December 31, 2009 to .73 percent of fair value at December 31, 2010. The fair value of Collateralized Debt Obligation (“CDO”) securities in an unrealized loss position is $6.6 million, with unrealized losses of $4.583 million at December 31, 2010; the unrealized loss decreased from 162.7 percent of fair value at December 31, 2009 to 69.48 percent of fair value at December 31, 2010. The fair value of state and local government securities in an unrealized loss position were $378.3 million at December 31, 2010 of which $240.3 million was purchased during 2010, the remainder of which had a fair market value of $138.0 million at December 31, 2009. For the securities purchased in 2010, there has been an unrealized loss of $11.7 million since purchase. Of the remaining state and local government securities in a loss position, the unrealized loss increased from 1.35 percent of fair value at December 31, 2009 to 4.21 percent of fair value at December 31, 2010. With respect to severity, the following table provides the number of securities and amount of unrealized loss in the various ranges of unrealized loss as a percent of book value.
                         
            Number of     Number of  
    Unrealized     Debt     Equity  
(Dollars in thousands)   Loss     Securities     Securities  
Greater than 40.0%
  $ 4,586       6       1  
30.1% to 40.0%
                 
20.1% to 30.0%
                 
15.1% to 20.0%
    415       2        
10.1% to 15.0%
    2,182       20       1  
5.1% to 10.0%
    8,152       134        
0.1% to 5.0%
    7,978       433        
 
                 
Total
  $ 23,313       595       2  
 
                 

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With respect to the duration of the impaired debt securities, the Company identified 32 which have been continuously impaired for the twelve months ending December 31, 2010. The valuation history of such securities in the prior year(s) was also reviewed to determine the number of months in prior year(s) in which the identified securities was in an unrealized loss position. Of the 32 securities, 14 are state and local tax-exempt securities with an unrealized loss of $1.3 million, the most notable of which had an unrealized loss of $325 thousand. Of the 32 securities, 6 are identical CDO securities with an aggregate unrealized loss of $4.6 million, the most notable of which had an unrealized loss of $1.1 million.
With respect to the CDO securities, each is in the form of a pooled trust preferred structure of which the Company owns a portion of the Senior Notes tranche. All of the assets underlying the pooled trust preferred structure are capital securities issued by trust subsidiaries of holding companies of banks and thrifts. Since December 31, 2009, the Senior Notes have been rated “A3” by Moody’s. The Senior Notes have also been rated as of December 31, 2010 by Fitch as “BBB,” such rating effective September 21, 2010. Prior to such downgrade, Fitch had rated the Senior Notes as “A” since December 31, 2009. As of December 31, 2010, 9 of the 26 trust subsidiaries were treated by the Trustee as in default, either because of an actual default or elective deferral of interest payments on their respective obligations. As of the end of the third and second quarters of 2010, 8 of the 26 trust subsidiaries were treated by the Trustee as in default on their respective obligations underlying the CDO structure. As of the end of the first quarter of 2010 and the fourth quarter of 2009, 6 of the 26 trust subsidiaries were treated as in default compared to 3 of the 26 trust subsidiaries treated as in default on their respective obligations as of the end of the first three quarters of 2009. In accordance with the prospectus for the CDO structure, the priority of payments favors holders of the Senior Notes over holders of the Mezzanine Notes and Income Notes. Though the maturity of the CDO structure is June 15, 2031, 25.28 percent of the outstanding principle of the Senior Notes has been prepaid through December 31, 2010 compared to 15.22 percent at December 31, 2009. More specifically, at any time the Senior Notes are outstanding, if either the Senior Principle or Senior Interest Coverage Tests (the “Senior Coverage Tests”) are not satisfied as of a calculation date, then funds that would have otherwise been used to make payments on the Mezzanine Notes or Income Notes shall instead be applied as principle prepayments on the Senior Notes. For each of the four quarters of 2010 and the fourth quarter of 2009, the Senior Principle Coverage Test was below its threshold level, while the Senior Interest Coverage Test exceeded its threshold level. The Senior Coverage Tests exceeded the threshold levels for each of the first three quarters of 2009. In its assessment of the Senior Notes for potential other-than-temporary impairment, the Company evaluated the underlying issuers and engaged a third party vendor to stress test the performance of the underlying capital securities and related obligors. Such stress testing has been performed as of the end of each of the four quarters of 2010 and at each quarter end in 2009. In each instance of stress testing, the results reflect no credit loss for the Senior Notes. In evaluating such results, the Company reviewed with the third party vendor the stress test assumptions and concurred with the analyses in concluding that the impairment at December 31, 2010 and at the end of each of the prior quarters of 2010 and 2009 was temporary, and not other-than-temporary.
Of the 32 securities temporarily impaired continuously for the twelve months ending December 31, 2010, 6 are non-guaranteed private label whole loan mortgages with an aggregate unrealized loss of $1.2 million, the most notable of which had an unrealized loss of $476 thousand. Of the 6 non-guaranteed private label whole loan mortgages, 2 are collateralized by 30-year fixed rate residential mortgages considered to be “Prime” and 4 are collateralized by 30-year fixed rate residential mortgages considered to be “ALT – A.” Moreover, none of the underlying mortgage collateral is considered “subprime”.
The Company’s engages a third-party to perform detailed analysis for other-than-temporary impairment of such securities. Such analysis takes into consideration original and current data for the tranche and CMO structure, the non-guaranteed classification of each CMO tranche, current and deal inception credit ratings, credit support (protection) afforded the tranche through the subordination of other tranches in the CMO structure, the nature of the collateral (e.g., Prime or Alt-A) underlying each CMO tranche, and realized cash flows since purchase. When available, the collateral loss estimates are compared against loss estimates obtained from the credit rating agencies for the CMO structure and the resulting impact upon the tranche.
The analysis includes performance projections based upon cash flow assumptions designed to assess risk by capturing key performance data and trends such as delinquencies, severity of defaults, severity of collateral loss, and a range of prepayment speeds taking into account both voluntary (“CRR”) and involuntary (“CDR”) payments and the seniority of the CMO tranche within the CMO deal. The projected cash flows incorporate a range of macroeconomic trends, including for example, interest rates, gross domestic product and employment, as well as home price appreciation/depreciation (“HPA”) and geographic affordability (“Geo Aff”).

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HPA is a primary driver of credit performance in addition to loan characteristics. Negative HPA refers to declining house price appreciation (i.e., depreciation in essence). HPA scenarios are performed at loan-level capturing characteristics such as loan-to-value, credit scores (e.g., FICO), loan type, occupancy, purpose, and geography. Geo Aff is also a house price appreciation scenario and such refers to house price affordability levels by geography (relative to income). Prior to performing any HPA or Geo Aff-based analysis, significant fine-tuning adjustments are made to factor in the current state of the housing market. Tuning adjustments include delinquency roll rates, cure rates, voluntary prepayments, loan-to-values, and credit scores. Additionally, other factors used in the analyses are updated for current market conditions and trends, including loss severities and collateral loss estimates provided by the credit rating agencies for the CMO structures.
Based on the analysis of its impaired debt securities as of December 31, 2010, the Company determined that none of such securities had other-than-temporary impairment.
Goodwill Impairment
As required by FASB ASC Topic 350, Intangibles — Goodwill and Other, the Company tests goodwill and other intangible assets for impairment at the reporting unit level annually during the third quarter. The reporting unit level at which goodwill exists is at ten of the eleven bank subsidiaries. In addition, goodwill and other intangible assets of a subsidiary are tested for impairment between annual tests if an event occurs or circumstances change that would more-likely-than not reduce the fair value of a reporting units below its carrying amount. Examples of events and circumstances that could trigger the need for interim impairment testing include:
    A significant change in legal factors or in the business climate;