10-Q 1 v24930e10vq.txt FORM 10-Q 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: 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 ------------------------------------------------------------------------------------------------------------
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