UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 2006
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to _________________
COMMISSION FILE 0-18911
GLACIER BANCORP, INC.
(Exact name of registrant as specified in its charter)
MONTANA 81-0519541
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
49 Commons Loop, Kalispell, Montana 59901
(Address of principal executive offices) (Zip Code)
(406) 756-4200
Registrant's telephone number, including area code
Not Applicable
(Former name, former address, and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by checkmark whether the registrant is a large accelerated filer, or an
accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the
Exchange Act).
Large Accelerated Filer X Accelerated Filer Non-Accelerated Filer
--- --- ---
Indicate by checkmark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes No X
--- ---
The number of shares of Registrant's common stock outstanding on October 27,
2006 was 34,820,433. No preferred shares are issued or outstanding.
GLACIER BANCORP, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
Page #
------
PART I. FINANCIAL INFORMATION
Item 1 -- Financial Statements
Condensed Consolidated Statements of Financial Condition --
Unaudited September 30, 2006, and September 30, 2005 and
December 31, 2005................................................ 3
Condensed Consolidated Statements of Operations --
Unaudited three and nine months ended September 30, 2006
and 2005......................................................... 4
Condensed Consolidated Statements of Stockholders' Equity and
Comprehensive Income -- Year ended December 31, 2005
and unaudited nine months ended September 30, 2006............... 5
Condensed Consolidated Statements of Cash Flows --
Unaudited nine months ended September 30, 2006 and 2005.......... 6
Notes to Condensed Consolidated Financial Statements -
Unaudited..................................................... 7
Item 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 22
Item 3 -- Quantitative and Qualitative Disclosure about Market
Risk................................................... 29
Item 4 -- Controls and Procedures................................... 29
PART II. OTHER INFORMATION............................................. 30
Item 1 -- Legal Proceedings......................................... 30
Item 1A -- Risk Factors............................................. 30
Item 2 -- Unregistered Sales of Equity Securities and Use of
Proceeds............................................... 30
Item 3 -- Defaults Upon Senior Securities........................... 30
Item 4 -- Submission of Matters to a Vote of Security Holders....... 30
Item 5 -- Other Information......................................... 30
Item 6 -- Exhibits.................................................. 30
Signatures.......................................................... 31
GLACIER BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except per SEPTEMBER 30, December 31, September 30,
share data) 2006 2005 2005
------------- ------------ -------------
(UNAUDITED) (unaudited)
ASSETS:
Cash on hand and in banks ............... $ 113,268 111,418 114,781
Federal funds sold ...................... 2,882 7,537 8,137
Interest bearing cash deposits .......... 67,672 13,654 16,636
----------- --------- ---------
Cash and cash equivalents ............ 183,822 132,609 139,554
Investment securities ................... 845,304 970,055 1,026,966
Loans receivable, net ................... 2,786,269 2,374,647 2,207,249
Loans held for sale ..................... 28,780 22,540 26,800
Premises and equipment, net ............. 93,859 79,952 73,579
Real estate and other assets
owned, net ........................... 510 332 1,803
Accrued interest receivable ............. 22,822 19,923 17,515
Core deposit intangible, net ............ 7,680 8,015 7,516
Goodwill ................................ 89,814 79,099 72,382
Other assets ............................ 67,836 19,172 16,516
----------- --------- ---------
$ 4,126,696 3,706,344 3,589,880
=========== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Non-interest bearing deposits ........... $ 751,593 667,008 684,151
Interest bearing deposits ............... 2,099,742 1,867,704 1,702,977
Advances from Federal Home Loan
Bank of Seattle ...................... 377,104 402,191 654,368
Securities sold under agreements to
repurchase ........................... 162,400 129,530 111,196
Other borrowed funds .................... 171,699 187,692 12,313
Accrued interest payable ................ 10,288 7,437 5,784
Deferred tax liability .................. 3,266 2,746 7,644
Subordinated debentures ................. 115,000 85,000 85,000
Other liabilities ....................... 24,594 23,797 21,047
----------- --------- ---------
Total liabilities .................... 3,715,686 3,373,105 3,284,480
----------- --------- ---------
Preferred shares, $.01 par value
per share. 1,000,000 shares
authorized
None issued or outstanding ........... -- -- --
Common stock, $.01 par value per
share. 78,125,000 shares
authorized ........................... 338 322 313
Paid-in capital ......................... 310,685 262,383 240,197
Retained earnings - substantially
restricted ........................... 97,533 69,713 60,682
Accumulated other comprehensive
income ............................... 2,454 821 4,208
----------- --------- ---------
Total stockholders' equity ........... 411,010 333,239 305,400
----------- --------- ---------
$ 4,126,696 3,706,344 3,589,880
=========== ========= =========
Number of shares outstanding ............ 33,844,184 32,172,547 31,345,769
Book value per share .................... $ 12.14 10.36 9.74
See accompanying notes to condensed consolidated financial statements.
3
GLACIER BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -----------------------
(UNAUDITED - dollars in thousands, except per share data) 2006 2005 2006 2005
- --------------------------------------------------------- ----------- ---------- ---------- ----------
INTEREST INCOME:
Real estate loans .......................................... $ 13,708 8,946 36,939 23,658
Commercial loans ........................................... 29,687 21,803 82,691 57,915
Consumer and other loans ................................... 10,348 7,666 28,867 20,407
Investment securities and other ............................ 10,149 11,155 31,280 34,642
----------- ---------- ---------- ----------
Total interest income ................................... 63,892 49,570 179,777 136,622
----------- ---------- ---------- ----------
INTEREST EXPENSE:
Deposits ................................................... 15,351 6,914 40,403 16,565
Federal Home Loan Bank of Seattle advances ................. 5,340 5,830 14,553 16,843
Securities sold under agreements to repurchase ............. 1,804 804 4,565 1,803
Subordinated debentures .................................... 1,519 1,633 4,232 4,817
Other borrowed funds ....................................... 873 629 3,085 2,291
----------- ---------- ---------- ----------
Total interest expense .................................. 24,887 15,810 66,838 42,319
----------- ---------- ---------- ----------
NET INTEREST INCOME ........................................... 39,005 33,760 112,939 94,303
Provision for loan losses .................................. 1,320 1,607 3,840 4,649
----------- ---------- ---------- ----------
Net interest income after provision for loan losses ..... 37,685 32,153 109,099 89,654
----------- ---------- ---------- ----------
NON-INTEREST INCOME:
Service charges and other fees ............................. 7,703 6,575 21,501 18,020
Miscellaneous loan fees and charges ........................ 1,700 1,806 5,468 4,693
Gains on sale of loans ..................................... 2,992 3,258 7,952 8,234
Loss on sale of investments ................................ (3) (1) (3) (138)
Other income ............................................... 1,370 698 2,898 2,148
----------- ---------- ---------- ----------
Total non-interest income ............................... 13,762 12,336 37,816 32,957
----------- ---------- ---------- ----------
NON-INTEREST EXPENSE:
Compensation, employee benefits
and related expenses .................................... 15,992 13,685 47,042 37,103
Occupancy and equipment expense ............................ 3,875 3,356 10,797 9,363
Outsourced data processing expense ......................... 620 615 2,022 1,270
Core deposit intangibles amortization ...................... 411 388 1,231 1,055
Other expenses ............................................. 6,946 6,132 19,529 16,935
----------- ---------- ---------- ----------
Total non-interest expense .............................. 27,844 24,176 80,621 65,726
----------- ---------- ---------- ----------
EARNINGS BEFORE INCOME TAXES .................................. 23,603 20,313 66,294 56,885
Federal and state income tax expense ....................... 7,797 6,738 22,193 18,700
----------- ---------- ---------- ----------
NET EARNINGS .................................................. $ 15,806 13,575 44,101 38,185
=========== ========== ========== ==========
Basic earnings per share ...................................... $ 0.48 0.43 1.35 1.23
Diluted earnings per share .................................... $ 0.47 0.42 1.33 1.21
Dividends declared per share .................................. $ 0.17 0.15 0.49 0.44
Return on average assets (annualized) ......................... 1.58% 1.52% 1.53% 1.51%
Return on average equity (annualized) ......................... 16.24% 17.88% 16.42% 17.67%
Average outstanding shares - basic ............................ 33,135,225 31,304,413 32,586,646 31,100,946
Average outstanding shares - diluted .......................... 33,602,209 31,960,244 33,084,871 31,673,706
See accompanying notes to condensed consolidated financial statements.
4
GLACIER BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31, 2005 AND UNAUDITED NINE MONTHS ENDED SEPTEMBER 30, 2006
Retained Accumulated Total
Common Stock earnings Other stock-
------------------ Paid-in substantially comprehensive holders'
(Dollars in thousands, except per share data) Shares Amount capital restricted income (loss) equity
- --------------------------------------------- ---------- ------ ------- ------------- ------------- --------
Balance at December 31, 2004 .................. 30,686,763 $307 227,552 36,391 5,934 270,184
Comprehensive income:
Net earnings ............................... -- -- -- 52,373 -- 52,373
Unrealized loss on securities, net of
reclassification adjustment and taxes ... -- -- -- -- (5,113) (5,113)
-------
Total comprehensive income .................... 47,260
-------
Cash dividends declared ($.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 $322 262,383 69,713 821 333,239
Comprehensive income:
Net earnings ............................... -- -- -- 44,101 -- 44,101
Unrealized gain on securities, net of
reclassification adjustment and taxes ... -- -- -- -- 1,633 1,633
-------
Total comprehensive income .................... 45,734
-------
Cash dividends declared ($.49 per share) ...... -- -- -- (16,281) -- (16,281)
Stock options exercised ....................... 354,201 3 5,482 -- -- 5,485
Stock issued in connection with acquisition ... 317,436 3 9,996 -- -- 9,999
Public offering of stock issued ............... 1,000,000 10 29,423 29,433
Stock based compensation and tax benefit ...... -- -- 3,401 -- -- 3,401
---------- ---- ------- ------- ------ -------
Balance at September 30, 2006 (unaudited) ..... 33,844,184 $338 310,685 97,533 2,454 411,010
========== ==== ======= ======= ====== =======
See accompanying notes to condensed consolidated financial statements.
5
GLACIER BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPT. 30,
---------------------------
(UNAUDITED - dollars in thousands) 2006 2005
- ---------------------------------- ----------- --------
OPERATING ACTIVITIES:
NET CASH PROVIDED BY OPERATING ACTIVITIES ......................... $ 51,825 49,342
----------- --------
INVESTING ACTIVITIES:
Proceeds from sales, maturities and prepayments of
investments available-for-sale ................................. 170,685 291,631
Purchases of investments available-for-sale ....................... (40,792) (109,211)
Principal collected on installment and commercial loans ........... 823,031 549,964
Installment and commercial loans originated or acquired ........... (1,068,141) (839,240)
Principal collections on mortgage loans ........................... 266,591 329,594
Mortgage loans originated or acquired ............................. (395,999) (385,971)
Net purchase of FHLB and FRB stock ................................ (455) (14)
Net funds received on acquisition of banks and branches ........... 17,176 1,170
Funds in escrow for Citizens Development Company acquisition ...... (47,176) --
Net addition of premises and equipment ............................ (16,400) (12,721)
----------- --------
NET CASH USED IN INVESTING ACTIVITIES .......................... (291,480) (174,798)
----------- --------
FINANCING ACTIVITIES:
Net increase in deposits .......................................... 249,451 308,024
Net decrease in FHLB advances and other borrowed funds ............ (41,080) (159,310)
Net increase in securities sold under repurchase agreements ....... 32,870 35,038
Proceeds from issuance of subordinated debentures ................. 30,000 --
Cash dividends paid ............................................... (16,281) (13,894)
Excess tax benefits from stock options ............................ 990 --
Proceeds from exercise of stock options and other stock issued .... 34,918 3,944
Cash paid for stock split ......................................... -- (8)
----------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES ...................... 290,868 173,794
----------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS ...................... 51,213 48,338
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .................. 132,609 91,216
----------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ........................ $ 183,822 139,554
=========== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for: Interest ......................... $ 63,724 41,400
Income taxes ..................... $ 22,961 18,077
The following schedule summarizes the acquisition of First National Bank of
Morgan in 2006 and First National Banks - West Co. and Citizens Bank Holding
Company in 2005
FIRST NATIONAL FIRST NATIONAL CITIZENS BANK
BANK OF MORGAN BANKS - WEST CO. HOLDING COMPANY
-------------- ---------------- ---------------
Fair Value of assets acquired $88,519 267,126 126,394
Cash paid for the capital stock 10,109 41,000 8,602
Capital stock issued 9,999 -- 8,715
Liabilities assumed 68,411 226,126 109,077
See accompanying notes to condensed consolidated financial statements.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1) Basis of Presentation
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of
normal recurring adjustments) necessary for a fair presentation of Glacier
Bancorp Inc.'s (the "Company") financial condition as of September 30,
2006, and September 30, 2005, stockholders' equity for the nine months
ended September 30, 2006, the results of operations for the three and nine
months ended September 30, 2006 and 2005, and cash flows for the nine
months ended September 30, 2006 and 2005. The condensed consolidated
statement of financial condition and statement of stockholders' equity and
comprehensive income of the Company as of December 31, 2005 have been
derived from the audited consolidated statements of the Company as of that
date.
The accompanying condensed consolidated financial statements do not include
all of the information and footnotes required by the accounting principals
generally accepted in the United States of America for complete financial
statements. These condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes
thereto contained in the Company's Annual Report on Form 10-K for the year
ended December 31, 2005. Operating results for the nine months ended
September 30, 2006 are not necessarily indicative of the results
anticipated for the year ending December 31, 2006. Certain
reclassifications have been made to the 2005 financial statements to
conform to the 2006 presentation.
2) Organizational Structure
The Company, headquartered in Kalispell, Montana, is a Montana corporation
incorporated in 2004 as a successor corporation to the Delaware corporation
incorporated in 1990. The Company is the parent company for ten wholly
owned banking subsidiaries: Glacier Bank ("Glacier"), First Security Bank
of Missoula ("First Security"), Western Security Bank ("Western"), Big Sky
Western Bank ("Big Sky"), Valley Bank of Helena ("Valley"), and Glacier
Bank of Whitefish ("Whitefish"), all located in Montana, Mountain West Bank
("Mountain West") which is located in Idaho, Utah, and Washington, Citizens
Community Bank ("Citizens") located in Idaho, 1st Bank ("1st Bank",
formerly known as "First National Bank") located in Wyoming, and First
National Bank of Morgan ("Morgan") located in Utah. In addition, the
Company owns four subsidiaries, Glacier Capital Trust II ("Glacier Trust
II"), Glacier Capital Trust III ("Glacier Trust III"), Glacier Capital
Trust IV ("Glacier Trust IV"), and Citizens (ID) Statutory Trust I
("Citizens Trust I") for the purpose of issuing trust preferred securities
and in accordance with Financial Accounting Standards Board Interpretation
46(R) the subsidiaries are not consolidated into the Company's financial
statements. The Company does not have any off-balance sheet entities.
On February 1, 2006, Glacier Capital Trust I, whose common equity was
wholly owned by the Company, had 1,400,000 shares of trust preferred
securities redeemed and the Subordinated Debentures of $35,000,000 paid.
The Subordinated Debentures were replaced by Glacier Trust III.
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
7
earlier redemption in an amount equal to their liquidation amount plus
accumulated and unpaid distributions to the date of redemption.
On August 22, 2006, 30,000 shares of trust preferred shares were issued by
Glacier Trust IV whose common equity is wholly owned by the Company. The
Trust Preferred Securities bear a cumulative fixed interest rate of 7.235%
for the first five years and then converts to a three month LIBOR plus
1.57% rate adjustable quarterly for the remaining term until maturity on
September 15, 2036. Interest distributions are payable quarterly. The Trust
Preferred Securities are subject to mandatory redemption upon repayment of
the Subordinated Debentures of $30,000,000 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 following abbreviated organizational chart illustrates the various
relationships:
<Table>
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)
- ---------------------------------------------------|--------------------------------------------------------
1st Bank Big Sky | Valley Bank Glacier Bank
(Commercial bank) Western Bank | of Helena of Whitefish
(Commercial Bank) | (Commercial bank) (Commercial bank)
- ---------------------------------------------------|--------------------------------------------------------
Citizens Community Bank First National Bank |
(Commercial bank) of Morgan | Glacier Capital Trust II Glacier Capital Trust III
(Commercial bank) |
- ---------------------------------------------------|--------------------------------------------------------
Glacier Capital Trust IV Citizens (ID) Statutory Trust I
- ------------------------------------------------------------------------------------------------------------
</Table>
3) Ratios
Returns on average assets and average equity were calculated based on daily
averages.
4) Dividends Declared
On September 27, 2006, the Board of Directors declared a $.17 per share
quarterly cash dividend payable on October 19, 2006 to stockholders of
record on October 10, 2006.
5) Computation of Earnings Per Share
Basic earnings per common share is computed by dividing net earnings by the
weighted average number of shares of common stock outstanding during the
period presented. Diluted earnings per share is computed by including the
net increase in shares as if dilutive outstanding stock options were
exercised, using the treasury stock method.
The following schedule contains the data used in the calculation of basic
and diluted earnings per share:
8
Three Three Nine Nine
months ended months ended months ended months ended
Sept 30, 2006 Sept 30, 2005 Sept 30, 2006 Sept 30, 2005
------------- ------------- ------------- -------------
Net earnings available to common
stockholders ......................... $15,806,000 13,575,000 44,101,000 38,185,000
Average outstanding shares - basic ...... 33,135,225 31,304,413 32,586,646 31,100,946
Add: Dilutive stock options ............. 466,984 655,831 498,225 572,760
----------- ---------- ---------- ----------
Average outstanding shares - diluted .... 33,602,209 31,960,244 33,084,871 31,673,706
=========== ========== ========== ==========
Basic earnings per share ................ $ 0.48 0.43 1.35 1.23
=========== ========== ========== ==========
Diluted earnings per share .............. $ 0.47 0.42 1.33 1.21
=========== ========== ========== ==========
There were approximately 538,433 and 197,209 average shares excluded from
the nine months ended diluted share calculation as of September 30, 2006,
and 2005, respectively, due to the option exercise price exceeding the
market price.
6) Stock Based Compensation
The Company has three stock based compensation plans outstanding. The
Directors 1994 Stock Option Plan was approved to provide for the grant of
options to outside Directors of the Company. The Employees 1995 Stock
Option Plan was approved to provide the grant of options to certain
full-time employees of the Company. The Employees 1995 Stock Option Plan
expired in April 2005 and has granted but unexpired options outstanding.
The 2005 Stock Incentive Plan was approved by shareholders on April 27,
2005 which provides awards to certain full-time employees of the Company.
The 2005 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. Upon
exercise of the stock options the shares are obtained from the authorized
and unissued stock.
The Company adopted SFAS No. 123 (Revised) Share-Based Payment, as of
January 1, 2006 and, accordingly, has determined compensation cost based on
the fair value of the option at the grant date. The Company adopted the
modified prospective transition method in reporting financial statement
results in the current and for future reporting periods. Under the modified
prospective method, SFAS No. 123 (Revised) applies to new awards and to
awards modified, repurchased, or cancelled after the effective date;
accordingly the prior interim and annual periods do not reflect restated
amounts. Additionally, the compensation cost for the portion of awards
outstanding for which the requisite service has not been rendered that are
outstanding as of the required effective date are recognized as the
requisite service is rendered on or after the required effective date. For
the nine months ended September 30, 2006, the compensation cost for the
stock option plans was $2,410,000, with a corresponding income tax benefit
of $707,000, resulting in a net earnings and cash flow from operations
reduction of $1,703,000, or a decrease of $.05 per share for both basic and
diluted earnings per share. For the three months ended September 30, 2006,
the compensation cost for the stock option plans was $726,000, with a
corresponding income tax benefit of $207,000, resulting in a net earnings
and cash flow from operations reduction of $519,000, or a decrease of $.02
per share for both basic and diluted earnings per share. Additionally, in
the cash flow statement, the excess tax benefit from stock options
decreased the net cash provided from operating activities and increased the
net cash provided by financing activities by $990,000 and $319,000 for the
nine and three months ended September 30, 2006,
9
respectively. Total unrecognized compensation cost, net of income tax
benefit, related to non-vested awards which are expected to be recognized
over the next weighted period of 1 year was $1,570,000 as of September 30,
2006. The total fair value of shares vested during the nine months ended
September 30, 2006 and 2005 was $1,245,000 and $920,000, respectively. The
total fair value of shares vested during the three months ended September
30, 2006 and 2005 was $709,000 and $368,000, respectively.
Prior to the adoption of SFAS No. 123 (Revised), the Company utilized the
intrinsic value method and compensation cost was the excess of the market
price of the stock at the grant date over the amount an employee must pay
to acquire the stock. The exercise price of all stock options granted has
been equal to the fair market value of the underlying stock at the date of
grant and, accordingly, the intrinsic value has been $0 and no compensation
cost was recognized prior to the adoption of SFAS No. 123 (Revised). The
Company did not modify any outstanding options prior to the adoption of the
standard. If the Company had determined compensation cost based on fair
value of the options at the grant date under SFAS 123 (Revised) prior to
the date of adoption, the Company's net income would have been reduced to
the pro forma amounts indicated below:
September 30, 2005 September 30, 2005
Three months ended Nine months ended
------------------ ------------------
Net earnings (in thousands): As reported $13,575 38,185
Compensation cost (207) (622)
------- ------
Pro forma 13,368 37,563
======= ======
Basic earnings per share: As reported 0.43 1.23
Compensation cost -- (0.02)
------- ------
Pro forma 0.43 1.21
======= ======
Diluted earnings per share: As reported 0.42 1.21
Compensation cost -- (0.02)
------- ------
Pro forma 0.42 1.19
======= ======
The per share weighted-average fair value of stock options granted during
2006 and 2005 was $6.47 and $3.52, respectively, on the date of grant using
the Black Scholes option-pricing model with the following assumptions: 2006
-- expected dividend yield 2.23%, risk-free interest rate of 4.35%,
volatility ratio of 27%, and expected life of 3.3 years: 2005 - expected
dividend yield 2.23%, risk-free interest rate of 3.44%, volatility ratio of
18%, and expected life of 3.4 years. Expected volatilities are based on
historical volatility and other factors. The Company uses historical data
to estimate option exercise and termination with the valuation model.
Employee and director awards, which have dissimilar historical exercise
behavior, are considered separately for valuation purposes. The risk-free
rate for periods within the contractual life of the option is based on the
U.S. Treasury yield in effect at the time of the grant. The option awards
generally vest upon six month or two years of service for directors and
employees, respectively, and generally expire in five years.
10
Change in shares granted for stock options for the nine months ended
September 30, 2006 and the year ended December 31, 2005, are summarized as
follows:
Options outstanding Options exercisable
-------------------------- -------------------------
Weighted Weighted
average average
Shares exercise price Shares exercise price
--------- -------------- -------- --------------
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
Canceled ..................... (59,907) 25.00 (14,565) 17.52
Granted ...................... 650,792 31.44
Became exercisable ........... 494,041 22.62
Exercised .................... (354,177) 15.49 (354,177) 15.49
--------- --------
Balance, September 30, 2006 .. 1,907,108 23.34 950,989 18.08
========= ========
The range of exercise prices on options outstanding and exercisable at
September 30, 2006 is as follows:
Weighted Options exercisable
Weighted average ----------------------------
average remaining Weighted
Options exercise contractual Options average
Price range Outstanding price life of options Exercisable exercise price
- --------------- ----------- -------- --------------- ----------- --------------
$5.19 - $6.99 97,706 $ 6.38 1.2 years 97,706 $6.38
$8.96 - $10.18 20,702 9.51 1.8 years 20,702 9.51
$12.17 - $13.20 90,994 12.66 .3 years 90,994 12.66
$14.09 - $17.45 234,110 14.30 1.4 years 234,110 14.30
$20.04 - $21.24 305,245 20.07 2.3 years 305,245 20.07
$24.99 - $28.35 524,831 25.05 3.4 years 94,732 25.01
$31.44 633,520 31.44 4.3 years 107,500 31.44
--------- -------
1,907,108 23.34 3.3 years 950,989 18.08
========= =======
11
7) Investments
A comparison of the amortized cost and estimated fair value of the
Company's investment securities, available-for-sale and other investments,
is as follows:
INVESTMENTS AS OF SEPTEMBER 30, 2006
Gross Unrealized Estimated
Weighted Amortized ---------------- Fair
(Dollars in thousands) Yield Cost Gains Losses Value
- ---------------------- -------- --------- ------ ------ ---------
AVAILABLE-FOR-SALE:
U.S. GOVERNMENT AND FEDERAL AGENCIES:
maturing within one year ......................... 4.08% $ 2,487 -- (18) 2,469
maturing within five years ....................... 5.02% 2,140 -- (7) 2,133
maturing five years through ten years ............ 7.73% 334 4 -- 338
maturing after ten years ......................... 4.71% 179 1 -- 180
-------- ------ ------ -------
4.73% 5,140 5 (25) 5,120
-------- ------ ------ -------
STATE AND LOCAL GOVERNMENTS AND OTHER ISSUES:
maturing within one year ......................... 4.52% 2,283 3 (2) 2,284
maturing one year through five years ............. 4.82% 4,773 44 (19) 4,798
maturing five years through ten years ............ 4.91% 14,331 766 (15) 15,082
maturing after ten years ......................... 5.13% 279,120 12,432 (65) 291,487
-------- ------ ------ -------
5.11% 300,507 13,245 (101) 313,651
-------- ------ ------ -------
MORTGAGE-BACKED SECURITIES .......................... 4.74% 54,918 159 (1,523) 53,554
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ............ 4.20% 415,757 57 (7,628) 408,186
FHLMC AND FNMA STOCK ................................ 5.74% 7,593 -- (139) 7,454
OTHER INVESTMENTS:
CERTIFICATES OF DEPOSITS WITH OVER 90 DAY MATURITY .. 4.84% 3,160 -- -- 3,160
FHLB AND FRB STOCK, AT COST ......................... 0.93% 54,179 -- -- 54,179
-------- ------ ------ -------
TOTAL INVESTMENTS ................................ 4.37% $841,254 13,466 (9,416) 845,304
======== ====== ====== =======
12
INVESTMENTS AS OF DECEMBER 31, 2005
Gross Unrealized Estimated
Weighted Amortized ---------------- Fair
(Dollars in thousands) Yield Cost Gains Losses Value
- ---------------------- -------- --------- ------ ------- ---------
AVAILABLE-FOR-SALE:
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
OTHER INVESTMENTS:
CERTIFICATES OF DEPOSITS WITH OVER 90 DAY MATURITY .. 3.18% 2,085 -- -- 2,085
FHLB AND FRB STOCK, AT COST ......................... 0.66% 53,529 -- -- 53,529
-------- ------ ------- -------
TOTAL INVESTMENTS ................................ 4.34% $968,700 13,362 (12,007) 970,055
======== ====== ======= =======
Interest income includes tax-exempt interest for the nine months ended
September 30, 2006 and 2005 of $10,428,000 and $10,382,000, respectively,
and for the three months ended September 30, 2006 and 2005 of $3,481,000
and $3,450,000, respectively.
Gross proceeds from sales of investment securities for the nine months
ended September 30, 2006 and 2005 were $488,000 and $116,129,000
respectively, resulting in gross gains of approximately $0 and $471,000 and
gross losses of approximately $3,000 and $609,000 respectively. The cost of
any investment sold is determined by specific identification.
13
8) Loans
The following table summarizes the Company's loan portfolio:
At At At
9/30/2006 12/31/2005 9/30/2005
TYPE OF LOAN -------------------- -------------------- --------------------
(Dollars in thousands) Amount Percent Amount Percent Amount Percent
- ---------------------- ---------- ------- ---------- ------- ---------- -------
Real Estate Loans:
Residential real estate $ 732,863 26.0% $ 589,260 24.6% $ 515,676 23.1%
Loans held for sale 28,780 1.0% 22,540 0.9% 26,800 1.2%
---------- ----- ---------- ----- ---------- -----
Total 761,643 27.0% 611,800 25.5% 542,476 24.3%
Commercial Loans:
Real estate 867,862 30.8% 781,181 32.6% 676,547 30.3%
Other commercial 696,696 24.7% 579,515 24.2% 609,880 27.3%
---------- ----- ---------- ----- ---------- -----
Total 1,564,558 55.5% 1,360,696 56.8% 1,286,427 57.6%
Consumer and other Loans:
Consumer 193,015 6.9% 175,503 7.3% 156,981 7.0%
Home equity 347,760 12.4% 295,992 12.3% 290,484 13.0%
---------- ----- ---------- ----- ---------- -----
Total 540,775 19.3% 471,495 19.6% 447,465 20.0%
Net deferred loan fees, premiums
and discounts (8,711) -0.3% (8,149) -0.3% (7,813) -0.4%
Allowance for loan losses (43,216) -1.5% (38,655) -1.6% (34,506) -1.5%
---------- ----- ---------- ----- ---------- -----
Loan receivable, net $2,815,049 100.0% $2,397,187 100.0% $2,234,049 100.0%
========== ===== ========== ===== ========== =====
The following table sets forth information regarding the Company's
non-performing assets at the dates indicated:
NONPERFORMING ASSETS At At At
(Dollars in thousands) 9/30/2006 12/31/2005 9/30/2005
- ---------------------- --------- ---------- ------------
Non-accrual loans:
Real estate loans $2,121 726 7
Commercial loans 3,848 4,045 3,035
Consumer and other loans 500 481 244
------ ------ -----
Total $6,469 5,252 3,286
Accruing Loans 90 days or more overdue:
Real estate loans 365 1,659 528
Commercial loans 1,940 2,199 1,997
Consumer and other loans 221 647 248
------ ------ -----
Total $2,526 4,505 2,773
Real estate and other assets owned, net 510 332 1,803
------ ------ -----
Total non-performing loans and real estate
and other assets owned, net $9,505 10,089 7,862
====== ====== =====
As a percentage of total bank assets 0.22% 0.26% 0.22%
Interest Income (1) $ 363 359 165
(1) This is the amount of interest that would have been recorded on loans
accounted for on a non-accrual basis for the nine months ended September
30, 2006 and 2005 and the year ended December 31, 2005, if such loans had
been current for the entire period.
14
The following table illustrates the loan loss experience:
ALLOWANCE FOR LOAN LOSS
Nine months ended Year ended Nine months ended
September 30, December 31, September 30,
(Dollars in thousands) 2006 2005 2005
- ---------------------- ----------------- ------------ -----------------
Balance at beginning of period $38,655 26,492 26,492
Charge offs:
Real estate loans (12) (115) (109)
Commercial loans (405) (744) (631)
Consumer and other loans (304) (539) (421)
------- ------ ------
Total charge-offs $ (721) (1,398) (1,161)
------- ------ ------
Recoveries:
Real estate loans 309 82 76
Commercial loans 135 414 333
Consumer and other loans 235 415 283
------- ------ ------
Total recoveries $ 679 911 692
------- ------ ------
Net recoveries (charge-offs) (42) (487) (469)
Acquisition (1) 763 6,627 3,834
Provision 3,840 6,023 4,649
------- ------ ------
Balance at end of period $43,216 38,655 34,506
======= ====== ======
Ratio of net charge-offs to average
loans outstanding during the period 0.00% 0.02% 0.02%
(1) Acquisition of First National Bank of Morgan, First State Bank, 1st Bank,
Citizens Community Bank, and Bonner's Ferry branch
The following table summarizes the allocation of the allowance for loan losses:
September 30, 2006 December 31, 2005 September 30, 2005
-------------------- -------------------- --------------------
Percent Percent Percent
of loans of loans of loans
in in in
(Dollars in thousands) Allowance category Allowance category Allowance category
- ---------------------- --------- -------- --------- -------- --------- --------
Real estate loans $ 5,328 26.6% 4,318 25.0% 3,668 23.8%
Commercial real estate loans 15,583 30.3% 14,370 32.0% 11,635 29.7%
Other commercial loans 14,090 24.3% 12,566 23.7% 12,819 26.8%
Consumer and other loans 8,215 18.8% 7,401 19.3% 6,384 19.7%
------- ----- ------ ----- ------ -----
Totals $43,216 100.0% 38,655 100.0% 34,506 100.0%
======= ===== ====== ===== ====== =====
15
9) Intangible Assets
The following table sets forth information regarding the Company's core
deposit intangibles and mortgage servicing rights as of September 30, 2006:
Core Deposit Mortgage
(Dollars in thousands) Intangible Servicing Rights (1) Total
- ---------------------- ------------ -------------------- -----
Gross carrying value $15,712
Accumulated Amortization (8,032)
-------
Net carrying value $7,680 1,150 8,830
=======
WEIGHTED-AVERAGE AMORTIZATION PERIOD
(Period in years) 10.0 9.6 9.9
AGGREGATE AMORTIZATION EXPENSE
For the three months ended September 30, 2006 $ 411 48 459
For the nine months ended September 30, 2006 $ 1,231 147 1,378
ESTIMATED AMORTIZATION EXPENSE
For the year ended December 31, 2006 $ 1,666 167 1,833
For the year ended December 31, 2007 1,666 79 1,745
For the year ended December 31, 2008 1,554 77 1,631
For the year ended December 31, 2009 1,404 74 1,478
For the year ended December 31, 2010 1,178 72 1,250
(1) The mortgage servicing rights are included in other assets and the gross
carrying value and accumulated amortization are not readily available.
On September 1, 2006, the Company acquired First National Bank of Morgan
which resulted in additional core deposit intangible of $896,000 and
additional goodwill of $10,715,000.
10) Deposits
The following table illustrates the amounts outstanding for deposits
greater than $100,000 at September 30, 2006, according to the time
remaining to maturity. Included in the three month CD maturities are
brokered CD's in the amount of $230,000,000.
Certificates Non-Maturity
(Dollars in thousands) of Deposit Deposits Totals
- ---------------------- ------------ ------------ ---------
Within three months ....... $324,211 1,067,502 1,391,713
Three to six months ....... 61,659 -- 61,659
Seven to twelve months .... 55,760 -- 55,760
Over twelve months ........ 31,258 -- 31,258
-------- --------- ---------
Totals ................. $472,888 1,067,502 1,540,390
======== ========= =========
16
11) Advances and Other Borrowings
The following chart illustrates the average balances and the maximum
outstanding month-end balances for Federal Home Loan Bank of Seattle (FHLB)
advances and repurchase agreements:
As of and As of and As of and
for the nine for the for the nine
months ended year ended months ended
(Dollars in thousands) September 30, 2006 December 31, 2005 September 30, 2005
- ---------------------- ------------------ ----------------- ------------------
FHLB Advances:
Amount outstanding at end of period ... $377,104 402,191 654,368
Average balance ....................... $484,396 673,904 725,352
Maximum outstanding at any month-end .. $572,954 804,047 858,961
Weighted average interest rate ........ 4.01% 3.19% 3.10%
Repurchase Agreements:
Amount outstanding at end of period ... $162,400 129,530 111,196
Average balance ....................... $145,741 103,522 93,575
Maximum outstanding at any month-end .. $163,498 132,534 111,196
Weighted average interest rate ........ 4.19% 2.85% 2.58%
12) Stockholders' Equity
The Federal Reserve Board has adopted capital adequacy guidelines that are
used to assess the adequacy of capital in supervising a bank holding
company. The following table illustrates the Federal Reserve Board's
capital adequacy guidelines and the Company's compliance with those
guidelines as of September 30, 2006.
Tier 1 Tier 2
CONSOLIDATED (Core) (Total) Leverage
(Dollars in thousands) Capital Capital Capital
- ---------------------- ---------- --------- ----------
GAAP Capital ................................ $ 411,010 411,010 411,010
Less: Goodwill and intangibles .............. (97,494) (97,494) (97,494)
Accumulated other comprehensive
Unrealized gain on AFS securities ..... (2,454) (2,454) (2,454)
Other adjustments ........................ (139) (139) (139)
Plus: Allowance for loan losses ............. -- 40,363 --
Subordinated debentures .................. 115,000 115,000 115,000
---------- --------- ----------
Regulatory capital computed ................. $ 425,923 466,286 425,923
========== ========= ==========
Risk weighted assets ........................ $3,229,078 3,229,078
========== =========
Total average assets ........................ $3,966,251
==========
Capital as % of defined assets .............. 13.19% 14.44% 10.74%
Regulatory "well capitalized" requirement ... 6.00% 10.00% 5.00%
---------- --------- ----------
Excess over "well capitalized" requirement .. 7.19% 4.44% 5.74%
========== ========= ==========
On August 9, 2006, the Company completed the settlement of the offering of
1,000,000 shares, generating net proceeds of $29,433,000. The proceeds were
used to fund a portion of the cash merger consideration payable in
connection with the acquisition of Citizens Development Company which was
completed on October 1, 2006.
17
13) Comprehensive Income
The Company's only component of comprehensive income other than net
earnings is the unrealized gains and losses on available-for-sale
securities.
For the three For the nine
months ended months ended
September 30, September 30,
---------------- ---------------
Dollars in thousands 2006 2005 2006 2005
- -------------------- ------- ------ ------ ------
Net earnings .............................................. $15,806 13,575 44,101 38,185
Unrealized holding gain (loss) arising during the period .. 11,435 (4,109) 2,691 (2,986)
Tax benefit expense ....................................... (4,505) 1,619 (1,060) 1,176
------- ------ ------ ------
Net after tax .......................................... 6,930 (2,490) 1,631 (1,810)
Reclassification adjustment for losses
included in net earnings ............................... 3 1 3 138
Tax benefit ............................................... (1) -- (1) (54)
------- ------ ------ ------
Net after tax .......................................... 2 1 2 84
Net unrealized gain (loss) on securities ............... 6,932 (2,489) 1,633 (1,726)
------- ------ ------ ------
Total comprehensive income .......................... $22,738 11,086 45,734 36,459
======= ====== ====== ======
14) Segment Information
The Company evaluates segment performance internally based on individual
bank charters, 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, non-bank units, and eliminations
of transactions between segments.
Nine months ended and as of September 30, 2006
-------------------------------------------------------------------
Mountain First
(Dollars in thousands) Glacier West Security Western 1st Bank Big Sky
- ---------------------- -------- --------- -------- ------- -------- ------------
Revenues from external customers $ 39,944 53,018 38,506 21,962 13,780 15,467
Intersegment revenues 778 25 179 62 461 92
Expenses (30,956) (43,609) (29,213) (17,152) (11,608) (11,890)
Intercompany eliminations -- -- -- -- -- --
-------- ------- ------- ------- ------- -------
Net Earnings $ 9,766 9,434 9,472 4,872 2,633 3,669
======== ======= ======= ======= ======= =======
Total Assets $814,126 893,260 792,063 438,175 293,021 275,045
======== ======= ======= ======= ======= =======
Total
Valley Whitefish Citizens Morgan Other Consolidated
-------- --------- -------- ------- -------- ------------
Revenues from external customers $ 14,032 9,626 10,458 424 376 217,593
Intersegment revenues 100 8 -- 22 54,251 55,978
Expenses (11,081) (7,549) (8,863) (338) (1,233) (173,492)
Intercompany eliminations -- -- -- -- (55,978) (55,978)
-------- ------- ------- ------- -------- ---------
Net Earnings $ 3,051 2,085 1,595 108 (2,584) 44,101
======== ======= ======= ======= ======== =========
Total Assets $285,180 193,301 170,354 89,038 (116,867) 4,126,696
======== ======= ======= ======= ======== =========
18
Nine months ended and as of September 30, 2005
--------------------------------------------------------------
Mountain First
(Dollars in thousands) Glacier West Security Western 1st Bank Big Sky
- ---------------------- -------- -------- -------- ------- -------- -------
Revenues from external customers $ 32,882 40,563 28,259 19,823 8,752 13,543
Intersegment revenues 540 15 67 -- 117 --
Expenses (24,686) (32,001) (20,204) (15,271) (6,958) (10,050)
Intercompany eliminations -- -- -- -- -- --
-------- ------- ------- ------- ------- -------
Net Earnings $ 8,736 8,577 8,122 4,552 1,911 3,493
======== ======= ======= ======= ======= =======
Total Assets $684,732 754,504 607,975 439,614 271,856 273,724
======== ======= ======= ======= ======= =======
Total
Valley Whitefish Citizens Other Consolidated
-------- --------- -------- ------- ------------
Revenues from external customers $ 12,001 8,348 5,523 (115) 169,579
Intersegment revenues 103 -- -- 48,078 48,920
Expenses (9,166) (5,992) (4,467) (2,599) (131,394)
Intercompany eliminations -- -- -- (48,920) (48,920)
-------- ------- ------- ------- ---------
Net Earnings $ 2,938 2,356 1,056 (3,556) 38,185
======== ======= ======= ======= =========
Total Assets $251,187 172,563 142,642 (8,917) 3,589,880
======== ======== ======== ======= =========
Three months ended and as of September 30, 2006
--------------------------------------------------------------
Mountain First
(Dollars in thousands) Glacier West Security Western 1st Bank Big Sky
- ---------------------- -------- -------- -------- ------- -------- --------
Revenues from external customers $ 14,172 19,235 13,373 7,906 4,909 5,305
Intersegment revenues 578 10 83 43 107 --
Expenses (11,483) (16,019) (10,362) (6,002) (4,109) (4,147)
Intercompany eliminations -- -- -- -- -- --
-------- ------- ------- ------- ------- -------
Net Earnings $ 3,267 3,226 3,094 1,947 907 1,158
======== ======= ======= ======= ======= =======
Total Assets $814,126 893,260 792,063 438,175 293,021 275,045
======== ======= ======= ======= ======= =======
Total
Valley Whitefish Citizens Morgan Other Consolidated
-------- --------- -------- ------ -------- ------------
Revenues from external customers $ 4,953 3,428 3,803 424 146 77,654
Intersegment revenues 34 8 -- 22 18,219 19,104
Expenses (4,011) (2,716) (3,271) (338) 610 (61,848)
Intercompany eliminations -- -- -- -- (19,104) (19,104)
-------- ------- ------- ------ -------- ---------
Net Earnings $ 976 720 532 108 (129) 15,806
======== ======= ======= ====== ======== =========
Total Assets $285,180 193,301 170,354 89,038 (116,867) 4,126,696
======== ======= ======= ====== ======== =========
19
Three months ended and as of September 30, 2005
--------------------------------------------------------------
Mountain First
(Dollars in thousands) Glacier West Security Western 1st Bank Big Sky
- ---------------------- -------- -------- -------- ------- -------- --------
Revenues from external customers $ 11,678 14,993 9,687 6,850 3,973 4,926
Intersegment revenues 110 15 54 -- 36 --
Expenses (8,644) (11,891) (7,037) (5,315) (3,147) (3,684)
Intercompany eliminations -- -- -- -- -- --
-------- ------- ------- ------- ------- -------
Net Earnings $ 3,144 3,117 2,704 1,535 862 1,242
======== ======= ======= ======= ======= =======
Total Assets $684,732 754,504 607,975 439,614 271,856 273,724
======== ======= ======= ======= ======= =======
Total
Valley Whitefish Citizens Other Consolidated
-------- --------- -------- ------- ------------
Revenues from external customers $ 4,102 2,755 2,836 106 61,906
Intersegment revenues 35 -- -- 16,897 17,147
Expenses (3,193) (2,044) (2,361) (1,015) (48,331)
Intercompany eliminations -- -- -- (17,147) (17,147)
-------- ------- ------- ------- ---------
Net Earnings $ 944 711 475 (1,159) 13,575
======== ======= ======= ======= =========
Total Assets $251,187 172,563 142,642 (8,917) 3,589,880
======== ======= ======= ======= =========
15) 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.
Nine Months Ended September 30,
2006 vs. 2005
Increase (Decrease) due to:
-------------------------------
(Dollars in thousands) Volume Rate Net
- ---------------------- ------- ------ ------
INTEREST INCOME
Residential real estate loans $ 9,984 3,297 13,281
Commercial loans 15,468 9,308 24,776
Consumer and other loans 4,916 3,544 8,460
Investment securities and other (5,049) 1,687 (3,362)
------- ------ ------
Total Interest Income 25,319 17,836 43,155
INTEREST EXPENSE
NOW accounts 107 1,174 1,281
Savings accounts 109 749 858
Money market accounts 770 6,115 6,885
Certificates of deposit 6,667 8,147 14,814
FHLB advances (5,594) 3,304 (2,290)
Other borrowings and
repurchase agreements 1,389 1,582 2,971
------- ------ ------
Total Interest Expense 3,448 21,071 24,519
------- ------ ------
NET INTEREST INCOME $21,871 (3,235) 18,636
======= ====== ======
20
16) Average Balance Sheet
The following 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. Non-accrual
loans are included in the average balance of the loans.
For the Three months ended 9-30-06 For the Nine months ended 9-30-06
---------------------------------- ---------------------------------
Interest Average Interest Average
AVERAGE BALANCE SHEET Average and Yield/ Average and Yield/
(Dollars in thousands) Balance Dividends Rate Balance Dividends Rate
---------- --------- ------- ---------- --------- -------
ASSETS
Residential Real Estate Loans $ 726,299 13,708 7.55% $ 672,448 36,939 7.32%
Commercial Loans 1,513,258 29,687 7.78% 1,457,040 82,691 7.59%
Consumer and Other Loans 522,143 10,348 7.86% 502,827 28,867 7.68%
---------- ------ ---------- --------
Total Loans 2,761,700 53,743 7.72% 2,632,315 148,497 7.54%
Tax -Exempt Investment Securities (1) 281,787 3,481 4.94% 282,807 10,428 4.92%
Other Investment Securities 625,273 6,668 4.27% 661,686 20,852 4.20%
---------- ------ ---------- --------
Total Earning Assets 3,668,760 63,892 6.97% 3,576,808 179,777 6.70%
------ --------
Goodwill and Core Deposit Intangible 89,811 87,991
Other Non-Earning Assets 193,102 190,508
---------- ----------
TOTAL ASSETS $3,951,673 $3,855,307
========== ==========
LIABILITIES
AND STOCKHOLDERS' EQUITY
NOW Accounts $ 360,802 651 0.72% $ 365,672 1,823 0.67%
Savings Accounts 219,617 456 0.82% 232,489 1,535 0.88%
Money Market Accounts 607,185 5,221 3.41% 549,203 11,970 2.91%
Certificates of Deposit 842,722 9,023 4.25% 851,578 25,075 3.94%
FHLB Advances 481,741 5,340 4.40% 484,396 14,553 4.02%
Repurchase Agreements
and Other Borrowed Funds 323,413 4,196 5.15% 318,688 11,882 4.98%
---------- ------ ---------- -------
Total Interest Bearing Liabilities 2,835,480 24,887 3.48% 2,802,026 66,838 3.19%
------ --------
Non-interest Bearing Deposits 703,737 662,955
Other Liabilities 26,362 31,143
---------- ----------
Total Liabilities 3,565,579 3,496,124
---------- ----------
Common Stock 332 326
Paid-In Capital 290,190 273,724
Retained Earnings 97,864 85,832
Accumulated Other
Comprehensive Income (2,292) (699)
---------- ----------
Total Stockholders' Equity 386,094 359,183
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $3,951,673 $3,855,307
========== ==========
Net Interest Income $39,005 $112,939
======= ========
Net Interest Spread 3.49% 3.51%
Net Interest Margin
on Average Earning Assets 4.22% 4.22%
Return on Average Assets (annualized) 1.58% 1.53%
Return on Average Equity (annualized) 16.24% 16.42%
(1) Excludes tax effect on non-taxable investment security income
21
17) Recent Acquisitions
On September 1, 2006, the Company completed the acquisition of First
National Bank of Morgan with total assets of $89 million, loans of $41
million, and deposits of $67 million. The bank is a national banking
association with its main office in Morgan, Utah and one branch office in
Mountain Green, Utah. First National Bank of Morgan became the Company's
tenth subsidiary bank and the first whole-bank acquisition in Utah,
expanding Glacier's focused community bank strategy in Utah and
complementing its two existing Utah branches. A portion of the purchase
price was allocated to core deposit intangible of $896,000 and goodwill of
$10,715,000.
On October 1, 2006, the acquisition of Citizens Development Company was
completed. Citizens Development Company is a Billings, Montana-based bank
holding company that owns five community banks located throughout Montana,
with principal banking offices in Billings, Lewistown, Hamilton, Columbia
Falls and Chinook. At September 30, 2006, Citizens had total assets of $411
million, net loans of $308 million, total deposits of $361 million, and
stockholders' equity of $37 million. A portion of the purchase price will
be allocated to core deposit intangible and goodwill. As a condition to
closing imposed by the bank regulators, the Company has entered into a
definitive agreement with the Bank of the Rockies to divest of the
Lewistown branch of its subsidiary, Western Security Bank. The Lewistown
branch has approximately $19 million in loans and $26 million in deposits.
Acquisitions are accounted for under the purchase method of accounting.
Accordingly, the assets and liabilities of the acquired banks are recorded
by the Company at their respective fair values at the date of the
acquisition and the results of operations are 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, is recorded as goodwill.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Impact of Recently Issued Accounting Standards
The Company adopted SFAS No. 123 (Revised) Share-Based Payment, as of January 1,
2006 and, accordingly, has determined compensation cost based on the fair value
of the option at the grant date. Net earnings was reduced as a result of the
adoption of SFAS 123(R) Share-based Payment beginning January 1, 2006, which
requires recording the estimated fair value of stock options as compensation
expense. For additional information regarding the standard see Note 6 to the
Consolidated Financial Statements. The following table illustrates the affect of
the adoption of SFAS 123(R) if it would not have been adopted in 2006.
Three months Nine months
IMPACT OF SFAS 123 (R) ended Sept. 30, ended Sept. 30,
(UNAUDITED $ in thousands, except ---------------- ---------------
per share data) 2006 2005 2006 2005
- --------------------------------- ------- ------ ------ ------
Net earnings $15,806 13,575 44,101 38,185
Stock option compensation cost 519 -- 1,703 --
------- ------ ------ ------
Pro forma net operating earnings $16,325 13,575 45,804 38,185
======= ====== ====== ======
Diluted earnings per share $ 0.47 0.42 1.33 1.21
Stock option compensation cost 0.02 -- 0.05 --
------- ------ ------ ------
Pro forma net operating earnings $ 0.49 0.42 1.38 1.21
======= ====== ====== ======
22
Recent Acquisitions
On September 1, 2006 the Company completed the acquisition of First National
Bank of Morgan ("Morgan"), accordingly, results of operations and financial
condition include Morgan from that date forward. The following table provides
information on selected classification of assets and liabilities acquired:
First National
(UNAUDITED - $ IN THOUSANDS) Bank of Morgan
- ---------------------------- -----------------
Acquisition Date September 1, 2006
Total assets 88,519
Investments 5,713
Net loans 40,944
Non-interest bearing deposits 14,144
Interest bearing deposits 53,028
Financial Condition
This section discusses the changes in the Statement of Financial Condition items
from September 30, 2005 and December 31, 2005, to September 30, 2006.
September 30, September 30, $ change from $ change from
2006 December 31, 2005 December 31, September 30,
ASSETS ($ IN THOUSANDS) (unaudited) 2005 (unaudited) 2005 2005
- ----------------------- ------------- ------------ ------------- ------------- -------------
Cash on hand and in banks $ 113,268 111,418 114,781 1,850 (1,513)
Investment securities, interest
bearing deposits, FHLB stock,
FRB stock, and fed funds 915,858 991,246 1,051,739 (75,388) (135,881)
Loans:
Real estate 757,470 607,627 538,339 149,843 219,131
Commercial 1,560,433 1,357,051 1,282,978 203,382 277,455
Consumer and other 540,362 471,164 447,238 69,198 93,124
---------- --------- --------- ------- --------
Total loans 2,858,265 2,435,842 2,268,555 422,423 589,710
Allowance for loan losses (43,216) (38,655) (34,506) (4,561) (8,710)
---------- --------- --------- ------- --------
Total loans net of
allowance for loan losses 2,815,049 2,397,187 2,234,049 417,862 581,000
---------- --------- --------- ------- --------
Other assets 282,521 206,493 189,311 76,028 93,210
---------- --------- --------- ------- --------
Total Assets $4,126,696 3,706,344 3,589,880 420,352 536,816
========== ========= ========= ======= ========
At September 30, 2006 total assets were $4.127 billion, which is $420 million,
or 11 percent, greater than the December 31, 2005 assets of $3.706 billion.
Without the acquisition of Morgan total assets increased $331 million, or 9
percent, from year end 2005. Of the $537 million increase in total assets since
September 30, 2005, $296 million, or 8 percent, was from internal growth.
Total loans have increased $422 million from December 31, 2005, or 17 percent,
with the growth occurring in all loan categories. The Morgan acquisition
accounted for $42 million, or 2 percent of the increase. Including loans
acquired, commercial loans have increased $203 million, or 15 percent, real
estate loans gained $150 million, or 25 percent, and consumer loans grew by $69
million, or 15 percent. Total loans have increased $590 million, or 26 percent,
with internal loan growth of $436 million, from September 30, 2005, with all
loan categories showing increases. Including loans acquired, commercial loans
increased the most, $277 million, or 22 percent, followed by real estate loans
which increased $219 million, or 41 percent, which was the largest percentage
gain, and consumer loans, which are primarily comprised of home equity loans,
increasing by $93 million, or 21 percent.
Investment securities, including interest bearing deposits in other financial
institutions, and federal funds sold have decreased $75 million from December
31, 2005, or 8 percent, and have declined $136 million, or 13 percent, from
23
September 30, 2005. Investment securities, without interest bearing deposits and
federal funds sold, have decreased $125 million from December 31, 2005, and $182
million from September 30, 2005. Investments, including interest bearing
deposits and federal funds sold, at September 30, 2006 represented 22% of total
assets versus 29% the prior year, which is a result of the continued use of
investment cash flow to fund loan growth.
The Company typically sells a majority of long-term mortgage loans originated,
retaining servicing only on loans sold to certain lenders. The sale of loans in
the secondary mortgage market reduces the Company's risk of holding long-term,
fixed rate loans in the loan portfolio. Mortgage loans sold for the nine months
ended September 30, 2006 and 2005 were $329 million and $331 million,
respectively, and for the three months ended September 30, 2006 and 2005 were
$119 million and $156 million, respectively. The Company has also been active in
generating commercial SBA loans. A portion of some of those loans is sold to
other investors. The amount of loans sold and serviced for others at September
30, 2006 was approximately $170 million.
September 30, September 30, $ change from $ change from
2006 December 31, 2005 December 31, September 30,
LIABILITIES ($ IN THOUSANDS) (unaudited) 2005 (unaudited) 2005 2005
- ---------------------------- ------------- ------------ ------------- ------------- -------------
Non-interest bearing deposits $ 751,593 667,008 684,151 84,585 67,442
Interest bearing deposits 2,099,742 1,867,704 1,702,977 232,038 396,765
Advances from Federal Home Loan Bank 377,104 402,191 654,368 (25,087) (277,264)
Securities sold under agreements to
repurchase and other borrowed funds 334,099 317,222 123,509 16,877 210,590
Other liabilities 38,148 33,980 34,475 4,168 3,673
Subordinated debentures 115,000 85,000 85,000 30,000 30,000
---------- --------- --------- ------- -------
Total liabilities $3,715,686 3,373,105 3,284,480 342,581 431,206
========== ========= ========= ======= =======
Non-interest bearing deposits have increased $85 million, or 13 percent, since
December 31, 2005, and by $67 million, or 10 percent, since September 30, 2005.
Acquisitions accounted for $14 million of the 2006 increase and $36 million of
the increase from September 30, 2005. This low cost of funding continues to be a
primary focus of each of our banks. Interest bearing deposits have increased
$232 million since December 31, 2005, with Brokered and National Market CD's
adding $68 million, and the Morgan acquisition adding $53 million to the total.
Since September 30, 2005 interest bearing deposits have increased $397 million,
or 23 percent, with $127 million of that amount from broker and Internet
sources, and $140 million from acquisitions. Federal Home Loan Bank (FHLB)
advances decreased $25 million, and repurchase agreements and other borrowed
funds increased $17 million from December 31, 2005. FHLB advances are $277
million less than the September 30, 2005 balances due primarily to the above
described increases in deposits and other funding sources including $163 million
in U.S. Treasury Tax and Loan Term Auction funds, and $30 million additional
subordinated debentures.
Liquidity and Capital Resources
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. The principal source of the
Company's cash revenues is the dividends received from the Company's banking
subsidiaries. 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.
The subsidiaries source of funds is generated by deposits, principal and
interest payments on loans, sale of loans and securities, short and long-term
borrowings, and net earnings. In addition, all of the banking subsidiaries are
members of the FHLB. As of September 30, 2006, the Company had $928 million of
available FHLB borrowing line of which $377 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.
24
Lending Commitments
In the normal course of business, there are various outstanding commitments to
extend credit, such as letters of credit and un-advanced loan commitments, which
are not reflected in the accompanying condensed consolidated financial
statements. Management does not anticipate any material losses as a result of
these transactions.
September 30, September 30, $ change from $ change from
STOCKHOLDERS' EQUITY 2006 December 31, 2005 December 31, September 30,
($ IN THOUSANDS EXCEPT PER SHARE DATA) (unaudited) 2005 (unaudited) 2005 2005
- -------------------------------------- ------------- ------------ ------------- ------------- -------------
Common equity $408,556 332,418 301,192 76,138 107,364
Accumulated other comprehensive income 2,454 821 4,208 1,633 (1,754)
-------- ------- ------- ------- -------
Total stockholders' equity 411,010 333,239 305,400 77,771 105,610
Core deposit intangible, net, and
goodwill (97,494) (87,114) (79,898) (10,380) (17,596)
-------- ------- ------- ------- -------
$313,516 246,125 225,502 67,391 88,014
======== ======= ======= ======= =======
Stockholders' equity to total assets 9.96% 8.99% 8.51%
Tangible stockholders' equity to total
tangible assets 7.78% 6.80% 6.42%
Book value per common share $ 12.14 10.36 9.74 1.78 2.40
Market price per share at end of
quarter $ 34.17 30.05 30.87 4.12 3.30
Total equity and book value per share amounts have increased $77.771 million and
$1.78 per share, respectively, from December 31, 2005, the result of the
secondary offering of 1 million shares on August 9, 2006, and 317,436 shares
issued for the Morgan acquisition, earnings retention, stock options exercised,
and an increase in other comprehensive income. Accumulated other comprehensive
income, representing net unrealized gains on securities available for sale,
decreased $1.754 million from September 30, 2005 and increased $1.633 million
from year end, primarily a function of interest rate changes.
September 30, September 30,
2006 December 31, 2005
CREDIT QUALITY INFORMATION ($ IN THOUSANDS) (unaudited) 2005 (unaudited)
- ------------------------------------------- ------------- ------------ -------------
Allowance for loan losses $43,216 $38,655 $34,506
Non-performing assets $ 9,505 10,089 7,862
Allowance as a percentage of non performing
assets 455% 383% 439%
Non-performing assets as a percentage of
total bank assets 0.22% 0.26% 0.22%
Allowance as a percentage of total loans 1.51% 1.59% 1.52%
Net charge-offs as a percentage of loans 0.00% 0.02% 0.02%
Allowance for Loan Loss and Non-Performing Assets
Non-performing assets as a percentage of total bank assets at September 30, 2006
were at .22 percent, the same percentage as at September 30, 2005, but
decreasing slightly from .26 percent at December 31, 2005. The Company ratios
compare favorably to the Federal Reserve Bank Peer Group average of .43 percent
at June 30, 2006, the most recent information available. The allowance for loan
losses was 455 percent of non-performing assets at September 30, 2006, up from
439 percent a year ago. The allowance, including $3.555 million from
acquisitions, has increased $8.710 million, or 25 percent, from a year ago. The
allowance of $43.216 million, is 1.51 percent of September 30, 2006 total loans
outstanding, down slightly from the 1.52 percent a year ago. The
25
provision for loan losses expense was $3.840 million for the first nine months
of 2006, a decrease of $809,000, or 17 percent, from the same period in 2005.
Net charged off loans was $42 thousand, or .001% of loans, for the nine months
ended September 30, 2006. Loan growth, average loan size, and credit quality
considerations will determine the level of additional provision expense.
RESULTS OF OPERATIONS -- THE THREE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO
THE THREE MONTHS ENDED SEPTEMBER 30, 2005.
The Company reported net quarterly earnings of $15.806 million, an increase of
$2.231 million, or 16 percent, over the $13.575 million for the third quarter of
2005. Net quarterly earnings were reduced by $519,000, or $0.02 per share, due
to the January 1, 2006 adoption of SFAS 123(R) Share-based Payment which
requires recording the estimated fair value of stock options as compensation
expense. Diluted earnings per share for the quarter of $0.47 is an increase of
12 percent over the per share earnings of $0.42 for the same quarter of 2005.
Excluding the affects of SFAS 123(R), diluted earnings per share would have been
$0.49, or an increase of 17 percent over the prior year quarter. Annualized
return on average assets and return on average equity for the quarter were 1.58
percent and 16.24 percent, respectively, which compares with prior year returns
for the third quarter of 1.52 percent and 17.88 percent.
Three months ended September 30,
REVENUE SUMMARY ---------------------------------------
(UNAUDITED - $ IN THOUSANDS) 2006 2005 $ change % change
- ---------------------------- ------- ------- -------- --------
Net interest income $39,005 $33,760 $5,245 16%
Non-interest income
Service charges, loan fees,
and other fees 9,403 8,381 1,022 12%
Gain on sale of loans 2,992 3,258 (266) -8%
Loss on sale of investments (3) (1) (2) 200%
Other income 1,370 698 672 96%
------- ------- ------ ---
Total non-interest income 13,762 12,336 1,426 12%
------- ------- ------ ---
$52,767 $46,096 $6,671 14%
======= ======= ====== ===
Tax equivalent net interest
margin 4.28% 4.24%
======= =======
Net Interest Income
Net interest income for the quarter increased $5.245 million, or 16 percent,
over the same period in 2005, and $1.379 million from the second quarter of
2006. Total interest income increased $14.322 million from the prior year's
quarter, or 29 percent, while total interest expense increased $9.077 million,
or 57 percent. The increase in interest expense is primarily attributable to the
volume increase in interest bearing deposits, and increases in short term
interest rates during 2005 continuing into 2006. The net interest margin as a
percentage of earning assets for the quarter, on a tax equivalent basis, was
4.28 percent which was 4 basis points higher than the 4.24 percent result for
the third quarter of 2005. The margin for the third quarter of 2006 decreased 6
basis points from the second quarter of 2006 margin of 4.34 percent, primarily a
result of the continued increase in funding costs. Issuing the $30 million
subordinated debentures in advance of acquisitions also reduced net interest
income by approximately $62,000 in the third quarter of 2006.
Non-interest Income
Fee income increased $1.022 million, or 12 percent, over the same period last
year, driven primarily by an increased number of loan and deposit accounts from
internal growth and acquisitions. Gain on sale of loans decreased $266 thousand,
or 8 percent, from the third quarter of last year. Loan origination volume in
our markets
26
for housing construction continues to remain very active by historical standards
and the recent decline was expected with the slow down from unprecedented
activity last year and as interest rates increased. Other income rose $672,000
of which $543,000 was non-recurring bank owned life insurance proceeds.
Three months ended September 30,
NON-INTEREST EXPENSE SUMMARY ---------------------------------------
(UNAUDITED - $ IN THOUSANDS) 2006 2005 $ change % change
- ---------------------------- ------- ------- -------- --------
Compensation and employee benefits $15,992 $13,685 $2,307 17%
Occupancy and equipment expense 3,875 3,356 519 15%
Outsourced data processing 620 615 5 1%
Core deposit intangibles amortization 411 388 23 6%
Other expenses 6,946 6,132 814 13%
------- ------- ------ ---
Total non-interest expense $27,844 $24,176 $3,668 15%
======= ======= ====== ===
Non-interest Expense
Non-interest expense increased by $3.668 million, or 15 percent, from the same
quarter of 2005. Compensation and benefit expense increased $2.307 million, or
17 percent. Excluding SFAS 123(R) compensation cost of $726 thousand the
increase would have been 12 percent. The remaining increase in compensation and
benefit expense was primarily attributed to four acquisitions during 2005 and
normal compensation increases for job performance and increased costs for
benefits. The number of full-time-equivalent employees has increased from 1,052
to 1,200, an 14 percent increase, since September 30, 2005. Occupancy and
equipment expense increased $519 thousand, or 15 percent, reflecting the bank
acquisitions, cost of additional branch locations and facility upgrades. Other
expenses increased $814 thousand, or 13 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) was 53 percent for the 2006 quarter, up from 52 percent for the 2005
quarter.
OPERATING RESULTS FOR NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO
SEPTEMBER 30, 2005
Net earnings for the nine months ended September 30, 2006 were $44.101 million,
which is an increase of $5.916 million, or 15 percent over the prior year.
Diluted earnings per share of $1.33 is an increase of 10 percent over the $1.21
earned in the first nine months of 2005. Excluding SFAS 123(R) compensation
costs of $1.703 million, diluted earnings per share increased 14 percent for the
first nine months of 2006. The 2006 nine month annualized return on average
assets and return on average equity was 1.53 percent and 16.42 percent,
respectively, which compares with prior year nine month returns of 1.51 percent
and 17.67 percent.
Nine months ended September 30,
REVENUE SUMMARY -----------------------------------------
(UNAUDITED - $ IN THOUSANDS) 2006 2005 $ change % change
- ---------------------------- -------- -------- -------- --------
Net interest income $112,939 $ 94,303 $18,636 20%
Non-interest income
Service charges, loan fees, and
other fees 26,969 22,713 4,256 19%
Gain on sale of loans 7,952 8,234 (282) -3%
Loss on sale of investments (3) (138) 135 -98%
Other income 2,898 2,148 750 35%
-------- -------- ------- ---
Total non-interest income 37,816 32,957 4,859 15%
-------- -------- ------- ---
$150,755 $127,260 $23,495 18%
======== ======== ======= ===
Tax equivalent net interest margin 4.33% 4.17%
======== ========
27
Net Interest Income
Net interest income for the nine months increased $18.636 million, or 20
percent, over the same period in 2005. Total interest income increased $43.155
million, or 32 percent, while total interest expense increased $24.519 million,
or 58 percent. The increase in interest expense is primarily attributable to the
volume increase in interest bearing deposits, and increases in short term
interest rates during 2005 and continuing in 2006. The net interest margin as a
percentage of earning assets, on a tax equivalent basis, was 4.33 percent which
was 16 basis points higher than the 4.17 percent result for 2005.
Non-interest Income
Total non-interest income increased $4.859 million, or 15 percent in 2006. Fee
income increased $4.256 million, or 19 percent, over last year, driven primarily
by an increased number of loan and deposit accounts, acquisitions, and
additional customer products and services offered. Gain on sale of loans
decreased $282 thousand, or 3 percent, from the first nine months of last year.
Loan origination volume in our markets for housing continues to remain very
active by historical standards and the recent decline was expected with the slow
down from unprecedented activity last year. Other income increased $750,000 of
which $543,000 was non-recurring bank owned life insurance proceeds.
Nine months ended September 30,
NON-INTEREST EXPENSE SUMMARY ---------------------------------------
(UNAUDITED - $ IN THOUSANDS) 2006 2005 $ change % change
- ---------------------------- ------- ------- -------- --------
Compensation and employee benefits $47,042 $37,103 $ 9,939 27%
Occupancy and equipment expense 10,797 9,363 1,434 15%
Outsourced data processing 2,022 1,270 752 59%
Core deposit intangibles
amortization 1,231 1,055 176 17%
Other expenses 19,529 16,935 2,594 15%
------- ------- ------- ---
Total non-interest expense $80,621 $65,726 $14,895 23%
======= ======= ======= ===
Non-interest Expense
Non-interest expense increased by $14.895 million, or 23 percent, from the same
nine months of 2005. Compensation and benefit expense increased $9.939 million,
or 27 percent. Excluding SFAS 123(R) compensation cost of $2.410 million the
increase would have been 20 percent. The remaining increase in compensation and
benefit expense was primarily attributed to four acquisitions during 2005, the
addition of five new bank branches in 2006, and normal compensation increases
for job performance and increased costs for benefits. Occupancy and equipment
expense increased $1.434 million, or 15 percent, reflecting the acquisitions,
cost of additional locations and facility upgrades. Other expenses increased
$2.594 million, or 15 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 to 53
percent from 52 percent for the first nine months of 2005 largely a result of
the recent acquisitions and branch openings.
Critical Accounting Policies
Companies 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 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 loss 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
28
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 consolidated financial statements, results of operations and
liquidity.
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.
Forward Looking Statements
This Form 10-Q includes forward looking statements, which 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 economies in which it operates. Future
events are difficult to predict, and the expectations described above are
necessarily 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 public filings,
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 banks and/or
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company believes that there have not been any material changes in
information about the Company's market risk than was provided in the Form 10-K
report for the year ended December 31, 2005.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer have reviewed
and evaluated the effectiveness of our disclosure controls and procedures (as
required by Exchange Act Rules 240.13a-15(b) and 15d-14(c)) as of the date of
this quarterly report. Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that the Company's current disclosure
controls and procedures are effective and timely, providing them with material
information relating to the Company required to be disclosed in the reports we
file or submit under the Exchange Act.
Changes in Internal Controls
There have not been any changes in the Company's internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the third quarter 2006, to which this report relates that
have materially affected, or are reasonably likely to materially affect the
Company's internal controls over financial reporting.
29
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no pending material legal proceedings to which the registrant or its
subsidiaries are a party.
ITEM 1A. RISK FACTORS
There have not been any material changes to the Company's risk factors during
the third quarter 2006.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) Not Applicable
(b) Not Applicable
(c) Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) Not Applicable
(b) Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
(a) None
(b) Not Applicable
(c) None
(d) None
ITEM 5. OTHER INFORMATION
(a) Not Applicable
(b) Not Applicable
ITEM 6. EXHIBITS
Exhibit 31.1 -- Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes -- Oxley Act of 2002
Exhibit 31.2 -- Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes -- Oxley Act of 2002
30
Exhibit 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
SIGNATURES
Pursuant to the requirements 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.
GLACIER BANCORP, INC.
November 6, 2006 /s/ Michael J. Blodnick
----------------------------------------
Michael J. Blodnick
President/CEO
November 6, 2006 /s/ James H. Strosahl
----------------------------------------
James H. Strosahl
Executive Vice President/CFO
31