UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2005 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE 000-18911
GLACIER BANCORP, INC.
MONTANA 81-0519541
(State of Incorporation) (IRS Employer Identification Number)
49 Commons Loop, Kalispell, MT 59901
(Address of Principal Office)
Registrant's telephone number, including area code: (406) 756-4200
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. X Yes No
----- -----
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes X No
----- -----
Indicate by check mark whether the registrant (i) 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 (ii) has been subject to such filing
requirements for the past 90 days. X Yes 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. [ ]
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as defined by Exchange Act Rule
12b-2). X Large accelerated filer Accelerated filer
----- ----- -----
Non-accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes X No
----- -----
The aggregate market value of the voting common equity held by non-affiliates of
the Registrant at June 30, 2005 (the last business day of the most recent second
quarter), was $766,394,625 (based on the average bid and ask price as quoted on
the NASDAQ National Market at the close of business on that date).
As of March 2, 2006, there were issued and outstanding 32,283,759 shares of the
Registrant's common stock. No preferred shares are issued or outstanding.
DOCUMENT INCORPORATED BY REFERENCE
Portions of the 2006 Annual Meeting Proxy Statement dated March 31, 2006 are
incorporated by reference into Part III of this Form 10-K.
1
GLACIER BANCORP, INC.
FORM 10-K ANNUAL REPORT
For the year ended December 31, 2005
TABLE OF CONTENTS
Page
----
PART I.
Item 1. Business 3
Item 1a Risk Factors 22
Item 1b Unresolved Staff Comments 23
Item 2. Properties 23
Item 3. Legal Proceedings 23
Item 4. Submission of Matter to a Vote of Security Holders 23
PART II.
Item 5. Market for the Registrant's Common Equity, Related Stockholder
Matters, and Issuer Purchase of Equity Securities 23
Item 6. Selected Financial Data 24
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 26
Item 7a. Quantitative and Qualitative Disclosure about Market Risk 36
Item 8. Financial Statements and Supplementary Data 36
Item 9. Changes in and Disagreements with Accountants in Accounting
and Financial Disclosures 72
Item 9a. Controls and Procedures 73
Item 9b. Other Information 73
PART III.
Item 10. Directors and Executive Officers of the Registrant 73
Item 11. Executive Compensation 74
Item 12. Security Ownership of Certain Beneficial Owners
and Management 74
Item 13. Certain Relationships and Related Transactions 74
Item 14 Principal Accountant Fees and Services 74
PART IV.
Item 15. Exhibits and Financial Statement Schedules 74
2
PART I.
This Annual Report and Form 10-K may be deemed to include forward looking
statements, which management believes are a benefit to shareholders. These
forward looking statements describe management's expectations regarding future
events and developments such as future operating results, growth in loans and
deposits, continued success of the Company's style of banking and the strength
of the local economy. The words "will," "believe," "expect," "should," and
"anticipate" and words of similar construction are intended in part to help
identify forward looking statements. Future events are difficult to predict, and
the expectations described above are subject to risk and uncertainty that may
cause actual results to differ materially and adversely. In addition to
discussions about risks and uncertainties set forth from time to time in the
Company's filings with the SEC, factors that may cause actual results to differ
materially from those contemplated by such forward looking statements include,
among others, the following possibilities: (1) local, national, and
international economic conditions are less favorable than expected or have a
more direct and pronounced effect on the Company than expected and adversely
affect the Company's ability to continue its internal growth at historical rates
and maintain the quality of its earning assets; (2) changes in interest rates
reduce interest margins more than expected and negatively affect funding
sources; (3) projected business increases following strategic expansion or
opening or acquiring new branches are lower than expected; (4) costs or
difficulties related to the integration of acquisitions are greater than
expected; (5) competitive pressure among financial institutions increases
significantly; (6) legislation or regulatory requirements or changes adversely
affect the businesses in which the Company is engaged; and (7) the Company's
ability to realize the efficiencies it expects to receive from its investments
in personnel and infrastructure.
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 71 banking
offices in Montana, Idaho, Wyoming, Utah and Washington. The Company offers a
wide range of banking products and services, including transaction and savings
deposits, commercial, consumer, 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.
SUBSIDIARIES
The Company is the parent holding company of its twelve wholly owned
subsidiaries, Glacier Bank ("Glacier"), Mountain West Bank in Idaho ("Mountain
West"), First Security Bank of Missoula ("First Security"), Western Security
Bank ("Western"), First National Bank - West ("First National"), Big Sky Western
Bank ("Big Sky"), Valley Bank of Helena ("Valley"), Glacier Bank of Whitefish
("Whitefish"), Citizens Community Bank ("Citizens"), Glacier Capital Trust I
("Glacier Trust I"), Glacier Capital Trust II ("Glacier Trust II"), and Citizens
(ID) Statutory Trust I ("Citizens Trust I"). The trusts are not consolidated for
financial statement purposes.
In connection with the acquisition of Citizens on April 1, 2005, the Company
acquired Citizens Trust I which was formed on June 7, 2004. On June 17, 2004,
Citizens Trust I issued 5,000 preferred securities at $1,000 per preferred
security. The purchase of the securities entitles the shareholder to receive
cumulative cash distributions at an annual interest rate of the three month
LIBOR plus 2.65% rate adjustable quarterly from payments on the junior
subordinated debentures of Glacier Bancorp, Inc. The subordinated debentures
will mature and the preferred securities must be redeemed by June 17, 2034. In
exchange for the Company's capital contribution, the Company owns all of the
outstanding common securities of Citizens Trust I.
The Company formed Glacier Trust II as a financing subsidiary on March 24, 2004.
Glacier Trust II issued 45,000 preferred securities at $1,000 per preferred
security. The purchase of the securities entitles the shareholder to receive
cumulative cash distributions at an annual interest of 5.788% for the first five
years and then converts to a three month LIBOR plus 2.75% rate from payments on
the junior subordinated debentures of Glacier Bancorp, Inc. The subordinated
debentures will mature and the preferred securities must be redeemed by April 7,
2034. In exchange for the Company's capital contribution, the Company owns all
of the outstanding common securities of Glacier Trust II.
The Company formed Glacier Capital Trust I as a financing subsidiary on December
18, 2000. On January 25, 2001, Glacier Trust issued 1,400,000 preferred
securities at $25 per preferred security. The purchase of the securities
entitled the shareholder to receive cumulative cash distributions at an annual
interest rate of 9.40% from payments on the junior subordinated debentures of
Glacier Bancorp, Inc. In exchange for the Company's capital contribution, the
Company owned all of the outstanding common securities of Glacier Trust I. The
trust preferred securities were redeemed and the Subordinated Debentures of
$35,000,000 were paid on February 1, 2006. The subordinated debentures were
replaced by Glacier Trust III ("Glacier Trust III"), which issued $35,000,000 in
3
subordinated debentures with an interest rate of 6.078%.
The Company provides full service brokerage services (selling products such as
stocks, bonds, mutual funds, limited partnerships, annuities and other insurance
products) through Raymond James Financial Services, a non-affiliated company.
The Company shares in the commissions generated, without devoting significant
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. We continue to look for profitable expansion
opportunities in existing and contiguous markets. On October 31, 2005, First
State Bank in Thompson Falls, Montana was acquired and its branches became part
of First Security. On May 20, 2005, Zions National Bank branch office in Bonners
Ferry, Idaho was acquired and became a branch of Mountain West Bank. On April 1,
2005, Citizens Bank Holding Co. and its subsidiary bank Citizens Community Bank
in Pocatello, Idaho was acquired and became the ninth subsidiary bank of the
Company. Citizens Community Bank operates four branches, two in Pocatello, one
in Ammon, and one in Rexburg, Idaho. On February 28, 2005, First National
Bank-West Co. and its subsidiary bank First National Bank - West in Evanston,
Wyoming was acquired and became the eighth subsidiary bank of the Company. First
National Bank - West maintains seven branches, its main and a second branch in
Evanston, Wyoming, and five additional branches in Afton, Alpine, Kemmerer,
Pinedale, and Mountain View, Wyoming. On June 4, 2004, we acquired AmericanWest
Bancorp.'s branch office in Ione, Washington which became a branch of Mountain
West Bank.
FDIC, FHLB AND FRB
The Federal Deposit Insurance Corporation ("FDIC") insures each subsidiary
bank's deposit accounts. Each subsidiary bank is a member of the Federal Home
Loan Bank of Seattle ("FHLB"), which is one of twelve banks which comprise the
Federal Home Loan Bank System. All subsidiaries, with the exception of Mountain
West and Citizens, are members of the Federal Reserve Bank ("FRB").
BANK LOCATIONS AT DECEMBER 31, 2005
Glacier Bancorp, Inc.'s office is located at 49 Commons Loop, Kalispell, MT
59901 and its telephone number is (406) 756-4200. Glacier's address is 202 Main
Street, Kalispell, MT 59901 (406) 756-4200, Mountain West's address is 125
Ironwood Drive, Coeur d'Alene, Idaho 83814 (208) 765-0284, First Security's
address is 1704 Dearborn, Missoula, MT 59801 (406) 728-3115, Western's address
is 2929 3rd Avenue North, Billings, MT 59101 (406) 252-3700, First National
Bank's address is 1001 Main Street, Evanston, WY 82930 (307) 789-3864, Big Sky's
address is 4150 Valley Commons, Bozeman, MT, 59718 (406) 587-2922, Valley's
address is 3030 North Montana Avenue, Helena, MT 59601 (406) 495-2400,
Whitefish's address is 319 East Second Street, Whitefish, MT 59937 (406)
751-4930, and Citizen's address is 280 South Arthur, Pocatello, ID 83204 (208)
232-5373. See "Item 2. Properties."
The following abbreviated organizational chart illustrates the various existing
parent/subsidiary relationships at December 31, 2005:
______________________________________
| Glacier Bancorp, Inc. |
| (Parent Holding Company) |
| |
|______________________________________|
|
______________________________________________________________|___________________________________________________________________
| Glacier Bank | | Mountain West Bank | | | First Security Bank | | Western Security Bank |
| (Commercial bank) | | (Commercial bank) | | | of Missoula | | (Commercial bank) |
| | | | | | (Commercial bank) | | |
|____________________________| |_________________________| | |__________________________| |________________________________|
|
______________________________________________________________|___________________________________________________________________
| First National Bank - West | | Big Sky | | | Valley Bank | | Glacier Bank |
| (Commercial bank) | | Western Bank | | | of Helena | | of Whitefish |
| | | (Commercial Bank) | | | (Commercial bank) | | (Commercial bank) |
|____________________________| |_________________________| | |__________________________| |________________________________|
|
______________________________________________________________|____________________________________________________________________
| Citizens Community Bank | | | | | | |
| (Commercial bank) | | Glacier Capital Trust I | | Glacier Capital Trust II | |Citizens (ID) Statutory Trust I |
| | | | | | | |
|____________________________| |_________________________| |__________________________| |________________________________|
4
FINANCIAL INFORMATION ABOUT SEGMENTS
At December 31, 2005, the Company had nine wholly owned banking subsidiaries,
Glacier, Mountain West, First Security, Western, First National, Big Sky,
Valley, Whitefish, and Citizens. For information regarding the holding company,
as separate from the subsidiaries, see "Item 7 - Management's Discussion &
Analysis" and footnote 16 to the Consolidated Financial Statements in "Item 8 -
Financial Statements and Supplementary Data".
The business of the Company's subsidiaries (collectively referred to hereafter
as "Banks") consists primarily of attracting deposit accounts from the general
public and originating commercial, residential, installment and other loans. The
Banks' principal sources of income are interest on loans, loan origination fees,
fees on deposit accounts and interest and dividends on investment securities.
The principal expenses are interest on deposits, FHLB advances, repurchase
agreements, subordinated debentures, and other borrowings, as well as general
and administrative expenses.
BUSINESS SEGMENT RESULTS
The Company evaluates segment performance internally based on individual banking
subsidiaries, and thus the operating segments are so defined. The following
schedule provides selected financial data for the Company's operating segments.
Centrally provided services to the Banks are allocated based on estimated usage
of those services. The operating segment identified as "Other" includes the
Parent company, nonbank units, and eliminations of transactions between
segments.
Glacier Mountain West First Security
---------------------------- --------------------------- ---------------------------
(Dollars in thousands) 2005 2004 2003 2005 2004 2003 2005 2004 2003
-------- ------- ------- ------- ------- ------- ------- ------- -------
Condensed Income Statements
Net interest income $ 26,508 24,541 22,565 29,607 22,552 17,061 24,839 24,372 22,246
Noninterest income 9,136 8,652 8,184 15,812 12,315 10,206 3,990 3,684 4,392
-------- ------- ------- ------- ------- ------- ------- ------- -------
Total revenues 35,644 33,193 30,749 45,419 34,867 27,267 28,829 28,056 26,638
Provision for loan losses (1,500) (1,075) (375) (1,897) (1,320) (1,124) (630) (600) (1,250)
Core deposit intangible expense (252) (276) (304) (214) (210) (205) (202) (216) (270)
Other noninterest expense (16,016) (14,980) (14,283) (26,006) (21,290) (17,958) (11,141) (10,184) (9,766)
-------- ------- ------- ------- ------- ------- ------- ------- -------
Pretax earnings 17,876 16,862 15,787 17,302 12,047 7,980 16,856 17,056 15,352
Income tax expense (6,096) (5,704) (5,437) (5,886) (3,769) (2,216) (5,505) (5,572) (5,288)
-------- ------- ------- ------- ------- ------- ------- ------- -------
Net income $ 11,780 11,158 10,350 11,416 8,278 5,764 11,351 11,484 10,064
======== ======= ======= ======= ======= ======= ======= ======= =======
Average Balance Sheet Data
Total assets $678,782 631,213 534,774 706,711 582,923 464,464 641,311 602,407 528,791
Total loans 442,151 366,627 336,978 473,639 347,718 264,418 366,927 317,793 305,209
Total deposits 398,969 365,746 340,788 504,063 394,149 318,196 367,375 347,481 349,118
Stockholders' equity 67,513 62,230 56,866 74,357 63,710 53,071 63,231 53,247 47,822
End of Year Balance Sheet Data
Total assets 731,468 646,523 595,778 779,538 629,205 547,035 769,094 626,341 578,803
Net loans 462,761 398,187 330,012 544,429 382,819 313,021 453,814 326,826 295,195
Total deposits 424,739 393,655 358,600 558,280 431,662 372,936 476,253 359,918 340,650
Stockholders' equity 69,257 64,207 58,703 80,008 67,002 61,031 83,447 56,004 49,334
Performance Ratios
Return on average assets 1.74% 1.77% 1.94% 1.62% 1.42% 1.24% 1.77% 1.91% 1.90%
Return on average equity 17.45% 17.93% 18.20% 15.35% 12.99% 10.86% 17.95% 21.57% 21.04%
Efficiency ratio 45.64% 45.96% 47.44% 57.73% 61.66% 66.61% 39.35% 37.07% 37.68%
Regulatory Capital Ratios & Other
Tier I risk-based capital ratio 11.76% 13.22% 13.75% 9.43% 10.20% 10.48% 13.25% 12.47% 12.04%
Tier II risk-based capital ratio 12.95% 14.35% 14.90% 10.63% 11.39% 11.68% 14.50% 13.72% 13.29%
Leverage capital ratio 9.34% 8.90% 8.97% 7.38% 7.16% 7.34% 10.06% 8.27% 7.80%
Full time equivalent employees 189 187 176 268 220 204 166 119 119
Locations 10 11 11 20 16 15 11 9 9
5
Western First National Big Sky
---------------------------- --------------------- ---------------------------
(Dollars in thousands) 2005 2004 2003 2005 2004 2003 2005 2004 2003
-------- ------- ------- ------- ---- ---- ------- ------- -------
Condensed Income Statements
Net interest income $ 14,522 15,663 13,670 8,179 -- -- 11,540 9,361 7,264
Noninterest income 3,966 3,583 4,043 2,340 -- -- 2,475 2,249 1,729
-------- ------- ------- ------- --- --- ------- ------- -------
Total revenues 18,488 19,246 17,713 10,519 -- -- 14,015 11,610 8,993
Provision for loan losses -- -- -- (251) -- -- (965) (510) (250)
Core deposit intangible expense (224) (279) (348) (371) -- -- (26) (33) (41)
Other noninterest expense (9,741) (9,016) (8,661) (5,636) -- -- (5,509) (5,190) (4,141)
-------- ------- ------- ------- --- --- ------- ------- -------
Pretax earnings 8,523 9,951 8,704 4,261 -- -- 7,515 5,877 4,561
Income tax expense (2,488) (3,039) (2,604) (1,401) -- -- (2,819) (2,157) (1,730)
-------- ------- ------- ------- --- --- ------- ------- -------
Net income $ 6,035 6,912 6,100 2,860 -- -- 4,696 3,720 2,831
======== ======= ======= ======= === === ======= ======= =======
Average Balance Sheet Data
Total assets $440,771 453,151 427,786 235,200 -- -- 263,479 224,968 190,745
Total loans 224,213 213,487 199,607 85,723 -- -- 195,547 146,579 121,080
Total deposits 222,765 214,602 220,978 189,723 -- -- 164,687 120,900 106,743
Stockholders' equity 50,054 48,731 47,782 34,932 -- -- 23,725 19,287 17,387
End of Year Balance Sheet Data
Total assets 431,640 446,502 446,405 304,196 -- -- 267,402 241,056 209,342
Net loans 231,817 210,181 196,732 111,682 -- -- 203,869 161,761 125,664
Total deposits 269,494 207,711 219,950 244,336 -- -- 191,040 132,853 115,496
Stockholders' equity 49,458 49,095 47,242 41,577 -- -- 26,581 20,567 17,882
Performance Ratios
Return on average assets 1.37% 1.53% 1.43% 1.22% -- -- 1.78% 1.65% 1.48%
Return on average equity 12.06% 14.18% 12.77% 8.19% -- -- 19.79% 19.29% 16.28%
Efficiency ratio 53.90% 48.30% 50.86% 57.11% -- -- 39.49% 44.99% 46.50%
Regulatory Capital Ratios & Other
Tier I risk-based capital ratio 14.97% 15.38% 15.04% 11.59% -- -- 10.10% 9.22% 10.36%
Tier II risk-based capital ratio 16.22% 16.63% 16.30% 12.85% -- -- 11.36% 10.48% 11.61%
Leverage capital ratio 10.36% 9.67% 9.23% 6.28% -- -- 9.24% 7.88% 7.82%
Full time equivalent employees 112 110 105 87 -- -- 68 59 54
Locations 7 7 7 7 -- -- 4 4 4
Valley Whitefish Citizens
---------------------------- --------------------------- ---------------------
(Dollars in thousands) 2005 2004 2003 2005 2004 2003 2005 2004 2003
-------- ------- ------- ------- ------- ------- ------- ---- ----
Condensed Income Statements
Net interest income $ 9,444 8,959 7,845 6,527 6,393 5,194 5,013 -- --
Noninterest income 3,509 2,940 3,730 1,916 1,419 1,273 1,902 -- --
-------- ------- ------- ------- ------- ------- ------- --- ---
Total revenues 12,953 11,899 11,575 8,443 7,812 6,467 6,915 -- --
Provision for loan losses (375) (440) (630) (300) (250) (180) (105) -- --
Core deposit intangible expense (48) (60) (75) -- -- -- (133) -- --
Other noninterest expense (6,787) (6,020) (5,471) (3,428) (3,280) (3,071) (4,052) -- --
-------- ------- ------- ------- ------- ------- ------- --- ---
Pretax earnings 5,743 5,379 5,399 4,715 4,282 3,216 2,625 -- --
Income tax (expense) benefit (1,783) (1,632) (1,754) (1,698) (1,457) (1,054) (1,022) -- --
-------- ------- ------- ------- ------- ------- ------- --- ---
Net income $ 3,960 3,747 3,645 3,017 2,825 2,162 1,603 -- --
======== ======= ======= ======= ======= ======= ======= === ===
Average Balance Sheet Data
Total assets $245,486 229,243 201,702 167,704 161,364 139,516 102,341 -- --
Total loans 135,394 110,228 96,045 115,030 88,614 72,206 78,831 -- --
Total deposits 160,948 144,351 131,687 90,212 77,681 70,857 80,939 -- --
Stockholders' equity 21,201 19,188 17,837 14,763 13,129 11,652 16,977 -- --
End of Year Balance Sheet Data
Total assets 254,437 241,518 219,105 174,069 169,411 149,531 144,161 -- --
Net loans 151,204 119,626 97,292 125,512 102,746 72,800 113,222 -- --
Total deposits 174,059 146,660 134,405 112,790 98,605 68,124 110,023 -- --
Stockholders' equity 21,809 20,052 18,176 14,847 13,839 12,126 23,029 -- --
Performance Ratios
Return on average assets 1.61% 1.63% 1.81% 1.80% 1.75% 1.55% 1.57% -- --
Return on average equity 18.68% 19.53% 20.44% 20.44% 21.52% 18.55% 9.44% -- --
Efficiency ratio 52.77% 51.10% 47.91% 40.60% 41.99% 47.49% 60.52% -- --
-- --
Regulatory Capital Ratios & Other
Tier I risk-based capital ratio 11.56% 12.38% 13.25% 10.06% 11.67% 12.32% 10.35% -- --
Tier II risk-based capital ratio 12.79% 13.62% 14.49% 11.21% 12.91% 13.57% 11.60% -- --
Leverage capital ratio 8.00% 7.58% 7.35% 8.44% 7.75% 7.60% 9.51% -- --
Full time equivalent employees 71 65 62 40 40 33 51 -- --
Locations 6 6 6 2 2 2 4 -- --
6
Other Consolidated
----------------------------- ---------------------------------
(Dollars in thousands) 2005 2004 2003 2005 2004 2003
--------- ------- ------- --------- --------- ---------
Condensed Income Statements
Net interest income $ (6,172) (4,448) (3,493) 130,007 107,393 92,352
Noninterest income (420) (277) 5 44,626 34,565 33,562
--------- ------- ------- --------- --------- ---------
Total revenues (6,592) (4,725) (3,488) 174,633 141,958 125,914
Provision for loan losses -- -- -- (6,023) (4,195) (3,809)
Core deposit intangible expense 0 -- -- (1,470) (1,074) (1,243)
Other noninterest expense (1,140) (1,099) (1,350) (89,456) (71,059) (64,701)
--------- ------- ------- --------- --------- ---------
Pretax earnings (7,732) (5,824) (4,838) 77,684 65,630 56,161
Income tax (expense) benefit 3,387 2,316 1,930 (25,311) (21,014) (18,153)
--------- ------- ------- --------- --------- ---------
Net income $ (4,345) (3,508) (2,908) 52,373 44,616 38,008
========= ======= ======= ========= ========= =========
Average Balance Sheet Data
Total assets $ (30,122) 11,847 (4,094) 3,451,663 2,897,116 2,483,684
Total loans (3,414) (346) (356) 2,114,041 1,590,700 1,395,187
Total deposits (19,747) (21,615) (11,056) 2,159,934 1,643,295 1,527,311
Stockholders' equity (69,429) (26,154) (26,407) 297,324 253,368 226,010
End of Year Balance Sheet Data
Total assets (149,661) 10,181 (6,366) 3,706,344 3,010,737 2,739,633
Net loans (1,123) (341) (351) 2,397,187 1,701,805 1,430,365
Total deposits (26,302) (41,356) (12,536) 2,534,712 1,729,708 1,597,625
Stockholders' equity (76,774) (20,582) (26,655) 333,239 270,184 237,839
Performance Ratios
Return on average assets 1.52% 1.54% 1.53%
Return on average equity 17.62% 17.61% 16.82%
Efficiency ratio 52.07% 50.81% 52.37%
Regulatory Capital Ratios & Other
Tier I risk-based capital ratio 12.00% 15.06% 12.98%
Tier II risk-based capital ratio 13.26% 16.31% 14.23%
Leverage capital ratio 9.17% 10.16% 8.45%
Full time equivalent employees 73 57 54 1125 857 807
Locations 71 55 54
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.
7
MARKET AREA
The Company has locations in twenty-seven counties within five states including
Montana, Idaho, Wyoming, Utah, and Washington. The Company has six banking
subsidiaries with forty offices that serve northwest and west central Montana.
In Idaho, there are nineteen locations within two banking subsidiaries; one of
which serves southeast Idaho and another serving northern and south central
Idaho. In Wyoming, a subsidiary with seven locations is concentrated in
southwest Wyoming. In addition to the three states the Company is domiciled in,
there are five additional locations; three located in Washington and two in
Utah.
The market areas' economic base primarily focuses on tourism, construction,
manufacturing, service industry, and health care. The tourism industry is highly
influenced by the two national parks, several ski resorts, large lakes, and
rural scenic areas. Construction results from the high population growth that
has occurred in the market areas, in particular Idaho and western Montana.
COMPETITION
The Company has approximately 20% of the total FDIC insured deposits in the nine
counties that it services in Montana. In Idaho, the Company has approximately 5%
of the deposits in the nine counties that it services. In Wyoming, First
National has 38% of the deposits in the three counties it services. In Utah,
Mountain West has 6% of the deposits in Box Elder and Summit counties combined.
In Washington, Mountain West has 62% of the deposits in Pend Oreille County.
There are a large number of depository institutions including savings banks,
commercial banks, and credit unions in the counties 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/brokerage 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 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.
8
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
AVERAGE BALANCE SHEET
The following three-year schedule provides (i) the total dollar amount of
interest and dividend income of the Company for earning assets and the resultant
average yield; (ii) the total dollar amount of interest expense on
interest-bearing liabilities and the resultant average rate; (iii) net interest
and dividend income; (iv) interest rate spread; and (v) net interest margin.
For the year ended 12-31-05 For the year ended 12-31-04
--------------------------------- --------------------------------
Interest Average Interest Average
AVERAGE BALANCE SHEET Average and Yield/ Average and Yield/
(Dollars in Thousands) Balance Dividends Rate Balance Dividends Rate
---------- --------- -------- ---------- --------- -------
ASSETS
Residential First Mortgage $ 508,105 34,506 6.79% $ 346,575 22,942 6.62%
Commercial Loans 1,188,925 81,359 6.84% 924,798 57,312 6.20%
Consumer and Other Loans 417,011 28,696 6.88% 319,327 20,331 6.37%
---------- -------- ---------- --------
Total Loans 2,114,041 144,561 6.84% 1,590,700 100,585 6.32%
Tax-Exempt Investment Securities (1) 283,031 13,867 4.90% 281,743 13,917 4.94%
Taxable Investment Securities 806,143 31,557 3.91% 844,051 32,783 3.88%
---------- -------- ---------- --------
Total Earning Assets 3,203,215 189,985 5.93% 2,716,494 147,285 5.42%
-------- --------
Goodwill and Intangibles 73,640 42,597
Non-Earning Assets 174,808 138,025
---------- ----------
TOTAL ASSETS $3,451,663 $2,897,116
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
NOW Accounts $ 317,334 889 0.28% $ 259,279 474 0.18%
Savings Accounts 209,004 1,130 0.54% 159,237 471 0.30%
Money Market Demand Accounts 483,423 7,552 1.56% 402,157 3,776 0.94%
Certificate Accounts 567,818 16,134 2.84% 422,342 9,333 2.21%
Advances from FHLB 673,904 21,489 3.19% 791,245 18,540 2.34%
Securities Sold Under agreements to
Reprchase and Other Borrowed Funds 287,991 12,784 4.44% 181,461 7,298 4.02%
---------- -------- ---------- --------
Total Interest Bearing Liabilities 2,539,474 59,978 2.36% 2,215,721 39,892 1.80%
-------- --------
Non-interest Bearing Deposits 582,355 400,280
Other Liabilities 32,510 27,747
---------- ----------
Total Liabilities 3,154,339 2,643,748
Common Stock 313 306
Paid-In Capital 240,063 224,985
Retained Earnings 53,062 22,804
Accumulated Other
Comprehensive Earnings 3,886 5,273
---------- ----------
Total Stockholders' Equity 297,324 253,368
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $3,451,663 $2,897,116
========== ==========
NET INTEREST INCOME $130,007 $107,393
======== ========
NET INTEREST SPREAD 3.57% 3.62%
TAX EQUIVALENT NET INTEREST MARGIN 4.20% 4.15%
RETURN ON AVERAGE ASSETS (2) 1.52% 1.54%
RETURN ON AVERAGE EQUITY (3) 17.62% 17.61%
For the year ended 12-31-03
--------------------------------
Interest Average
AVERAGE BALANCE SHEET Average and Yield/
(Dollars in Thousands) Balance Dividends Rate
---------- --------- -------
ASSETS
Residential First Mortgage $ 336,494 23,883 7.10%
Commercial Loans 770,352 50,203 6.52%
Consumer and Other Loans 288,341 20,013 6.94%
---------- --------
Total Loans 1,395,187 94,099 6.74%
Tax-Exempt Investment Securities (1) 226,971 11,410 5.03%
Taxable Investment Securities 688,239 25,321 3.68%
---------- --------
Total Earning Assets 2,310,397 130,830 5.66%
--------
Goodwill and Intangibles 41,292
Non-Earning Assets 131,995
----------
TOTAL ASSETS $2,483,684
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
NOW Accounts $ 227,154 484 0.21%
Savings Accounts 139,958 500 0.36%
Money Market Demand Accounts 375,402 3,840 1.02%
Certificate Accounts 456,790 12,397 2.71%
Advances from FHLB 601,679 16,860 2.80%
Securities Sold Under agreements to
Reprchase and Other Borrowed Funds 101,075 4,397 4.35%
---------- --------
Total Interest Bearing Liabilities 1,902,058 38,478 2.02%
--------
Non-interest Bearing Deposits 328,007
Other Liabilities 27,609
----------
Total Liabilities 2,257,674
Common Stock 301
Paid-In Capital 203,428
Retained Earnings 14,217
Accumulated Other
Comprehensive Earnings 8,064
----------
Total Stockholders' Equity 226,010
----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $2,483,684
==========
NET INTEREST INCOME $ 92,352
========
NET INTEREST SPREAD 3.64%
TAX EQUIVALENT NET INTEREST MARGIN 4.20%
RETURN ON AVERAGE ASSETS (2) 1.53%
RETURN ON AVERAGE EQUITY (3) 16.82%
(1) Without tax effect on non-taxable securities income
(2) Net income divided by average total assets
(3) Net income divided by average equity
9
RATE/VOLUME ANALYSIS
Net interest income can be evaluated from the perspective of relative dollars of
change in each period. Interest income and interest expense, which are the
components of net interest income, are shown in the following table on the basis
of the amount of any increases (or decreases) attributable to changes in the
dollar levels of the Company's interest-earning assets and interest-bearing
liabilities ("Volume") and the yields earned and rates paid on such assets and
liabilities ("Rate"). The change in interest income and interest expense
attributable to changes in both volume and rates has been allocated
proportionately to the change due to volume and the change due to rate.
Years Ended December 31, Years Ended December 31,
2005 vs. 2004 2004 vs. 2003
--------------------------- -------------------- -------
Increase (Decrease) due to: Increase (Decrease) due to:
--------------------------- ----------------------------
(Dollars in Thousands) Volume Rate Net Volume Rate Net
------- ------- ------- ------- ------- --------
INTEREST INCOME
Real Estate Loans $10,693 $ 871 $11,564 $ 716 $(1,657) $ (941)
Commercial Loans 16,369 7,678 24,047 10,064 (2,955) 7,109
Consumer and Other Loans 6,219 2,146 8,365 2,151 (1,833) 318
Investment Securities (1,519) 243 (1,276) 8,092 1,877 9,969
------- ------- ------- ------- ------- -------
Total Interest Income 31,762 10,938 42,700 21,023 (4,568) 16,455
------- ------- ------- ------- ------- -------
INTEREST EXPENSE
NOW Accounts 106 308 414 69 (79) (10)
Savings Accounts 147 512 659 69 (98) (29)
Money Market Accounts 763 3,013 3,776 274 (338) (64)
Certificate Accounts 3,215 3,587 6,802 (935) (2,129) (3,064)
FHLB Advances (2,749) 5,698 2,949 5,312 (3,632) 1,680
Other Borrowings and
Repurchase Agreements 4,284 1,202 5,486 3,496 (595) 2,901
------- ------- ------- ------- ------- -------
Total Interest Expense 5,766 14,320 20,086 8,285 (6,871) 1,414
------- ------- ------- ------- ------- -------
NET INTEREST INCOME $25,996 $(3,382) $22,614 $12,738 $ 2,303 $15,041
======= ======= ======= ======= ======= =======
Net interest income increased $23 million in 2005 over 2004. The increase was
primarily due to increases in loan volumes and loan rates which combined
outpaced the increase in deposit and borrowing rates. For additional information
see "Item 7 - Management's Discussion and Analysis".
INVESTMENT ACTIVITIES
It has generally been the Company's policy to maintain a liquidity portfolio
only slightly above policy limits because higher yields can generally be
obtained from loan originations than from short-term deposits and investment
securities.
Liquidity levels may be increased or decreased depending upon yields on
investment alternatives and upon management's judgment as to the attractiveness
of the yields then available in relation to other opportunities and its
expectation of the level of yield that will be available in the future.
The Company's investment securities are generally classified as available for
sale and are carried at estimated fair value with unrealized gains or losses
reflected as an adjustment to stockholders' equity.
The Company uses an effective tax rate of 35% in calculating the tax equivalent
yield. Approximately $296 million of the investment portfolio is comprised of
tax exempt investments which is a decrease of $3 million from the prior year.
For information about the Company's equity investment in the stock of the FHLB
of Seattle, see "Sources of Funds - Advances and Other Borrowings".
For additional information, see "Item 7 - Management's Discussion & Analysis"
and footnote 3 to the Consolidated Financial Statements in "Item 8 - Financial
Statements and Supplementary Data".
10
LENDING ACTIVITY
GENERAL
The Banks focus their lending activity primarily on several types of loans: 1)
first-mortgage, conventional loans secured by residential properties,
particularly single-family, 2) installment lending for consumer purposes (e.g.,
auto, home equity, etc.), and 3) commercial lending that concentrates on
targeted businesses. "Item 7 - Management's Discussion & Analysis" and footnote
4 to the Consolidated Financial Statements in "Item 8 - Financial Statements and
Supplementary Data" contain more information about the lending portfolio.
LOAN PORTFOLIO COMPOSITION
The following table summarizes the Company's loan portfolio:
At At At
12/31/05 12/31/04 12/31/03
------------------- ------------------- -------------------
(Dollars in Thousands) Amount Percent Amount Percent Amount Percent
---------- ------- ---------- ------- ---------- -------
TYPE OF LOAN
REAL ESTATE LOANS:
Residential first mortgage $ 589,260 24.58% $ 382,750 22.49% $ 305,372 21.35%
Held for sale $ 22,540 0.94% $ 14,476 0.85% $ 16,973 1.19%
---------- ------ ---------- ------ ---------- ------
Total $ 611,800 25.52% $ 397,226 23.34% $ 322,345 22.54%
---------- ------ ---------- ------ ---------- ------
COMMERCIAL LOANS:
Real estate $ 781,181 32.59% $ 526,455 30.94% $ 483,684 33.82%
Other commercial $ 579,515 24.17% $ 466,582 27.42% $ 359,030 25.10%
---------- ------ ---------- ------ ---------- ------
Total $1,360,696 56.76% $ 993,037 58.36% $ 842,714 58.92%
---------- ------ ---------- ------ ---------- ------
INSTALLMENT AND OTHER LOANS:
Consumer $ 175,503 7.32% $ 95,663 5.62% $ 95,739 6.69%
Home equity $ 295,992 12.35% $ 248,684 14.61% $ 199,693 13.96%
---------- ------ ---------- ------ ---------- ------
Total $ 471,495 19.67% $ 344,347 20.23% $ 295,432 20.65%
---------- ------ ---------- ------ ---------- ------
Net deferred loan fees, premiums
and discounts ($8,149) -0.34% ($6,313) -0.37% ($6,136) -0.43%
Allowance for loan losses ($38,655) -1.61% ($26,492) -1.56% ($23,990) -1.68%
---------- ------ ---------- ------ ---------- ------
LOANS RECEIVABLE, NET $2,397,187 100.00% $1,701,805 100.00% $1,430,365 100.00%
========== ====== ========== ====== ========== ======
At At
12/31/02 12/31/01
------------------ --------------------
(Dollars in Thousands) Amount Percent Amount Percent
---------- ------- ---------- -------
TYPE OF LOAN
REAL ESTATE LOANS:
Residential first mortgage $ 315,043 24.22% $ 401,133 30.33%
Held for sale $ 51,987 4.00% $ 27,403 2.07%
---------- ------ ---------- ------
Total $ 367,030 28.22% $ 428,536 32.40%
---------- ------ ---------- ------
COMMERCIAL LOANS:
Real estate $ 397,803 30.58% $ 379,346 28.69%
Other commercial $ 276,675 21.27% $ 241,811 18.29%
---------- ------ ---------- ------
Total $ 674,478 51.85% $ 621,157 46.98%
---------- ------ ---------- ------
INSTALLMENT AND OTHER LOANS:
Consumer $ 112,893 8.68% $ 142,875 10.80%
Home equity $ 174,033 13.38% $ 156,140 11.81%
---------- ------ ---------- ------
Total $ 286,926 22.06% $ 299,015 22.61%
---------- ------ ---------- ------
Net deferred loan fees, premiums
and discounts ($6,837) -0.52% ($7,727) -0.58%
Allowance for loan losses ($20,944) -1.61% ($18,654) -1.41%
---------- ------ ---------- ------
LOANS RECEIVABLE, NET $1,300,653 100.00% $1,322,327 100.00%
========== ====== ========== ======
LOAN PORTFOLIO MATURITIES OR REPRICING TERM
The stated maturities or first repricing term (if applicable) for the loan
portfolio at December 31, 2005 was as follows:
(Dollars in Thousands) Real Estate Commercial Consumer Totals
----------- ---------- -------- ---------
Variable Rate Maturing or Repricing in:
One year or less $171,400 552,503 222,148 946,051
One to five years 144,073 375,160 16,939 536,172
Thereafter 8,452 22,395 -- 30,847
Fixed Rate Maturing or Repricing in:
One year or less 121,736 168,911 56,739 347,386
One to five years 120,362 191,301 133,250 444,913
Thereafter 45,777 50,429 42,416 138,622
-------- --------- ------- ---------
Totals $611,800 1,360,699 471,492 2,443,991
======== ========= ======= =========
REAL ESTATE LENDING
The Banks' lending activities consist of the origination of both construction
and permanent loans on residential and commercial real Estate. The Banks
actively solicit real estate loan applications from real estate brokers,
contractors, existing customers, customer referrals, and walk-ins to their
offices. The Banks' lending policies generally limit the maximum loan-to-value
ratio on residential
11
mortgage loans to 80% of the lesser of the appraised value or purchase price or
above 80% of the loan if insured by a private mortgage insurance company. The
Banks also provide interim construction financing for single-family dwellings.
These loans are generally supported by a term take out commitment. The Banks
also make lot acquisition loans to borrowers who intend to construct their
primary residence on the respective lot. These loans are generally for a term of
three to five years and are secured by the developed lot.
LAND ACQUISITION AND DEVELOPMENT LOANS
Where real estate market conditions warrant, the banks make 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 75% of cost or 80%
of market value. The loans are made to borrowers with vast real estate
development experience and appropriate financial strength. Generally it is
required 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.
RESIDENTIAL BUILDER GUIDANCE LINES
For borrowers located in a strong real estate markets, the banks provide 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 set 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. Loans to finance investment or income properties are made, but
require additional equity and a higher debt service coverage margin commensurate
with the specific property and projected income.
CONSUMER LENDING
The majority of all consumer loans are secured by real estate, automobiles, or
other assets. The Banks intend to continue lending for such loans because of
their short-term nature, generally between three months and five years, with an
average term of approximately two years. Moreover, interest rates on consumer
loans are generally higher than on mortgage loans. The Banks also originate
second mortgage and home equity loans, especially to its existing customers in
instances where the first and second mortgage loans are less than 80% of the
current appraised value of the property.
CREDIT RISK MANAGEMENT
The Company's credit risk management includes stringent credit policies,
individual loan approval limits and committee approval of larger loan requests.
Management practices also includes regular internal and external credit
examinations, management review of loans experiencing deterioration of credit
quality, quarterly monitoring of all spec home loans, semi annual review of
loans by industry and annual interest rate shock testing.
LOAN APPROVAL LIMITS
Individual loan approval limits have been established for each lender based on
the loan type and experience of the individual. Each subsidiary bank has an
Officer Loan Committee consisting of senior lenders and members of senior
management. The Officer Loan Committee has approval authority up to Bank's Board
of Directors loan approval authority. The Bank's Board of Directors Approval
authority is $1,000,000 at First National Bank West, $2,000,000 at Big Sky
Western Bank, Citizens Community Bank, Glacier Bank of Whitefish, Valley Bank of
Helena and Western Security Bank and $3,500,000 at First Security Bank, Glacier
Bank of Kalispell and Mountain West Bank. Loans over these limits up to
$10,000,000 are approved by the Executive Loan Committee of the Company's Board
of Directors. The membership of the Executive Loan Committee consists of the
bank's senior loan officers and the Company's Credit Administrator. Loans
greater than $10,000,000 are approved by the Company's Board of Directors. Under
banking laws loans to one borrower and related entities are limited to a set
percentage of the unimpaired capital and surplus of the bank.
LOAN PURCHASES AND SALES
Fixed-rate, long-term mortgage loans are generally sold in the secondary market.
The Banks are 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 Banks' risk of increases in interest rates
of holding long-term, fixed-rate loans in the loan portfolio and allows the
Banks to continue to make loans during periods when deposit flows decline or
funds are not otherwise available for lending purposes. In connection with
conventional loan sales, the Banks typically sell a majority of mortgage loans
originated, retaining servicing only on loans sold to certain lenders. The Banks
have also been very active in generating commercial SBA loans, and other
commercial loans, with a portion of those loans sold to other investors. As of
December 31, 2005, loans serviced for others aggregated approximately $145
million.
12
LOAN ORIGINATION AND OTHER FEES
In addition to interest earned on loans, the Banks receive loan origination 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% to 1.5%
on residential mortgages and .5% to 1.5% on commercial loans. Consumer loans
require a flat fee as well as a minimum interest amount. The Banks also receive
other fees and charges relating to existing loans, which include charges and
fees collected in connection with loan modifications and tax service fees.
NON-PERFORMING LOANS AND ASSET CLASSIFICATION
Loans are reviewed on a regular basis and are placed on a non-accrual status
when the collection of principal or interest is unlikely. The Banks typically
place loans on non-accrual when principal or interest is due and has remained
unpaid for 90 days or more unless the loan is secured by collateral having
realizable value sufficient to discharge the debt in full. Once a loan has been
classified as non-accrual previously accrued unpaid interest is reversed.
Interest accrued and unpaid at the time a loan is placed on non-accrual status
is charged against interest income. Subsequent payments are either applied to
the outstanding principal balance or recorded as interest income, depending on
the assessment of the ultimate repayment of the loan.
The following table sets forth information regarding the Banks' non-performing
assets at the dates indicated:
NONPERFORMING ASSETS
At At At At At
(Dollars in Thousands) 12/31/05 12/31/04 12/31/03 12/31/02 12/31/01
-------- -------- -------- -------- --------
NON-ACCRUAL LOANS:
Mortgage loans $ 726 $ 847 $ 1,129 $ 2,476 $ 4,044
Commercial loans 4,045 4,792 8,246 5,157 4,568
Consumer loans 481 311 687 409 620
------- ------ ------- ------- -------
Total 5,252 5,950 10,062 8,042 9,232
------- ------ ------- ------- -------
ACCRUING LOANS 90 DAYS OR MORE OVERDUE:
Mortgage loans 1,659 179 379 846 818
Commercial loans 2,199 1,067 1,798 968 376
Consumer loans 647 396 242 184 243
------- ------ ------- ------- -------
Total 4,505 1,642 2,419 1,998 1,437
------- ------ ------- ------- -------
Real estate and other assets owned, net 332 2,016 587 1,542 593
------- ------ ------- ------- -------
TOTAL NON-PERFORMING LOANS AND REAL
ESTATE AND OTHER ASSETS OWNED, NET 10,089 9,608 13,068 11,582 $11,262
------- ------ ------- ------- -------
AS A PERCENTAGE OF TOTAL ASSETS 0.26% 0.32% 0.48% 0.51% 0.53%
------- ------ ------- ------- -------
Interest Income (1) $ 359 $ 372 $ 665 $ 596 $ 658
------- ------ ------- ------- -------
(1) This is the amount of interest that would have been recorded on loans
accounted for on a non-performing basis as of the end of each period if
such loans had been current for the entire period.
Non-performing assets as a percentage of total assets at December 31, 2005 were
..26 percent versus .32 percent at the same time last year, which compares
favorably to the Peer Group average of .45 percent at September 30, 2005, the
most recent information available. The reserve for loan losses was 383 percent
of non-performing assets at December 31, 2005, up from 276 percent a year ago.
With the continuing change in loan mix from residential real estate to
commercial and consumer loans, which historically have greater credit risk, the
Company has increased the balance in the reserve for loan losses account. The
reserve balance has increased $12,163,000, or 46 percent, to $38,655,000, which
is 1.59 percent of total loans outstanding, up from 1.53 percent of loans at
December 31, 2004. Of the $12,163,000 increase, $6,627,000 is the result of
acquisitions.
13
ALLOWANCE FOR LOAN LOSSES
The Allowance for Loan Losses ("ALL") is maintained at a level that allows for
the absorption of loan losses inherent within the bank's loan portfolios. The
Company is committed to the early recognition of problem loans and to a strong
conservative allowance.
Determining the adequacy of the ALL involves a high degree of judgment and is
inevitably imprecise. Accordingly, the ALL is maintained within a range based
upon a best estimate. The adequacy of the ALL is based on management's current
judgment about the credit quality of the loan portfolio and considers all known
relevant internal and external factors that affect loan losses. An evaluation of
the adequacy of the ALL is conducted at a minimum on a quarterly basis and is
documented and approved by the subsidiary Banks' Boards of Directors and
reviewed by the Company's Board of Directors quarterly.
The primary responsibility for credit risk assessment and identification of
problem loans rests with the loan officer of the account. This continuous
process, utilizing the bank's credit risk rating process, is necessary to
support management's evaluation of adequacy of the ALL. An independent loan
review function verifying loan risk ratings validates the loan officer and
management's evaluation about the credit quality of the loan portfolio. The loan
review function also assesses the evaluation process and provides an independent
analysis of the adequacy of the ALL.
The ALL methodology is designed to reasonably estimate the probable loan and
lease loss within the Bank's loan portfolios. The methodology is based upon a
process of estimating general, specific, and other allowance allocations.
- General allocations are estimated by applying loan loss rates to
groups of loans as defined by Financial Accounting Standards Board
(FASB) Statement No. 5 Accounting for Contingencies.
- Specific allocations are estimated for loans that are impaired or have
been selected for individual review as defined by FASB Statement No.
114 Accounting by Creditors for Impairment of a Loan--an amendment of
FASB Statements No. 5 and 15.
- Allocations that include other factors that warrant an increase or
decrease in the ALL balance.
At a minimum, the process includes the following elements:
- Is well documented with clear explanations of the supporting analyses
- Includes an analysis of the loan portfolio whether on an individual or
group basis
- Considers all known relevant internal and external factors that may
affect loan losses
- Applies procedures consistently but, when appropriate, is modified for
new factors
- Ensures the ALL balance is recorded in accordance with U.S. generally
accepted accounting principals
The Banks' charge-off policy is generally 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 the lower of
the unpaid principal balance or estimated fair value, not to exceed estimated
net realizable value. Any write-down at the time of recording real estate owned
is charged to the allowance for loan losses. Any subsequent write-downs are a
charge to current expenses.
14
LOAN LOSS EXPERIENCE
Years ended December 31,
-------------------------------------------
(Dollars in Thousands) 2005 2004 2003 2002 2001
------- ------ ------ ------ ------
BALANCE AT BEGINNING OF PERIOD $26,492 23,990 20,944 18,654 7,799
CHARGE OFFS:
Residential real estate (115) (419) (416) (887) (677)
Commercial loans (744) (1,150) (912) (2,522) (723)
Consumer loans (539) (776) (1,078) (1,328) (2,029)
------- ------ ------ ------ ------
Total charge offs $(1,398) (2,345) (2,406) (4,737) (3,429)
------- ------ ------ ------ ------
RECOVERIES:
Residential real estate 82 171 126 276 33
Commercial loans 414 120 274 326 266
Consumer loans 415 361 284 680 567
------- ------ ------ ------ ------
Total recoveries $ 911 652 684 1,282 866
------- ------ ------ ------ ------
CHARGEOFFS, NET OF RECOVERIES (487) (1,693) (1,722) (3,455) (2,563)
Acquisitions (1) 6,627 -- 959 -- 8,893
PROVISION 6,023 4,195 3,809 5,745 4,525
------- ------ ------ ------ ------
BALANCE AT END OF PERIOD $38,655 26,492 23,990 20,944 18,654
======= ====== ====== ====== ======
Ratio of net charge offs to average
loans outstanding during the period 0.02% 0.10% 0.12% 0.26% 0.20%
(1) Acquisition of First State Bank, Citizens Community Bank, First National
Bank - West, Pend Oreille Bank, WesterFed Financial Corporation and several
branches
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSS
2005 2004 2003 2002 2001
------------------- ------------------- ------------------- ------------------- -------------------
Percent Percent Percent Percent Percent
of loans of loans of loans of loans of loans
in in in in in
(Dollars in thousands) Allowance category Allowance category Allowance category Allowance category Allowance category
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
Residential first mortgage
and loans held for sale $ 4,318 25.0% 2,693 22.9% 2,147 21.8% 2,334 27.4% 2,722 31.5%
Commercial real estate 14,370 32.0% 9,222 30.3% 7,464 33.2% 7,088 30.1% 5,906 28.3%
Other commercial 12,566 23.7% 9,836 26.9% 9,951 24.7% 7,670 20.9% 6,225 18.0%
Consumer 7,401 19.3% 4,741 19.9% 4,428 20.3% 3,852 21.6% 3,801 22.2%
------- ----- ------ ----- ------ ----- ------ ----- ------ -----
Totals $38,655 100.0% 26,492 100.0% 23,990 100.0% 20,944 100.0% 18,654 100.0%
======= ===== ====== ===== ====== ===== ====== ===== ====== =====
SOURCES OF FUNDS
GENERAL
Deposits are the most important source of the Banks' funds for lending and other
business purposes. In addition, the Banks derive funds from loan repayments,
advances from the FHLB of Seattle, repurchase agreements, treasury term
borrowings, and loan sales. 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 money 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. They also may be used on a long-term basis to support expanded
activities and to match maturities of longer-term assets. Deposits obtained
through the Banks have traditionally been the principal source of funds for use
in lending and other business purposes. Currently, 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 regular statement savings, interest-bearing
checking,
15
money market deposit accounts, fixed rate certificates of deposit with
maturities ranging form three months to five years, negotiated-rate jumbo
certificates, non-interest demand accounts, and individual retirement accounts.
"Item 7 - Management's Discussion and Analysis" contains information relating to
changes in the overall deposit portfolio.
Deposits are obtained primarily from individual and business residents of the
Banks' market area. The Banks issue negotiated-rate certificate accounts with
balances of $100,000, or more, and have paid a limited amount of fees to brokers
to obtain deposits. The following table illustrates the amounts outstanding for
deposits greater than $100,000, according to the time remaining to maturity:
Certificate Demand
(Dollars in thousands) Accounts Deposits Totals
----------- -------- ---------
Within three months ............ $235,336 912,887 1,148,223
Three months to six months ..... 46,971 -- 46,971
Seven months to twelve months .. 49,556 -- 49,556
Over twelve months ............. 39,230 -- 39,230
-------- ------- ---------
Totals ...................... $371,093 912,887 1,283,980
======== ======= =========
For additional information, see "Item 7 - Management's Discussion & Analysis"
and footnote 7 to the Consolidated Financial Statements in "Item 8 - Financial
Statements and Supplementary Data".
In addition to funds obtained in the ordinary course of business, the Company
formed Glacier Trust I and Glacier trust II as financing subsidiaries and
obtained Citizens Trust I in connection with the acquisition of Citizens on
April 1, 2005. Citizens Trust I issued 5,000 preferred securities at $1,000 per
preferred security. The purchase of the securities entitles the shareholder to
receive cumulative cash distributions at an annual interest rate of three month
LIBOR plus 2.65% rate adjustable quarterly from payments on the junior
subordinated debentures of Glacier Bancorp, Inc. The subordinated debentures
will mature and the preferred securities must be redeemed by June 17, 2034. In
exchange for the Company's capital contribution, the Company owns all of the
outstanding common securities of Citizens Trust I. Glacier Trust II issued
45,000 preferred securities at $1,000 per preferred security. The purchase of
the securities entitles the shareholder to receive cumulative cash distributions
at an annual interest of 5.788% for the first five years and then converts to a
three month LIBOR plus 2.75% adjustable quarterly rate from payments on the
junior subordinated debentures of Glacier Bancorp, Inc. The subordinated
debentures will mature and the preferred securities must be redeemed by April 7,
2034. In exchange for the Company's capital contribution, the Company owns all
of the outstanding common securities of Glacier Trust II. The proceeds were used
for general corporate purposes. Glacier Trust I issued 1,400,000 preferred
securities at $25 per preferred security. The purchase of the securities
entitles the shareholder to receive cumulative cash distributions at an annual
interest rate of 9.40% from payments on the junior subordinated debentures of
Glacier Bancorp, Inc. In exchange for the Company's capital contribution, the
Company owns all of the outstanding common securities of the trust. The purpose
of the issuance of the securities was to finance the acquisition of WesterFed
Financial Corporation and seven Wells Fargo & Company and First Security
Corporation branches in 2001. On February 1, 2006, the Glacier Trust I
subordinated debentures were redeemed and replaced with an equal amount of
junior subordinated debentures with an interest rate of 6.08%. For additional
information regarding the subordinated debentures, see Note 10 and 22 to the
Consolidated Financial Statements "Item 8 - Financial Statements and
Supplementary Data".
ADVANCES AND OTHER BORROWINGS
As a member of the Federal Home Loan Bank of Seattle ("FHLB"), the Banks may
borrow from the FHLB on the security of stock which it is required to own in
that bank and certain of its home mortgages and other assets (principally,
securities which are obligations of, or guaranteed by, the United States),
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 capital 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 savings accounts and to expand lending by
matching a portion of the estimated amortization and prepayments of retained
fixed rate mortgages. All of the Banks are members of the FHLB.
From time to time, primarily as a short-term financing arrangement for
investment or liquidity purposes, the Banks have made use of repurchase
agreements with various securities dealers. This process involves the "selling"
of one or more of the securities in the Banks' portfolio and by entering into an
agreement to "repurchase" that same security at an agreed upon later date. A
rate of interest is paid to the dealer 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 the Board of Directors, the Banks enter into repurchase agreements
with local municipalities, and large balance customers, and have adopted
procedures designed to ensure proper transfer of title and safekeeping of the
underlying securities.
16
The following chart illustrates the average balances and the maximum outstanding
month-end balances for FHLB advances and repurchase agreements:
For the year ended December 31,
-------------------------------
(Dollars in thousands) 2005 2004 2003
-------- ------- -------
FHLB Advances
Amount outstanding at end of period.... $402,191 818,933 777,294
Average balance ....................... $673,904 791,245 601,679
Maximum outstanding at any month-end... $804,047 862,136 777,294
Weighted average interest rate ........ 3.19% 2.34% 2.80%
Repurchase Agreements:
Amount outstanding at end of period $129,530 76,158 56,968
Average balance ....................... $103,522 69,480 61,609
Maximum outstanding at any month-end... $132,534 80,265 74,808
Weighted average interest rate ........ 2.85% 1.25% 1.09%
The Banks also participate in a treasury term auction program whereby when the
treasury has excess funds, the Banks are able to bid on the funds. The term of
the borrowings are typically less then 21 days and the interest rate is based on
the Bank's bid. The following lists the outstanding treasury term borrowings:
December 31,
---------------------------
(dollars in thousands) 2005 2004 2003
------------- ---- ----
Outstanding balance .. $ 179,000 -- --
Weighted rate ........ 4.29% -- --
Maturity date ........ Jan. 3, 2006 -- --
For additional information concerning the Company's advances and repurchase
agreements, see footnotes 8 and 9 to the Consolidated Financial Statements in
"Item 8 - Financial Statements and Supplementary Data".
EMPLOYEES
As of December 31, 2005, the Company employed 1,244 persons, 1,125 of who 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 and employee stock options.
The Company considers its employee relations to be excellent. See Note 13 in the
Consolidated Financial Statements in "Item 8 - Financial Statements and
Supplementary Data" for detailed information regarding profit sharing plan costs
and eligibility.
SUPERVISION AND REGULATION
INTRODUCTION
Banking is a highly regulated industry, and banking laws and regulations are
primarily intended to protect depositors, not shareholders. The following
discussion identifies some of the more significant state and federal laws and
regulations affecting the banking industry. It is intended only to summarize
these laws and regulations and, therefore, is not complete and is qualified by
the statutes and regulations referenced in the discussion.
17
BANK HOLDING COMPANY REGULATION
General. The Company is a bank holding company as defined in the Bank Holding
Company Act of 1956, as amended, due to its ownership of Glacier Bank, Mountain
West Bank, First Security Bank of Missoula, Western Security Bank, Big Sky
Western Bank, First National Bank, Valley Bank of Helena, and Glacier Bank of
Whitefish, and Citizens Community Bank. All of the Banks are Montana-state
chartered commercial banks, except for Mountain West Bank and Citizens Community
Bank, both of which are Idaho state-chartered banks, and First National
Bank-West, which is a national banking association. All of the Banks are also
members of the Federal Reserve, with the exception of Mountain West Bank and
Citizens Community Bank, which is a non-Fed member FDIC-insured bank. As a bank
holding company, the Company is subject to regulation, supervision and
examination by the Federal Reserve. In general, the Bank Holding Company Act
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 and provide additional information with 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 Bank Holding Company Act 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% 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 Bank Holding
Company Act also prohibits a bank holding company from acquiring or retaining
direct or indirect ownership or control of more than 5% 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 which, by
statute or by Federal Reserve regulation or order, have been identified as
activities closely related to the business of banking or of managing or
controlling banks.
Transactions with Affiliates. Subsidiary banks 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 their
securities, and on the use of their securities as collateral for loans to any
borrower. These regulations and restrictions may limit the Company's ability to
obtain funds from the Banks for its cash needs, including funds for payment of
dividends, interest and operational expenses.
Tying Arrangements. We are 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 its subsidiaries may condition an extension of credit to
a customer on either (1) a requirement that the customer obtain additional
services provided by us or (2) an agreement by the customer to refrain from
obtaining other services from a competitor.
Support of Subsidiary Banks. Under Federal Reserve policy, the Company is
expected to act as a source of financial and managerial strength to its
subsidiary 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 subsidiary banks are subordinate to deposits and to certain
other indebtedness of those subsidiary banks.
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 SUBSIDIARIES
With the exception of Mountain West Bank, Citizens Community Bank and First
National Bank-West, the Company's subsidiaries are subject to extensive
regulation and supervision by the Montana Department of Commerce's Banking and
Financial Institutions Division and the FRB as a result of their membership in
the Federal Reserve System. Mountain West Bank and Citizens Community Bank are
subject to regulation by the Idaho Department of Finance and by the FDIC as
state non-member commercial banks. 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. As a national banking association with its home office in Wyoming,
First National Bank-West is subject to regulation by the Office of the
Comptroller of the Currency ("OCC") and, to a certain extent, the Wyoming
Division of Banking.
The federal laws that apply to the Banks regulate, among other things, the scope
of their business, their investments, their reserves against
18
deposits, the timing of the availability of deposited funds and the nature and
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 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. These factors are also considered 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 insiders--executive officers, directors, principal
shareholders, and their related interests. Extensions of credit to insiders must
be made on substantially the same terms, including interest rates and
collateral, and follow credit underwriting procedures that are not less
stringent than those prevailing at the time for comparable transactions with
non-insiders. Also, extensions of credit to insiders must not involve more than
the normal risk of repayment or present other unfavorable features.
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, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth,
compensation and benefits. Additional standards apply to 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.
INTERSTATE BANKING AND BRANCHING
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Act") permits nationwide interstate banking and branching under
certain circumstances. This legislation generally authorizes interstate
branching and relaxes federal law restrictions on interstate banking. Currently,
bank holding companies may purchase banks in any state, and states may not
prohibit such purchases. Additionally, banks are permitted to merge with banks
in other states as long as the home state of neither merging bank has opted out.
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 have implemented a loan-to-deposit ratio
screen to ensure compliance with this prohibition.
With regard to interstate bank mergers, Montana "opted-out" of the Interstate
Act. Subject to certain conditions, an in-state bank that has been in existence
for at least 5 years may merge with an out-of-state bank. Banks, bank holding
companies, and their respective subsidiaries cannot acquire control of a bank
located in Montana if, after the acquisition, the acquiring institution,
together with its affiliates, would directly or indirectly control more than 22%
of the total deposits of insured depository institutions and credit unions
located in Montana. Montana law does not authorize the establishment of a branch
bank in Montana by an out-of-state bank.
Idaho has enacted "opting in" legislation in accordance with the Interstate Act
provisions allowing banks to engage in interstate merger transactions subject to
certain "aging" requirements. Branches may not be acquired or opened separately
in Idaho by an out-of-state bank, but once an out-of-state bank has acquired a
bank within Idaho, either through merger or acquisition of all or substantially
all of the bank's assets, the out-of-state bank may open additional branches
within Idaho.
Utah and Washington have each enacted "opting in" legislation similar in certain
respects to that enacted by Idaho, allowing banks to engage in interstate merger
transactions subject to certain aging requirements. Under Utah law, an
out-of-state bank may acquire a bank branch located in Utah, but it may not
establish a de novo branch in Utah if its home state does not have reciprocal
laws on de novo branching. Under Washington law, an out-of-state bank may,
subject to the Director's approval, open de novo branches in Washington or
acquire an in-state branch so long as the home state of the out-of-state bank
has reciprocal laws with respect to de novo branching or branch acquisitions
Under Wyoming law, banks located in Wyoming may be acquired by out-of-state
banks so long as (1) with certain exceptions, the resulting bank and its
affiliates would not control 30% or more of the total deposits held by all
insured depository institutions in Wyoming, and (2) the in-state bank has been
in existence for at least three years. Branches may not be acquired or opened
separately in Wyoming by an out-of-state bank, but once an out-of-state bank has
acquired a bank within Wyoming, either through merger or acquisition of all or
substantially all of the bank's assets, the out-of-state bank may open
additional branches within Wyoming.
DEPOSIT INSURANCE
The deposits of the Banks are currently insured to a maximum of $100,000 per
depositor (in some instances up to $100,000 per
19
deposit account, depending on the ownership category of the account) through the
Bank Insurance Fund ("BIF") administered by the FDIC. All insured banks are
subject to semi-annual deposit insurance premium assessments by the FDIC. The
FDIC has implemented a risk-based insurance premium system under which banks are
assessed insurance premiums based on how much risk they present to the Bank
Insurance Fund. Banks with higher levels of capital and a low degree of
supervisory concern are assessed lower premiums than banks with lower levels of
capital or a higher degree of supervisory concern. Under the Federal Deposit
Insurance Reform Act of 2005, the Bank Insurance Fund will be merged with the
Savings Association Insurance Fund into a new Deposit Insurance Fund, and the
maximum deposit insurance amounts will be subject to inflation adjustments every
five years, commencing April, 2010.
DIVIDENDS
The principal source of the Company's cash revenues is dividends received from
the Company's subsidiary Banks. 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. 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 laws and, in the case
of First National Bank - West, the OCC, also limit a bank's ability to pay
dividends.
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 and undivided
profits. Tier II capital generally consists of the allowance for loan 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% 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%
and a minimum total risk-based ratio of 8%.
Leverage Ratio. The guidelines also employ a leverage ratio, which is Tier I
capital as a percentage of 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 3%; however, for all but the most highly rated bank holding companies
and for bank holding companies seeking to expand, regulators expect an
additional cushion of at least 1% to 2%.
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.
CORPORATE GOVERNANCE AND ACCOUNTING LEGISLATION
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 ("SOX") addresses
corporate and accounting fraud. SOX establishes an accounting oversight board to
enforce auditing standards and restricts the scope of services that accounting
firms may provide to their public company audit clients. Among other things, SOX
also (i) 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"); (ii) imposes new disclosure requirements
regarding internal controls, off-balance-sheet transactions, and pro forma
(non-GAAP) disclosures; (iii) accelerates the time frame for reporting of
insider transactions and periodic disclosures by public companies; and (iv)
requires companies to disclose 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."
SOX also requires the SEC, based on certain enumerated factors, to regularly and
systematically review corporate filings. To deter wrongdoing, SOX: (i) subjects
bonuses issued to top executives to disgorgement if a restatement of a company's
financial statements was due to corporate misconduct; (ii) prohibits an officer
or director from misleading or coercing an auditor; (iii) prohibits insider
trades during pension fund "blackout periods"; (iv) imposes new criminal
penalties for fraud and other wrongful acts; and (v) extends
20
the period during which certain securities fraud lawsuits can be brought against
a company or its officers.
As a publicly reporting company, we are subject to the requirements of SOX and
related rules and regulations issued by the SEC and NASDAQ. We anticipate that
we will incur additional expense, including ongoing compliance with Section 404,
as a result of SOX, but we do not expect that such compliance will have a
material impact on our business.
ANTI-TERRORISM LEGISLATION
The Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001 ("Patriot Act") is intended to
combat terrorism. Among other things, the Patriot Act (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)
generally eliminates civil liability for persons who file suspicious activity
reports. The Patriot Act also increases governmental powers to investigate
terrorism, including expanded government access to account records. The
Department of the Treasury is empowered to administer and make rules to
implement the Patriot Act. While the Patriot Act may, to some degree, affect the
Company's record-keeping and reporting expenses, the Company does not believe
that the Patriot Act will have a material adverse effect on its business and
operations.
FINANCIAL SERVICES MODERNIZATION
Gramm-Leach-Bliley Act of 1999. The Financial Services Modernization Act of
1999, also known as the Gramm-Leach-Bliley Act, brought about significant
changes to the laws affecting banks and bank holding companies. Generally, the
Act (i) repealed the historical restrictions on preventing banks from
affiliating with securities firms, (ii) provided a uniform framework for the
activities of banks, savings institutions and their holding companies, (iii)
broadened the activities that may be conducted by national banks and banking
subsidiaries of bank holding companies, (iv) provided an enhanced framework for
protecting the privacy of consumer information and (v) addressed 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. In addition, in a change from previous law, bank
holding companies will be in a position to be owned, controlled or acquired by
any company engaged in financially related activities, so long as the company
meets certain regulatory requirements. The act also permits national banks (and,
in states with wildcard statutes, certain state banks), either directly or
through operating subsidiaries, to engage in certain non-banking financial
activities.
We do not believe that the Gramm-Leach-Bliley Act will negatively affect our
operations in the short term. However, to the extent the legislation permits
banks, securities firms and insurance companies to affiliate, the financial
services industry may experience further consolidation. This consolidation could
result in a growing number of larger financial institutions that offer a wider
variety of financial services than we currently offer, and these companies may
be able to aggressively compete in the markets we currently serve.
EFFECTS OF GOVERNMENT MONETARY POLICY
The Company's earnings and growth are affected by general economic conditions,
and by the fiscal and monetary policies of the federal government, particularly
the Federal Reserve. The Federal Reserve implements a 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 Company cannot predict with certainty the nature and
impact of future changes in monetary policies and their impact on the Company or
its subsidiary Banks.
21
TAXATION
FEDERAL TAXATION
The Company files a consolidated federal tax return, using the accrual method of
accounting. All required tax returns have been 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. See
note 12 to the Consolidated Financial Statements in "Item 8 - Financial
Statements and Supplementary Data" for additional information.
STATE TAXATION
Under Montana, Idaho 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% in Montana, 7.6% in Idaho, and 5% in Utah. Wyoming and
Washington do not impose a corporate tax.
ITEM 1A. RISK FACTORS
Our business exposes us to certain risks. The following is a discussion of the
most significant risks and uncertainties that may affect our business, financial
condition and future results.
FLUCTUATING INTEREST RATES CAN ADVERSELY AFFECT OUR PROFITABILITY
Our 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 our 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 our interest rate spread, and, in turn, our profitability. We
cannot assure you that we can minimize our interest rate risk. In addition,
interest rates also affect the amount of money we can lend. When interest rates
rise, the cost of borrowing also increases. Accordingly, changes in levels of
market interest rates could materially and adversely affect our net interest
spread, asset quality, loan origination volume, business and prospects. For
discussion concerning Net Interest Income Simulation see "Item 7 - Management
Discussion & Analysis".
OUR ALLOWANCE FOR LOAN LOSSES MAY NOT BE ADEQUATE TO COVER ACTUAL LOAN LOSSES,
WHICH COULD ADVERSELY AFFECT OUR EARNINGS
We maintain an allowance for loan losses in an amount that we believe is
adequate to provide for losses inherent in the portfolio. While we strive to
carefully monitor credit quality and to identify loans that may become
nonperforming, at any time there are loans included in the portfolio that will
result in losses, but that have not been identified as nonperforming or
potential problem loans. We cannot be sure that we will be able to identify
deteriorating loans before they become nonperforming assets, or that we will be
able to limit losses on those loans that are identified. As a result, future
additions to the allowance may be necessary. Additionally, future additions to
the allowance may be required based on changes in the composition of the loans
comprising the portfolio and changes in the financial condition of borrowers,
such as may result from changes in economic conditions, or as a result of
incorrect assumptions by management in determining the allowance. Additionally,
federal banking regulators, as an integral part of their supervisory function,
periodically review our allowance for loan losses. These regulatory agencies may
require us to increase the allowance for loan losses which could have a negative
effect on our financial condition and results of operation.
OUR LOAN PORTFOLIO MIX COULD RESULT IN INCREASED CREDIT RISK IN AN ECONOMIC
DOWNTURN
Our loan portfolio contains a high percentage of commercial, commercial real
estate, real estate acquisition and development loans in relation to our total
loans and total assets. These types of loans generally are viewed as having more
risk of default than residential real estate loans or certain other types of
loans or investments. In fact, the Federal Deposit Insurance Corporation
recently issued a pronouncement alerting banks to their 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 loan portfolio contains a significant number of commercial
and commercial real estate loans with relatively large balances, the
deterioration of one or a few of these loans may cause a significant increase in
nonperforming loans. An increase in nonperforming 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 our
results of operations and financial condition.
COMPETITION IN OUR MARKET AREA MAY LIMIT OUR FUTURE SUCCESS
Commercial banking is a highly competitive business. We compete with other
commercial banks, savings and loan associations, credit unions and finance
companies operating in our market area. We are subject to substantial
competition for loans and deposits
22
from other financial institutions. Some of our competitors are not subject to
the same degree of regulation and restriction as we are. Some of our competitors
have greater financial resources than we do. If we are unable to effectively
compete in our market area, our business and results of operations could be
adversely affected.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
At December 31, 2005, the Company owned 53 of its 71 offices, including its
headquarters and other property having an aggregate book value of approximately
$58 million, and leased the remaining branches. 8 offices are leased in Montana,
6 offices are leased in Idaho, 2 offices are leased in Wyoming, 1 office is
leased in Utah, and 1 office is leased in Washington. The following schedule
provides property information for the Company's operating segments as of
December 31, 2005.
Properties Properties Net Book
(dollars in thousands) Leased Owned Value
- ---------------------- ---------- ---------- --------
Glacier 2 8 $ 7,738
Mountain West 7 13 13,760
First Security 3 8 9,137
Western 1 6 4,592
First National 2 5 3,263
Big Sky 1 3 8,694
Valley 1 5 4,178
Whitefish -- 2 3,016
Citizens 1 3 3,150
--- --- -------
18 53 $57,528
=== === =======
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 Note 5 and 19 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.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the fourth quarter of
2005.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASE OF EQUITY SECURITIES
The Company's stock trades on the NASDAQ National Market under the symbol: GBCI.
The primary market makers are: D.A. Davidson & Co., Inc., Goldman, Sachs & Co.,
Keefe, Bruyette & Woods, Inc., Knight Equity Markets, L.P., and Morgan Stanley &
23
Co., Inc.
The market range of high and low bid prices for the Company's common stock for
the periods indicated are shown below. The sale price information has been
adjusted retroactively for all stock dividends and splits previously issued. As
of December 31, 2005, there were approximately 10,932 shareholders of Company
common stock. Following is a schedule of quarterly common stock price ranges:
2005 2004
--------------- ---------------
Quarter High Low High Low
- ------- ------ ------ ------ ------
First ... $27.98 $23.59 $21.63 $18.88
Second .. $26.39 $21.07 $22.60 $19.59
Third ... $31.40 $25.91 $24.28 $20.60
Fourth .. $33.50 $28.00 $28.71 $23.12
The Company paid cash dividends on its common stock of $.60 and $.54 per share
for the years ended December 31, 2005 and 2004, respectively.
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 2005.
EQUITY COMPENSATION PLAN INFORMATION
We currently maintain two compensation plans that provide for the issuance of
the Company's common stock to officers and other employees, directors and
consultants. These consist of the 1994 Director Stock Option Plan, amended, and
the 2005 Employee Stock Incentive Plan, each of which have been approved by the
shareholders. In addition, there are outstanding options issued under the 1995
Employee Stock Option Plan that has expired. The following table sets forth
information regarding outstanding options and shares reserved for future
issuance under the foregoing plans as of December 31, 2005:
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 (1) warrants, and rights reflected in column (a))
Plan Category (a) (b) (c)
- ------------- ------------------------ -------------------- --------------------------
Equity compensation plans
approved by the shareholders 1,670,400 $18.580 3,757,156
Equity compensation plans not
approved by shareholders -- $ 0 --
(1) Includes shares to be issued upon exercise of options under plans of
Mountain West Bank and WesterFed, which were assumed as a result of their
acquisitions.
ITEM 6. SELECTED FINANCIAL DATA
The following financial data of the Company are derived from the Company's
historical audited financial statements and related footnotes. 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 financial
statements and related footnotes contained elsewhere in this report.
24
SUMMARY OF OPERATIONS AND SELECTED FINANCIAL DATA
At December 31,
----------------------------------------------------------
(dollars in thousands, except per share data) 2005 2004 2003 2002 2001
- --------------------------------------------- ---------- --------- --------- --------- ---------
SUMMARY OF FINANCIAL CONDITION:
Total assets .................................. $3,706,344 3,010,737 2,739,633 2,281,344 2,085,747
Investment securities, available for sale ..... 967,970 1,085,626 1,096,954 782,825 545,585
Loans receivable, net ......................... 2,397,187 1,701,805 1,430,365 1,300,653 1,322,327
Allowance for loan losses ..................... (38,655) (26,492) (23,990) (20,944) (18,654)
Intangibles ................................... 87,114 42,315 42,816 40,011 41,771
Deposits ...................................... 2,534,712 1,729,708 1,597,625 1,459,923 1,446,064
Advances from Federal Home Loan Bank .......... 402,191 818,933 777,294 483,660 367,295
Securities sold under agreements to
repurchase and other borrowed funds ........ 317,222 81,215 64,986 61,293 32,585
Stockholders' equity .......................... 333,239 270,184 237,839 212,249 176,983
Equity per common share* ...................... 10.36 8.80 7.86 7.14 6.11
Equity as a percentage of total assets ........ 8.99% 8.97% 8.68% 9.30% 8.49%
Years ended December 31,
------------------------------------------------
(dollars in thousands, except per share data) 2005 2004 2003 2002 2001
- --------------------------------------------- -------- ------- ------- ------- -------
SUMMARY OF OPERATIONS:
Interest income ............................... $189,985 147,285 130,830 133,989 137,920
Interest expense .............................. 59,978 39,892 38,478 47,522 65,546
-------- ------- ------- ------- -------
Net interest income ........................ 130,007 107,393 92,352 86,467 72,374
Provision for loan losses ..................... 6,023 4,195 3,809 5,745 4,525
Non-interest income ........................... 44,626 34,565 33,562 25,917 23,251
Non-interest expense .......................... 90,926 72,133 65,944 57,813 57,385
-------- ------- ------- ------- -------
Earnings before income taxes ............... 77,684 65,630 56,161 48,826 33,715
Income taxes .................................. 25,311 21,014 18,153 16,424 12,026
-------- ------- ------- ------- -------
Net earnings ............................... 52,373 44,616 38,008 32,402 21,689
======== ======= ======= ======= =======
Basic earnings per common share* ........... 1.67 1.46 1.26 1.10 0.80
Diluted earnings per common share* ......... 1.64 1.43 1.24 1.08 0.78
Dividends declared per share* .............. 0.60 0.54 0.48 0.39 0.35
At or for the years ended December 31,
--------------------------------------
2005 2004 2003 2002 2001
----- ----- ----- ----- ------
RATIOS:
Net earnings as a percent of
average assets ................................ 1.52% 1.54% 1.53% 1.50% 1.10%
average stockholders' equity .................. 17.62% 17.61% 16.82% 16.57% 13.49%
Dividend payout ratio ............................ 35.93% 37.36% 38.07% 35.45% 43.48%
Average equity to average asset ratio ............ 8.61% 8.75% 9.10% 9.08% 8.26%
Net interest margin on average earning assets
(tax equivalent) .............................. 4.20% 4.15% 4.20% 4.51% 4.08%
Allowance for loan losses as a percent of loans .. 1.59% 1.53% 1.65% 1.58% 1.39%
Allowance for loan losses as a percent of
nonperforming assets ......................... 383% 276% 184% 181% 165%
At or for the years ended December 31,
--------------------------------------------------------
(dollars in thousands) 2005 2004 2003 2002 2001
- ---------------------- ---------- --------- --------- --------- -------
OTHER DATA:
Loans originated and purchased ................ $2,113,777 1,543,595 1,509,850 1,204,852 994,527
Loans serviced for others ..................... $ 145,279 174,805 189,601 253,063 286,996
Number of full time equivalent employees ...... 1,125 857 807 737 728
Number of offices ............................. 71 55 54 50 51
Number of shareholders of record .............. 1,907 1,784 1,763 1,586 1,645
* revised for stock splits and dividends
Acquisitions using the purchase method of accounting include the operations
since the acquisition date.
25
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, 2005 COMPARED TO DECEMBER 31, 2004
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 audited financial statements and the notes
thereto included later in this report. All numbers, except per share data, are
expressed in thousands of dollars.
HIGHLIGHTS AND OVERVIEW
During the past year the Company acquired three banks and a branch that combined
accounted for an increase in total assets of $570 million, net loans of $291
million, and deposits of $458 million. The acquisitions resulted in two new
subsidiaries that are strategically located in southwest Wyoming and southeast
Idaho and additional branches that merged into existing subsidiaries located in
western Montana and Northern Idaho. The acquisitions resulted in additional
goodwill of $42 million and core deposit intangibles of $5 million.
The Company experienced strong loan growth with total loans outstanding
increasing by $708 million, or 41 percent from the prior year. Without the
acquisition, loans increased $417 million, or 24 percent. All loan
classifications experienced increases with commercial loan growth leading the
way with an increase of $366 million, or 37 percent. Real estate loans increased
$214 million, or 55 percent, and consumer loans increased by $127 million, or 37
percent. Due to the continuing reduction in spreads on funding costs versus
investment returns, the cash flow from investments were used to fund loans.
Investments declined $118 million, or 11% from prior year.
Non-interest bearing deposits increased $207 million or 45 percent during the
year providing a stable low-cost funding source for a portion of the asset
growth. The Company also increased interest bearing deposits by $598 million or
47 percent, of which $165 million was in the form of brokered CDs. $179 million
of the $183 increase in other borrowed funds is from the treasury term auction
borrowings that are a temporary funding source when the Treasury has excess
funds available. The increase in deposits and other borrowed funds has allowed
the Company to reduce its funding with the Federal Home Loan Bank by $417
million, which typically has a higher interest rate than other sources.
Increases in short term interest rates by the Federal Reserve Board during 2005
have resulted in higher yields on loans and sources of funding. The increase in
loan volumes, higher loan rates, and the increase in non-interest bearing
deposits, resulted in an increase in net interest income of $23 million or 21
percent over the prior year.
The Company also increased non-interest income by $10 million primarily the
result of the increase in the loan and deposit portfolios and the high volume of
residential loans sold. Mortgage loans sold during 2005 increased $163 million,
or 56 percent, which contributed to the $3 million or 38 percent increase on
gain in sale of loans sold.
Non-interest expense increased $19 million, or 26%, from last year with the
largest increase occurring in compensation and benefits. Additional locations
and related staffing and merit increases were the primary reasons for this
increase. Other operating expenses also increased reflecting the increased
volume of activities in loan and deposit operations and the bank acquisitions.
Looking forward, our future performance will depend on many factors including
economic conditions, interest rate changes, increasing competition for deposits
and quality loans, and regulatory burden. Increasing interest rates slow the
volume of real estate loan originations which reduces the fee income from that
activity while at the same time reducing commission expense for loan
originators. Increasing rates result in increased earnings on assets, however,
the cost of interest bearing funds also increases. The Company goal of asset and
liability management practices is to maintain or increase the level of net
interest income within an acceptable level of interest rate risk.
FINANCIAL CONDITION
ASSETS
The results of operations and financial condition include the acquisitions from
the completion dates forward. The following table provides information on
selected classifications of assets and liabilities acquired:
26
First National Citizens Bonners Ferry First State
(UNAUDITED - $ IN THOUSANDS) Total Bank Community Bank Branch Bank
-------- -------------- -------------- ------------- -------------
Acquisition Date Feb. 28, 2005 April 1, 2005 May 20, 2005 Oct. 31, 2005
Total assets $569,980 267,126 126,394 23,868 152,592
Investments 154,517 124,733 7,916 -- 21,868
Net loans 290,828 87,678 89,240 5,047 108,863
Non-interest bearing deposits 148,499 95,053 25,789 6,073 21,584
Interest bearing deposits 309,929 129,697 75,008 17,777 87,447
The following table summarizes the asset balances as of December 31, 2005 and
2004, the amount of change, and percentage change during 2005:
December 31,
-----------------------
ASSETS ($ IN THOUSANDS) 2005 2004 $ change % change
---------- ---------- --------- --------
Cash on hand and in banks $ 111,418 $ 79,300 $ 32,118 41%
Investments, interest bearing deposits,
FHLB stock, FRB stock, and Fed Funds 991,246 1,098,633 (107,387) -10%
Loans:
Real estate 607,627 393,141 214,486 55%
Commercial 1,357,051 991,081 365,970 37%
Consumer 471,164 344,075 127,089 37%
---------- ---------- --------- ---
Total loans 2,435,842 1,728,297 707,545 41%
Allowance for loan losses (38,655) (26,492) (12,163) 46%
---------- ---------- --------- ---
Total loans net of allowance for loan losses 2,397,187 1,701,805 695,382 41%
---------- ---------- --------- ---
Other assets 206,493 130,999 75,494 58%
---------- ---------- --------- ---
Total Assets $3,706,344 $3,010,737 $ 695,607 23%
========== ========== ========= ===
At December 31, 2005 total assets were $3.706 billion, which is $696 million
greater than the December 31, 2004 assets of $3.011 billion, an increase of 23
percent. Without $570 million in assets acquired in acquisitions, total assets
were up $126 million from a year ago, or 4 percent.
Total loans have increased $708 million from December 31, 2004, or 41 percent,
with the growth occurring in all loan categories. Commercial loans have
increased $366 million, or 37 percent, real estate loans gained $214 million, or
55 percent, and consumer loans grew by $127 million, or 37 percent. Acquisitions
added $291 million of the total with internal growth contributing $417 million,
a 24 percent increase.
Investment securities, including interest bearing deposits in other financial
institutions, and federal funds sold have decreased $107 million from December
31, 2004. Without the acquisitions, investments would have declined $262
million, or 24 percent, from December 31, 2004. Investment securities at year
end represented 27% of total assets versus 36% the prior year.
27
The following table summarizes the major asset components as a percentage of
total assets as of December 31, 2005, 2004, and 2003:
December 31,
---------------------
2005 2004 2003
----- ----- -----
ASSETS:
Cash, and cash equivalents, investment securities, FHLB
and Federal Reserve stock .......................... 29.7% 39.1% 43.2%
Real estate loans and loans held for sale ............. 16.3% 13.0% 11.5%
Commercial loans ...................................... 35.9% 32.3% 30.1%
Consumer loans ........................................ 12.5% 11.3% 10.6%
Other assets .......................................... 5.6% 4.3% 4.6%
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
The percentage of assets held as cash, and cash equivalents, investment
securities, FHLB and Federal Reserve stock has decreased from 39.1 percent at
December 31, 2004 to 29.7 percent at December 31, 2005. The decrease is a result
of the continuing principal paydowns on securities and the increase in total
assets resulting from the large increase in loans outstanding. The Company
continues to focus on quality loan growth of all types which contributed to an
increase in all loan categories.
LIABILITIES
The following table summarizes the liability balances as of December 31, 2005
and 2004, the amount of change, and percentage change during 2005:
December 31,
-----------------------
LIABILITIES ($ IN THOUSANDS) 2005 2004 $ change % change
---------- ---------- --------- --------
Non-interest bearing deposits $ 667,008 $ 460,059 $ 206,949 45%
Interest-bearing deposits 1,867,704 1,269,649 598,055 47%
Advances from Federal Home Loan Bank 402,191 818,933 (416,742) -51%
Securities sold under agreements to
repurchase and other borrowed funds 317,222 81,215 236,007 291%
Other liabilities 33,980 30,697 3,283 11%
Subordinated debentures 85,000 80,000 5,000 6%
---------- ---------- --------- ---
Total liabilities $3,373,105 $2,740,553 $ 632,552 23%
========== ========== ========= ===
Non-interest bearing deposits have increased $207 million, or 45 percent, since
December 31, 2004. Without acquisitions the increase was $58 million, or 13
percent. This continues to be a primary focus of our banks and the programs we
have initiated this past year continue to gain momentum. Interest bearing
deposits, including $165 million in broker originated certificates of deposit,
have increased $598 million from December 31, 2004 with $310 million from
acquisitions. Since December 31, 2004, without acquisitions, interest bearing
deposits increased $288 million, or 23 percent. This growth in deposits, a low
cost stable funding source, gives us increased flexibility in managing our asset
mix. Federal Home Loan Bank advances decreased $417 million, and repurchase
agreements and other borrowed funds increased $236 million from December 31,
2004. At December 31, 2005 other borrowed funds includes $179 million in U.S.
Treasury Tax and Loan Term Auction funds.
28
The following table summarizes the major liability components as a percentage of
total liabilities as of December 31, 2005, 2004, and 2003:
December 31,
---------------------
2005 2004 2003
----- ----- -----
LIABILITIES AND STOCKHOLDER'S EQUITY:
Deposit accounts ............................ 68.4% 57.4% 58.3%
FHLB advances ............................... 10.8% 27.2% 28.4%
Other borrowings and repurchase agreements .. 8.6% 2.7% 2.4%
Other liabilities ........................... 3.2% 3.7% 2.2%
Stockholders' equity ........................ 9.0% 9.0% 8.7%
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
The deposits increased from 57.4 percent at December 31, 2004 to 68.4 percent at
December 31, 2005. The large increase in deposits and the increase in other
borrowed funds allowed the Company to significantly reduce the FHLB advances.
Stockholders equity as a percentage of total liabilities and stockholder's
equity remained steady throughout the year, even though there were several
branch and bank acquisitions and large growth in liabilities.
STOCKHOLDERS' EQUITY
($ IN THOUSANDS EXCEPT PER SHARE DATA)
December 31,
-------------------
2005 2004 $ change % change
-------- -------- -------- --------
Common equity $332,418 $264,250 $ 68,168 26%
Accumulated other comprehensive income 821 5,934 (5,113) -86%
-------- -------- --------
Total stockholders' equity 333,239 270,184 63,055 23%
Core deposit intangible, net, and goodwill (87,114) (42,315) (44,799) 106%
-------- -------- --------
Tangible stockholders' equity $246,125 $227,869 $ 18,256 8%
======== ======== ========
Stockholders' equity to total assets 8.99% 8.97%
Tangible stockholders' equity to total tangible assets 6.80% 7.68%
Book value per common share $ 10.36 $ 8.80 $ 1.56 18%
Market price per share at end of quarter $ 30.05 $ 27.23 $ 2.82 10%
STOCKHOLDERS' EQUITY
Total equity and book value per share amounts have increased substantially from
December 31, 2004, the result of issuing stock for the Citizens Community Bank,
and First State Bank acquisitions, earnings retention, and stock options
exercised. Accumulated other comprehensive income, representing net unrealized
gains on securities available for sale, decreased $5.113 million from December
31, 2004, primarily a function of interest rate changes and the decreased
balance of securities.
RESULTS OF OPERATIONS
REVENUE SUMMARY
($ IN THOUSANDS)
Years ended December 31,
-----------------------------------------
2005 2004 $ change % change
-------- -------- -------- --------
Net interest income $130,007 $107,393 $22,614 21%
Fees and other revenue:
Service charges, loan fees, and other fees 30,812 24,260 6,552 27%
Gain on sale of loans 11,048 8,015 3,033 38%
Loss on sale of investments (138) -- (138) n/m
Other income 2,904 2,290 614 27%
-------- -------- ------- ---
Total non-interest income 44,626 34,565 10,061 29%
-------- -------- ------- ---
$174,633 $141,958 $32,675 23%
======== ======== ======= ===
Tax equivalent net interest margin 4.20% 4.15%
======== ========
29
NET INTEREST INCOME
Net interest income for the year increased $22.614 million, or 21 percent, over
2004. Total interest income increased $42.700 million, or 29 percent, while
total interest expense was $20.086 million, or 50 percent higher. FHLB dividends
received were $1.125 million lower in 2005. The increase in interest expense is
primarily attributable to the volume increase in interest bearing liabilities,
and increases in short term interest rates during 2004 and 2005. The net
interest margin as a percentage of earning assets, on a tax equivalent basis,
was 4.20 percent which was five basis points higher than the 4.15 percent result
for 2004.
NON-INTEREST INCOME
Total non-interest income increased $10.061 million, or 29 percent in 2005. Fee
income increased $6.552 million, or 27 percent, over last year, driven primarily
by an increased number of loan and deposit accounts, acquisitions, and
additional customer product and services offered. Gain on sale of loans
increased $3.033 million, or 38 percent, from last year. Loan origination
activity for housing construction and purchases remains strong in our markets
and has offset much of the reduction in refinance activity experienced last
year. Other income was $614 thousand higher than 2004 of which $220 thousand was
from the sale of property held for future expansion that was no longer needed,
and the remainder from various volume increases.
NON-INTEREST EXPENSE SUMMARY
Years ended December 31,
---------------------------------------
($ IN THOUSANDS) 2005 2004 $ change % change
------- ------- -------- --------
Compensation and employee
benefits and related expense $51,385 $39,955 $11,430 29%
Occupancy and equipment expense 12,851 10,797 2,054 19%
Outsourced data processing 1,839 1,551 288 19%
Core deposit intangibles amortization 1,470 1,074 396 37%
Other expenses 23,381 18,756 4,625 25%
------- ------- ------- ---
Total non-interest expense $90,926 $72,133 $18,793 26%
======= ======= ======= ===
NON-INTEREST EXPENSE
Non-interest expense increased by $18.793 million, or 26 percent, from 2004.
Compensation and benefit expense increased $11.430 million, or 29 percent, with
acquisitions, additional bank branches, commissions on mortgage loan production,
normal compensation increases for job performance and increased cost for
benefits accounting for the majority of the increase. Occupancy and equipment
expense increased $2.054 million, or 19 percent, reflecting the acquisitions,
cost of additional locations and facility upgrades. Other expenses increased
$4.625 million, or 25 percent, primarily from acquisitions, additional marketing
expenses, and costs associated with new branch offices. The efficiency ratio
(non-interest expense/net interest income + non-interest income) increased
slightly to 52 percent up from 51 percent for 2004.
INCOME TAX EXPENSE
Income tax expense in 2005 was reduced by $317 thousand due to the statutory
closing of certain previous years' tax returns and tax accrual adjustments.
CREDIT QUALITY INFORMATION
December 31, December 31,
($ IN THOUSANDS) 2005 2004
------------ ------------
Allowance for loan losses $38,655 $26,492
Non-performing assets 10,089 9,608
Allowance as a percentage of non performing assets 383% 276%
Non-performing assets as a percentage of total assets 0.26% 0.32%
Allowance as a percentage of total loans 1.59% 1.53%
Net charge-offs as a percentage of loans 0.020% 0.098%
PROVISION FOR LOAN LOSSES - Non-performing assets as a percentage of total
assets at December 31, 2005 were at .26 percent, increasing
30
from .22 percent at September 30, 2005 the result of higher levels of
non-performing assets acquired with the First State Bank transaction. Without
the effects of the First State Bank acquisition, non-performing assets would
have been $4.561 million, or .12 percent of total assets. At December 31, 2004
the ratio was .32 percent. The Company ratios compare favorably to the Federal
Reserve Bank Peer Group average of .45 percent at September 30, 2005, the most
recent information available. The allowance for loan losses was 383 percent of
non-performing assets at December 31, 2005, up from 276 percent a year ago. The
allowance, including $6.627 million from acquisitions, has increased $12.163
million, or 46 percent, from a year ago. The allowance of $38.655 million, is
1.59 percent of December 30, 2005 total loans outstanding, up slightly from the
1.53 percent a year ago. The provision for loan losses expense was $6.023
million for 2005, an increase of $1.828 million, or 44 percent, from 2004. Net
charge offs of $487 thousand was a very low .020 percent of loans outstanding
which is substantially lower than the already low .098 percent in 2004. With the
continuing change in loan mix from residential real estate to commercial and
consumer loans, which historically have greater credit risk, the Company has
increased the balance in the allowance for loan loss. Loan growth, average loan
size, and credit quality considerations will determine the level of additional
provision expense.
EFFECT OF INFLATION AND CHANGING PRICES
Generally accepted accounting principles 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 a financial institution are monetary in
nature; therefore, interest rates generally have a more significant impact on a
company's performance than does the effect of inflation.
COMMITMENTS
In the normal course of business, there are various outstanding commitments to
extend credit, such as letter of credit and un-advanced loan commitments, which
are not reflected in the accompanying 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 the advances from the Federal Home Loan Bank. For the maturity schedule of
advances see footnote 8 to the Consolidated Financial Statements in "Item 8 -
Financial Statements and Supplementary Data". The following table represents our
contractual obligations as of December 31, 2005:
Payments Due by Period
--------------------------------------------------------------------------------------
Indeterminate
(dollars in thousands) Total Maturity (1) 2006 2007 2008 2009 2010 Thereafter
---------- ------------- ------- ------- ------ ------ ------ ----------
Deposits ..................... $2,534,712 1,768,835 619,363 95,113 27,009 10,937 13,411 44
Advances from the FHLB ....... 402,191 -- 192,373 101,922 21,298 2,297 774 83,527
Repurchase agreements ........ 129,530 -- 129,348 -- -- 182 -- --
Subordinated debentures ...... 85,000 -- 35,000 -- -- -- -- 50,000
Capital lease obligations .... 3,631 -- 189 200 202 204 206 2,630
Operating lease obligations .. 7,021 -- 1,333 1,197 988 781 706 2,016
---------- --------- ------- ------- ------ ------ ------ -------
$3,162,085 1,768,835 977,606 198,432 49,497 14,401 15,097 138,217
========== ========= ======= ======= ====== ====== ====== =======
(1) Represents interest and non-interest bearing checking, money market, and
savings accounts
MARKET RISK
Market risk is the risk of loss in a financial instrument arising from adverse
changes in market rates/prices such as interest rates, foreign currency exchange
rates, commodity prices, and equity prices. The Company's primary market risk
exposure is interest rate risk. The ongoing monitoring and management of this
risk is an important component of the Company's asset/liability management
process which is governed by policies established by its Board of Directors that
are reviewed and approved annually. The Board of Directors delegates
responsibility for carrying out the asset/liability management policies to the
Asset/Liability Committee (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/trends.
INTEREST RATE RISK
The objective of interest rate risk management is to contain the risks
associated with interest rate fluctuations. The process involves identification
and management of the sensitivity of net interest income to changing interest
rates. Managing interest rate risk is not an exact science. The interval between
repricing of interest rates of assets and liabilities changes from day to day as
the assets and liabilities change. For some assets and liabilities contractual
maturity and the actual cash flows experienced are not the same. A good example
is residential mortgages that have long term contractual maturities but may be
repaid well in advance of the maturity when current prevailing interest rates
become lower than the contractual rate. Interest-bearing deposits without a
stated maturity could be withdrawn after seven days, however, the Bank's
experience indicates that these funding pools have a much longer duration and
are not as sensitive to interest rate changes as other financial instruments.
Prime based loans generally have rate changes when the
31
Federal Reserve Bank 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, 2005, we had a negative GAP position at six months
and a positive GAP position at twelve months. The cumulative GAP as a percentage
of total assets for six months is a negative 6.29% which compares to a negative
5.55% at December 31, 2004 and a negative 4.00% at December 31, 2003. 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 our 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 ............... $ 23,276 -- -- -- 23,276
Investment securities ............... 10,466 4,585 108,451 205,221 328,723
Mortgage-backed securities .......... 101,731 87,758 360,355 35,874 585,718
FHLB stock and FRB stock ............ 36,301 -- -- 17,228 53,529
Floating rate loans ................. 801,593 144,458 536,172 30,847 1,513,070
Fixed rate loans .................... 209,418 137,968 444,913 138,622 930,921
---------- -------- --------- -------- ---------
TOTAL INTEREST BEARING ASSETS .......... $1,182,785 374,769 1,449,891 427,792 3,435,237
========== ======== ========= ======== =========
LIABILITIES:
Interest-bearing deposits ........... 976,353 148,970 139,073 603,308 1,867,704
FHLB advances ....................... 105,568 86,822 126,469 83,332 402,191
Repurchase agreements and other
borrowed funds ................... 316,856 252 114 -- 317,222
---------- -------- --------- -------- ---------
TOTAL INTEREST BEARING LIABILITIES ..... $1,398,777 236,044 265,656 686,640 2,587,117
========== ======== ========= ======== =========
Repricing gap .......................... $ (215,992) 138,725 1,184,235 (258,848) 848,120
Cumulative repricing gap ............... $ (215,992) (77,267) 1,106,968 848,120
Cumulative gap as a % of total assets .. -6.29% -2.25% 32.22% 24.69%
Gap Earnings Sensitivity (1) ........... $ (471)
Gap Earnings Sensitivity Ratio (2) ..... -0.90%
(1) Gap Earnings Sensitivity is the estimated effect on income, after taxes of
39%, of a 1% increase or decrease in interest rates (1% of ($77,276 -
$30,138))
(2) Gap Earnings Sensitivity Ratio is Gap Earnings Sensitivity divided by the
estimated yearly earnings of $52,373. A 1% increase in interest rates has
this estimated percentage decrease effect on annual income.
This table estimates the repricing maturities of the Company's 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 more than 5 years category. Money market
balances are included in the less than 6 months category. Mortgage-backed
securities are at the anticipated principal payments based on the
weighted-average-life.
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 Asset/Liability Management Committee (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
32
balance sheet growth, given a 200 basis point (bp) upward and 200 or 100 bp
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, 2005 and 2004 as compared to the 10% Board approved policy limit.
2005 2004
------- ------
+200 bp
Estimated sensitivity ...................... -2.08% -3.47%
Estimated decrease in net interest income .. $(2,704) (3,727)
-200 bp and -100 bp (1)
Estimated sensitivity ...................... -0.64% 0.38%
Estimated increase in net interest income .. $ (832) 408
(1) -200 bp and -100 bp for the years ended December 31, 2005, and 2004,
respectively
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/external variables. Furthermore, the sensitivity analysis does
not reflect actions that ALCO might take in responding to or anticipating
changes in interest rates.
LIQUIDITY RISK
Liquidity risk is the possibility that the Company will not be able to fund
present and future obligations. 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. Core
deposits, FHLB credit lines, available-for-sale investment securities, and net
income are the key elements in meeting these objectives. All nine banking
subsidiaries are members of the FHLB. This membership provides for established
lines of credit in the form of advances that are a supplemental source of funds
for lending and other general business purposes. As of year ended December 31,
2005, the Company had $847 million of available FHLB line of which $402 million
was utilized. Accordingly, management of the Company has a wide range of
versatility in managing the liquidity and asset/liability mix for each
individual institution as well as the Company as a whole
CAPITAL RESOURCES AND ADEQUACY
Maintaining capital strength has been a long term objective. Ample 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. Shareholders' equity increased $63.055 million
during 2005, or 23 percent the net result of earnings of $52.373 million, common
stock issued for the acquisition of Citizens and First State Bank, less cash
dividend payments and a decline of $5.113 million in the net unrealized gains on
available-for-sale investment securities. For additional information see
footnote 11 in the Consolidated Financial Statements. Dividend payments were
increased by $.06 per share, or 11 percent in 2005. The payment of dividends is
subject to government regulation, in that regulatory authorities may prohibit
banks and bank holding companies from paying dividends which would constitute an
unsafe or unsound banking practice.
CRITICAL ACCOUNTING POLICIES
Companies may apply certain critical accounting policies requiring management to
make subjective or complex judgments, often as a result of the need to estimate
the effect of matters that are inherently uncertain. The Company considers its
only material critical accounting policy to be the allowance for loan losses.
The allowance for loan losses is established through a provision for loan losses
charged against earnings. The balance of allowance for loan losses is maintained
at the amount management believes will be adequate to absorb known and inherent
losses in the loan portfolio. The appropriate balance of allowance for loan
losses is determined by applying estimated loss factors to the credit exposure
from outstanding loans. Estimated loss factors are based on subjective
measurements including management's assessment of the internal risk
classifications, changes in the nature of the loan portfolio, industry
concentrations and the impact of current local, regional and national economic
factors on the quality of the loan portfolio. Changes in these estimates and
assumptions are reasonably possible and may have a material impact on the
Company's
33
consolidated financial statements, results of operations or liquidity. For
additional information regarding the allowance for loan losses, its relation to
the provision for loans losses and risk related to asset quality, see Note 4 to
the Consolidated Financial Statements in "Item 8 - Financial Statements and
Supplementary Data".
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2005, the Financial Accounting Standards Board issued a Staff
Position which amends SFAS No. 115 Accounting for Certain Investments in Debt
and Equity Securities. The Staff Position addresses the determination as to when
an investment is considered impaired, whether that impairment is other than
temporary, and the measurement of an impairment loss.
In May 2005, the Financial Accounting Standards Board issued SFAS No. 154
Accounting Changes and Errors Corrections which requires retrospective
application to prior periods' financial statements of changes in accounting
principle, unless it is impracticable to determine either the period-specific
effects or the cumulative effect of the change. This Statement replaces APB
Opinion No. 20 Accounting Changes, and SFAS No. 3 Reporting Accounting Changes
in Interim Financial Statements. APB Opinion No. 20 previously required that
most voluntary changes in accounting principle be recognized by including in net
income of the period of the change the cumulative effect of changing to the new
accounting principle. This Statement applies to all voluntary changes in
accounting principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. The statement is effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005.
In December 2004, the Financial Accounting Standards Board issued a revised
version of SFAS No. 123 Share-Based Payment, mandating that companies measure
the cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award (with limited
exceptions). The intrinsic value method of accounting for such awards, as
previously elected by the company and provided for in APB Opinion No. 25,
Accounting for Stock Issued to Employees will no longer be acceptable under GAAP
for public companies as of the beginning of the first interim or annual
reporting period that begins after June 15, 2005. If no comparable market values
are available, the grant-date fair value of employee share options and similar
instruments is to be estimated using option-pricing models adjusted for the
unique characteristics of those instruments.
Under the previous provisions of SFAS No. 123, Accounting for Stock Based
Compensation companies using the intrinsic value method were required to
disclose in a footnote to their financial statements the effect on net income of
using the intrinsic value rather than the grant-date fair value method. The
company has continued to use the intrinsic value method, with appropriate
disclosures, in its financial statements through December 31, 2005 (See Stock
Based Compensation under Note 1 to the company's consolidated financial
statements). The company expects to adopt SFAS No. 123 (Revised) effective with
its reporting for the first quarter of 2006.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2004 COMPARED TO DECEMBER 31, 2003
RESULTS OF OPERATIONS
Operating results include amounts related to the operation of the three branches
acquired with the Pend Oreille Bank as of July 15, 2003 and the Ione, Washington
branch as of June 4, 2004.
34
REVENUE SUMMARY
($ IN THOUSANDS)
Years ended December 31,
-----------------------------------------
2004 2003 $ change % change
-------- -------- -------- --------
Net interest income $107,393 $ 92,352 $15,041 16%
Fees and other revenue:
Service charges, loan fees, and other fees 24,260 19,756 4,504 23%
Gain on sale of loans 8,015 10,674 (2,659) -25%
Gain on sale of investments,
net of impairment charge -- 1,253 (1,253) -100%
Other income 2,290 1,879 411 22%
-------- -------- ------- ----
Total non-interest income 34,565 33,562 1,003 3%
-------- -------- ------- ----
$141,958 $125,914 $16,044 13%
======== ======== ======= ====
Tax equivalent net interest margin 4.15% 4.20%
======== ========
NET INTEREST INCOME
Net interest income increased $15.041 million, or 16 percent, over 2003. Total
interest income was $16.455 million, or 13 percent higher than 2003, while total
interest expense was $1.414 million, or 4 percent higher. The investment
portfolio generated approximately 61 percent of the increase in interest income.
Additional interest income from the large increase in loans outstanding was
partially offset by lower rates on the loan portfolio due to refinancing, and
re-pricing of existing loans. The increase in interest expense is attributed to
the increase in the subordinated debentures which increased interest expense by
$2.004 million. Interest expense on deposits declined $3.167 million, or 18
percent, from reductions in rates on maturing fixed term interest bearing
deposits. Interest on Federal Home Loan Bank borrowings and other borrowed funds
increased $2.577 million, or 15 percent, from increased volumes and decreasing
interest rates. The net interest margin as a percentage of earning assets, on a
tax equivalent basis, was 4.15 percent which was a decrease from 4.20 percent
for 2003.
NON-INTEREST INCOME
Fee income increased $4.504 million, or 23 percent, over last year, driven
primarily by an increased number of loan and deposit accounts and the fee income
associated with this growth in accounts. Gain on sale of loans decreased $2.659
million, or 25 percent, from last year, because of greatly reduced refinance
activity. Loan origination activity for housing, especially new construction,
remains quite strong in our markets. In 2003 gains on sale of investments, net
of impairment charge, of $1.253 million were recorded and zero gains were
realized in 2004.
NON-INTEREST EXPENSE SUMMARY
($ IN THOUSANDS)
Years ended December 31,
---------------------------------------
2004 2003 $ change % change
------- ------- -------- --------
Compensation and employee
benefits and related expense $39,955 $36,173 $3,782 10%
Occupancy and equipment expense 10,797 9,931 866 9%
Outsourced data processing 1,551 1,650 (99) -6%
Core deposit intangibles amortization 1,074 1,243 (169) -14%
Other expenses 18,756 16,947 1,809 11%
------- ------- ------ ---
Total non-interest expense $72,133 $65,944 $6,189 9%
======= ======= ====== ===
NON-INTEREST EXPENSE
Non-interest expense increased by $6.189 million, or 9 percent, from 2003
including expenses from the acquisitions, two additional branches in Boise,
Idaho, and a new branch in downtown Bozeman, Montana. Compensation and benefit
expense increased $3.782 million, or 10 percent, with the additional bank
branches, normal compensation increases for job performance and increased cost
for benefits tied to Company performance, accounting for the majority of the
increase. Occupancy and equipment expense increased $866 thousand, or 9 percent,
reflecting the cost of the additional locations and facility upgrades. Other
expenses increased $1.809 million, or 11 percent, primarily from start up
expenses on implementing the High Performance Checking program at the four banks
not previously on the program, additional advertising expense, $600 thousand
increase in audit and consulting expenses, and costs associated with new branch
offices and the acquisitions. The efficiency ratio (non-interest expense/net
interest income + non-interest income) was 51 percent,
35
improving slightly from the 53 percent in 2003, excluding the gain on sale of
securities.
CREDIT QUALITY INFORMATION
($ IN THOUSANDS)
December 31, December 31,
2004 2003
------------ ------------
Allowance for loan losses $26,492 $23,990
Non-performing assets 9,608 13,068
Allowance as a percentage of non performing assets 276% 184%
Non-performing assets as a percentage of total assets 0.32% 0.48%
Allowance as a percentage of total loans 1.53% 1.65%
Net charge-offs as a percentage of loans 0.098% 0.118%
PROVISION FOR LOAN LOSSES - Non-performing assets as a percentage of total
assets at December 31, 2004 were at .32 percent, a decrease from .48 percent at
December 31, 2003. This compares favorably to the Federal Reserve Bank Peer
Group average of .49 percent at September 30, 2004, the most recent information
available. The allowance for loan losses was 276 percent of non-performing
assets at December 31, 2004, compared to 184 percent a year ago. The allowance
has increased $2.502 million, or 10 percent, from a year ago to $26.492 million,
which is 1.53 percent of December 31, 2004 total loans outstanding, down
slightly from the 1.65 percent a year ago. The fourth quarter provision for loan
losses expense was $1.200 million, an increase of $504 thousand from the same
quarter in 2003.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information regarding "Quantitative and Qualitative Disclosures about Market
Risk" is set fourth under "Item 7 - Management's Discussion and Analysis".
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
36
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Audit Committee, Board of Directors and Stockholders
Glacier Bancorp, Inc.
Kalispell, Montana
We have audited the accompanying consolidated statement of financial condition
of Glacier Bancorp, Inc. as of December 31, 2005 and the related consolidated
statements of operations, stockholders' equity and comprehensive income and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Glacier Bancorp,
Inc. as of December 31, 2005 and the results of its operations and its cash
flows for the year then ended in conformity with accounting principles generally
accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Glacier
Bancorp, Inc.'s internal control over financial reporting as of December 31,
2005 based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) and our report dated February 24, 2006 expressed an unqualified opinion
on management's assessment and on the effectiveness of the Company's internal
control over financial reporting.
\s\ BKD, LLP
Denver, Colorado
February 24, 2006
37
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Audit Committee, Board of Directors and Stockholders
Glacier Bancorp, Inc.
Kalispell, Montana
We have audited management's assessment, included in the accompanying Report of
Management, that Glacier Bancorp, Inc. maintained effective internal control
over financial reporting as of December 31, 2005, based on criteria established
in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Glacier Bancorp, Inc.'s
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit includes obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control and performing such
other procedures as we consider necessary in the circumstances. We believe that
our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Glacier Bancorp, Inc. maintained
effective internal control over financial reporting as of December 31, 2005, is
fairly stated, in all material respects, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, in our opinion, Glacier
Bancorp, Inc. maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2005, based on criteria established
in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
As discussed in management's assessment, the Company has excluded certain
entities from management's assessment and we have excluded those entities from
the scope of our audit of internal control over financial reporting as permitted
by the SEC staff guidance provided in Question 3 of the SEC's publication,
Office of the Chief Accountant and Division of Corporation Finance: Management's
38
Report on Internal Control Over Financial Reporting and Disclosure in Exchange
Act Periodic Reports, Frequently Asked Questions, dated June 23, 2004.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements of Glacier Bancorp, Inc. and subsidiaries and our report dated
February 24, 2006 expressed an unqualified opinion thereon.
\s\ BKD, LLP
Denver, Colorado
February 24, 2006
39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Glacier Bancorp, Inc.:
We have audited the accompanying consolidated statement of financial condition
of Glacier Bancorp, Inc. and subsidiaries as of December 31, 2004 and the
related consolidated statements of operations, stockholders' equity and
comprehensive income, and cash flows for each of the years in the two-year
period ended December 31, 2004. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Glacier Bancorp,
Inc. and subsidiaries as of December 31, 2004, and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 2004, in conformity with U.S. generally accepted accounting
principles.
/s/ KPMG
Billings, Montana
March 15, 2005
40
GLACIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
----------------------
(dollars in thousands, except per share data) 2005 2004
---------- ---------
ASSETS:
Cash on hand and in banks ................................................... $ 111,418 79,300
Federal funds sold........................................................... 7,537 --
Interest bearing cash deposits............................................... 15,739 13,007
---------- ---------
Cash and cash equivalents................................................. 134,694 92,307
Investment securities, available-for-sale ................................... 967,970 1,085,626
Loans receivable, net of allowance for loan losses of $38,655
and $26,492 at December 31, 2005, and 2004, respectively.................. 2,374,647 1,687,329
Loans held for sale.......................................................... 22,540 14,476
Premises and equipment, net ................................................. 79,952 55,732
Real estate and other assets owned, net ..................................... 332 2,016
Accrued interest receivable ................................................. 19,923 15,637
Core deposit intangible, net of accumulated amortization of $6,801
and $5,331 at December 31, 2005, and 2004, respectively................... 8,015 4,939
Goodwill..................................................................... 79,099 37,376
Other assets................................................................. 19,172 15,299
---------- ---------
$3,706,344 3,010,737
========== =========
LIABILITIES:
Non-interest bearing deposits................................................ $ 667,008 460,059
Interest bearing deposits.................................................... 1,867,704 1,269,649
Advances from Federal Home Loan Bank of Seattle ............................. 402,191 818,933
Securities sold under agreements to repurchase .............................. 129,530 76,158
Other borrowed funds......................................................... 187,692 5,057
Accrued interest payable..................................................... 7,437 4,864
Deferred tax liability....................................................... 2,746 8,392
Subordinated debentures...................................................... 85,000 80,000
Other liabilities............................................................ 23,797 17,441
---------- ---------
Total liabilities......................................................... 3,373,105 2,740,553
STOCKHOLDERS' EQUITY:
Preferred shares, $.01 par value per share. 1,000,000 shares authorized.
none issued or outstanding at December 31, 2005 and 2004.................. -- --
Common stock, $.01 par value per share. 78,125,000 and 62,500,000
shares authorized, 32,172,548 and 30,686,763 issued and outstanding
at December 31, 2005 and 2004, respectively............................... 322 307
Paid-in capital.............................................................. 262,383 227,552
Retained earnings - substantially restricted................................. 69,713 36,391
Accumulated other comprehensive income....................................... 821 5,934
---------- ---------
Total stockholders' equity ............................................... 333,239 270,184
---------- ---------
$3,706,344 3,010,737
========== =========
See accompanying notes to consolidated financial statements.
41
GLACIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
Years ended December 31,
----------------------------
(dollars in thousands, except per share data) 2005 2004 2003
-------- ------- -------
INTEREST INCOME:
Real estate loans ................................................ $ 34,506 22,942 23,883
Commercial loans ................................................. 81,359 57,312 50,203
Consumer and other loans ......................................... 28,696 20,331 20,013
Investment securities and other .................................. 45,424 46,700 36,731
-------- ------- -------
Total Interest Income ......................................... 189,985 147,285 130,830
-------- ------- -------
INTEREST EXPENSE:
Deposits ......................................................... 25,705 14,054 17,221
Federal Home Loan Bank of Seattle advances ....................... 21,489 18,540 16,860
Securities sold under agreements to repurchase ................... 2,948 873 673
Subordinated debentures .......................................... 6,455 5,619 3,615
Other borrowed funds ............................................. 3,381 806 109
-------- ------- -------
Total Interest Expense ........................................ 59,978 39,892 38,478
-------- ------- -------
NET INTEREST INCOME ........................................... 130,007 107,393 92,352
Provision for loan losses ........................................ 6,023 4,195 3,809
-------- ------- -------
Net interest income after provision
for loan losses ............................................ 123,984 103,198 88,543
NON-INTEREST INCOME:
Service charges and other fees ................................... 24,503 19,550 15,458
Miscellaneous loan fees and charges .............................. 6,309 4,710 4,298
Gain on sale of loans ............................................ 11,048 8,015 10,674
(Loss) Gain on sale of investments, net of impairment charge ..... (138) -- 1,253
Other income ..................................................... 2,904 2,290 1,879
-------- ------- -------
Total Non-Interest Income ..................................... 44,626 34,565 33,562
-------- ------- -------
NON-INTEREST EXPENSE:
Compensation, employee benefits and related expense .............. 51,385 39,955 36,173
Occupancy and equipment expense .................................. 12,851 10,797 9,931
Outsourced data processing expense ............................... 1,839 1,551 1,650
Core deposit intangibles amortization ............................ 1,470 1,074 1,243
Other expense .................................................... 23,381 18,756 16,947
-------- ------- -------
Total Non-Interest Expense .................................... 90,926 72,133 65,944
-------- ------- -------
EARNINGS BEFORE INCOME TAXES ........................................ 77,684 65,630 56,161
Federal and state income tax expense ............................. 25,311 21,014 18,153
-------- ------- -------
NET EARNINGS ........................................................ $ 52,373 44,616 38,008
======== ======= =======
BASIC EARNINGS PER SHARE ......................................... $ 1.67 1.46 1.26
DILUTED EARNINGS PER SHARE ....................................... $ 1.64 1.43 1.24
See accompanying notes to consolidated financial statements.
42
GLACIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003
Retained
earnings
(accumulated Accumulated Total
Common Stock deficit) other comp- stock-
------------------- Paid-in substantially rehensive holders'
(Dollars in thousands, except per share data) Shares Amount capital restricted income equity
---------- ------ ------- ------------- ----------- --------
Balance at December 31, 2002 ..................... 29,710,000 $297 216,868 (15,027) 10,111 212,249
Comprehensive income:
Net earnings .................................. -- -- -- 38,008 -- 38,008
Unrealized loss on securities, net of
reclassification adjustment ................ -- -- -- -- (3,495) (3,495)
---------
Total comprehensive income ....................... -- -- -- -- -- 34,513
---------
Cash dividends declared ($.48 per share) ......... -- -- -- (14,573) -- (14,573)
Stock options exercised .......................... 544,173 6 4,668 -- -- 4,674
Acquisition of fractional shares ................. -- -- -- (15) -- (15)
Tax benefit from stock related compensation ...... -- -- 991 -- -- 991
---------- ---- ------- ------- ------- ---------
Balance at December 31, 2003 ..................... 30,254,173 $303 222,527 8,393 6,616 237,839
Comprehensive income:
Net earnings .................................. -- -- -- 44,616 -- 44,616
Unrealized loss on securities, net of
reclassification adjustment ................ -- -- -- -- (682) (682)
---------
Total comprehensive income ....................... -- -- -- -- -- 43,934
---------
Cash dividends declared ($.54 per share) ......... -- -- -- (16,618) -- (16,618)
Stock options exercised .......................... 521,653 5 5,434 -- -- 5,439
Repurchase and retirement of stock ............... (89,063) (1) (1,804) -- -- (1,805)
Acquisition of fractional shares ................. -- -- (9) -- -- (9)
Tax benefit from stock related compensation ...... -- -- 1,404 -- -- 1,404
---------- ---- ------- ------- ------- ---------
Balance at December 31, 2004 ..................... 30,686,763 $307 227,552 36,391 5,934 270,184
Comprehensive income:
Net earnings .................................. -- -- -- 52,373 -- 52,373
Unrealized loss on securities, net of
reclassification adjustment ................ -- -- -- -- (5,113) (5,113)
---------
Total comprehensive income ....................... -- -- -- -- -- 47,260
---------
Cash dividends declared ($.60 per share) ......... -- -- -- (19,051) -- (19,051)
Stock options exercised .......................... 397,770 4 5,154 -- -- 5,158
Stock issued in connection with acquisitions ..... 1,088,014 11 28,427 -- -- 28,438
Acquisition of fractional shares ................. -- -- (8) -- -- (8)
Tax benefit from stock related compensation ...... -- -- 1,258 -- -- 1,258
---------- ---- ------- ------- ------- ---------
Balance at December 31, 2005 ..................... 32,172,547 $322 262,383 69,713 821 333,239
========== ==== ======= ======= ======= =========
Year ended December 31,
-------------------------
2005 2004 2003
------- ------ ------
Disclosure of reclassification amount:
Unrealized and realized holding loss arising during the year ............. $(8,574) (1,124) (2,225)
Tax benefit .............................................................. 3,377 442 866
------- ------ ------
Net after tax ......................................................... (5,197) (682) (1,359)
------- ------ ------
Reclassification adjustment for net loss (gain) included in net income ... 138 -- (3,502)
Tax (benefit) expense .................................................... (54) -- 1,366
------- ------ ------
Net after tax ......................................................... 84 -- (2,136)
------- ------ ------
Net change in unrealized loss on available-for-sale securities ..... $(5,113) (682) (3,495)
======= ====== ======
See accompanying notes to consolidated financial statements.
43
GLACIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
---------------------------------
(dollars in thousands) 2005 2004 2003
----------- -------- --------
OPERATING ACTIVITIES :
Net earnings .......................................................... $ 52,373 44,616 38,008
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Mortgage loans held for sale originated or acquired ................ (455,429) (292,017) (521,323)
Proceeds from sales of mortgage loans held for sale ................ 462,115 302,529 567,010
Provision for loan losses .......................................... 6,023 4,195 3,809
Depreciation of premises and equipment ............................. 5,349 4,567 4,283
Amortization of core deposit intangible ............................ 1,470 1,074 1,243
Loss (gain) on sale of investments, net of impairment charge ....... 138 -- (1,253)
Gain on sale of loans .............................................. (11,048) (8,015) (10,674)
Amortization of investment securities premiums and discounts, net .. 8,846 11,263 14,360
Federal Home Loan Bank of Seattle stock dividends .................. (180) (1,218) (2,179)
Deferred tax (benefit) expense ..................................... (2,204) 284 722
Tax benefit from stock related compensation ........................ 1,258 1,404 991
Net increase in accrued interest receivable ........................ (890) (696) (1,270)
Net increase (decrease) in accrued interest payable ................ 1,949 495 (1,795)
Net increase in current income taxes ............................... 1,308 1,201 1,645
Net decrease (increase) in other assets ............................ 2,394 (2,145) 1,808
Net increase (decrease) in other liabilities ....................... 3,512 2,253 (99)
----------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ....................... 76,984 69,790 95,286
----------- -------- --------
INVESTING ACTIVITIES:
Proceeds from sales, maturities and prepayments of investment
securities available-for-sale ................................... 419,524 317,273 389,400
Purchases of investment securities available-for-sale .............. (164,119) (315,172) (715,454)
Principal collected on installment and commercial loans ............ 781,848 677,004 566,245
Installment and commercial loans originated or acquired ............ (1,150,877) (875,539) (705,249)
Principal collections on mortgage loans ............................ 470,450 296,482 303,251
Mortgage loans originated or acquired .............................. (507,471) (376,039) (283,278)
Net purchase of FHLB and FRB stock ................................. (1,995) (1,942) (973)
Acquisitions of banks and branches ................................. 6,265 14,524 (243)
Net addition of premises and equipment ............................. (17,359) (7,032) (7,579)
----------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES ........................... (163,734) (270,441) (453,880)
----------- -------- --------
FINANCING ACTIVITIES:
Net increase in deposits ........................................... 346,577 116,943 77,943
Net (decrease) increase in FHLB advances ........................... (439,545) 41,639 293,634
Net increase in securities sold under repurchase agreements ........ 53,372 19,190 10,762
Net increase (decrease) in other borrowed funds .................... 182,634 (2,961) (7,069)
Proceeds from issuance of subordinated debentures .................. -- 45,000 --
Cash dividends paid ................................................ (19,051) (16,618) (14,572)
Proceeds from exercise of stock options and other stock issued ..... 5,158 5,439 4,674
Repurchase and retirement of stock ................................. -- (1,805) --
Cash paid for stock dividends ...................................... (8) (9) (15)
----------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES ....................... 129,137 206,818 365,357
----------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS .......................... 42,387 6,167 6,763
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ..................... 92,307 86,140 79,377
----------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR ........................... $ 134,694 92,307 86,140
=========== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest ............................. $ 57,404 39,382 40,219
Cash paid during the year for income taxes ......................... $ 24,808 18,424 14,721
The following schedule summarizes the acquisition of Bank Holding Co. and
subsidiaries in 2005
FIRST NATIONAL CITIZENS BANK FIRST STATE
BANKS - WEST CO. HOLDING COMPANY BANK
---------------- --------------- -----------
Fair Value of assets acquired $267,126 126,394 152,592
Cash paid for the capital stock 41,000 8,602 2,100
Capital stock issued -- 8,715 19,723
Liabilities assumed 226,126 109,077 130,663
See accompanying notes to consolidated financial statements.
44
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) GENERAL
Glacier Bancorp, Inc. (the "Company"), is a Montana corporation incorporated in
2004 as a successor corporation to the Delaware corporation incorporated in
1990. The Company is a multi-bank holding company that provides a full range of
banking services to individual and corporate customers in Montana, Idaho,
Wyoming, Utah and Washington through its subsidiary banks. The subsidiary banks
are subject to competition from other financial service providers. The
subsidiary banks are also subject to the regulations of certain government
agencies and undergo periodic examinations by those regulatory authorities.
The accounting and consolidated financial statement reporting policies of the
Company conform with accounting principles generally accepted in the United
States of America. In preparing the consolidated financial statements,
management is required to make estimates and assumptions that affect the
reported and disclosed amounts of assets and liabilities as of the date of the
statement of financial condition and income and expenses for the period. Actual
results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change in
the near term relate to the determination of the allowance for loan losses.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the subsidiary banks' allowance
for loan losses. Such agencies may require the subsidiary banks to recognize
additions to the allowance based on their judgments about information available
to them at the time of their examination.
(B) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its nine wholly owned operating subsidiaries, Glacier Bank ("Glacier"), Mountain
West Bank in Idaho, ("Mountain West"), First Security Bank of Missoula ("First
Security"), Western Security Bank ("Western"), First National Bank - West
("First National"), Big Sky Western Bank, ("Big Sky"), Valley Bank of Helena
("Valley"), Glacier Bank of Whitefish ("Whitefish"), and Citizens Community Bank
("Citizens"). All significant inter-company transactions have been eliminated in
consolidation.
On October 31, 2005, First State Bank in Thompson Falls, Montana was acquired
and its branches became part of First Security. On May 20, 2005, Zions National
Bank branch office in Bonners Ferry, Idaho was acquired and became a branch of
Mountain West Bank. On April 1, 2005, Citizens Bank Holding Co. and its
subsidiary bank Citizens Community Bank in Pocatello, Idaho was acquired and
became the ninth subsidiary bank of the Company. On February 28, 2005, First
National Bank-West Co. and its subsidiary bank First National Bank - West in
Evanston, Wyoming was acquired and became the eighth subsidiary bank of the
Company. On June 4, 2004, AmericanWest Bancorp.'s branch office in Ione,
Washington was acquired and became a branch of Mountain West Bank. Accordingly,
the financial information presented includes the operations since the date of
the acquisitions. See footnote 20 for additional information related to these
transactions.
(C) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, cash held as demand deposits at
various banks and regulatory agencies, interest bearing deposits and federal
funds sold with original maturities of three months or less.
(D) INVESTMENT SECURITIES
Debt securities for which the Company has the positive intent and ability to
hold to maturity are classified as held-to-maturity and are stated at amortized
cost. Debt and equity securities held primarily for the purpose of selling in
the near term are classified as trading securities and are reported at fair
market value, with unrealized gains and losses included in income. Debt and
equity securities not classified as held-to-maturity or trading are classified
as available-for-sale and are reported at fair value with unrealized gains and
losses, net of income taxes, shown as a separate component of stockholders'
equity. Currently, the Company only holds available-for-sale securities.
Premiums and discounts on investment securities are amortized or accreted into
income using a method that approximates the level-yield interest method. The
cost of any investment, if sold, is determined by specific identification.
Declines in the fair value of securities below carrying value that are other
than temporary are charged to expense as realized losses and the related
carrying value is reduced to fair value.
The Company holds stock in the Federal Home Loan Bank of Seattle (FHLB) and the
Federal Reserve Bank (FRB). FHLB and FRB stocks are restricted because they may
only be sold to another member institution or the FHLB or FRB at their par
values. Due to restrictive terms, and the lack of a readily determinable market
value, FHLB and FRB stocks are carried at cost.
45
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES . . . CONTINUED
(E) LOANS RECEIVABLE
Loans that are intended to be held to maturity are reported at their unpaid
principal balance less charge-offs, specific valuation accounts, and any
deferred fees or costs on originated loans. Purchased loans are reported net of
unamortized premiums or discounts. Interest income is reported on the interest
method and includes discounts and premiums on purchased loans and net loan fees
on originated loans which are amortized over the expected life of loans using
methods that approximate the effective interest method.
Loans on which the accrual of interest has been discontinued are designated as
nonaccrual loans. Accrual of interest on loans is discontinued either when
reasonable doubt exists as to the full, timely collection of interest or
principal or when a loan becomes contractually past due by ninety days or more
with respect to interest or principal unless such past due loan is well secured
and in the process of collection. When a loan is placed on nonaccrual status,
interest previously accrued but not collected is reversed against current period
interest income. Interest accruals are resumed on such loans only when they are
brought fully current with respect to interest and principal and when, in the
judgment of management, the loans are estimated to be fully collectible as to
both principal and interest.
(F) LOANS HELD FOR SALE
Mortgage and commercial loans originated and intended for sale in the secondary
market are carried at the lower of cost or estimated market value in the
aggregate. Net unrealized losses are recognized by charges to income. A sale is
recognized when the Company surrenders control of the loan and consideration,
other than beneficial interests in the loan, is received in exchange. A gain is
recognized to the extent the selling price exceeds the carrying value.
(G) ALLOWANCE FOR LOAN LOSSES
Management's periodic evaluation of the adequacy of the allowance is based on
factors such as the Company's past loan loss experience, known and inherent
risks in the portfolio, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral, current
economic conditions, and independent appraisals. Loan losses are charged against
the allowance when management believes the uncollectibility of a loan balance is
confirmed. Subsequent recoveries, if any, are credited to the allowance.
The Company also provides an allowance for losses on impaired loans. Groups of
small balance homogeneous loans (generally consumer and residential real estate
loans) are evaluated for impairment collectively. A loan is considered impaired
when, based upon current information and events, it is probable that the Company
will be unable to collect, on a timely basis, all principal and interest
according to the contractual terms of the loan's original agreement. When a
specific loan is determined to be impaired, the allowance for loan losses is
increased through a charge to expense for the amount of the impairment. The
amount of the impairment is measured using cash flows discounted at the loan's
effective interest rate, except when it is determined that the sole source of
repayment for the loan is the operations or liquidation of the underlying
collateral. In such cases, impairment is measured by determining the current
value of the collateral, reduced by anticipated selling costs. The Company
recognizes interest income on impaired loans only to the extent the cash
payments are received.
(H) PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less depreciation. Depreciation is
computed on a straight-line method over the estimated useful lives or the term
of the related lease. The estimated useful life for office buildings is 15-40
years and the estimated useful life for furniture, fixtures, and equipment is
3-10 years.
I) REAL ESTATE OWNED
Property acquired by foreclosure or deed in lieu of foreclosure is carried at
the lower of cost or estimated fair value, less selling costs. Costs, excluding
interest, relating to the improvement of property are capitalized, whereas those
relating to holding the property are charged to expense. Fair value is
determined as the amount that could be reasonably expected in a current sale
(other than a forced or liquidation sale) between a willing buyer and a willing
seller. If the fair value of the asset minus the estimated cost to sell is less
than the cost of the property, a loss is recognized and the asset carrying value
is reduced.
(J) GOODWILL
On an annual basis, as required by Financial Accounting Standards Board (FASB)
Statement 142, Goodwill and Other Intangible Assets, the Company tests goodwill
for impairment at the subsidiary level during the third quarter. In addition,
goodwill is tested for impairment on an interim basis if an event or
circumstance indicates that it is more likely than not that an impairment loss
has occurred.
46
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES . . . CONTINUED
(K) CORE DEPOSIT INTANGIBLES
Core deposit intangibles represent the intangible value of depositor
relationships resulting from deposit liabilities assumed in acquisitions and are
amortized using an accelerated method based on an estimated runoff of the
related deposits, not exceeding 10 years. The useful life of the core deposit
intangible is reevaluated on an annual basis, with any changes in estimated
useful life being accounted for prospectively over the revised remaining life.
(L) INCOME TAXES
Deferred tax assets and liabilities are recognized for estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of assets and liabilities and their respective tax bases. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(M) STOCK-BASED COMPENSATION
Compensation cost for stock-based compensation to employees is measured at the
grant date using the intrinsic value method. Under the intrinsic value method,
compensation cost is the excess of the market price of the stock at the grant
date over the amount an employee must pay to ultimately acquire the stock and is
recognized over any related service period.
The per share weighted-average fair value of stock options granted during 2005,
2004 and 2003 was $3.46, $2.12, and $3.26, respectively, on the date of grant
using the Black Scholes option-pricing model with the following assumptions:
2005 - expected dividend yield of 2.23%, risk-free interest rate of 3.44%,
volatility ratio of 18%, and expected life of 3.4 years: 2004 - expected
dividend yield of 2.44%, risk-free interest rate of 2.82%, volatility ratio of
19%, and expected life of 4.8 years: 2003 - expected dividend yield of 3.01%,
risk-free interest rate of 2.78%, volatility ratio of 21%, and expected life of
4.8 years.
The exercise price of all options granted has been equal to the fair market
value of the underlying stock at the date of grant and, accordingly, no
compensation cost has been recognized for its stock options in the financial
statements. Had the Company determined compensation cost based on the fair value
of the option itself at the grant date for its stock options under SFAS 123,
Accounting for Stock-Based Compensation, the Company's net income would have
been reduced to the pro forma amounts indicated below:
Years ended December 31,
-------------------------
2005 2004 2003
------- ------ ------
Net earnings (in thousands): As reported $52,373 44,616 38,008
Compensation cost (1,308) (685) (752)
------- ------ ------
Pro forma 51,065 43,931 37,256
======= ====== ======
Basic earnings per share: As reported $ 1.67 1.46 1.26
Compensation cost (0.04) (0.02) (0.02)
------- ------ ------
Pro forma 1.63 1.44 1.24
======= ====== ======
Diluted earnings per share: As reported $ 1.64 1.43 1.24
Compensation cost (0.04) (0.02) (0.02)
------- ------ ------
Pro forma 1.60 1.41 1.22
======= ====== ======
In December 2004, the Financial Accounting Standards Board issued a revised
version of SFAS No. 123 Share-Based Payment (SFAS 123R), which replaces SFAS 123
and supersedes APB 25. The Company is required to apply SFAS 123R as of the
first interim reporting period of the first annual reporting period that begins
after June 15, 2005. SFAS 123R requires the recognition of compensation cost
related to share-based payment plans to be recognized in the financial
statements based on the fair value of the equity or liability instruments
issued. The company expects to adopt SFAS No. 123 (Revised) effective with its
reporting for the first quarter of 2006.
(N) LONG-LIVED ASSETS
Long-lived assets, including core deposit intangibles, are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. An asset is deemed impaired
if the sum of the expected future cash flows is less than the carrying amount of
the asset. If impaired, an impairment loss is recognized to reduce the carrying
value of the asset to fair value. At December 31, 2005 and 2004 there were no
assets that were considered impaired.
47
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES . . . CONTINUED
(O) MORTGAGE SERVICING RIGHTS
The Company recognizes the rights to service mortgage loans for others, whether
acquired or internally originated. Loan servicing rights are initially recorded
at fair value based on comparable market quotes and are amortized as other
expense in proportion to and over the period of estimated net servicing income.
Loan servicing rights are evaluated quarterly for impairment by discounting the
expected future cash flows, taking into consideration the estimated level of
prepayments based on current industry expectations and the predominant risk
characteristics of the underlying loans including loan type, note rate and loan
term. Impairment adjustments, if any, are recorded through a valuation
allowance.
As of December 31, 2005 and 2004 the carrying value of servicing rights was
approximately $1,112,000 and $1,241,000, respectively. Amortization expense of
$276,000, $328,000, and $729,000 was recognized in the years ended December 31,
2005, 2004, and 2003, respectively. The servicing rights are included in other
assets on the balance sheet and are amortized over the period of estimated net
servicing income. There was no impairment of carrying value at December 31, 2005
or 2004. At December 31, 2005, the fair value of mortgage servicing rights was
approximately $1,409,000.
(P) EARNINGS PER SHARE
Basic earnings per share is computed by dividing net earnings available to
common stockholders by the weighted average number of shares of common stock
outstanding during the year. Diluted earnings per share is computed by dividing
such net earnings by the weighted average number of common shares used to
compute basic EPS plus the incremental amount of potential common stock
determined by the treasury stock method. Previous period amounts are restated
for the effect of stock dividends and splits.
(Q) STOCK SPLIT
On April 26, 2005 the Board of Directors declared a five-for-four stock split,
payable to shareholders of record on May 10, 2005, payable May 26, 2005. On
April 28, 2004 the Board of Directors declared a five-for-four stock split,
payable to shareholders of record on May 11, 2004, payable May 20, 2004. All
prior period amounts have been restated to reflect the stock splits.
(R) LEASES
The Company leases certain land, premises and equipment from third parties under
operating and capital leases. The lease payments for operating lease agreements
are recognized on a straight-line basis. The present value of the future minimum
rental payments for capital leases is recognized as an asset when the lease is
formed. Lease improvements incurred at the inception of the lease are recorded
as an asset and depreciated over the initial term of the lease and lease
improvements incurred subsequently are depreciated over the remaining term of
the lease plus any extensions expected to be used.
(S) COMPREHENSIVE INCOME
Comprehensive income includes net income, as well as other changes in
stockholders' equity that result from transactions and economic events other
than those with stockholders. The Company's only significant element of other
comprehensive income is unrealized gains and losses on available-for-sale
securities.
(T) RECLASSIFICATIONS
Certain reclassifications have been made to the 2004 and 2003 financial
statements to conform to the 2005 presentation.
2. CASH ON HAND AND IN BANKS
The subsidiary banks are required to maintain an average reserve balance with
either the Federal Reserve Bank or in the form of cash on hand. The amount of
this required reserve balance at December 31, 2005 was $18,402,000.
48
3. INVESTMENT SECURITIES, AVAILABLE FOR SALE
A comparison of the amortized cost and estimated fair value of the Company's
investment securities, available for sale, is as follows.
INVESTMENTS AS OF DECEMBER 31, 2005
Gross Unrealized Estimated
Weighted Amortized ---------------- Fair
(Dollars in thousands) Yield Cost Gains Losses Value
-------- --------- ------ ------- ---------
U.S. GOVERNMENT AND FEDERAL AGENCIES
maturing within one year ................. 4.54% $ 1,236 -- (2) 1,234
maturing one year through five years ..... 4.32% 3,962 -- (39) 3,923
maturing five years through ten years .... 6.55% 324 6 -- 330
maturing after ten years ................. 5.04% 337 2 -- 339
-------- ------ ------- -------
4.53% 5,859 8 (41) 5,826
-------- ------ ------- -------
STATE AND LOCAL GOVERNMENTS AND OTHER ISSUES:
maturing within one year ................. 4.16% 365 3 -- 368
maturing one year through five years ..... 4.75% 6,858 48 (143) 6,763
maturing five years through ten years .... 5.08% 8,728 365 (16) 9,077
maturing after ten years ................. 5.10% 287,175 12,476 (225) 299,426
-------- ------ ------- -------
5.09% 303,126 12,892 (384) 315,634
-------- ------ ------- -------
MORTGAGE-BACKED SECURITIES .................. 4.67% 65,926 308 (1,599) 64,635
REAL ESTATE MORTGAGE INVESTMENT CONDUITS .... 4.22% 530,582 154 (9,653) 521,083
FHLMC AND FNMA STOCK ........................ 5.74% 7,593 -- (330) 7,263
FHLB AND FRB STOCK, AT COST ................. 0.66% 53,529 -- -- 53,529
-------- ------ ------- -------
TOTAL INVESTMENTS ..................... 4.34% $966,615 13,362 (12,007) 967,970
======== ====== ======= =======
INVESTMENTS AS OF DECEMBER 31, 2004
Gross Unrealized Estimated
Weighted Amortized ---------------- Fair
(Dollars in thousands) Yield Cost Gains Losses Value
-------- ---------- ------ ------ ---------
U.S. GOVERNMENT AND FEDERAL AGENCIES
maturing within one year ................. 1.29% $ 251 -- -- 251
maturing five years through ten years .... 4.62% 350 6 -- 356
maturing after ten years ................. 3.08% 481 2 (1) 482
---------- ------ ------ ---------
3.16% 1,082 8 (1) 1,089
---------- ------ ------ ---------
STATE AND LOCAL GOVERNMENTS AND OTHER ISSUES:
maturing within one year ................. 5.30% 518 8 -- 526
maturing one year through five years ..... 5.37% 1,205 64 -- 1,269
maturing five years through ten years .... 4.69% 6,514 324 -- 6,838
maturing after ten years ................. 5.13% 292,102 12,971 (1,098) 303,975
---------- ------ ------ ---------
5.12% 300,339 13,367 (1,098) 312,608
---------- ------ ------ ---------
MORTGAGE-BACKED SECURITIES .................. 4.99% 56,629 919 (503) 57,045
REAL ESTATE MORTGAGE INVESTMENT CONDUITS .... 3.77% 660,389 1,624 (4,469) 657,544
FHLMC AND FNMA STOCK ........................ 5.74% 7,593 -- (56) 7,537
FHLB AND FRB STOCK, AT COST ................. 3.22% 49,803 -- -- 49,803
---------- ------ ------ ---------
TOTAL INVESTMENTS ..................... 4.20% $1,075,835 15,918 (6,127) 1,085,626
========== ====== ====== =========
49
3. INVESTMENT SECURITIES, AVAILABLE FOR SALE...CONTINUED
Maturities of securities do not reflect repricing opportunities present in
adjustable rate securities, nor do they reflect expected shorter maturities
based upon early prepayment of principal. Weighted yields on tax-exempt
investment securities exclude the tax effect. The Real Estate Mortgage
Investment Conduits are backed by the FNMA, GNMA, or FHLMC.
The book value of securities was as follows at:
December 31,
(dollars in thousands) 2003
------------
U.S. Government and Federal Agencies .......... $ 1,581
State and Local Governments and Other Issues .. 312,028
Mortgage-Backed Securities .................... 65,246
Real Estate Mortgage Investment Conduits ...... 663,799
FHLMC and FNMA stock .......................... 7,657
FHLB and FRB stock ............................ 46,643
----------
$1,096,954
==========
Investments with an unrealized loss position at December 31, 2005:
Less than 12 months 12 months or more Total
--------------------- --------------------- --------------------
Fair Unrealized Fair Unrealized Fair Unrealized
(Dollars in thousands) Value Loss Value Loss Value Loss
-------- ---------- -------- ---------- ------- ----------
U.S. Government and Federal Agencies .......... $ 5,158 40 44 1 5,202 41
State and Local Governments and other issues .. 12,689 216 9,330 168 22,019 384
FHLMC stock ................................... 7,170 330 -- -- 7,170 330
Mortgage-Backed Securities .................... 28,810 640 23,620 959 52,430 1,599
Real Estate Mortgage Investment Conduits ...... 193,990 2,517 303,991 7,136 497,981 9,653
-------- ----- ------- ----- ------- ------
Total temporarily impaired securities ......... $247,817 3,743 336,985 8,264 584,802 12,007
======== ===== ======= ===== ======= ======
Most of the unrealized loss is the result of changing market values due to
changes in intermediate and long term (10 year) interest rates. The value of
real estate mortgage investment conduits and mortgage-backed securities is also
affected by the level of mortgage refinancing activity and resulting prepayment
of the underlying mortgages. During periods of increasing rates, values decline
due to the opportunity to invest at current rates which are higher than the
rates on the investments held. The Company anticipates the unrealized losses to
be temporary and therefore an impairment charge is not required as of December
31, 2005.
Interest Income includes tax-exempt interest for the years ended December 31,
2005, 2004, and 2003 of $13,867,000, $13,917,000, and $11,410,000, respectively.
Gross proceeds from sales of investment securities for the years ended December
31, 2005, 2004, and 2003 were approximately $116,139,000, $66,910,000 and
$19,603,000 respectively, resulting in gross gains of approximately $471,000,
$304,000 and $3,502,000 and gross losses of approximately $609,000, $304,000 and
$0, respectively. During 2003 an impairment of $2,249,000 was recognized. The
cost of any investment sold is determined by specific identification.
At December 31, 2005, the Company had investment securities with carrying values
of approximately $511,536,000 pledged as security for deposits of several local
government units, securities sold under agreements to repurchase, collateral for
treasury term borrowings, and as collateral for treasury tax and loan
borrowings. At December 31, 2005, the Company had qualified investment
securities with carrying values of approximately $301,290,000 pledged as
collateral for advances with the FHLB.
50
4. LOANS RECEIVABLE, NET AND LOANS HELD FOR SALE
The following is a summary of loans receivable, net and loans held for sale at:
December 31,
----------------------
(dollars in thousands) 2005 2004
---------- ---------
Residential first mortgage ...................... $ 589,260 382,750
Loans held for sale ............................. 22,540 14,476
Commercial real estate .......................... 781,181 526,455
Other commercial ................................ 579,515 466,582
Consumer ........................................ 175,503 95,663
Home equity ..................................... 295,992 248,684
---------- ---------
2,443,991 1,734,610
Net deferred loan fees, premiums and discounts .. (8,149) (6,313)
Allowance for loan losses ....................... (38,655) (26,492)
---------- ---------
$2,397,187 1,701,805
========== =========
The following is a summary of activity in allowance for losses on loans:
Years ended December 31,
-------------------------
(dollars in thousands) 2005 2004 2003
------- ------ ------
Balance, beginning of period .. $26,492 23,990 20,944
Acquisitions .................. 6,627 -- 959
Net charge offs ............... (487) (1,693) (1,722)
Provision ..................... 6,023 4,195 3,809
------- ------ ------
Balance, end of period ........ $38,655 26,492 23,990
======= ====== ======
The following is the allocation of allowance for loan losses and percent of
loans in each category at:
DECEMBER 31, 2005 December 31, 2004
--------------------- ---------------------
PERCENT OF Percent of
OF LOANS IN of loans in
(dollars in thousands) AMOUNT CATEGORY Amount category
------- ----------- ------- -----------
Residential first mortgage and loans held for sale .... $ 4,318 25.0% $ 2,693 22.9%
Commercial real estate ................................ 14,370 32.0% 9,222 30.4%
Other commercial ...................................... 12,566 23.7% 9,836 26.9%
Consumer .............................................. 3,988 7.2% 2,083 5.5%
Home equity ........................................... 3,413 12.1% 2,658 14.3%
------- ----- ------- -----
$38,655 100.0% $26,492 100.0%
======= ===== ======= =====
Substantially all of the Company's loan receivables are with customers within
the Company's market area. Although the Company has a diversified loan
portfolio, a substantial portion of its customers' ability to honor their
contracts is dependent upon the economic performance in the Company's market
areas. The subsidiary banks are subject to regulatory limits for the amount of
loans to any individual borrower and all subsidiary banks are in compliance as
of December 31, 2005. No individual borrower had outstanding loans or
commitments exceeding 10% of the Company's consolidated stockholders' equity as
of December 31, 2005.
51
4. LOANS RECEIVABLE, NET AND LOANS HELD FOR SALE ... CONTINUED
Impaired loans, which consists of those reported as non-accrual, for the years
ended December 31, 2005, 2004, and 2003 were approximately $5,252,000,
$5,950,000, and $10,062,000, respectively, of which no impairment allowance was
deemed necessary. The average recorded investment in impaired loans for the
years ended December 31, 2005, 2004, and 2003 was approximately $5,090,000,
$8,733,000, and $8,620,000, respectively. Interest income that would have been
recorded on impaired loans if such loans had been current for the entire period
would have been approximately $359,000, $372,000, and $665,000 for the years
ended December 31, 2005, 2004, and 2003, respectively. Interest income
recognized on impaired loans for the years ended December 31, 2005, 2004, and
2003 was not significant. Loans ninety days overdue and still accruing interest
for the years ended December 31, 2005, 2004, and 2003 were approximately
$4,505,000, $1,642,000, and $2,419,000, respectively.
The weighted average interest rate on loans was 6.84% and 6.32% at December 31,
2005 and 2004, respectively.
At December 31, 2005, 2004 and 2003 loans sold and serviced for others were
$145,279,000, $174,805,000, and $189,601,000, respectively.
At December 31, 2005 the Company had $1,513,070,000 in variable rate loans and
$930,921,000 in fixed rate loans.
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and letters of
credit, and involve, to varying degrees, elements of credit risk. The Company's
exposure to credit loss in the event of nonperformance by the other party to the
financial instrument for commitments to extend credit is represented by the
contractual amount of those instruments. The Company uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments. The Company did not have any outstanding
commitments on impaired loans as of December 31, 2005.
The Company had outstanding commitments as follows:
December 31,
------------------
(dollars in thousands) 2005 2004
-------- -------
Loans and loans in process ....... $525,334 367,388
Unused consumer lines of credit .. 176,275 169,286
Letters of credit ................ 25,218 18,842
-------- -------
$726,827 555,516
======== =======
Substantially all of the loans held for sale at December 31, 2005 and 2004 were
committed to be sold.
The Company has entered into transactions with its executive officers,
directors, significant shareholders, and their affiliates. The aggregate amount
of loans to such related parties at December 31, 2005 and 2004 was approximately
$37,509,000 and $25,635,000. During 2005, new loans to such related parties were
approximately $29,964,000 and repayments were approximately $18,090,000.
52
5. PREMISES AND EQUIPMENT, NET
Premises and equipment, net consist of the following at:
December 31,
------------------
(dollars in thousands) 2005 2004
-------- -------
Land ........................................... $ 18,155 12,053
Office buildings and construction in progress .. 64,696 45,079
Furniture, fixtures and equipment .............. 34,826 25,656
Leasehold improvements ......................... 2,584 2,827
Accumulated depreciation ....................... (40,309) (29,883)
-------- -------
$ 79,952 55,732
======== =======
6. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table sets forth information regarding the Company's core deposit
intangibles and mortgage servicing rights:
Mortgage
Core Deposit Servicing
(Dollars in thousands) Intangible Rights (1) Total
------------ ---------- -----
AS OF DECEMBER 31, 2005
Gross carrying value $14,816
Accumulated Amortization (6,801)
-------
Net carrying value $ 8,015 1,112 9,127
=======
AS OF DECEMBER 31, 2004
Gross carrying value $10,270
Accumulated Amortization (5,331)
-------
Net carrying value $ 4,939 1,241 6,180
=======
WEIGHTED-AVERAGE AMORTIZATION PERIOD
(Period in years) 10.0 9.5 9.9
AGGREGATE AMORTIZATION EXPENSE
For the year ended December 31, 2005 $ 1,470 276 1,746
For the year ended December 31, 2004 1,074 328 1,402
For the year ended December 31, 2003 1,243 729 1,972
ESTIMATED AMORTIZATION EXPENSE
For the year ended December 31, 2006 1,612 77 1,689
For the year ended December 31, 2007 1,508 75 1,583
For the year ended December 31, 2008 1,413 73 1,486
For the year ended December 31, 2009 1,279 71 1,350
For the year ended December 31, 2010 1,069 68 1,137
(1) Gross carrying value and accumulated amortization are not readily available
53
6. GOODWILL AND OTHER INTANGIBLE ASSETS . . . CONTINUED
On October 31, 2005, First State Bank was acquired and its branches became part
of First Security. A portion of the purchase was allocated to core deposit
intangible of $914,000 and goodwill of $7,508,000. On May 20, 2005, the Zions
National Bank branch office in Bonners Ferry, Idaho was acquired and became a
branch of Mountain West Bank. A portion of the purchase was allocated to core
deposit intangible of $211,000 and goodwill of $2,154,000. On April 1, 2005,
Citizens was acquired and a portion of the purchase was allocated to core
deposit intangible of $975,000 and goodwill of $9,553,000. On February 28, 2005,
First National was acquired and a portion of the purchase was allocated to core
deposit intangible of $2,446,000 and goodwill of $22,508,000. The following is a
summary of activity in goodwill.
(Dollars in thousands) Goodwill
--------
Balance as of December 31, 2004 $37,376
Acquisition of First National 22,508
Acquisition of Citizens 9,553
Acquisition of Bonner's Ferry branch 2,154
Acquisition of First State Bank 7,508
-------
Balance as of December 31, 2005 $79,099
=======
7. DEPOSITS
Deposits consist of the following at:
DECEMBER 31, 2005 December 31, 2004
------------------------------- -------------------------------
Weighted Weighted
Average Average
(dollars in thousands) Rate AMOUNT PERCENT Rate Amount Percent
-------- ---------- ------- -------- ---------- -------
Demand accounts ................... 0.0% $ 667,008 26.2% 0.0% $ 460,059 26.6%
---------- ----- ---------- -----
NOW accounts ...................... 0.3% 367,077 14.5% 0.2% 280,455 16.2%
Savings accounts .................. 0.5% 247,607 9.8% 0.3% 166,350 9.6%
Money market demand accounts ...... 1.5% 487,143 19.2% 0.9% 415,817 24.0%
Certificate accounts:
1.00% and lower ................ 4,048 0.2% 52,056 3.0%
1.01% to 2.00% ................. 87,955 3.5% 177,172 10.2%
2.01% to 3.00% ................. 166,379 6.6% 100,566 5.8%
3.01% to 4.00% ................. 240,085 9.5% 33,934 2.0%
4.01% to 5.00% ................. 89,004 3.5% 21,216 1.2%
5.01% to 6.00% ................. 10,304 0.4% 11,936 0.8%
6.01% to 7.00% ................. 3,102 0.1% 9,643 0.6%
7.01% and higher ............... -- 0.0% 504 0.0%
Brokered 3.01 to 4.00% ......... 165,000 6.5% -- 0.0%
---------- ----- ---------- -----
Total certificate accounts .. 2.8% 765,877 30.3% 2.2% 407,027 23.6%
---------- ----- ---------- -----
Total interest bearing deposits ... 1.6% 1,867,704 73.8% 1.1% 1,269,649 73.4%
---------- ----- ---------- -----
Total deposits .................... 1.2% $2,534,712 100.0% 0.9% 1,729,708 100.0%
========== ===== ========== =====
Deposits with a balance in excess
of $100,000 .................... $1,283,980 $ 699,066
========== ==========
7. DEPOSITS . . . CONTINUED
54
At December 31, 2005, scheduled maturities of certificate accounts are as
follows:
Years ending December 31,
-----------------------------------------------------------
(dollars in thousands) TOTAL 2006 2007 2008 2009 Thereafter
-------- -------- ------ ------ ------ ----------
1.00% and lower ......... $ 4,048 4,048 -- -- -- --
1.01% to 2.00% .......... 87,955 85,277 2,506 164 8 --
2.01% to 3.00% .......... 166,379 133,830 25,748 5,703 905 193
3.01% to 4.00% .......... 240,085 172,395 36,311 17,139 8,588 5,652
4.01% to 5.00% .......... 89,004 52,890 23,341 3,895 1,436 7,442
5.01% to 6.00% .......... 10,304 2,954 7,191 24 -- 135
6.01% to 7.00% .......... 3,102 2,969 16 84 -- 33
Brokered 3.01 to 4.00% .. 165,000 165,000 -- -- -- --
-------- ------- ------ ------ ------ ------
$765,877 619,363 95,113 27,009 10,937 13,455
======== ======= ====== ====== ====== ======
Interest expense on deposits is summarized as follows:
Years ended December 31,
-------------------------
(dollars in thousands) 2005 2004 2003
------- ------ ------
NOW accounts .................. $ 889 474 484
Savings accounts .............. 1,130 471 500
Money market demand accounts .. 7,552 3,776 3,840
Certificate accounts .......... 16,134 9,333 12,397
------- ------ ------
$25,705 14,054 17,221
======= ====== ======
The Company reclassified approximately $2,683,000 and $2,361,000 of overdraft
demand deposits to loans of December 31, 2005 and 2004, respectively. The
Company has entered into transactions with its executive officers, directors,
significant shareholders, and their affiliates. The aggregate amount of deposits
with such related parties at December 31, 2005, and 2004 was approximately
$29,135,000 and $11,439,000, respectively.
8. ADVANCES FROM FEDERAL HOME LOAN BANK OF SEATTLE
Advances from the Federal Home Loan Bank of Seattle (FHLB) consist of the
following:
Totals as of
Maturing in years ending December 31, December 31,
------------------------------------------------------- -----------------
(dollars in thousands) 2006 2007 2008 2009 2010 Thereafter 2005 2004
-------- ------- ------ ----- ---- ---------- ------- -------
1.00% to 2.00% ....... $ 40,000 -- -- -- -- -- 40,000 40,000
2.01% to 3.00% ....... 71,500 87,500 -- -- -- -- 159,000 617,942
3.01% to 4.00% ....... 1,000 13,000 3,000 250 750 40,000 58,000 97,350
4.01% to 5.00% ....... 78,550 -- -- 2,000 -- 43,527 124,077 42,000
5.01% to 6.00% ....... 148 148 18,124 1 -- -- 18,421 18,564
6.01% to 7.00% ....... 675 974 74 46 24 -- 1,793 1,966
7.01% to 8.00% ....... 500 300 100 -- -- -- 900 1,111
-------- ------- ------ ----- --- ------ ------- -------
$192,373 101,922 21,298 2,297 774 83,527 402,191 818,933
======== ======= ====== ===== === ====== ======= =======
55
8. ADVANCES FROM FEDERAL HOME LOAN BANK OF SEATTLE . . . CONTINUED
These advances are collateralized by the FHLB stock held by the Company and a
blanket assignment of the Bank's unpledged qualifying real estate loans and
investments. The total amount of advances available, subject to collateral
availability, as of December 31, 2005 was approximately $445,197,000.
The weighted average interest rate on these advances was 3.26% and 2.72% at
December 31, 2005 and 2004, respectively.
The Federal Home Loan Bank of Seattle holds callable options, which may be
exercised after a predetermined time as shown below as of December 31, 2005:
Interest Earliest
(dollars in thousands) Amount Rate Maturity Call
-------- ------------ -------- --------
Call Terms
Quarterly at FHLB option .......................... $ 3,000 5.37% 2008 2006
Quarterly at FHLB option .......................... 15,000 5.52% 2008 2006
If three month LIBOR is greater than 8% on
quarterly measurement date after initial term .. 82,000 3.49% - 4.83% 2012 2006
--------
$100,000
========
9. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWED FUNDS
Securities sold under agreements to repurchase consist of the following at:
BOOK MARKET
WEIGHTED VALUE OF VALUE OF
REPURCHASE AVERAGE UNDERLYING UNDERLYING
AMOUNT RATE ASSETS ASSETS
---------- -------- ---------- ----------
DECEMBER 31, 2005
(DOLLARS IN THOUSANDS)
SECURITIES SOLD UNDER AGREEMENTS
TO REPURCHASE WITHIN:
OVERNIGHT ................... $127,243 3.66% 191,166 190,602
TERM UP TO 30 DAYS .......... 1,137 2.53% 1,165 1,146
TERM OVER 90 DAYS ........... 1,150 3.00% 1,191 1,171
-------- -------- -------
$129,530 3.65% $193,522 192,919
======== ======== =======
December 31, 2004
(dollars in thousands)
Securities sold under agreements
to repurchase within:
Overnight ................... $ 76,158 1.87% 126,671 129,340
-------- -------- -------
$ 76,158 1.87% $126,671 129,340
======== ======== =======
The securities, consisting of agency issued or guaranteed mortgage backed
securities, underlying agreements to repurchase entered into by the Company are
for the same securities originally sold, and are held in a custody account by a
third party. For the year ended December 31, 2005 and 2004 securities sold under
agreements to repurchase averaged approximately $103,522,000 and $69,480,000,
respectively, and the maximum outstanding at any month end during the year was
approximately $132,534,000 and $80,265,000, respectively.
56
9. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWED
FUNDS...CONTINUED
The Company participates in a U.S. treasury term auction program whereby when
the treasury has excess funds, the Company is able to bid on the funds. The term
of the borrowings are typically less then 21 days and the interest rate is based
on the Company's bid. The following lists the outstanding treasury term
borrowings:
December 31,
--------------------
(dollars in thousands) 2005 2004
------------- ----
Outstanding balance .. $ 179,000 --
Weighted rate ........ 4.29% --
Maturity date ........ JAN. 3, 2006 --
The Company also has a U.S. treasury tax and loan account note option program
which provides short term funding with no fixed maturity date up to $19,500,000
at federal funds rates minus 25 basis points. At December 31, 2005 and 2004 the
outstanding balance under this program was approximately $7,382,000 and
$4,354,000. The borrowings are secured with investment securities with a par
value of approximately $27,635,000 and a market value of approximately
$30,769,000. For the year ended December 31, 2005, the maximum outstanding at
any month end was approximately $11,059,000 and the average balance was
approximately $3,685,000.
10. SUBORDINATED DEBENTURES
In connection with the acquisition of Citizens on April 1, 2005, the Company
acquired Citizens Trust I. On June 17, 2004, 5,000 shares of trust preferred
shares were issued by Citizens Trust I whose common equity is wholly owned by
the Company. The Trust Preferred Securities bear a cumulative three month LIBOR
plus 2.65% rate adjustable quarterly until maturity on June 17, 2034. Interest
distributions are payable quarterly. The Trust Preferred Securities are subject
to mandatory redemption upon repayment of the Subordinated Debentures of
$5,000,000 at their stated maturity date or their earlier redemption in an
amount equal to their liquidation amount plus accumulated and unpaid
distribution to the date of redemption.
On March 24, 2004, 45,000 shares of trust preferred shares were issued by
Glacier Trust II whose common equity is wholly owned by the Company. The Trust
Preferred Securities bear a cumulative fixed interest rate of 5.788% for the
first five years and then converts to a three month LIBOR plus 2.75% rate
adjustable quarterly for the remaining term until maturity on April 7, 2034.
Interest distributions are payable quarterly. The Trust Preferred Securities are
subject to mandatory redemption upon repayment of the Subordinated Debentures of
$45,000,000 at their stated maturity date or their earlier redemption in an
amount equal to their liquidation amount plus accumulated and unpaid
distributions to the date of redemption.
On January 25, 2001, 1,400,000 shares of trust preferred shares were issued by
Glacier Trust I whose common equity is wholly owned by the Company. The Trust
Preferred Securities bear a cumulative fixed interest rate of 9.40%. Interest
distributions are payable quarterly. The Trust Preferred Securities were
redeemed and the Subordinated Debentures of $35,000,000 were paid on February 1,
2006. The Subordinated Debentures were replaced by Glacier Trust III ("Glacier
Trust III"), which issued $35,000,000 in subordinated debentures with an
interest rate of 6.078%.
On January 31, 2006, 35,000 shares of trust preferred shares were issued by
Glacier Trust III whose common equity is wholly owned by the Company. The Trust
Preferred Securities bear a cumulative fixed interest rate of 6.078% for the
first five years and then converts to a three month LIBOR plus 1.29% rate
adjustable quarterly for the remaining term until maturity on April 7, 2036.
Interest distributions are payable quarterly. The Trust Preferred Securities are
subject to mandatory redemption upon repayment of the Subordinated Debentures of
$35,000,000 at their stated maturity date or their earlier redemption in an
amount equal to their liquidation amount plus accumulated and unpaid
distributions to the date of redemption.
The Company guaranteed the payment of distributions and payments for redemption
or liquidation of the Trust Preferred Securities to the extent of funds held by
Citizens Trust I, Glacier Trust II, Glacier Trust I and Glacier Trust III. The
obligations of the Company under the Subordinated Debentures together with the
guarantee and other back-up obligations, in the aggregate, constitute a full and
unconditional guarantee by the Company of the obligations of all trusts under
the Trust Preferred Securities.
57
10. SUBORDINATED DEBENTURES...CONTINUED
The Subordinated Debentures with Citizens Trust I are unsecured, bear interest
rate of three month LIBOR plus 2.65% per annum and mature on June 17, 2034. The
Subordinated Debentures with Glacier Trust II are unsecured, bear interest at a
rate of 5.788% per annum for the first five years and then converts to a three
month LIBOR plus 2.75% rate adjustable quarterly for the remaining term until
maturity on April 7, 2034. The Subordinated Debentures with Glacier Trust I were
unsecured, bear interest at a rate of 9.40% per annum. Interest is payable
quarterly for all Subordinated Debentures. The Subordinated Debentures with
Glacier Trust III are unsecured, bear interest at a rate of 6.078% per annum for
the first five years and then converts to a three month LIBOR plus 1.29% rate
adjustable quarterly for the remaining term until maturity on April 7, 2036.
Interest is payable quarterly for all Subordinated Debentures. The Company may
defer the payment of interest at any time from time to time for a period not
exceeding 20 consecutive quarters provided that the deferral period does not
extend past the stated maturity. During any such deferral period, distributions
on the Trust Preferred Securities will also be deferred and the Company's
ability to pay dividends on its common shares will be restricted.
Subject to approval by the Federal Reserve Bank, the Trust Preferred Securities
may be redeemed at par prior to maturity at the Company's option on or after
June 17, 2009 for Citizens Trust I, April 7, 2009 for Glacier Trust II, and
April 7, 2011 for Glacier Trust III. On February 1, 2006, with the approval of
the Federal Reserve Bank, the Trust Preferred Securities of Glacier Trust I were
redeemed. The Trust Preferred Securities may also be redeemed at any time in
whole (but not in part) for the Trusts in the event of unfavorable changes in
laws or regulations that result in (1) Citizens Trust I, Glacier Trust I or
Glacier Trust III becoming subject to federal income tax on income received on
the Subordinated Debentures, (2) interest payable by Parent Company on the
Subordinated Debentures becoming non-deductible for federal tax purposes, (3)
the requirement for the trusts to register under the Investment Company Act of
1940, as amended, or (4) loss of the ability to treat the Trust Preferred
Securities as "Tier 1 Capital" under the Federal Reserve capital adequacy
guidelines.
58
11. REGULATORY CAPITAL
The Federal Reserve Board has adopted capital adequacy guidelines pursuant to
which it assesses the adequacy of capital in supervising a bank holding company.
The following table illustrates the Federal Reserve Board's adequacy guidelines
and the Company's compliance with those guidelines as of December 31, 2005:
Minimum capital Well capitalized
Actual requirement requirement
---------------- --------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------- ------ ------- ----- ------- ------
Tier 1 (core) capital to risk weighted assets
Consolidated .... 329,289 12.00% 109,724 4.00% 164,585 6.00%
Glacier ......... 63,476 11.76% 21,583 4.00% 32,375 6.00%
Mountain West ... 54,415 9.43% 23,078 4.00% 34,617 6.00%
First Security .. 69,758 13.25% 21,066 4.00% 31,599 6.00%
Western ......... 44,428 14.97% 11,874 4.00% 17,811 6.00%
First National .. 17,250 11.59% 5,952 4.00% 8,928 6.00%
Big Sky ......... 24,769 10.10% 9,806 4.00% 14,709 6.00%
Valley .......... 19,682 11.56% 6,812 4.00% 10,218 6.00%
Whitefish ....... 14,562 10.06% 5,792 4.00% 8,688 6.00%
Citizens ........ 12,665 10.35% 4,894 4.00% 7,341 6.00%
Tier 2 (core) capital to risk weighted assets
Consolidated .... 363,632 13.26% 219,447 8.00% 274,309 10.00%
Glacier ......... 69,882 12.95% 43,166 8.00% 53,958 10.00%
Mountain West ... 61,341 10.63% 46,156 8.00% 57,695 10.00%
First Security .. 76,372 14.50% 42,132 8.00% 52,665 10.00%
Western ......... 48,150 16.22% 23,749 8.00% 29,686 10.00%
First National .. 19,115 12.85% 11,904 8.00% 14,880 10.00%
Big Sky ......... 27,842 11.36% 19,612 8.00% 24,515 10.00%
Valley .......... 21,783 12.79% 13,624 8.00% 17,030 10.00%
Whitefish ....... 16,237 11.21% 11,584 8.00% 14,480 10.00%
Citizens ........ 14,199 11.60% 9,788 8.00% 12,235 10.00%
Leverage capital to total average assets
Consolidated .... 329,289 9.17% 143,692 4.00% 179,615 5.00%
Glacier ......... 63,476 9.34% 27,198 4.00% 33,998 5.00%
Mountain West ... 54,415 7.38% 29,487 4.00% 36,859 5.00%
First Security .. 69,758 10.06% 27,732 4.00% 34,665 5.00%
Western ......... 44,428 10.36% 17,149 4.00% 21,436 5.00%
First National .. 17,250 6.28% 10,991 4.00% 13,738 5.00%
Big Sky ......... 24,769 9.24% 10,721 4.00% 13,401 5.00%
Valley .......... 19,682 8.00% 9,844 4.00% 12,305 5.00%
Whitefish ....... 14,562 8.44% 6,898 4.00% 8,623 5.00%
Citizens ........ 12,665 9.51% 5,329 4.00% 6,661 5.00%
59
11. REGULATORY CAPITAL. . . CONTINUED
The following table illustrates the Federal Reserve Board's adequacy guidelines
and the Company's compliance with those guidelines as of December 31, 2004:
Minimum capital Well capitalized
Actual requirement requirement
---------------- --------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------- ------ ------- ----- ------- ------
Tier 1 (core) capital to risk weighted assets
Consolidated .... 300,475 15.06% 79,800 4.00% 119,700 6.00%
Glacier ......... 57,244 13.22% 17,318 4.00% 25,977 6.00%
Mountain West ... 42,992 10.20% 16,861 4.00% 25,292 6.00%
First Security .. 49,798 12.47% 15,978 4.00% 23,967 6.00%
Western ......... 43,151 15.38% 11,224 4.00% 16,835 6.00%
Big Sky ......... 18,547 9.22% 8,043 4.00% 12,065 6.00%
Valley .......... 17,674 12.38% 5,711 4.00% 8,567 6.00%
Whitefish ....... 12,945 11.67% 4,439 4.00% 6,658 6.00%
Tier 2 (core) capital to risk weighted assets
Consolidated .... 325,432 16.31% 159,601 8.00% 199,501 10.00%
Glacier ......... 62,128 14.35% 34,636 8.00% 43,295 10.00%
Mountain West ... 48,005 11.39% 33,722 8.00% 42,153 10.00%
First Security .. 54,800 13.72% 31,956 8.00% 39,945 10.00%
Western ......... 46,675 16.63% 22,447 8.00% 28,059 10.00%
Big Sky ......... 21,064 10.48% 16,087 8.00% 20,108 10.00%
Valley .......... 19,453 13.62% 11,423 8.00% 14,279 10.00%
Whitefish ....... 14,325 12.91% 8,877 8.00% 11,097 10.00%
Leverage capital to total average assets
Consolidated .... 300,475 10.16% 118,271 4.00% 147,839 5.00%
Glacier ......... 57,244 8.90% 25,723 4.00% 32,154 5.00%
Mountain West ... 42,992 7.16% 24,027 4.00% 30,033 5.00%
First Security .. 49,798 8.27% 24,093 4.00% 30,117 5.00%
Western ......... 43,151 9.67% 17,854 4.00% 22,317 5.00%
Big Sky ......... 18,547 7.88% 9,413 4.00% 11,767 5.00%
Valley .......... 17,674 7.58% 9,325 4.00% 11,656 5.00%
Whitefish ....... 12,945 7.75% 6,684 4.00% 8,355 5.00%
The Federal Deposit Insurance Corporation Improvement Act generally restricts a
depository institution from making any capital distribution (including payment
of a dividend) or paying any management fee to its holding Company if the
institution would thereafter be capitalized at less than 8% of total risk-based
capital, 4% of Tier I capital, or a 4% leverage ratio. At December 31, 2005 and
2004, the subsidiary banks' capital measures exceed the highest supervisory
threshold, which requires total Tier II capital of at least 10%, Tier I capital
of at least 6%, and a leverage ratio of at least 5%. Each of the subsidiaries
was considered well capitalized by the respective regulator as of December 31,
2005 and 2004. There are no conditions or events since year-end that management
believes have changed the Company's or subsidiaries capital category.
The subsidiary banks are subject to certain restrictions on the amount of
dividends that they may declare without prior regulatory approval. At December
31, 2005, approximately $89,085,000 of retained earnings was available for
dividend declaration without prior regulatory approval.
60
12. FEDERAL AND STATE INCOME TAXES
The following is a summary of consolidated income tax expense for:
(dollars in thousands) 2005 2004 2003
-------- ------ ------
Current:
Federal ................................. $ 22,099 16,361 13,741
State ................................... 5,416 4,369 3,690
-------- ------ ------
Total current tax expense ............ 27,515 20,730 17,431
-------- ------ ------
Deferred:
Federal ................................. (1,955) 238 554
State ................................... (249) 46 168
-------- ------ ------
Total deferred tax (income) expense .. (2,204) 284 722
-------- ------ ------
Total income tax expense .......... $ 25,311 21,014 18,153
======== ====== ======
Federal and state income tax expense differs from that computed at the federal
statutory corporate tax rate as follows for:
Years ended
December 31,
------------------
2005 2004 2003
---- ---- ----
Federal statutory rate .......................... 35.0% 35.0% 35.0%
State taxes, net of federal income tax benefit .. 4.3% 4.4% 4.4%
Tax-exempt interest income ...................... -5.9% -7.2% -6.8%
Other, net ...................................... -0.8% -0.2% -0.3%
---- ---- ----
32.6% 32.0% 32.3%
==== ==== ====
The tax effect of temporary differences which give rise to a significant portion
of deferred tax assets and deferred tax liabilities are as follows:
December 31,
------------------
(dollars in thousands) 2005 2004
-------- -------
Deferred tax assets:
Allowance for losses on loans ........................ $ 15,786 10,879
Deferred compensation ................................ 2,372 1,795
Other ................................................ 690 650
-------- -------
Total gross deferred tax assets ................... 18,848 13,324
-------- -------
Deferred tax liabilities:
Federal Home Loan Bank stock dividends ............... (10,488) (10,270)
Fixed assets, due to differences in depreciation ..... (3,385) (2,676)
Intangibles .......................................... (3,542) (1,998)
Deferred loan costs .................................. (2,076) (1,602)
Available-for-sale securities fair value adjustment .. (534) (3,858)
Other ................................................ (1,569) (1,312)
-------- -------
Total gross deferred tax liabilities .............. (21,594) (21,716)
-------- -------
Net deferred tax liability ........................ $ (2,746) (8,392)
======== =======
There is no valuation allowance at December 31, 2005 and 2004 because management
believes that it is more likely than not that the Company's deferred tax assets
will be realized by offsetting future taxable income from reversing taxable
temporary differences and anticipated future taxable income.
12. FEDERAL AND STATE INCOME TAXES . . . CONTINUED
61
Retained earnings at December 31, 2005 includes approximately $3,600,000 for
which no provision for Federal income tax has been made. This amount represents
the base year bad debt reserve, which is essentially an allocation of earnings
to pre-1988 bad debt deductions for income tax purposes only. This amount is
treated as a permanent difference and deferred taxes are not recognized unless
it appears that this reserve will be reduced and thereby result in taxable
income in the foreseeable future. The Company is not currently contemplating any
changes in its business or operations which would result in a recapture of this
federal bad debt reserve into taxable income.
13. EMPLOYEE BENEFIT PLANS
The Company has a profit sharing plan that has a 3% "safe harbor" provision
which is a non-elective contribution by the Company. To be considered eligible
for the plan, the employee must be 21 year of age, worked 501 hours in the plan
year, and been employed for a full calendar quarter. In addition, elective
contributions, depending on the Company's profitability, are made to the plan.
Participants are at all times fully vested in all contributions. The total plan
expense for the years ended December 31, 2005, 2004, and 2003 was approximately
$4,057,000, $3,181,000 and $3,072,000 respectively.
The Company also has an employees' savings plan. The plan allows eligible
employees to contribute up to 60%, 25% prior to October 1, 2004, of their
monthly salaries. The Company matches an amount equal to 50% of the employee's
contribution, up to 6% of the employee's total pay. Participants are at all
times fully vested in all contributions. The Company's contribution to the
savings plan for the years ended December 31, 2005, 2004 and 2003 was
approximately $930,000, $750,000, and $693,000, respectively.
The Company has a non-funded deferred compensation plan for directors and senior
officers. The plan provides for the deferral of cash payments of up to 25% of a
participants' salary, and for 100% of bonuses and directors fees, at the
election of the participant. The total amount deferred was approximately
$483,000, $402,000, and $236,000, for the years ending December 31, 2005, 2004,
and 2003, respectively. Effective January 1, 2005, the participant receives an
earnings credit at a rate equal to 50% of the Company's return on equity. For
years prior to 2005 the participant received an earnings credit at a one year
certificate of deposit rate, or at the total return rate on Company stock, on
the amount deferred, as elected by the participant at the time of the deferral
election. The total earnings for the years ended 2005, 2004, and 2003 were
approximately $190,000, $437,000, and $364,000, respectively. In connection with
several acquisitions, the Company assumed the obligations of a deferred
compensation plan for certain key employees. As of December 31, 2005, the
liability related to the obligation was approximately $2,136,000 and was
included in other liabilities of the Consolidated Statements of Financial
Condition. The amount expensed related to the obligation during 2005 was
insignificant.
The Company has a Supplemental Executive Retirement Plan (SERP) which provides
retirement benefits at the savings and retirement plan levels, for amounts that
are limited by IRS regulations under those plans. Eligible employees include
participates of the non-funded deferred compensation plan and employees whose
benefits were limited as a result of IRS regulations. The Company's required
contribution to the SERP for the years ended December 31, 2005, 2004 and 2003
was approximately $74,000, $63,000, and $53,000, respectively.
The Company has entered into employment contracts with twelve senior officers
that provide benefits under certain conditions following a change in control of
the Company.
62
14. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
For the Years Ended December 31,
-------------------------------------
2005 2004 2003
----------- ---------- ----------
Net earnings available to common
stockholders, basic and diluted .... $52,373,000 44,616,000 38,008,000
Average outstanding shares - basic .... 31,295,827 30,565,716 30,110,363
Add: Dilutive stock options ........... 596,889 578,353 546,603
----------- ---------- ----------
Average outstanding shares - diluted .. 31,892,716 31,144,069 30,656,966
=========== ========== ==========
Basic earnings per share .............. $ 1.67 1.46 1.26
=========== ========== ==========
Diluted earnings per share ............ $ 1.64 1.43 1.24
=========== ========== ==========
There were approximately 148,000 and 1,400 options excluded from the diluted
share calculation for December 31, 2005 and 2004, respectively, due to the
option exercise price exceeding the market price. There were no options excluded
from the diluted share calculation for December 31, 2003 because the market
price exceeded the option exercise price as of the end of the year.
15. STOCK OPTION PLANS
In the year ended December 31, 1995 a Stock Option Plan was approved which
provided for the grant of options limited to 279,768 shares to certain full-time
employees of the Company. In April 1999, the Employees 1995 Stock Option Plan
was amended to provide 600,000 additional shares for the Employees Plan. In
April, 2002, the Employees 1995 Stock Option Plan was amended to provide
1,000,000 additional shares for the Employees Plan. The option price at which
the Company's common stock may be purchased upon exercise of options granted
under the plans must be at least equal to the per share market value of such
stock at the date the option is granted. The Employee 1995 Stock Option Plan
expired in April 2005.
On April 27, 2005, a Stock Incentive Plan was approved which provided awards
limited to 2,500,000 shares to certain full-time employees of the Company,
provided that the Company does not issue more than 1,700,000 shares pursuant to
awards in a form other than options and share appreciation rights. The Stock
Incentive Plan permits the granting of options, share appreciation rights
restricted shares, restricted share units, and unrestricted shares, deferred
share units, and performance awards.
In the year ended December 31, 1994 a Stock Option Plan was approved which
provided for the grant of options to outside Directors of the Company, limited
to 50,000 shares. In April 1999, the Directors 1994 Stock Option Plan was
amended to provide 100,000 additional shares for the Directors Plan. In April,
2002, the Directors 1994 Stock Option Plan was amended to provide 500,000
additional shares for the Directors Plan
The fiscal 1994, 1995, and 2005 plans also contain provisions authorizing the
grant of limited stock rights, which permit the optionee, upon a change in
control of the Company, to surrender his or her options for cancellation and
receive cash or common stock equal to the difference between the exercise price
and the fair market value of the shares on the date of the grant. The option
price at which the Company's common stock may be purchased upon exercise of
options granted under the plans must be at least equal to the per share market
value of such stock at the date the option is granted. All option shares are
adjusted for stock splits and stock dividends. The term of the options may not
exceed five years from the date the options are granted. The employee options
vest over a period of two years and the director options vest over a period of
six months.
63
15. STOCK OPTION PLANS . . . CONTINUED
At December 31, 2005, total shares available for option grants to employees and
directors are 3,757,156. Changes in shares granted for stock options for the
years ended December 31, 2005, 2004, and 2003, are summarized as follows:
Options outstanding Options exercisable
-------------------------- -------------------------
Weighted Weighted
average average
Shares exercise price Shares exercise price
--------- -------------- -------- --------------
Balance, December 31, 2002 .. 1,569,409 $ 9.31 919,880 $ 8.35
Canceled .................... (51,175) 11.35 (8,999) 7.38
Granted ..................... 558,666 14.16
Became exercisable .......... 435,620 10.48
Exercised ................... (544,173) 8.58 (544,173) 8.58
--------- --------
Balance, December 31, 2003 .. 1,532,727 11.28 802,328 9.18
Canceled .................... (63,266) 14.61 (18,959) 8.55
Granted ..................... 562,823 19.92
Became exercisable .......... 441,299 14.36
Exercised ................... (521,653) 10.42 (521,653) 10.42
--------- --------
Balance, December 31, 2004 .. 1,510,631 14.65 703,015 11.61
Canceled .................... (29,882) 21.05 (4,974) 9.77
Granted ..................... 587,761 25.03
Became exercisable .......... 525,759 16.31
Exercised ................... (398,110) 12.95 (398,110) 12.95
--------- --------
Balance, December 31, 2005 .. 1,670,400 18.58 825,690 14.25
========= ========
The range of exercise prices on options outstanding and exercisable at December
31, 2005 is as follows:
Options average average Options average
Price range Outstanding exercise price life of options Exercisable exercise price
- ----------- ----------- -------------- --------------- ----------- --------------
$5.19 - $7.89 142,206 $ 6.75 .8 years 142,206 $ 6.75
$8.96 - $11.40 70,849 9.99 2.2 years 70,849 9.99
$12.17 - $13.20 138,713 12.69 1.1 years 138,713 12.69
$14.09 - $17.45 290,434 14.27 2.1 years 290,434 14.27
$19.50 - $21.24 459,095 20.07 3.1 years 79,786 20.05
$24.99 - $28.35 569,103 25.05 4.1 years 103,702 25.00
--------- -------
1,670,400 18.58 3.1 years 825,690 14.25
========= =======
The options exercised during the year ended December 31, 2005 were at prices
from $5.19 to $28.35.
64
16. PARENT COMPANY INFORMATION (CONDENSED)
The following condensed financial information is the unconsolidated (parent
company only) information for Glacier Bancorp, Inc.:
December 31,
STATEMENTS OF FINANCIAL CONDITION ------------------
(dollars in thousands) 2005 2004
-------- -------
Assets:
Cash ........................................ $ 1,967 3,500
Interest bearing cash deposits .............. 11,125 40,088
-------- -------
Cash and cash equivalents ................ 13,092 43,588
Investment securities, available-for-sale ... 1,302 19,337
Other assets ................................ 2,415 3,427
Investment in subsidiaries .................. 409,931 290,765
-------- -------
$426,740 357,117
======== =======
Liabilities and Stockholders' Equity:
Dividends payable ........................... $ 5,151 4,176
Subordinated debentures ..................... 85,000 80,000
Other liabilities ........................... 3,350 2,757
-------- -------
Total liabilities ........................ 93,501 86,933
Common stock ................................ 322 307
Paid-in capital ............................. 262,383 227,552
Retained earnings ........................... 69,713 36,391
Accumulated other comprehensive income ...... 821 5,934
-------- -------
Total stockholders' equity ............... 333,239 270,184
-------- -------
$426,740 357,117
======== =======
Years ended December 31,
STATEMENTS OF OPERATIONS -------------------------
(dollars in thousands) 2005 2004 2003
------- ------ ------
Revenues
Dividends from subsidiaries ......................................... $21,950 21,300 17,400
Other income ........................................................ 60 1,088 288
Intercompany charges for services ................................... 8,365 7,406 6,652
------- ------ ------
Total revenues ................................................... 30,375 29,794 24,340
Expenses
Employee compensation and benefits .................................. 5,144 4,517 4,223
Other operating expenses ............................................ 11,013 9,803 7,573
------- ------ ------
Total expenses ................................................... 16,157 14,320 11,796
Earnings before income tax benefit and equity in undistributed
earnings of subsidiaries ......................................... 14,218 15,474 12,544
Income tax benefit .................................................. (3,386) (2,316) (1,937)
------- ------ ------
Income before equity in undistributed earnings of subsidiaries ...... 17,604 17,790 14,481
Subsidiary earnings in excess of dividends distributed .............. 34,769 26,826 23,527
------- ------ ------
Net earnings ........................................................... $52,373 44,616 38,008
======= ====== ======
65
16. PARENT COMPANY INFORMATION (CONDENSED)...CONTINUED
Years ended December 31,
STATEMENTS OF CASH FLOWS ----------------------------
(dollars in thousands) 2005 2004 2003
-------- ------- -------
Operating Activities
Net earnings ..................................................... $ 52,373 44,616 38,008
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Loss on sale of investments available-for-sale ................... 451 274 --
Subsidiary earnings in excess of dividends distributed ........... (34,769) (26,826) (23,527)
Net increase in other assets and other liabilities ............... 4,709 2,359 5,965
-------- ------- -------
Net cash provided by operating activities ........................... 22,764 20,423 20,446
-------- ------- -------
Investing activities
Purchases of investment securities available-for-sale ............ -- (35,802) --
Proceeds from sales, maturities and prepayments of securities
available-for-sale ............................................. 17,796 17,227 54
Equity contribution to subsidiary ................................ (56,206) -- (10,377)
Net addition of premises and equipment ........................... (949) (430) (863)
-------- ------- -------
Net cash used by investing activities ............................... (39,359) (19,005) (11,186)
-------- ------- -------
Financing activities
Proceeds from issuance of subordinated debentures ................ -- 45,000 --
Cash dividends paid .............................................. (19,051) (16,618) (14,573)
Proceeds from exercise of stock options and other stock issued ... 5,158 5,439 4,674
Repurchase and retirement of stock ............................... -- (1,805) --
Cash paid for stock dividends .................................... (8) (9) (15)
-------- ------- -------
Net cash (used) provided by financing activities .................... (13,901) 32,007 (9,914)
-------- ------- -------
Net (decrease) increase (decrease) in cash and cash equivalents ..... (30,496) 33,425 (654)
Cash and cash equivalents at beginning of year ...................... 43,588 10,163 10,817
-------- ------- -------
Cash and cash equivalents at end of year ............................ $ 13,092 43,588 10,163
======== ======= =======
17. UNAUDITED QUARTERLY FINANCIAL DATA
Summarized unaudited quarterly financial data is as follows (in thousands except
per share amounts):
QUARTERS ENDED, 2005
-------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------- ------------- ------------- -------------
Interest income ................. $ 40,507 46,545 49,570 53,363
Interest expense ................ 12,051 14,458 15,810 17,659
------------- ------------- ------------- -------------
Net interest income ............. 28,456 32,087 33,760 35,704
Provision for loan losses ....... 1,490 1,552 1,607 1,374
Earnings before income taxes .... 17,000 19,572 20,313 20,799
Net earnings .................... 11,520 13,090 13,575 14,188
Basic earnings per share ........ 0.37 0.42 0.43 0.45
Diluted earnings per share ...... 0.37 0.41 0.42 0.44
Dividends per share ............. 0.14 0.15 0.15 0.16
Market range high-low ........... $27.98-$23.59 $26.39-$21.07 $31.40-$25.91 $33.50-$28.00
66
17. UNAUDITED QUARTERLY FINANCIAL DATA...CONTINUED
Quarters Ended, 2004
-------------------------------------------------------------
March 31 June 30 September 30 December 31
------------- ------------- ------------- -------------
Interest income ................. $ 35,465 35,441 37,640 38,739
Interest expense ................ 9,076 9,662 10,255 10,899
------------- ------------- ------------- -------------
Net interest income ............. 26,389 25,779 27,385 27,840
Provision for loan losses ....... 830 965 1,200 1,200
Earnings before income taxes .... 15,544 15,654 17,333 17,099
Net earnings .................... 10,610 10,763 11,680 11,563
Basic earnings per share ........ 0.34 0.35 0.38 0.39
Diluted earnings per share ...... 0.34 0.34 0.38 0.37
Dividends per share ............. 0.13 0.13 0.14 0.14
Market range high-low ........... $21.63-$18.88 $22.60-$19.59 $24.28-$20.60 $28.71-$23.12
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments have been defined to generally mean cash or a contract
that implies an obligation to deliver cash or another financial instrument to
another entity. For purposes of the Company's Consolidated Statement of
Financial Condition, this includes the following items:
2005 2004
----------------------- ----------------------
(dollars in thousands) AMOUNT FAIR VALUE Amount Fair Value
---------- ---------- --------- ----------
Financial Assets:
Cash on hand and in banks ........................ $ 111,418 111,418 79,300 79,300
Federal funds sold ............................... 7,537 7,537 -- --
Interest bearing cash deposits ................... 15,739 15,739 13,007 13,007
Investment securities ............................ 328,723 328,723 321,234 321,234
Mortgage-backed securities ....................... 585,718 585,718 714,589 714,589
FHLB and FRB stock ............................... 53,529 53,529 49,803 49,803
Loans receivable, net ............................ 2,397,187 2,351,640 1,701,805 1,704,351
Financial Liabilities:
Deposits ......................................... $2,534,712 2,533,171 1,729,708 1,731,843
Advances from the FHLB of Seattle ................ 402,191 391,128 818,933 811,837
Repurchase agreements and other borrowed funds ... 317,222 317,222 81,215 81,215
Subordinated debentures .......................... 85,000 83,836 80,000 81,502
Financial assets and financial liabilities other than securities are not traded
in active markets. The above estimates of fair value require subjective
judgments and are approximates. Changes in the following methodologies and
assumptions could significantly affect the estimates. These estimates may also
vary significantly from the amounts that could be realized in actual
transactions.
Financial Assets - The estimated fair value is the book value of cash, federal
funds sold and interest bearing cash deposits. For investment and
mortgage-backed securities, the fair value is based on quoted market prices. The
fair value of Federal Home Loan Bank of Seattle and Federal Reserve Bank stock
is the book value, due to the stocks being restricted because they may only be
sold to another member institution or the FHLB or FRB at their par values. The
fair value of loans is estimated by discounting future cash flows using current
rates at which similar loans would be made.
Financial Liabilities - The estimated fair value of demand and savings deposits
is the book value since rates are regularly adjusted to market rates.
Certificate accounts fair value is estimated by discounting the future cash
flows using current rates for similar deposits. Advances from the Federal Home
Loan Bank of Seattle fair value is estimated by discounting future cash flows
using current rates for advances with similar weighted average maturities.
Repurchase agreements and other borrowed funds have variable interest rates, or
are short term, so book value approximates fair value. The subordinated
debentures' fair value is based on quoted market prices or comparison pricing to
a similar product issued at year-end.
18. FAIR VALUE OF FINANCIAL INSTRUMENTS...CONTINUED
67
Off-balance sheet financial instruments - Commitments to extend credit and
letters of credit represent the principal categories of off-balance sheet
financial instruments. Rates for these commitments are set at time of loan
closing, so no adjustment is necessary to reflect these commitments at market
value. See Note 4 to consolidated financial statements.
19. CONTINGENCIES AND COMMITMENTS
The company leases certain land, premises and equipment from third parties under
operating and capital leases. Total rent expense for the years ended December
31, 2005, 2004, and 2003 was approximately $1,334,000 $1,151,000, and
$1,025,000, respectively. One of the Company's subsidiaries has entered into
lease transactions with two of its directors and the related party rent expense
for the years ended December 31, 2005, 2004, and 2003 was approximately
$273,000, $221,000, and $150,000. The total future minimum rental commitments
required under operating and capital leases that have initial or remaining
noncancelable lease terms in excess of one year at December 31, 2005 are as
follows (Dollars in thousands):
Capital Operating
Years ended December 31, Leases Leases Total
- ------------------------ ------- --------- ------
2006 $ 189 1,333 1,522
2007 200 1,197 1,397
2008 202 988 1,190
2009 204 781 985
2010 206 706 912
Thereafter 2,630 2,016 4,646
------ ----- ------
Total minimum lease payments $3,631 7,021 10,652
===== ======
Less: Amounts representing interest 1,615
------
Present Value of minimum lease payments 2,016
Less: Current portion of
obligations under capital leases 32
------
Long-term portion of
obligations under capital leases 1,984
======
The Company is a defendant in legal proceedings arising in the normal course of
business. In the opinion of management, the disposition of pending litigation
will not have a material effect on the Company's consolidated financial
position, results of operations or liquidity.
The Company has plans to open eight new offices and expand eight existing
facilities. The Company has commitments related to the additional locations and
upgrades which will incur additional expenses in 2006.
20. ACQUISITIONS
On October 31, 2005, First Security completed the acquisition of Thompson Falls
Holding Co. and its subsidiary bank First State Bank, with total assets of $153
million, loans of $109 million, and deposits of $109 million. The bank operates
from two banking offices in Thompson Falls and Plains, Montana. A portion of the
purchase price was allocated to core deposit intangible of $914,000 and goodwill
of $7,508,000
On May 20, 2005, Mountain West Bank of Coeur d'Alene completed the acquisition
of the Zions National Bank branch in Bonners Ferry, Idaho, with total assets of
$24 million, loans of $5 million, and deposits of $24 million. A portion of the
purchase price was allocated to core deposit intangible of $211,000 and goodwill
of $2,154,000.
On April 1, 2005, the Company completed the acquisition of Citizens Bank Holding
Company and its subsidiary bank Citizens Community Bank, Pocatello, Idaho, with
total assets of $126 million, loans of $89 million, and deposits of $101
million. This bank operates from three banking offices in Pocatello and Idaho
Falls, and a loan production office in Rexburg, Idaho, and became the ninth
subsidiary bank of the Company. A portion of the purchase price was allocated to
core deposit intangible of $975,000 and goodwill of $9,553,000.
20. ACQUISITIONS...CONTINUED
68
On February, 28, 2005 the Company completed the acquisition of First National
Bank - West, Evanston, Wyoming, with total assets of $267 million, loans of $88
million, and deposits of $225 million. This bank has seven locations in western
Wyoming and became the eighth subsidiary bank of the Company and the first to be
located in the state of Wyoming. A portion of the purchase price was allocated
to core deposit intangible of $2,446,000 and goodwill of $22,508,000.
On June 4, 2004, the Company completed the acquisition of the AmericanWest
Bancorp.'s branch office in Ione, Washington. The branch had approximately $15
million in deposits, and became a branch of Mountain West Bank, the Company's
Idaho banking subsidiary. In consideration for the assumption of liabilities,
the Company received $14.5 million in cash. A portion of the purchase price was
allocated to core deposit intangible of $148 thousand and goodwill of $425
thousand.
The acquisitions were accounted for under the purchase method of accounting.
Accordingly, the assets and liabilities of the acquired branches were recorded
by the Company at their respective fair values at the date of the acquisition
and the results of operations have been included with those of the Company since
the date of acquisition. The excess of the Company's purchase price over the net
fair value of the assets acquired and liabilities assumed, including
identifiable intangible assets, was recorded as goodwill.
21. OPERATING SEGMENT INFORMATION
FASB Statement 131, Financial Reporting for Segments of a Business Enterprise,
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. According to the statement,
operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance.
The Company evaluates segment performance internally based on individual bank
charter, and thus the operating segments are so defined. All segments, except
for the segment defined as "other," are based on commercial banking operations.
The operating segment defined as "other" includes the Parent company, non-bank
operating units, and eliminations of transactions between segments.
The accounting policies of the individual operating segments are the same as
those of the Company described in note 1. Transactions between operating
segments are primarily conducted at fair value, resulting in profits that are
eliminated for reporting consolidated results of operations. Expenses for
centrally provided services are allocated based on the estimated usage of those
services.
69
The following is a summary of selected operating segment information for the
years ended and as of December 31, 2005, 2004, and 2003.
(Dollars in thousands)
Mountain First First
2005 Glacier West Security Western National Big Sky
---- -------- -------- -------- ------- -------- -------
Net interest income ........... $ 26,508 29,607 24,839 14,522 8,179 11,540
Provision for loan losses ..... (1,500) (1,897) (630) -- (251) (965)
-------- ------- ------- ------- ------- -------
Net interest income after
provision for loan losses .. 25,008 27,710 24,209 14,522 7,928 10,575
Noninterest income ............ 9,136 15,812 3,990 3,966 2,340 2,475
Core deposit amortization ..... (252) (214) (202) (224) (371) (26)
Other noninterest expense ..... (16,016) (26,006) (11,141) (9,741) (5,636) (5,509)
-------- ------- ------- ------- ------- -------
Earnings before income taxes .. 17,876 17,302 16,856 8,523 4,261 7,515
Income tax (expense) benefit .. (6,096) (5,886) (5,505) (2,488) (1,401) (2,819)
-------- ------- ------- ------- ------- -------
Net income .................... $ 11,780 11,416 11,351 6,035 2,860 4,696
======== ======= ======= ======= ======= =======
Assets ........................ $731,468 779,538 769,094 431,640 304,196 267,402
Net loans ..................... 462,761 544,429 453,814 231,817 111,682 203,869
Goodwill ...................... 4,084 23,159 12,165 3,848 22,508 1,752
Deposits ...................... 424,739 558,280 476,253 269,494 244,336 191,040
Stockholders' equity .......... 69,257 80,008 83,447 49,458 41,577 26,581
2005 Valley Whitefish Citizens Other Consolidated
---- ------- --------- -------- -------- ------------
Net interest income ........... 9,444 6,527 5,013 (6,172) 130,007
Provision for loan losses ..... (375) (300) (105) -- (6,023)
------- ------- ------- -------- ---------
Net interest income after
provision for loan losses .. 9,069 6,227 4,908 (6,172) 123,984
Noninterest income ............ 3,509 1,916 1,902 (420) 44,626
Core deposit amortization ..... (48) -- (133) -- (1,470)
Other noninterest expense ..... (6,787) (3,428) (4,052) (1,140) (89,456)
------- ------- ------- -------- ---------
Earnings before income taxes .. 5,743 4,715 2,625 (7,732) 77,684
Income tax (expense) benefit .. (1,783) (1,698) (1,022) 3,387 (25,311)
------- ------- ------- -------- ---------
Net income .................... 3,960 3,017 1,603 (4,345) 52,373
======= ======= ======= ======== =========
Assets ........................ 254,437 174,069 144,161 (149,661) 3,706,344
Net loans ..................... 151,204 125,512 113,222 (1,123) 2,397,187
Goodwill ...................... 1,770 260 9,553 -- 79,099
Deposits ...................... 174,059 112,790 110,023 (26,302) 2,534,712
Stockholders' equity .......... 21,809 14,847 23,029 (76,774) 333,239
70
21. OPERATING SEGMENT INFORMATION . . . CONTINUED
(Dollars in thousands)
Mountain First
2004 Glacier West Security Western Big Sky Valley Whitefish Other Consolidated
---- -------- -------- -------- ------- ------- ------- --------- ------- -------------
Net interest income ........... $ 24,541 22,552 24,372 15,663 9,361 8,959 6,393 (4,448) 107,393
Provision for loan losses ..... (1,075) (1,320) (600) -- (510) (440) (250) -- (4,195)
-------- ------- ------- ------- ------- ------- ------- ------ ---------
Net interest income after
provision for loan losses .. 23,466 21,232 23,772 15,663 8,851 8,519 6,143 (4,448) 103,198
Noninterest income ............ 8,652 12,315 3,684 3,583 2,249 2,940 1,419 (277) 34,565
Core deposit amortization ..... (276) (210) (216) (279) (33) (60) -- -- (1,074)
Other noninterest expense ..... (14,980) (21,290) (10,184) (9,016) (5,190) (6,020) (3,280) (1,099) (71,059)
-------- ------- ------- ------- ------- ------- ------- ------ ---------
Earnings before income taxes .. 16,862 12,047 17,056 9,951 5,877 5,379 4,282 (5,824) 65,630
Income tax (expense) benefit .. (5,704) (3,769) (5,572) (3,039) (2,157) (1,632) (1,457) 2,316 (21,014)
-------- ------- ------- ------- ------- ------- ------- ------ ---------
Net income .................... $ 11,158 8,278 11,484 6,912 3,720 3,747 2,825 (3,508) 44,616
======== ======= ======= ======= ======= ======= ======= ====== =========
Assets ........................ $646,523 629,205 626,341 446,502 241,056 241,518 169,411 10,181 3,010,737
Net loans ..................... 398,187 382,819 326,826 210,181 161,761 119,626 102,746 (341) 1,701,805
Goodwill ...................... 4,084 21,005 4,657 3,848 1,752 1,770 260 -- 37,376
Deposits ...................... 393,655 431,662 359,918 207,711 132,853 146,660 98,605 (41,356) 1,729,708
Stockholders' equity .......... 64,207 67,002 56,004 49,095 20,567 20,052 13,839 (20,582) 270,184
(Dollars in thousands)
Mountain First
2003 Glacier West Security Western Big Sky Valley Whitefish Other Consolidated
---- -------- -------- -------- ------- ------- ------- --------- ------- -------------
Net interest income ........... $ 22,565 17,061 22,246 13,670 7,264 7,845 5,194 (3,493) 92,352
Provision for loan losses ..... (375) (1,124) (1,250) -- (250) (630) (180) -- (3,809)
-------- ------- ------- ------- ------- ------- ------- ------ ---------
Net interest income after
provision for loan losses .. 22,190 15,937 20,996 13,670 7,014 7,215 5,014 (3,493) 88,543
Noninterest income ............ 8,184 10,206 4,392 4,043 1,729 3,730 1,273 5 33,562
Core deposit amortization ..... (304) (205) (270) (348) (41) (75) -- -- (1,243)
Other noninterest expense ..... (14,283) (17,958) (9,766) (8,661) (4,141) (5,471) (3,071) (1,350) (64,701)
-------- ------- ------- ------- ------- ------- ------- ------ ---------
Earnings before income taxes .. 15,787 7,980 15,352 8,704 4,561 5,399 3,216 (4,838) 56,161
Income tax (expense) benefit .. (5,437) (2,216) (5,288) (2,604) (1,730) (1,754) (1,054) 1,930 (18,153)
-------- ------- ------- ------- ------- ------- ------- ------ ---------
Net income .................... $ 10,350 5,764 10,064 6,100 2,831 3,645 2,162 (2,908) 38,008
======== ======= ======= ======= ======= ======= ======= ====== =========
Assets ........................ $595,778 547,035 578,803 446,405 209,342 219,105 149,531 (6,366) 2,739,633
Net loans ..................... 330,012 313,021 295,195 196,732 125,664 97,292 72,800 (351) 1,430,365
Goodwill ...................... 4,084 20,580 4,657 3,848 1,752 1,770 260 -- 36,951
Deposits ...................... 358,600 372,936 340,650 219,950 115,496 134,405 68,124 (12,536) 1,597,625
Stockholders' equity .......... 58,703 61,031 49,334 47,242 17,882 18,176 12,126 (26,655) 237,839
22. SUBSEQUENT EVENTS
On February 1, 2006, Glacier Trust I redeemed the $35,000,000 in subordinated
debentures which had an interest rate of 9.40%. The subordinated debentures were
replaced by Glacier Trust III ("Glacier Trust III"), which issued $35,000,000 in
subordinated debentures with an interest rate of 6.078%. The Company formed
Glacier Trust III as a financing subsidiary on January 27, 2006. On January 31,
2006, Glacier Trust III issued 35,000 preferred securities at $1,000 per
preferred security. The purchase of the securities entitles the shareholder to
receive cumulative cash distributions at an annual interest rate of 6.078% for
the first five years and then converts to a three month LIBOR plus 1.29% rate
adjustable quarterly from payments on the junior subordinated debentures of
Glacier Bancorp, Inc. The subordinated debentures will mature and the preferred
securities must be redeemed by April 7, 2036. In exchange for the Company's
capital contribution, the Company owns all of the outstanding common securities
of Glacier Trust III.
71
23. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2005, the Financial Accounting Standards Board issued a Staff
Position which amends SFAS No. 115 Accounting for Certain Investments in Debt
and Equity Securities. The Staff Position addresses the determination as to when
an investment is considered impaired, whether that impairment is other than
temporary, and the measurement of an impairment loss.
In May 2005, the Financial Accounting Standards Board issued SFAS No. 154
Accounting Changes and Errors Corrections which requires retrospective
application to prior periods' financial statements of changes in accounting
principle, unless it is impracticable to determine either the period-specific
effects or the cumulative effect of the change. This Statement replaces APB
Opinion No. 20 Accounting Changes, and SFAS No. 3 Reporting Accounting Changes
in Interim Financial Statements. APB Opinion No. 20 previously required that
most voluntary changes in accounting principle be recognized by including in net
income of the period of the change the cumulative effect of changing to the new
accounting principle. This Statement applies to all voluntary changes in
accounting principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. The statement is effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005.
In December 2004, the Financial Accounting Standards Board issued a revised
version of SFAS No. 123 Share-Based Payment, mandating that companies measure
the cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award (with limited
exceptions). The intrinsic value method of accounting for such awards, as
previously elected by the company and provided for in APB Opinion No. 25,
Accounting for Stock Issued to Employees will no longer be acceptable under GAAP
for public companies as of the beginning of the first interim or annual
reporting period that begins after June 15, 2005. If no comparable market values
are available, the grant-date fair value of employee share options and similar
instruments is to be estimated using option-pricing models adjusted for the
unique characteristics of those instruments.
Under the previous provisions of SFAS No. 123, Accounting for Stock Based
Compensation companies using the intrinsic value method were required to
disclose in a footnote to their financial statements the effect on net income of
using the intrinsic value rather than the grant-date fair value method. The
company has continued to use the intrinsic value method, with appropriate
disclosures, in its financial statements through December 31, 2005 (See Stock
Based Compensation under Note 1 to the company's consolidated financial
statements). The company expects to adopt SFAS No. 123 (Revised) effective with
its reporting for the first quarter of 2006.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Audit Committee of the Board of Directors of the Company approved a change
in auditors. At a meeting of the Audit Committee held on June 13, 2005, the
Audit Committee appointed BKD, LLP ("BKD") to serve as the Company's independent
public accountants, effective June 16, 2005. BKD replaced KPMG LLP ("KPMG").
KPMG performed audits of the Company's consolidated financial statements as of
and for each of the years ended December 31, 2003 and 2004. In addition, KPMG
performed audits of management's assessment of the effectiveness of internal
control over financial reporting and the effectiveness of internal control over
financial reporting as of December 31, 2004.
The audit reports of KPMG on the consolidated financial statements of the
Company as of and for the years ended December 31, 2003 and 2004 did not contain
an adverse opinion or disclaimer of opinion, and were not qualified or modified
as to uncertainty, audit scope or accounting principles. The audit reports of
KPMG on management's assessment of the effectiveness of internal control over
financial reporting and the effectiveness of internal control over financial
reporting as of December 31, 2004 did not contain an adverse opinion or
disclaimer of opinion, and were not qualified or modified as to uncertainty,
audit scope or accounting principles.
In connection with the audits of the two fiscal years ended December 31, 2004
and the subsequent interim period through June 13, 2005, there were no (1)
disagreements between the Company and KPMG on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedures, which disagreements if not resolved to their satisfaction would have
caused KPMG to make reference in connection with their opinion to the subject
matter of the disagreement, or (2) reportable events, as defined in Item
304(a)(1)(v) of Securities and Exchange (SEC) Regulation S-K.
During the two years ended December 31, 2003 and 2004 and from December 31, 2004
through June 13, 2005, the date on which BKD was selected to be engaged to be
the Company's independent accountant, neither the Company nor anyone on its
behalf had consulted BKD with respect to any accounting or auditing issues
involving the Company. In particular, there was no discussion with the Company
regarding the application of accounting principles to a specified transaction,
the type of audit opinion that might be
72
rendered on the financial statements, or any related item. Subsequent to BKD
being engaged, there have been no changes or disagreements with accountants on
accounting and financial disclosure.
KPMG furnished a letter, addressed to the SEC, stating that they agree with the
above statements, except that they were not in a position to agree or disagree
with the first paragraph and the last paragraph.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. An evaluation was carried out
under the supervision and with the participation of the Company's management,
including the Chief Executive Officer ("CEO") and Chief Financial Officer
("CFO"), of the effectiveness of our disclosure controls and procedures. Based
on that evaluation, the CEO and CFO have concluded that as of the end of the
period covered by this report, our disclosure controls and procedures are
effective to provide reasonable assurance that information required to be
disclosed by us in reports that we file or submit under the Securities Exchange
Act of 1934 is recorded, processed, summarized and timely reported as provided
in the SEC's rules and forms. As a result of this evaluation, there were no
significant changes in our internal control over financial reporting during the
three months ended December 31, 2005 that have materially affected, or are
reasonable likely to materially affect, our internal control over financial
reporting.
Management's Report on Internal Control Over Financial Reporting Management is
responsible for establishing and maintaining effective internal control over
financial reporting as it relates to its financial statements presented in
conformity with U.S. generally accepted accounting principles. Glacier's
internal control system was designed to provide reasonable assurance to the
Company's management and Board of Directors regarding the preparation and fair
presentation of published financial statements in accordance with U.S. generally
accepted accounting principles. Internal control over financial reporting
includes self monitoring mechanisms and actions are taken to correct
deficiencies as they are identified.
There are inherent limitations in any internal control, no matter how well
designed, misstatements due to error or fraud may occur and not be detected,
including the possibility of circumvention or overriding of controls.
Accordingly, even an effective internal control system can provide only
reasonable assurance with respect to financial statement preparation. Further,
because of changes in conditions, the effectiveness of an internal control
system may vary over time.
Management assessed its internal control structure over financial reporting as
of December 31, 2005. This assessment was based on criteria for effective
internal control over financial reporting described in "Internal Control -
Integrated Framework" issued by the Committee of Sponsoring Organizations of the
Treadway Commission. The assessment performed by management of its internal
control over financial reporting as of December 31, 2005 did not include the
following entities which were acquired by the Company during fiscal year 2005:
First National Bank - West, First State Bank (which was merged with and into
First Security Bank of Missoula), and Citizens Community Bank (collectively, the
"Acquisitions"). First National Bank - West, First State Bank and Citizens
Community Bank represent approximately 7%, 4%, and 3%, respectively of the
assets of the Company on a consolidated basis. Based on this assessment,
management asserts that Glacier Bancorp, Inc. and subsidiaries (except those
subsidiaries acquired in the Acquisitions) maintained effective internal control
over financial reporting as it relates to its financial statements presented in
conformity with accounting principles generally accepted in the Unites States.
There was no material change to the internal control over financial reporting as
a result of the Acquisitions.
The registered public accounting firm that audited the financial statements, BKD
LLP for year ended December 31, 2005, included in the annual report has issued
an attestation report on management's assessment of the company's internal
control over financial reporting, which expresses unqualified opinions on
management's assessment and on the effectiveness of the Company's internal
control over financial reporting as of December 31, 2005.
ITEM 9B. OTHER INFORMATION
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding "Directors and Executive Officers of the Registrant" is
set forth under the headings "Business of the Meeting - Election of Directors -
Information with Respect to Nominees and Other Directors - Background of
Nominees and Continuing Directors" and "Security Ownership of Certain Beneficial
Owners and Management - Executive Officers who are not Directors" of
73
the Company's 2006 Annual Meeting Proxy Statement ("Proxy Statement") and is
incorporated herein by reference.
Information regarding "Compliance with Section 16(a) of the Exchange Act" is set
forth under the section "Compliance with Section 16 (a) Filing Requirements" of
the Company's Proxy Statement and is incorporated herein by reference.
Information regarding the Company's audit committee financial expert is set
forth under the heading "Meetings and Committees of Board of Directors-Committee
Membership" in our Proxy Statement and is incorporated by reference.
Consistent with the requirements of Sarbanes-Oxley, the Company has a Code of
Ethics applicable to senior financial officers including the principal executive
officer. The Code of Ethics can be accessed electronically by visiting the
Company's website at www.glacierbancorp.com.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding "Executive Compensation" is set forth under the headings
"Meetings and Committees of the Board of Directors - Compensation of Directors"
and "Executive Compensation" of the Company's Proxy Statement and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding "Security Ownership of Certain Beneficial Owners and
Management" is set forth under the headings "Information with Respect to
Nominees and Other Directors," "Security Ownership of Certain Beneficial Owners
and Management - Executive Officers who are not Directors" and "Beneficial
Owners" of the Company's Proxy Statement and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding "Certain Relationships and Related Transactions" is set
forth under the heading "Transactions with Management" of the Company's Proxy
Statement and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information regarding "Principal Accounting Fees and Services" is set forth
under the heading "Auditors" of the Company's Proxy Statement and is
incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) and (2) Financial Statements and Financial Statement Schedules
The financial statements and related documents listed in the index set forth in
Item 8 of this report are filed as part of this report.
All other schedules to the consolidated financial statements required by
Regulation S-X are omitted because they are not applicable, not material or
because the information is included in the consolidated financial statements or
related notes.
74
(1) The following exhibits are included as part of this Form 10-K:
EXHIBIT NO. EXHIBIT
- ----------- -------
3(a) Amended and Restated Certificate of Incorporation (1)
3(b) Amended and Restated Bylaws (2)
10(a) 1994 Director Stock Option Plan and related agreements (3)
10(b) 1995 Employee Stock Option Plan and related agreements (3)
10(c) Deferred Compensation Plan effective January 1, 2005 (4)
10(d) Supplemental Executive Retirement Agreement (4)
10(e) 2005 Stock Incentive Plan and related agreements (5)
10(f) Employment Agreement dated January 1, 2006 between the Company,
Glacier Bancorp, Inc. and Michael J. Blodnick
10(g) Employment Agreement dated January 1, 2006 between the Company,
Glacier Bancorp, Inc. and James H. Strosahl
10(h) Employment Agreement dated January 1, 2006 between First Security
Bank of Missoula and William L. Bouchee
10(i) Employment agreement dated January 1, 2006, between Mountain West
Bank and Jon W. Hippler
14 Code of Ethics (6)
21 Subsidiaries of the Company (See item 1, "Subsidiaries")
23(a) Consent of BKD LLP
23(b) Consent of KPMG LLP
31.1 Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes - Oxley Act of 2002
(1) Incorporated by reference to exhibits 3.1, 10.1, 10.2 and 10.3 of the
Company's Quarterly Report on form 10-Q for the quarter ended March 31,
2005.
(2) Incorporated by reference to Exhibit 3.ii included in the Company's
Quarterly Report on form 10-Q for the quarter ended June 30, 2004.
(3) Incorporated by reference to Exhibit 99.1 of the Company's S-8 Registration
Statement (No. 333-105995).
(4) Incorporated by reference to exhibits 10(g) and 10(h) of the Company's
Annual Report on Form 10-k for the fiscal year ended December 31, 2004.
(5) Incorporated by reference to exhibits 99.1 through 99.3 of the Company's
S-8 Registration Statement (No. 333-125024).
(6) Incorporated by reference to Exhibit 14, included in the Company's Form
10-K for the year ended December 31, 2003.
75
SIGNATURES
PURSUANT to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on March 15, 2006.
GLACIER BANCORP, INC.
By: /s/ Michael J. Blodnick
------------------------------------
Michael J. Blodnick
President/CEO/Director
PURSUANT to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on March 15, 2006, by the following persons in the
capacities indicated.
/s/ Michael J. Blodnick President, CEO, and Director
- ------------------------------------- (Principal Executive Officer)
Michael J. Blodnick
/s/ James H. Strosahl Executive Vice President and CFO
- ------------------------------------- (Principal Financial/Accounting Officer)
James H. Strosahl
Majority of the Board of Directors
/s/ Everit A. Sliter Chairman
- -------------------------------------
Everit A. Sliter
/s/ James M. English Director
- -------------------------------------
James M. English
/s/ Allen Fetscher Director
- -------------------------------------
Allen J. Fetscher
/s/ Jon W. Hippler Director
- -------------------------------------
Jon W. Hippler
/s/ Craig A. Langel Director
- -------------------------------------
Craig A. Langel
/s/ L. Peter Larson Director
- -------------------------------------
L. Peter Larson
/s/ John W. Murdoch Director
- -------------------------------------
John W. Murdoch
76