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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 June 30, 2008
[ ] 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
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(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
49 Commons Loop, Kalispell, Montana 59901
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(Address of principal executive offices) (Zip Code)
(406) 756-4200
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Registrant's telephone number, including area code
Not Applicable
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(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 check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer [X] Accelerated Filer [ ] Non-Accelerated Filer [ ] Smaller reporting Company [ ]
(Do not check if a smaller reporting company)
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 July 21, 2008
was 53,992,982. No preferred shares are issued or outstanding.
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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
June 30, 2008, June 30, 2007 and audited December 31, 2007.................. 3
Condensed Consolidated Statements of Operations - Unaudited three and six
months ended June 30, 2008 and 2007......................................... 4
Condensed Consolidated Statements of Stockholders' Equity and Comprehensive
Income - audited year ended December 31, 2007 and unaudited six months
ended June 30, 2008......................................................... 5
Condensed Consolidated Statements of Cash Flows - Unaudited six months
ended June 30, 2008 and 2007........................... 6
Notes to Condensed Consolidated Financial Statements - Unaudited ........... 7
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................. 21
Item 3 - Quantitative and Qualitative Disclosure about Market Risk .................. 32
Item 4 - Controls and Procedures..................................................... 32
PART II. OTHER INFORMATION.................................................................... 33
Item 1 - Legal Proceedings........................................................... 33
Item 1A - Risk Factors............................................................... 33
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds................. 34
Item 3 - Defaults Upon Senior Securities............................................. 35
Item 4 - Submission of Matters to a Vote of Security Holders ........................ 35
Item 5 - Other Information........................................................... 35
Item 6 - Exhibits.................................................................... 36
Signatures........................................................................... 36
GLACIER BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, December 31, June 30,
(Dollars in thousands, except per share data) 2008 2007 2007
----------------------------------------------------------------- ------------- ------------ ------------
(UNAUDITED) (audited) (unaudited)
ASSETS:
Cash on hand and in banks .................................. $ 123,545 145,697 134,647
Federal funds sold ......................................... 135 135 11,735
Interest bearing cash deposits ............................. 26,654 81,777 124,566
------------ ---------- -----------
Cash and cash equivalents .............................. 150,334 227,609 270,948
Investment securities ...................................... 773,417 700,324 737,104
Loans receivable, net ...................................... 3,717,373 3,516,999 3,289,234
Loans held for sale ........................................ 42,772 40,123 42,620
Premises and equipment, net ................................ 125,398 123,749 119,320
Real estate and other assets owned, net .................... 6,523 2,043 2,153
Accrued interest receivable ................................ 28,128 26,168 27,621
Deferred tax asset ......................................... 3,624 -- 2,504
Core deposit intangible, net ............................... 12,416 13,963 15,575
Goodwill ................................................... 140,301 140,301 140,018
Other assets ............................................... 27,582 26,051 25,858
------------ ---------- -----------
Total assets ........................................... $ 5,027,868 4,817,330 4,672,955
============ ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Non-interest bearing deposits .............................. $ 778,786 788,087 820,728
Interest bearing deposits .................................. 2,347,137 2,396,391 2,533,957
Advances from Federal Home Loan Bank of Seattle ............ 658,211 538,949 260,224
Securities sold under agreements to repurchase ............. 176,211 178,041 156,794
Other borrowed funds ....................................... 355,437 223,580 233,986
Accrued interest payable ................................... 11,922 13,281 15,388
Deferred tax liability ..................................... -- 481 --
Subordinated debentures .................................... 118,559 118,559 118,559
Other liabilities .......................................... 31,962 31,385 33,648
------------ ---------- -----------
Total liabilities ...................................... 4,478,225 4,288,754 4,173,284
------------ ---------- -----------
Preferred shares, $.01 par value per share. 1,000,000 shares
authorized None issued or outstanding .................... -- -- --
Common stock, $.01 par value per share. 117,187,500 shares
authorized ............................................... 540 536 535
Paid-in capital ............................................ 380,161 374,728 371,289
Retained earnings - substantially restricted ............... 171,017 150,195 128,355
Accumulated other comprehensive (loss) income .............. (2,075) 3,117 (508)
------------ ---------- -----------
Total stockholders' equity ............................. 549,643 528,576 499,671
------------ ---------- -----------
Total liabilities and stockholders' equity ............. $ 5,027,868 4,817,330 4,672,955
============ ========== ===========
Number of shares outstanding ............................... 53,985,813 53,646,480 53,525,651
Book value per share ....................................... $ 10.18 9.85 9.34
See accompanying notes to condensed consolidated financial statements.
3
GLACIER BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED - dollars in thousands, except THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
per share data) ------------------------------ ------------------------------
------------------------------------------------ 2008 2007 2008 2007
----------- ---------- ---------- -----------
INTEREST INCOME:
Real estate loans .......................... $ 12,399 15,201 24,991 29,642
Commercial loans ........................... 41,100 38,170 83,633 74,822
Consumer and other loans ................... 11,790 11,870 23,897 23,184
Investment securities and other ............ 9,284 10,052 18,068 19,565
----------- ---------- ---------- -----------
Total interest income ................ 74,573 75,293 150,589 147,213
----------- ---------- ---------- -----------
INTEREST EXPENSE:
Deposits ................................... 13,474 20,530 30,343 39,337
Federal Home Loan Bank of Seattle advances 4,821 4,050 10,539 9,092
Securities sold under agreements to
repurchase ............................... 808 1,724 2,149 3,611
Subordinated debentures .................... 1,853 1,816 3,726 3,630
Other borrowed funds ....................... 1,317 1,977 2,903 3,256
----------- ---------- ---------- -----------
Total interest expense ............... 22,273 30,097 49,660 58,926
----------- ---------- ---------- -----------
NET INTEREST INCOME ............................. 52,300 45,196 100,929 88,287
Provision for loan losses .................. 5,042 1,210 7,542 2,405
----------- ---------- ---------- -----------
Net interest income after provision for
loan losses ......................... 47,258 43,986 93,387 85,882
----------- ---------- ---------- -----------
NON-INTEREST INCOME:
Service charges and other fees ............. 10,599 9,483 20,070 17,746
Miscellaneous loan fees and charges ........ 1,624 2,275 3,114 4,097
Gains on sale of loans ..................... 4,245 3,708 8,125 6,750
Gain (Loss) on sale of investments ......... -- -- 248 (8)
Other income ............................... 913 945 2,086 3,518
----------- ---------- ---------- -----------
Total non-interest income ............. 17,381 16,411 33,643 32,103
----------- ---------- ---------- -----------
NON-INTEREST EXPENSE:
Compensation, employee benefits and
related expense ........................ 20,967 20,594 42,064 40,100
Occupancy and equipment expense ............ 5,116 4,812 10,249 9,270
Advertising and promotions expense ......... 1,833 1,581 3,372 3,021
Outsourced data processing expense ......... 647 680 1,314 1,492
Core deposit intangibles amortization....... 767 809 1,546 1,589
Other expense .............................. 7,113 6,598 13,511 12,785
----------- ---------- ---------- -----------
Total non-interest expense ............ 36,443 35,074 72,056 68,257
----------- ---------- ---------- -----------
EARNINGS BEFORE INCOME TAXES .................... 28,196 25,323 54,974 49,728
Federal and state income tax expense ....... 9,737 8,598 19,116 16,910
----------- ---------- ---------- -----------
NET EARNINGS .................................... $ 18,459 16,725 35,858 32,818
=========== ========== ========== ===========
Basic earnings per share ........................ $ 0.35 0.31 0.67 0.62
Diluted earnings per share ...................... $ 0.34 0.31 0.66 0.61
Dividends declared per share .................... $ 0.13 0.12 0.26 0.24
Return on average assets (annualized) ........... 1.51% 1.47% 1.48% 1.47%
Return on average equity (annualized) ........... 13.51% 13.79% 13.25% 13.90%
Average outstanding shares - basic .............. 53,971,220 53,164,813 53,910,414 52,836,255
Average outstanding shares - diluted ............ 54,151,290 53,601,696 54,084,193 53,414,992
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, 2007 AND UNAUDITED SIX MONTHS ENDED JUNE 30, 2008
Common Stock Retained Accumulated Total
--------------------- earnings Other stock-
(Dollars in thousands, except per share data) Shares Amount Paid-in substantially comprehensive holders'
------------------------------------------------ ----------- ------- --------- ------------- -------------- ---------
Balance at December 31, 2006 ................... 52,302,820 $ 523 344,265 108,286 3,069 456,143
Comprehensive income:
Net earnings .............................. -- -- -- 68,603 -- 68,603
Unrealized gain on securities, net of
reclassification adjustment and taxes ... -- -- -- -- 48 48
---------
Total comprehensive income ..................... 68,651
---------
Cash dividends declared ($.50 per share) ....... -- -- -- (26,694) -- (26,694)
Stock options exercised ........................ 550,080 6 6,148 -- -- 6,154
Stock issued in connection with acquisition .... 793,580 7 18,993 -- -- 19,000
Stock based compensation and tax benefit ....... -- -- 5,322 -- -- 5,322
----------- ------- --------- ------------- --------- ---------
Balance at December 31, 2007 ................... 53,646,480 $ 536 374,728 150,195 3,117 528,576
Comprehensive income:
Net earnings .............................. -- -- -- 35,858 -- 35,858
Unrealized loss on securities, net of
reclassification adjustment and taxes ... -- -- -- -- (5,192) (5,192)
---------
Total comprehensive income ..................... 30,666
---------
Cash dividends declared ($.26 per share) ....... -- -- -- (14,039) -- (14,039)
Stock options exercised ........................ 339,333 4 3,417 -- -- 3,421
Cumulative effect of a change in
principle .................................... -- -- -- (997) -- (997)
Stock based compensation and tax benefit ....... -- -- 2,016 -- -- 2,016
----------- ------- --------- ------------- ---------- ---------
Balance at June 30, 2008 (unaudited) ........... 53,985,813 $ 540 380,161 171,017 (2,075) 549,643
=========== ======= ========= =========== ========== =========
See accompanying notes to condensed consolidated financial statements.
5
GLACIER BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30,
-------------------------
(UNAUDITED - dollars in thousands) 2008 2007
--------------------------------------------------------------------- --------- ---------
OPERATING ACTIVITIES:
NET CASH PROVIDED BY OPERATING ACTIVITIES .................... $ 38,467 31,584
--------- ---------
INVESTING ACTIVITIES:
Proceeds from sales, maturities and prepayments of investments
available-for-sale ........................................ 211,647 165,114
Purchases of investments available-for-sale .................. (293,751) (22,491)
Principal collected on installment and commercial loans ...... 563,086 584,905
Installment and commercial loans originated or acquired ...... (752,164) (737,316)
Principal collections on mortgage loans ...................... 176,482 270,272
Mortgage loans originated or acquired ........................ (195,321) (262,835)
Net purchase of FHLB and FRB stock ........................... (138) (3,451)
Net cash paid for sale of Western's Lewistown branch ......... -- (6,846)
Net cash received from North Side State Bank acquisition ..... -- 9,339
Net addition of premises and equipment ....................... (6,226) (1,221)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES ................... (296,385) (4,530)
--------- ---------
FINANCING ACTIVITIES:
Net (decrease) increase in deposits .......................... (58,555) 72,993
Net increase in FHLB advances and other borrowed funds ....... 251,119 17,917
Net decrease in securities sold under repurchase agreements .. (1,830) (13,422)
Cash dividends paid .......................................... (14,039) (12,749)
Excess tax benefits from stock options ....................... 527 1,399
Proceeds from exercise of stock options and other stock issued 3,421 4,739
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES .................... 180,643 70,877
--------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ..... (77,275) 97,931
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ............. 227,609 173,017
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................... $ 150,334 270,948
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for: Interest .......... $ 51,020 54,368
Income taxes ...... $ 22,265 14,005
The following schedule summarizes the acquisition of North Side State Bank
in 2007
NORTH SIDE
STATE BANK
-----------------
April 30, 2007
Acquired
Fair Value of assets acquired $ 127,258
Cash paid for the capital stock 8,854
Capital stock issued 19,000
Liabilities assumed 99,967
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 June 30, 2008 and
2007, stockholders' equity for the six months ended June 30, 2008, the
results of operations for the three and six months ended June 30, 2008 and
2007, and cash flows for the six months ended June 30, 2008 and 2007. The
condensed consolidated statement of financial condition and statement of
stockholders' equity and comprehensive income of the Company as of
December 31, 2007 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 accounting
principles 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, 2007. Operating results for the six months
ended June 30, 2008 are not necessarily indicative of the results
anticipated for the year ending December 31, 2008. Certain
reclassifications have been made to the 2007 financial statements to
conform to the 2008 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. As of June 30, 2008, the Company is the
parent holding company for ten wholly-owned, independent community bank
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"), First Bank of Montana
("First Bank-MT"), 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") located in
Wyoming, and First National Bank of Morgan ("Morgan") located in Utah.
On April 30, 2008, Glacier Bank of Whitefish ("Whitefish") merged into
Glacier with operations conducted under the Glacier charter. Prior period
activity of Whitefish was combined and included in Glacier's historical
results. The merger was accounted for as a combination of two wholly-owned
subsidiaries without purchase accounting.
In addition, the Company owns four trust 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 ("FASB") Interpretation 46(R), the subsidiaries are not
consolidated into the Company's financial statements. The Company does not
have any other off-balance sheet entities.
See Note 12 - Segment Information for selected financial data including
net earnings and total assets for the parent company and each of the
community bank subsidiaries. Although the consolidated total assets of the
Company was $5 billion at June 30, 2008, eight of the ten community banks
had total assets of less than $1 billion. Morgan, the smallest community
bank subsidiary had $99.5 million in total
7
assets, while Glacier Bank, the largest community bank subsidiary, had
$1.2 billion in total assets at June 30, 2008.
The following abbreviated organizational chart illustrates the various
relationships as of June 30, 2008:
--------------------------
| Glacier Bancorp, Inc. |
| (Parent Holding Company) |
--------------------------
|
----------------------------------------------------------------------------------------------------------------
| Glacier Bank | | Mountain West Bank | | | First Security Bank | | Western Security Bank |
| (MT Community Bank) | | (ID Community Bank) | | | Of Missoula | | (MT Community Bank) |
| | | | | | (MT Community Bank) | | |
---------------------- ---------------------- | -------------------------- -------------------------
|
----------------------------------------------------------------------------------------------------------------
| 1st Bank | | Big Sky | | | Vally Bank | | Citizens Community Bank |
| (WY Community Bank) | | Western Bank | | | Of Helena | | (ID Community Bank) |
| | | (MT Community Bank) | | | (MT Community Bank) | | |
---------------------- ---------------------- | -------------------------- ---------------------------
|
----------------------------------------------------------------------------------------------------------------
| First Bank of Montana| | First National Bank | | | | | |
| (MT Community Bank)| | of Morgan | | | Glacier Capital Trust II | | Glacier Capital Trust III |
| | | (UT Community Bank) | | | | | |
---------------------- ---------------------- | -------------------------- ---------------------------
|
---------------------------------------------------------
| | | |
| Glacier Capital Trust IV | | Citizens (ID) Statutory |
| | | Trust I |
-------------------------- --------------------------
8
3) 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 JUNE 30, 2008
Estimated
Weighted Amortized Gross Unrealized Fair
(Dollars in thousands) Yield Cost Gains Losses Value
----------------------------------------------------------- -------- --------- ------- -------- ---------
AVAILABLE-FOR-SALE:
GOVERNMENT-SPONSORED ENTERPRISES:
maturing within one year ................................ 3.27% 400 1 -- 401
maturing one year through five years .................... 0.00% -- -- -- --
maturing five years through ten years ................... 4.64% 262 -- (2) 260
maturing after ten years ................................ 4.03% 81 1 -- 82
--------- ------ -------- ---------
3.84% 743 2 (2) 743
--------- ------ -------- ---------
STATE AND LOCAL GOVERNMENTS AND OTHER ISSUES:
maturing within one year ................................ 3.91% 1,383 3 -- 1,386
maturing one year through five years .................... 4.47% 4,287 49 (1) 4,335
maturing five years through ten years ................... 5.09% 15,858 752 (4) 16,606
maturing after ten years ................................ 5.09% 248,389 6,608 (904) 254,093
--------- ------ -------- ---------
5.07% 269,917 7,412 (909) 276,420
--------- ------ -------- ---------
MORTGAGE-BACKED SECURITIES ................................ 4.82% 438,118 773 (8,375) 430,516
FHLMC AND FNMA STOCK ...................................... 5.73% 7,593 -- (2,322) 5,271
--------- ------ -------- ---------
TOTAL MARKETABLE SECURITIES .......................... 4.93% 716,371 8,187 (11,608) 712,950
--------- ------ -------- ---------
OTHER INVESTMENTS:
Certificates of Deposits with over 90 day maturity, at cost 5.25% 99 -- -- 99
FHLB and FRB stock, at cost ............................... 1.73% 59,952 -- -- 59,952
Other stock, at cost ...................................... 3.07% 416 -- -- 416
--------- ------ -------- ---------
TOTAL INVESTMENTS .................................... 4.68% $ 776,838 8,187 (11,608) 773,417
========= ====== ======== =========
9
INVESTMENTS AS OF DECEMBER 31, 2007
Estimated
(Dollars in thousands) Weighted Amortized Gross Unrealized Fair
------------------------------------------------- Yield Cost Gains Losses Value
-------- --------- ------- -------- ---------
AVAILABLE-FOR-SALE:
U.S. GOVERNMENT AND FEDERAL AGENCIES:
maturing within one year ...................... 3.66% $ 2,550 3 -- 2,553
GOVERNMENT-SPONSORED ENTERPRISES:
maturing within one year ...................... 4.86% 947 -- (1) 946
maturing one year through five years .......... 0.00% -- -- -- --
maturing five years through ten years ......... 7.06% 280 -- (1) 279
maturing after ten years ...................... 6.47% 87 1 -- 88
--------- ------- -------- ---------
5.43% 1,314 1 (2) 1,313
--------- ------- -------- ---------
STATE AND LOCAL GOVERNMENTS AND OTHER ISSUES:
maturing within one year ...................... 4.03% 1,328 5 (1) 1,332
maturing one year through five years .......... 4.30% 3,928 45 (2) 3,971
maturing five years through ten years ......... 4.96% 16,847 932 (2) 17,777
maturing after ten years ...................... 5.09% 255,109 8,999 (319) 263,789
--------- ------- -------- ---------
5.06% 277,212 9,981 (324) 286,869
--------- ------- -------- ---------
MORTGAGE-BACKED SECURITIES ...................... 4.55% 346,085 693 (3,405) 343,373
FHLMC AND FNMA STOCK ............................ 5.74% 7,593 -- (1,804) 5,789
--------- ------- -------- ---------
TOTAL MARKETABLE SECURITIES ................ 4.79% 634,754 10,678 (5,535) 639,897
--------- ------- -------- ---------
OTHER INVESTMENTS:
Certificates of Deposits with over
90 day maturity, at cost ........................ 5.06% 199 -- -- 199
FHLB and FRB stock, at cost ..................... 1.72% 59,815 -- -- 59,815
Other stock, at cost ............................ 3.09% 413 -- -- 413
--------- ------- -------- ---------
TOTAL INVESTMENTS .......................... 4.52% $ 695,181 10,678 (5,535) 700,324
========= ======= ======== =========
Interest income includes tax-exempt interest for the six months ended June
30, 2008 and 2007 of $6,348,000 and $6,928,000, respectively, and for the
three months ended June 30, 2008 and 2006 of $3,174,000 and $3,476,000,
respectively.
Gross proceeds from sale of marketable securities for the six months ended
June 30, 2008 and 2007 were $97,002,000 and $55,798,000, respectively,
resulting in gross gains of $0 and $1,000, respectively, and gross losses
of $0 and $9,000, respectively. The gross proceeds and gross gains for the
sale of other stock was $248,000 and $0 for the six months ended June 30,
2008 and 2007, respectively. The Company realized a gain of $130,000 from
the extinguishment of the Company's share ownership in Principal Financial
Group and a gain of $118,000 from the mandatory redemption of a portion of
Visa, Inc. shares from its recent initial public offering. The cost of any
investment sold is determined by specific identification.
The investments in the Federal Home Loan Bank ("FHLB") of Seattle stock
are required investments related to the Company's borrowings from FHLB of
Seattle. FHLB of Seattle obtains their funding primarily through issuance
of consolidated obligations of the FHLB system. The U.S. Government does
not guarantee these obligations, and each of the 12 FHLBs are jointly and
severally liable for repayment of each other's debt.
10
4) Loans and Leases
The following table summarizes the Company's loan and lease portfolio,
TYPE OF LOAN At At At
(Dollars in thousands) 6/30/08 12/31/2007 6/30/07
--------------------------- ------------------------- ----------------------
Amount Percent Amount Percent Amount Percent
Real Estate Loans:
Residential real estate $ 706,815 18.8% $ 689,238 19.4% $ 781,216 23.4%
Loans held for sale 42,772 1.1% 40,123 1.1% 42,620 1.3%
------------- ------- ------------ ------- ------------ -----
Total 749,587 19.9% 729,361 20.5% 823,836 24.7%
Commercial Loans:
Real estate 1,736,784 46.2% 1,617,076 45.4% 1,317,821 39.6%
Other commercial 664,558 17.7% 636,351 17.9% 641,170 19.2%
------------- ------- ------------ ------- ------------ -----
Total 2,401,342 63.9% 2,253,427 63.3% 1,958,991 58.8%
Consumer and other Loans:
Consumer 207,595 5.6% 206,724 5.8% 210,783 6.3%
Home equity 471,398 12.5% 432,217 12.2% 401,759 12.1%
------------- ------- ------------ ------- ------------ -----
Total 678,993 18.1% 638,941 18.0% 612,542 18.4%
Net deferred loan fees,
premiums and discounts (8,970) -0.3% (10,194) -0.3% (11,093) -0.3%
Allowance for loan and lease
losses (60,807) -1.6% (54,413) -1.5% (52,422) -1.6%
------------- ------- ------------ ------- ------------ -----
Loan receivable, net $ 3,760,145 100.0% $ 3,557,122 100.0% $ 3,331,854 100.0%
============= ======= ============ ======= ============ =====
The following table sets forth information regarding the Company's
non-performing assets at the dates indicated:
June 30, December 31, June 30,
(Dollars in thousands) 2008 2007 2007
---------- ------------ --------
Real estate and other assets owned $ 6,523 2,043 2,153
Accruing Loans 90 days or more overdue 3,700 2,685 4,592
Non-accrual loans 19,674 8,560 5,235
---------- ------------ --------
Total non-performing assets $ 29,897 13,288 11,980
========== ============ ========
Non-performing assets as a percentage of total bank assets 0.58% 0.27% 0.25%
Impaired loans, net of government guaranteed amounts, were $23,707,000,
$12,152,000 and $5,235,000 as of June 30, 2008, December 31, 2007 and June
30, 2007, respectively. The allowance for loan and lease loss includes
valuation allowances of $3,030,000, $2,827,000 and $0 specific to certain
impaired loans as of June 30, 2008, December 31, 2007, and June 30, 2007,
respectively.
11
The following table illustrates the loan and lease loss experience:
June 30, December 31, June 30,
(Dollars in thousands) 2008 2007 2007
---------- ------------- ------------
Balance at the beginning of the period $ 54,413 49,259 49,259
Charge-offs (1,498) (3,387) (563)
Recoveries 350 1,222 682
---------- ------------- ------------
Net (charge-offs) recoveries $ (1,148) (2,165) 119
Acquisition (1) - 639 639
Provision 7,542 6,680 2,405
---------- ------------- ------------
Balance at the end of the period $ 60,807 54,413 52,422
========== ============= ============
Net (charge-offs) recoveries as a percentage of loans (0.030%) (0.060%) 0.004%
----------
(1) Increase attributable to the April 30, 2007 acquisition of North Side
State Bank ("North Side") of Rock Springs, Wyoming, which was merged into
1st Bank, the Company's subsidiary bank in Evanston, Wyoming.
5) Intangible Assets
The following table sets forth information regarding the Company's core
deposit intangible and mortgage servicing rights as of June 30, 2008:
Core Deposit Mortgage
(Dollars in thousands) Intangible Servicing Rights (1) Total
------------ -------------------- ---------
Gross carrying value $ 25,706
Accumulated Amortization (13,290)
------------
Net carrying value $ 12,416 1,268 13,684
============
WEIGHTED-AVERAGE AMORTIZATION PERIOD
(Period in years) 10.0 9.7 10.0
AGGREGATE AMORTIZATION EXPENSE
For the three months ended June 30, 2008 $ 767 53 820
For the six months ended June 30, 2008 1,546 92 1,638
ESTIMATED AMORTIZATION EXPENSE
For the year ended December 31, 2008 $ 3,032 135 3,167
For the year ended December 31, 2009 2,738 85 2,823
For the year ended December 31, 2010 2,369 83 2,452
For the year ended December 31, 2011 1,662 80 1,742
For the year ended December 31, 2012 1,300 78 1,378
----------
(1) The mortgage servicing rights are included in other assets and the gross
carrying value and accumulated amortization are not readily available.
Acquisitions are accounted for using the purchase accounting method as
prescribed by Statement of Financial Accounting Standard ("SFAS") No. 141,
Business Combinations. Purchase accounting requires the total purchase
price to be allocated to the estimated fair values of assets acquired and
12
liabilities assumed, including certain intangible assets. Goodwill is
recorded for the residual amount in excess of the net fair value.
Adjustment of the allocated purchase price may be related to fair value
estimates for which all information has not been obtained or required for
pre-acquisition contingencies of the acquired entity known or discovered
during the allocation period, the period of time required to identify and
measure the fair values of the assets and liabilities acquired in the
business combination. The allocation period is generally limited to one
year following consummation of a business combination.
6) Deposits
The following table illustrates the amounts outstanding for deposits
$100,000 and greater at June 30, 2008 according to the time remaining to
maturity. Included in the certificates of deposit ("CD") maturities are
brokered CDs in the amount of $1,015,000.
Certificates Non-Maturity
(Dollars in thousands) of Deposit Deposits Totals
------------ ------------- ------------
Within three months $ 120,148 1,303,609 1,423,757
Three to six months 85,336 - 85,336
Seven to twelve months 100,861 - 100,861
Over twelve months 47,338 - 47,338
------------ ------------ ------------
Totals $ 353,683 1,303,609 1,657,292
============ ============ ============
7) Advances and Other Borrowings
The following chart illustrates the average balances and the maximum
outstanding month-end balances for FHLB of Seattle advances, repurchase
agreements and U.S. Treasury, Tax and Loan borrowings:
As of and As of and As of and
for the six for the for the six
(Dollars in thousands) months ended year ended months ended
June 30, 2008 December 31, 2007 June 30, 2007
------------- ----------------- -------------
FHLB advances:
Amount outstanding at end of period $ 658,211 538,949 260,224
Average balance $ 648,296 382,243 368,928
Maximum outstanding at any month-end $ 815,860 538,949 509,519
Weighted average interest rate 3.26% 4.94% 4.97%
Repurchase agreements:
Amount outstanding at end of period $ 176,211 178,041 156,794
Average balance $ 184,892 171,290 159,557
Maximum outstanding at any month-end $ 192,216 193,421 168,395
Weighted average interest rate 2.33% 4.35% 4.56%
U.S. Treasury, Tax and Loan:
Amount outstanding at end of period $ 209,298 221,409 231,786
Average balance $ 173,434 120,188 128,986
Maximum outstanding at any month-end $ 299,477 244,012 244,012
Weighted average interest rate 2.74% 5.03% 5.28%
13
8) 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 June 30, 2008.
CONSOLIDATED Tier 1 (Core) Tier 2 (Total) Leverage
(Dollars in thousands) Capital Capital Capital
------------- -------------- ------------
Total stockholder's equity $ 549,643 549,643 549,643
Less: Goodwill and intangibles (152,717) (152,717) (152,717)
Other adjustments (2,322) (2,322) (2,322)
Plus: Allowance for loan and lease losses - 52,258 -
Accumulated other comprehensive
Unrealized loss on AFS securities 2,075 2,075 2,075
Subordinated debentures 115,000 115,000 115,000
------------ -------------- ------------
Regulatory capital computed $ 511,679 563,937 511,679
============ ============== ============
Risk weighted assets $ 4,172,360 4,172,360
Total average assets $ 4,762,239
============ ============== ============
Capital as % of risk weighted assets 12.26% 13.52% 10.74%
Regulatory "well capitalized" requirement 6.00% 10.00% 5.00%
------------ -------------- ------------
Excess over "well capitalized" requirement 6.26% 3.52% 5.74%
============ ============== ============
9) 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:
Three Three Six Six
months ended months ended months ended months ended
June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007
------------- ------------- ------------- -------------
Net earnings available to common
stockholders $ 18,459,000 16,725,000 35,858,000 32,818,000
Average outstanding shares - basic 53,971,220 53,164,813 53,910,414 52,836,255
Add: Dilutive stock options 180,070 436,883 173,779 578,737
------------- ------------- ------------- -------------
Average outstanding shares - diluted 54,151,290 53,601,696 54,084,193 53,414,992
============= ============= ============= =============
Basic earnings per share $ 0.35 0.31 0.67 0.62
============= ============= ============= =============
Diluted earnings per share $ 0.34 0.31 0.66 0.61
============= ============= ============= =============
14
There were approximately 1,567,573 and 436,130 average shares excluded
from the diluted average outstanding share calculation for the six months
ended June 30, 2008 and 2007, respectively, due to the option exercise
price exceeding the market price.
10) 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 months For the six months
ended June 30, ended June 30,
Dollars in thousands 2008 2007 2008 2007
---------- --------- -------- --------
Net earnings $ 18,459 16,725 35,858 32,818
Unrealized holding loss arising during the period (10,492) (7,092) (8,320) (5,911)
Tax benefit 4,134 2,794 3,279 2,329
---------- --------- -------- --------
Net after tax (6,358) (4,298) (5,041) (3,582)
Reclassification adjustment for (gain) losses
included in net earnings - - (248) 8
Tax expense (benefit) - - 97 (3)
---------- --------- -------- --------
Net after tax - - (151) 5
Net unrealized loss on securities (6,358) (4,298) (5,192) (3,577)
---------- --------- -------- --------
Total comprehensive income $ 12,101 12,427 30,666 29,241
========== ========= ======== ========
11) Federal and State Income Taxes
The Company and its financial institution subsidiaries join together in
the filing of consolidated income tax returns in the following
jurisdictions: federal, Montana, Idaho and Utah. Although 1st Bank has
operations in Wyoming and Mountain West has operations in Washington,
neither Wyoming nor Washington impose a corporate level income tax. All
required income tax returns have been timely filed. Income tax returns for
the years ended December 31, 2005, 2006 and 2007 remain subject to
examination by federal, Montana, Idaho and Utah tax authorities and income
tax returns for the years ended December 31, 2003 and 2004 remain subject
to examination by the state of Montana and Idaho.
On January 1, 2007, the Company adopted FASB Interpretation No. 48 ("FIN
48"), Accounting for Uncertainty in Income Taxes. There was no cumulative
effect recognized in retained earnings as a result of adopting FIN 48. The
Company determined its unrecognized tax benefit to be $152,000 as of June
30, 2008.
If the unrecognized tax benefit amount was recognized, it would decrease
the Company's effective tax rate from 34.8 percent to 34.5 percent.
Management believes that it is unlikely that the balance of its
unrecognized tax benefits will significantly increase or decrease over the
next twelve months.
The Company recognizes interest related to unrecognized income tax
benefits in interest expense and penalties are recognized in other
expense. During the six months ended June 30, 2008 and 2007, the Company
recognized $0 interest expense and recognized $0 penalty with respect to
income tax liabilities. The Company had approximately $37,000 and $50,000
accrued for the payment of interest at June 30, 2008 and 2007,
respectively. The Company had accrued liabilities of $0 for the payment of
penalties at June 30, 2008 and 2007.
15
12) Segment Information
The Company defines operating segments and evaluates segment performance
internally based on individual bank charters. 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 limited partnership interests that operate residential rental
real estate properties which have been allocated low income housing tax
credits. Intersegment revenues primarily represents interest income on
intercompany borrowings, management fees, and data processing fees
received by individual banks or the parent company. Intersegment revenues,
expenses and assets are eliminated in order to report results in
accordance with accounting principles generally accepted in the United
States of America.
Six months ended and as of June 30, 2008
----------------------------------------------------------------------------------------
Mountain First
(Dollars in thousands) Glacier West Security Western 1st Bank Big Sky Valley
----------------------------------- ----------- --------- ---------- -------- -------- ------- -------
Revenues from external customers $ 42,359 43,550 27,909 18,484 13,983 12,460 10,872
Intersegment revenues 82 25 935 644 638 - 212
Expenses (32,167) (37,647) (21,754) (15,074) (11,708) (9,424) (8,373)
----------- --------- -------- -------- -------- ------- -------
Net Earnings $ 10,274 5,928 7,090 4,054 2,913 3,036 2,711
=========== ========= ======== ======== ======== ======= =======
Total Assets $ 1,156,216 1,114,885 847,406 567,473 430,756 330,894 286,312
=========== ========= ======== ======== ======== ======= =======
First Bank Total
Citizens of MT Morgan Parent Other Eliminations Consolidated
---------- -------- ------- ------- ------- ------------- ------------
Revenues from external customers $ 7,007 4,548 2,715 229 116 - 184,232
Intersegment revenues 165 124 233 44,798 15 (47,871) -
Expenses (6,230) (3,547) (2,675) (9,169) (142) 9,536 (148,374)
---------- -------- ------- ------- ------- ----------- ---------
Net Earnings $ 942 1,125 273 35,858 (11) (38,335) 35,858
========== ======= ======= ======= ======= =========== =========
Total Assets $ 203,816 153,124 99,488 680,379 3,362 (846,243) 5,027,868
========== ======= ======= ======= ======= =========== =========
Six months ended and as of June 30, 2007
----------------------------------------------------------------------------------------
Mountain First
(Dollars in thousands) Glacier West Security Western 1st Bank Big Sky Valley
------------------------------------- ----------- --------- ---------- --------- -------- -------- -------
Revenues from external customers $ 38,538 42,446 29,187 20,455 11,809 11,439 10,667
Intersegment revenues 78 24 920 713 552 15 95
Expenses (30,418) (35,521) (23,497) (16,903) (9,966) (9,024) (8,570)
----------- --------- ---------- --------- -------- -------- -------
Net Earnings $ 8,198 6,949 6,610 4,265 2,395 2,430 2,192
----------- --------- ---------- --------- -------- -------- -------
Total Assets $ 1,030,238 996,119 834,762 553,387 470,595 288,449 281,809
----------- --------- ---------- --------- -------- -------- -------
First Bank Total
Citizens of MT Morgan Parent Other Eliminations Consolidated
----------- ---------- -------- -------- -------- ------------ ------------
Revenues from external customers $ 7,549 4,604 2,427 110 85 - 179,316
Intersegment revenues - 316 632 41,190 25 (44,560) -
Expenses (6,461) (3,969) (2,602) (8,482) (114) 9,029 (146,498)
---------- ---------- -------- -------- ------ ----------- ----------
Net Earnings $ 1,088 951 457 32,818 (4) (35,531) 32,818
---------- ---------- -------- -------- ------ ----------- ----------
Total Assets $ 181,250 143,093 91,560 634,276 3,421 (836,004) 4,672,955
---------- ---------- -------- -------- ------ ----------- ----------
16
Three months ended and as of June 30, 2008
-------------------------------------------------------------------------------------------
Mountain First
(Dollars in thousands) Glacier West Security Western 1st Bank Big Sky Valley
-------------------------------- -------------- ------------ ---------- ----------- ---------- ---------- ----------
Revenues from external customers $ 21,121 21,846 13,681 9,255 6,937 6,184 5,518
Intersegment revenues 41 25 469 259 228 - 123
Expenses (15,954) (18,809) (10,561) (7,418) (5,654) (4,646) (4,180)
-------------- ------------ ---------- ----------- ---------- ---------- ----------
Net Earnings $ 5,208 3,062 3,589 2,096 1,511 1,538 1,461
-------------- ------------ ---------- ----------- ---------- ---------- ----------
Total Assets $ 1,156,216 1,114,885 847,406 567,473 430,756 330,894 286,312
-------------- ------------ ---------- ----------- ---------- ---------- ----------
First Bank Total
Citizens of MT Morgan Parent Other Eliminations Consolidated
-------------- ---------- ------- ---------- -------- ------------ --------------
Revenues from external customers $ 3,580 2,334 1,340 91 67 - 91,954
Intersegment revenues 33 23 82 22,910 5 (24,198) -
Expenses (3,088) (1,796) (1,286) (4,542) (78) 4,517 (73,495)
-------------- ---------- ------- ---------- -------- ------------ --------------
Net Earnings $ 525 561 136 18,459 (6) (19,681) 18,459
-------------- ---------- ------- ---------- -------- ------------ --------------
Total Assets $ 203,816 153,124 99,488 680,379 3,362 (846,243) 5,027,868
-------------- ---------- ------- ---------- -------- ------------ --------------
Three months ended and as of June 30, 2007
-------------------------------------------------------------------------------------------
Mountain First
(Dollars in thousands) Glacier West Security Western 1st Bank Big Sky Valley
-------------------------------- -------------- ------------ ---------- ----------- ---------- ---------- ----------
Revenues from external customers $ 19,700 22,140 14,764 9,407 6,741 5,894 5,543
Intersegment revenues 39 13 643 549 302 14 58
Expenses (15,515) (18,399) (12,066) (8,361) (5,600) (4,613) (4,449)
-------------- ------------ ---------- ---------- ---------- ---------- ----------
Net Earnings $ 4,224 3,754 3,341 1,595 1,443 1,295 1,152
-------------- ------------ ---------- ---------- ---------- ---------- ----------
Total Assets $ 1,030,238 996,119 834,762 553,387 470,595 288,449 281,809
-------------- ------------ ---------- ---------- ---------- ---------- ----------
First Bank Total
Citizens of MT Morgan Parent Other Eliminations Consolidated
-------------- ---------- ------- ---------- -------- ------------ --------------
Revenues from external customers $ 3,820 2,379 1,221 56 39 - 91,704
Intersegment revenues - 101 327 20,959 15 (23,020) -
Expenses (3,259) (1,985) (1,339) (4,290) (46) 4,943 (74,979)
-------------- ---------- ------- ---------- -------- ------------ --------------
Net Earnings $ 561 495 209 16,725 8 (18,077) 16,725
-------------- ---------- ------- ---------- -------- ------------ --------------
Total Assets $ 181,250 143,093 91,560 634,276 3,421 (836,004) 4,672,955
-------------- ---------- ------- ---------- -------- ------------ --------------
13) Fair Value Measurement
On January 1, 2008, the Company adopted Financial Accounting Standards
Board ("FASB") issued SFAS No. 157, Fair Value Measurements, which is
effective for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. FASB issued Staff Position ("FSP") SFAS
157-2, Effective Date of SFAS No. 157, which delays the effective date of
SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for
items that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). SFAS 157 has been
applied prospectively as of January 1, 2008.
SFAS 157 defines fair value as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. FAS 157 also establishes a
fair value hierarchy which requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when
measuring fair value. The standard describes three levels of inputs that
may be used to measure fair value:
Level 1 Quoted prices in active markets for identical assets or
liabilities
17
Level 2 Observable inputs other than Level 1 prices, such as quoted prices
for similar assets or liabilities; quoted prices in markets that
are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full
term of the assets or liabilities
Level 3 Unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets
or liabilities
The following are the assets measured at fair value on a recurring basis at and
for the period ended June 30, 2008.
Quoted prices Significant
in active markets other Significant
for identical observable Unobservable
assets inputs Inputs Total
(Dollars in thousands) (Level 1) (Level 2) (Level 3) June 30, 2008
------------------------------------ -------------------- ------------- -------------- -------------
Available-for-sale securities ...... $ - 695,619 17,331 712,950
-------------------- ------------- -------------- -------------
Total assets at fair value .... $ - 695,619 17,331 712,950
==================== ============= ============== =============
The valuation techniques for available-for-sale securities include
obtaining quoted market prices for identical assets, where available. If
such prices are not available, fair value is based on independent asset
pricing services and models, the inputs of which are market-based or
independently sourced market parameters, including, but not limited to,
yield curves, interest rates, volatilities, and prepayments. There have
been no significant changes in the valuation techniques during the period.
The following is a reconciliation of the beginning and ending balances for
assets measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) during the period ended June 30, 2008.
Significant
Unobservable
Inputs
(Dollars in thousands) (Level 3)
---------------------------------------------- --------------------
Balance as of January 1, 2008 ................ $ 17,041
Total unrealized gains included in other
comprehensive income ....................... 295
Amortization, accretion, or principal payments (5)
--------------------
Balance as of June 30, 2008 .................. $ 17,331
====================
The change in unrealized losses related to available-for-sale securities
are reported in the accumulated other comprehensive income (loss).
18
14) 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.
Six Months Ended June 30,
(Dollars in thousands) 2008 vs. 2007
Increase (Decrease) due to:
----------------------------------------
Volume Rate Net
--------------- ---------- ---------
INTEREST INCOME
Residential real estate loans $ (2,409) (2,242) (4,651)
Commercial loans 17,766 (8,955) 8,811
Consumer and other loans 2,495 (1,782) 713
Investment securities and other (1,540) 43 (1,497)
--------------- ---------- ---------
Total Interest Income 16,312 (12,936) 3,376
INTEREST EXPENSE
NOW accounts 45 (788) (743)
Savings accounts 11 (345) (334)
Money market accounts 1,104 (4,439) (3,335)
Certificates of deposit (2,770) (1,812) (4,582)
FHLB advances 6,886 (5,439) 1,447
Other borrowings and repurchase
agreements 2,681 (4,400) (1,719)
--------------- ---------- ---------
Total Interest Expense 7,957 (17,223) (9,266)
--------------- ---------- ---------
NET INTEREST INCOME $ 8,355 4,287 12,642
=============== ========== =========
19
15) 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.
AVERAGE BALANCE SHEET For the Three months ended 6-30-08 For the Six months ended 6-30-08
------------------------------------- -----------------------------------
(Dollars in thousands) Interest Average Interest Average
Average and Yield/ Average and Yield/
Balance Dividends Rate Balance Dividends Rate
------------- ----------- -------- ----------- ---------- ---------
ASSETS
Residential real estate loans $ 728,127 12,399 6.81% $ 723,749 24,991 6.91%
Commercial loans 2,351,722 41,100 7.01% 2,313,383 83,633 7.25%
Consumer and other loans 659,960 11,790 7.17% 649,525 23,897 7.38%
------------- ----------- ----------- ----------
Total Loans 3,739,809 65,289 7.00% 3,686,657 132,521 7.21%
Tax - exempt investment securities (1) 255,227 3,174 4.97% 257,560 6,348 4.93%
Other investment securities 537,735 6,110 4.55% 530,123 11,720 4.42%
------------- ----------- ----------- ----------
Total Earning Assets 4,532,771 74,573 6.58% 4,474,340 150,589 6.73%
----------- ----------
Goodwill and core deposit intangible 153,157 153,587
Other non-earning assets 229,029 234,279
------------- -----------
TOTAL ASSETS $ 4,914,957 $ 4,862,206
------------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
NOW accounts $ 467,852 698 0.60% $ 465,784 1,609 0.69%
Savings accounts 272,941 446 0.66% 270,113 993 0.74%
Money market accounts 763,838 3,904 2.05% 781,622 9,855 2.53%
Certificates of deposit 854,667 8,426 3.95% 857,610 17,886 4.18%
FHLB advances 701,324 4,821 2.76% 648,296 10,539 3.26%
Repurchase agreements
and other borrowed funds 521,139 3,978 3.06% 512,717 8,778 3.43%
------------- ----------- ----------- ----------
Total Interest Bearing Liabilities 3,581,761 22,273 2.49% 3,536,142 49,660 2.82%
----------- ----------
Non-interest bearing deposits 735,953 735,579
Other liabilities 47,641 46,113
------------- -----------
Total Liabilities 4,365,355 4,317,834
Common stock 540 539
Paid-in capital 379,265 377,858
Retained earnings 166,307 161,543
Accumulated other
Comprehensive income 3,490 4,432
------------- -----------
Total Stockholders' Equity 549,602 544,372
------------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 4,914,957 $ 4,862,206
------------- -----------
Net interest income $ 52,300 $ 100,929
----------- ----------
Net interest spread 4.09% 3.91%
Net Interest Margin 4.63% 4.52%
Net Interest Margin (Tax Equivalent) 4.75% 4.65%
Return on average assets (annualized) 1.51% 1.48%
Return on average equity (annualized) 13.51% 13.25%
----------
(1) Excludes tax effect of $2,810 and $1,405 on non-taxable investment
security income for the year and quarter ended June 30, 2008,
respectively.
20
16) Change in Accounting Principle
In September 2006, FASB ratified the consensus reached by the Emerging
Issues Task Force ("EITF") for Issue 06-4, Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangement. Effective for fiscal years
beginning after December 15, 2007, the EITF requires policy holders of
split dollar life insurance arrangements to recognize a liability for
future benefits to the employee with the option to recognize the change
in accounting principle through either a cumulative-effective
adjustment to beginning retained earnings or through retrospective
application to all periods.
The Company has split-dollar life insurance policies that required
recording a liability for future benefits. The Company opted to
recognize a cumulative-effect adjustment of $997,000 to retained
earnings as of January 1, 2008 due to the impracticality of obtaining
prior years information.
In February 2007, FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities, including an amendment of
SFAS No. 115. SFAS 159 allows companies to report selected financial
assets and liabilities at fair value. The changes in fair value are
recognized in earnings and the assets and liabilities measured under
this methodology are required to be displayed separately in the balance
sheet. While SFAS 159 is effective beginning January 1, 2008, the
Company has not elected the fair value option that is offered by this
statement.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - THE THREE MONTHS ENDED JUNE 30, 2008 COMPARED
TO MARCH 31, 2008 AND JUNE 30, 2007
Performance Summary
The Company reported net earnings of $18.459 million for the second quarter, an
increase of $1.734 million, or 10 percent, over the $16.725 million for the
second quarter of 2007. Diluted earnings per share of $.34 for the quarter is an
increase of 10 percent over the diluted earnings per share of $.31 for the same
quarter of 2007. Annualized return on average assets and return on average
equity for the second quarter were 1.51 percent and 13.51 percent, respectively,
which compares with prior year returns for the second quarter of 1.47 percent
and 13.79 percent, respectively. The increase in earnings is primarily due to an
improvement in the net interest margin and a steady increase in loans as well as
a $1 million increase in non-interest income.
21
REVENUE SUMMARY
(UNAUDITED - $ IN THOUSANDS)
Three months ended
--------------------------------------------------
June 30, March 31, June 30,
2008 2008 2007
(unaudited) (unaudited) (unaudited)
--------------- ----------------- ------------
Net interest income
Interest income $ 74,573 $ 76,016 $ 75,293
Interest expense 22,273 27,387 30,097
--------------- ----------------- ------------
Net interest income 52,300 48,629 45,196
Non-interest income
Service charges, loan fees, and other fees 12,223 10,961 11,758
Gain on sale of loans 4,245 3,880 3,708
Gain on sale of investments - 248 -
Other income 913 1,173 945
--------------- ----------------- ------------
Total non-interest income 17,381 16,262 16,411
--------------- ----------------- ------------
$ 69,681 $ 64,891 $ 61,607
=============== ================= ============
Tax equivalent net interest margin 4.75% 4.54% 4.51%
=============== ================= ============
$ change from $ change from % change from % change from
March 31, June 30, March 31, June 30,
2008 2007 2008 2007
-------------- ------------- ------------------------------
Net interest income
Interest income $ (1,443) $ (720) -2% -1%
Interest expense $ (5,114) $ (7,824) -19% -26%
-------------- -------------
Net interest income 3,671 7,104 8% 16%
Non-interest income
Service charges, loan fees, and other fees 1,262 465 12% 4%
Gain on sale of loans 365 537 9% 14%
Gain on sale of investments (248) - -100% n/m
Other income (260) (32) -22% -3%
-------------- -------------
Total non-interest income 1,119 970 7% 6%
-------------- -------------
$ 4,790 $ 8,074 7% 13%
============== =============
----------
n/m - not measurable
Net Interest Income
Net interest income for the quarter increased $4 million, or 8 percent, from the
prior quarter, and increased $7 million, or 16 percent, over the same period in
2007. While total interest income has decreased by $1 million, or 1 percent,
from the same period last year, total interest expense has decreased by $8
million, or 26 percent, from the same period last year. The decrease in total
interest expense is primarily attributable to rate decreases in interest bearing
deposits and lower cost borrowings. The net interest margin as a percentage of
earning assets, on a tax equivalent basis, was 4.75 percent which is 21 basis
points higher than the 4.54 percent achieved for the prior quarter and 24 basis
points higher than the 4.51 percent result for the second quarter of 2007.
Provision for Loan Losses
The Company recorded a provision for loan losses of $5.0 million, an increase of
$3.8 million from the same quarter in 2007. Such increase is primarily
attributable to higher reserves for certain commercial real estate loans in
Western Montana and Idaho, most notably in the Coeur d'Alene, Sandpoint and
Boise markets, and the
22
increase in non-performing assets at June 30, 2008 compared to June 30, 2007.
Net charged-off loans during the three months ended June 30, 2008 was $915
thousand.
The determination of the allowance for loan and lease losses ("ALLL") and the
related provision for loan losses is a critical accounting estimate that
involves management's judgments about current environmental factors which affect
loan losses, such factors including economic conditions, changes in collateral
values, net charge-offs, and other factors discussed in "Financial Condition
Analysis" - Allowance for Loan and Lease Losses.
Non-interest Income
Non-interest income for the quarter increased $1 million, or 7 percent, from the
prior quarter, and also increased $1 million, or 6 percent, over the same period
in 2007. Fee income increased $1.3 million, or 12 percent, during the quarter,
compared to the $465 million, or 4 percent, increase over the same period last
year. The fee income increases are attributable to the continued growth in the
number of checking accounts. Gain on sale of loans for the quarter increased
$365 thousand, or 9 percent, and increased $537 thousand, or 14 percent, over
the same period last year, such increases resulting from a greater volume of
real estate and other loans sold. There were no sales of investments in the
quarter, unlike the first quarter which included $248 thousand in gain from the
sale of shares in Principal Financial Group (PFG) and a mandatory redemption of
a portion of Visa, Inc. shares from its initial public offering. For the
quarter, other income decreased by $260 thousand, or 22 percent, compared to a
decrease of $32 thousand, or 3 percent, over the same period last year.
NON-INTEREST EXPENSE SUMMARY
(UNAUDITED - $ IN THOUSANDS)
Three months ended
--------------------------------------
June 30, March 31, June 30,
2008 2008 2007
(unaudited) (unaudited) (unaudited)
----------- ----------- ----------
Compensation and employee benefits $ 20,967 $ 21,097 $ 20,594
Occupancy and equipment expense 5,116 5,133 4,812
Advertising and promotion expense 1,833 1,539 1,582
Outsourced data processing 647 667 680
Core deposit intangibles amortization 767 779 809
Other expenses 7,113 6,398 6,597
----------- ----------- ----------
Total non-interest expense $ 36,443 $ 35,613 $ 35,074
=========== =========== ==========
$ change from $ change from % change from % change from
March 31, June 30, March 31, June 30,
2008 2007 2008 2007
------------- -------------- ------------- -------------
Compensation and employee benefits $ (130) $ 373 -1% 2%
Occupancy and equipment expense (17) 304 0% 6%
Advertising and promotion expense 294 251 19% 16%
Outsourced data processing (20) (33) -3% -5%
Core deposit intangibles amortization (12) (42) -2% -5%
Other expenses 715 516 11% 8%
------------- --------------
Total non-interest expense $ 830 $ 1,369 2% 4%
============= ==============
23
Non-interest Expense
Non-interest expense increased by $830 thousand, or 2 percent, from the prior
quarter and increased by $1.4 million, or 4 percent, from the same quarter of
2007. Compensation and benefit expense decreased $130 thousand, or 1 percent,
over the prior quarter, and increased $373 thousand, or 2 percent, over the same
quarter of 2007. The year-over-year increase is primarily attributable to
increased staffing levels, including new branches, as well as increased
compensation, including commissions tied to increased production, and benefits,
including health insurance. The number of full-time-equivalent employees has
increased from 1,469 to 1,537, a 5 percent increase since June 30, 2007.
Occupancy and equipment expense increased $304 thousand, or 6 percent, while
other expenses increased $516 thousand, or 8 percent, since June 30, 2007,
reflecting the cost of additional branch locations, facility upgrades, and other
general and administrative costs. Advertising and promotion expense increased
$294 thousand, or 19 percent, from the prior quarter, and increased $251
thousand, or 16 percent, from the same quarter of 2007, such increases primarily
attributable to new branch promotions, and the banks continuing focus on
attracting and retaining non-interest bearing deposits.
The efficiency ratio (non-interest expense/net interest income plus non-interest
income) was 52 percent for the 2008 second quarter, compared to 57 percent for
the 2007 second quarter, a five percentage point improvement.
RESULTS OF OPERATIONS - THE SIX MONTHS ENDED JUNE 30, 2008 COMPARED
TO THE SIX MONTHS ENDED JUNE 30, 2007
Performance Summary
Net earnings of $35.858 million for the first half of 2008 is an increase of
$3.040 million, or 9 percent over the first half of the prior year. Diluted
earnings per share of $0.66 versus $0.61 for the same period last year is an
increase of 8 percent. Included in first half of 2007 earnings is a nonrecurring
$1.0 million gain ($1.6 million pre-tax) from the sale of Western Security
Bank's Lewistown, Montana branch, which was partially offset by approximately
$500 thousand of nonrecurring expenses from the merger of three of the acquired
Citizens Development Company's ("CDC") five subsidiaries into the Company's
subsidiaries.
REVENUE SUMMARY
(UNAUDITED - $ IN THOUSANDS)
Six months ended June 30,
------------------------------------------------
2008 2007 $ change % change
---------- --------- --------- --------
Interest income $ 150,589 $ 147,213 $ 3,376 2%
Interest expense 49,660 58,926 (9,266) -16%
---------- --------- ---------
Net interest income 100,929 88,287 12,642 14%
Non-interest income
Service charges, loan fees, and other fees 23,184 21,843 1,341 6%
Gain on sale of loans 8,125 6,750 1,375 20%
Gain (loss) on sale of investments 248 (8) 256 -3200%
Other income 2,086 3,518 (1,432) -41%
---------- --------- ---------
Total non-interest income 33,643 32,103 1,540 5%
---------- --------- ---------
$ 134,572 $ 120,390 $ 14,182 12%
========== ========= =========
Tax equivalent net interest margin 4.65% 4.49%
========== =========
Net Interest Income
Net interest income for the six months increased $13 million, or 14 percent,
over the same period in 2007. Total interest income increased $3 million, or 2
percent, while total interest expense decreased $9 million, or 16
24
percent. The decrease in interest expense is primarily attributable to the rate
decreases on interest bearing deposits and lower cost borrowings. The net
interest margin as a percentage of earning assets, on a tax equivalent basis,
was 4.65 percent, an increase of 16 basis points from the 4.49 percent for the
same period in 2007.
Provision for Loan Losses
The provision for loan loss expense was $8 million for the first six months of
2008, an increase of $5 million, or 214 percent, from the same period in 2007.
The increase in the provision reflects an increase in non-performing loans since
December 31, 2007, as well as reserves for certain commercial real estate loans
in western Montana and Idaho. Net charged-off loans during the six months ended
June 30, 2008 was $1.148 million.
Non-interest Income
Total non-interest income increased $1.5 million, or 5 percent in 2008. Fee
income for the first half of 2008 increased $1 million, or 6 percent, over the
first half of 2007, driven primarily by an increased number of loan and deposit
accounts, and additional customer products and services offered. Gain on sale of
loans increased $1.4 million, or 20 percent, from the first six months of last
year. Gain from the sale of investments during the first half of 2008 included a
first quarter mandatory redemption of a portion of Visa, Inc. shares from its
initial public offering, and the sale of shares in Principal Financial Group
(PFG). Other income for the six months decreased $1.4 million, or 41 percent,
over the same period in 2007. Such decrease is attributable to a gain of $1.6
million from the January 19, 2007 sale of Western Security Bank's Lewistown
branch, a regulatory requirement imposed to complete the acquisition of CDC.
NON-INTEREST EXPENSE SUMMARY
(UNAUDITED - $ IN THOUSANDS)
Six months ended June 30,
-------------------------------------------
2008 2007 $ change % change
--------- --------- -------- --------
Compensation and employee benefits $ 42,064 $ 40,100 $ 1,964 5%
Occupancy and equipment expense 10,249 9,270 979 11%
Advertising and promotion expense 3,372 3,021 351 12%
Outsourced data processing 1,314 1,492 (178) -12%
Core deposit intangibles amortization 1,546 1,589 (43) -3%
Other expenses 13,511 12,785 726 6%
--------- --------- --------
Total non-interest expense $ 72,056 $ 68,257 $ 3,799 6%
========= ========= ========
Non-interest Expense
Non-interest expense increased by $4 million, or 6 percent, from the same six
months of 2007. The first half of 2007 included approximately $500,000 of
non-recurring expenses and costs, including overtime, associated with the
January 26, 2007 merger of three of the five CDC subsidiaries into Glacier
Bancorp, Inc.'s subsidiaries, and related operating system conversions.
Compensation and employee benefit expense increased $2 million, or 5 percent,
from the first half of 2007, due largely to the increased number of employees
added since June 30, 2007. Occupancy and equipment expense increased $979
thousand, or 11 percent, while other expenses increased $726 thousand, or 6
percent, since June 30, 2007, reflecting the cost of additional locations and
facility upgrades. Advertising and promotion expense increased $351 thousand, or
12 percent, from the first half of 2007, due primarily to new branch promotions,
and the banks continuing focus on attracting and retaining non-interest bearing
deposits. The efficiency ratio (non-interest expense/net interest income plus
non-interest income) was 54 percent for the first half of 2008 compared
favorably to 57 percent for the first six months of 2007.
25
FINANCIAL CONDITION ANALYSIS
As reflected in the table below, total assets at June 30, 2008 were $5.028
billion, which is $211 million, or 4 percent greater than total assets of $4.817
billion at December 31, 2007, and $355 million, or 8 percent, greater than the
June 30, 2007 total assets of $4.673 billion.
$ change $ change
June 30, December 31, June 30, from from
2008 2007 2007 December 31, June 30,
ASSETS ($ IN THOUSANDS) (unaudited) (audited) (unaudited) 2007 2007
------------ -------------- ------------ ------------- -----------
Cash on hand and in banks $ 123,545 145,697 134,647 (22,152) (11,102)
Investment securities, interest bearing deposits,
FHLB stock, FRB stock, and fed funds 800,206 782,236 873,405 17,970 (73,199)
Loans:
Real estate 746,193 725,854 819,427 20,339 (73,234)
Commercial 2,396,098 2,247,303 1,951,995 148,795 444,103
Consumer and other 678,661 638,378 612,854 40,283 65,807
------------ -------------- ------------ ------------- -----------
Total loans 3,820,952 3,611,535 3,384,276 209,417 436,676
Allowance for loan and lease losses (60,807) (54,413) (52,422) (6,394) (8,385)
------------ -------------- ------------ ------------- -----------
Total loans net of allowance for loan and lease
losses 3,760,145 3,557,122 3,331,854 203,023 428,291
------------ -------------- ------------ ------------- -----------
Other assets 343,972 332,275 333,049 11,697 10,923
------------ -------------- ------------ ------------- -----------
Total Assets $ 5,027,868 4,817,330 4,672,955 210,538 354,913
============ ============== ============ ============= ===========
At June 30, 2008, total loans were $3.821 billion, an increase of $139 million,
or 3.8 percent (15 percent annualized) over total loans of $3.682 billion at
March 31, 2008, and an increase of $209 million, or 6 percent (12 percent
annualized) over total loans of $3.612 billion at December 31, 2007. Over the
first half of 2008, commercial loans increased the most with an increase of $149
million, or 7 percent, followed by consumer loans, which are primarily comprised
of home equity loans, increasing by $40 million, or 6 percent, while real estate
loans increased $20 million, or 3 percent from the fourth quarter of 2007. Since
June 30, 2007, total loans have increased $437 million, or 13 percent, of which
commercial loans increased $444 million, or 23 percent, consumer loans grew by
$66 million, or 11 percent, while real estate loans decreased $73 million, or 9
percent.
Investment securities, including interest bearing deposits in other financial
institutions and federal funds sold, have increased $18 million, or 2 percent,
from December 31, 2007 and have decreased $73 million, or 8 percent, from June
30, 2007. Investment securities at June 30, 2008 represented 16 percent of total
assets at June 30, 2008 and at December 31, 2007 compared to 19 percent at June
30, 2007.
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 with servicing
released for the six months ended June 30, 2008 and 2007 were $356 million and
$310 million, respectively, and for the three months ended June 30, 2008 and
2007 were $180 million and $168 million, respectively. The Company has also been
active in originating commercial SBA loans, some of which are sold to investors.
The amount of loans sold and serviced for others at June 30, 2008 was
approximately $185 million.
Allowance for Loan and Lease Losses
The Company is committed to a conservative management of the credit risk within
the loan and lease portfolios, including the early recognition of problem loans.
The Company's credit risk management includes stringent credit policies,
individual loan approval limits, limits on concentrations of credit, and
committee approval of larger loan requests. Management practices also include
regular internal and external credit examinations, identification and review of
individual loans and leases experiencing deterioration of credit quality,
procedures for the collection of non-performing assets, quarterly monitoring of
the loan and lease portfolios, semi-annual review of loans by industry, and
periodic interest rate shock testing.
26
Determining the adequacy of the ALLL involves a high degree of judgment and is
inevitably imprecise as the risk of loss is difficult to quantify. The ALLL
methodology is designed to reasonably estimate the probable loan and lease
losses within each subsidiary bank's loan and lease portfolios. Accordingly, the
ALLL is maintained within a range of estimated losses. The determination of the
ALLL and the related provision for credit losses is a critical accounting
estimate that involves management's judgments about all known relevant internal
and external environmental factors that affect loan losses, including the credit
risk inherent in the loan and lease portfolios, economic conditions nationally
and in the local markets in which the banks operate, changes in collateral
values, delinquencies, non-performing assets and net charge-offs. Relative to
national economic developments, the local market areas in which the banks
operate largely continue to have economies that foster the above-average job and
population growth achieved over the course of 2007. Although the Company and the
banks continue to actively monitor national and local economic trends, a
softening of economic conditions combined with declines in the values of real
estate that collateralize most of the Company's loan and lease portfolios may
adversely affect the credit risk and potential for loss to the Company.
The Company considers the ALLL balance of $60.807 million adequate to cover
inherent losses in the loan and lease portfolios as of June 30, 2008. However,
no assurance can be given that the Company will not, in any particular period,
sustain losses that are significant relative to the amount reserved, or that
subsequent evaluations of the loan and lease portfolios applying management's
judgment about then current factors, including regulatory developments, will not
require significant changes in the ALLL. Under such circumstances, this could
result in enhanced provisions for credit losses. See additional risk factors in
Part II - Other information, Item 1A - Risk Factors.
The Company's model of ten wholly-owned, independent community banks, each with
it own loan committee, chief credit officer and Board of Directors, provides
substantial local oversight to the lending and credit management function. Loan
relationships exceeding a bank's loan approval limit up to $10 million are
subject to approval by the Executive Loan Committee consisting of the ten banks'
chief credit officers and the Company's Credit Administrator. Loans exceeding
$10 million are subject to approval by the Company's Board of Directors. Unlike
a traditional, single-bank holding company, the Company's decentralized business
model affords multiple reviews of larger loans before credit is extended, a
significant benefit in mitigating and managing the Company's credit risk. The
geographic dispersion of the market areas in which the Company and the community
bank subsidiaries operate further mitigates the risk of credit loss. While this
process is intended to limit credit exposure, there can be no assurance that
problem credits will not arise and loan losses incurred, particularly in periods
of rapid economic downturns.
At the end of each quarter, each of the subsidiary community banks analyzes its
loan and lease portfolio and maintain an ALLL at a level that is appropriate and
determined in accordance with accounting principals generally accepted in the
United States of America. The ALLL balance covers estimated credit losses on
individually evaluated loans, including those which are determined to be
impaired, as well as estimated credit losses inherent in the remainder of the
loan and lease portfolios.
The ALLL evaluation is well documented and approved by each subsidiary bank's
Board of Directors and reviewed by the Company's Board of Directors. In
addition, the policy and procedures for determining the balance of the ALLL are
reviewed annually by each subsidiary bank's Board of Directors and the Company's
Board of Directors.
The primary responsibility for credit risk assessment and identification of
problem loans rests with the loan officer of the account. This continuous
process, utilizing each of the bank's internal credit risk rating process, is
necessary to support management's evaluation of ALLL adequacy. An independent
loan review function verifying credit risk ratings evaluates the loan officer
and management's evaluation of the loan portfolio credit quality. The loan
review function also assesses the evaluation process and provides an independent
analysis of the adequacy of the ALLL.
27
The following table summarizes the allocation of the ALLL:
June 30, 2008 December 31, 2007 June 30, 2007
------------------------------- ---------------------------- ------------------------------
Allowance Percent Allowance Percent Allowance Percent
for loan and of loans in for loan and of loans in for loan and of loans in
(Dollars in thousands) lease Losses category lease Losses category lease Losses category
--------------------------- ----------------- ----------- -------------- ----------- ---------------- -----------
Real estate loans $ 5,391 19.6% 4,755 20.2% 5,642 24.2%
Commercial real estate loans 26,310 45.3% 23,010 44.6% 19,047 31.6%
Other commercial loans 19,063 17.4% 17,453 17.6% 18,386 26.2%
Consumer and other loans 10,043 17.7% 9,195 17.6% 9,347 18.0%
----------------- ----------- -------------- ----------- ---------------- -----------
Totals $ 60,807 100.0% 54,413 100.0% 52,422 100.0%
================= =========== ============== =========== ================ ===========
Each bank's ALLL is generally available to absorb losses from any segment of its
loan and lease portfolio.
The increase in the ALLL for commercial real estate loans was primarily due to
increases in reserves for certain commercial real estate loans in the high
growth areas of Western Montana and Idaho, most notably in the Coeur d'Alene,
Sandpoint and Boise markets, and the increase in non-performing assets since
June 30, 2007.
Six months ended Year ended Six months ended
June 30, December 31, June 30,
(Dollars in thousands) 2008 2007 2007
---------------- ------------- ----------------
Balance at beginning of period $ 54,413 49,259 49,259
Charge-offs:
Real estate loans (580) (306) (94)
Commercial loans (570) (2,367) (309)
Consumer and other loans (348) (714) (160)
---------------- ------------- ----------------
Total charge-offs $ (1,498) (3,387) (563)
---------------- ------------- ----------------
Recoveries:
Real estate loans 44 208 110
Commercial loans 178 656 376
Consumer and other loans 128 358 196
---------------- ------------- ----------------
Total recoveries $ 350 1,222 682
---------------- ------------- ----------------
Net (charge-offs) recoveries (1,148) (2,165) 119
Acquisition (1) - 639 639
Provision 7,542 6,680 2,405
---------------- ------------- ----------------
Balance at end of period $ 60,807 54,413 52,422
================ ============= ================
Ratio of net (charge-offs) recoveries to
average loans outstanding during the period (0.030%) (0.060%) 0.004%
Allowance for loan and lease lossess as a
percentage of total loan and leases 1.59% 1.51% 1.55%
----------
(1) Increase attributable to the April 30, 2007 acquisition of North Side State
Bank ("North Side") of Rock Springs, Wyoming, which was merged into 1st
Bank, the Company's subsidiary bank in Evanston, Wyoming.
The ALLL has increased $8.4 million, or 16 percent, from a year ago. The ALLL of
$60.807 million is 1.59 percent of June 30, 2008 total loans outstanding, up
from 1.51 percent at prior year end, and up from 1.55 percent in the second
quarter last year. The first six months provision for loan and lease loss
expense was $7.5 million, an
28
increase of $5.1 million from the same period in 2007. Net loans and lease
charge-offs were $1.1 million, or .030 percent of average loans and leases in
the first six months of 2008, compared to net recoveries of $119 thousand, or
..004 percent of average loans and leases in the first six months of 2007.
The banks' charge-off policy is consistent with bank regulatory standards.
Consumer loans generally are charged off when the loan becomes over 120 days
delinquent. Real estate acquired as a result of foreclosure or by deed-in-lieu
of foreclosure is classified as real estate owned until such time as it is sold.
When such property is acquired, it is recorded at the lower of the unpaid
principal balance or estimated fair value, not to exceed estimated net
realizable value. Any write-down at the time of recording real estate owned is
charged to the ALLL. Any subsequent write-downs are charged to current expense.
Non-performing Assets At At At
(Dollars in thousands) 6/30/2008 12/31/2007 6/30/2007
---------------- --------------- ------------
Non-accrual loans:
Real estate loans $ 1,293 934 977
Commercial loans 17,788 7,192 3,799
Consumer and other loans 593 434 459
---------------- --------------- ------------
Total $ 19,674 8,560 5,235
Accruing Loans 90 days or more overdue:
Real estate loans 467 840 659
Commercial loans 3,006 1,216 3,791
Consumer and other loans 227 629 142
---------------- --------------- ------------
Total $ 3,700 2,685 4,592
Real estate and other assets owned, net 6,523 2,043 2,153
---------------- --------------- ------------
Total non-performing loans and real estate
and other assets owned, net $ 29,897 13,288 11,980
================ =============== ============
As a percentage of total bank assets 0.58% 0.27% 0.25%
Interest Income (1) $ 707 683 206
Allowance for loan and lease losses as a
percentage of non-performing assets 203% 409% 438%
----------
(1) Amounts represent interest income that would have been recognized on loans
accounted for on a non-accrual basis for the six months ended June 30,
2008, year ended December 31, 2007 and six months ended June 30, 2007 had
such loans performed pursuant to contractual terms.
Non-performing assets as a percentage of total bank assets at June 30, 2008 were
at .58 percent, up from .57 percent as of March 31, 2008, and up from .25
percent at June 30, 2007. These ratios compare favorably to the Federal Reserve
Bank Peer Group average of 1.06 percent at March 31, 2008, the most recent
information available. The ALLL was 203 percent of non-performing assets at June
30, 2008, down from 409 percent for the prior year end and down from 438 percent
a year ago. Each of the subsidiary banks evaluates the level of its
non-performing assets, the values of the underlying real estate and other
collateral, and related trends in net charge-offs. Through pro-active credit
administration, the banks work closely with borrowers to seek favorable
resolution to the extent possible, thereby attempting to minimize net
charge-offs or losses to the Company.
Most of the Company's non-performing assets are secured by real estate. Based on
the most current information available to management, including updated
appraisals where appropriate, the Company believes in most instances the value
of the underlying real estate collateral is adequate to minimize any significant
charge-offs or loss to the Company.
29
Loans are reviewed on a regular basis and are placed on a non-accrual status
when the collection of the contractual principal or interest is unlikely. The
Company typically places loans on non-accrual when principal or interest is due
and has remained unpaid for 90 days or more unless the loan is in process of
collection and well-secured by collateral the fair value of which is sufficient
to discharge the debt in full. When a loan is placed on non-accrual status,
interest previously accrued but not collected is generally reversed against
current period interest income. Subsequent payments are either applied to the
outstanding principal balance or recorded as interest income, depending on the
assessment of the ultimate repayment of the loan. Interest accruals are resumed
on such loans only when they are brought fully current with respect to interest
and principal and when, in the judgment of management, the loans are estimated
to be fully collectible as to both principal and interest.
A loan is considered impaired when, based upon current information and events,
it is probable that the Company will be unable to collect the scheduled payments
of principal or interest when due according to the contractual terms of the loan
agreement. The amount of the impairment is measured using cash flows discounted
at the loan's effective interest rate, except when it is determined that
repayment of the loan is expected to be provided solely by the underlying
collateral. For collateral dependent loans, impairment is measured by the fair
value of the collateral. When the ultimate collectibility of the total principal
of an impaired loan is in doubt, all payments are applied to principal under the
cost recovery method. When the ultimate collectibility of the total principal on
an impaired loan is not in doubt, contractual interest is generally credited to
interest income when received under the cash basis method. Total interest income
recognized for impaired loans under the cash basis for the three and six months
ended June 30, 2008 and 2007 was not significant. Impaired loans, net of
government guaranteed amounts, were $23.707 million and $5.235 million as of
June 30, 2008 and 2007, respectively. The ALLL includes valuation allowances of
$3.030 million and $0 specific to certain impaired loans as of June 30, 2008 and
2007, respectively.
June 30, December 31, June 30, $ change from $ change from
2008 2007 2007 December 31, June 30,
LIABILITIES ($ IN THOUSANDS) (unaudited) (audited) (unaudited) 2007 2007
-------------- --------------- -------------- --------------- ---------------
Non-interest bearing deposits $ 778,786 788,087 820,728 (9,301) (41,942)
Interest bearing deposits 2,347,137 2,396,391 2,533,957 (49,254) (186,820)
Advances from Federal Home Loan Bank 658,211 538,949 260,224 119,262 397,987
Securities sold under agreements to
repurchase and other borrowed funds 531,648 401,621 390,780 130,027 140,868
Other liabilities 43,884 45,147 49,036 (1,263) (5,152)
Subordinated debentures 118,559 118,559 118,559 - -
-------------- --------------- -------------- --------------- ---------------
Total liabilities $ 4,478,225 4,288,754 4,173,284 189,471 304,941
============== =============== ============== =============== ===============
Non-interest bearing deposits increased $8 million, or 1 percent, since March
31, 2008, decreased $9 million, or 1 percent, since December 31, 2007, and
decreased $42 million, or 5 percent, since June 30, 2007. Interest bearing
deposits decreased $49 million from December 31, 2007. The decrease of $187
million in interest bearing deposits since June 30, 2007 includes a $226 million
decrease in higher cost brokered CD's in favor of lower cost interest bearing
deposits. FHLB of Seattle advances increased $398 million from June 30, 2007 and
increased $119 million from December 31, 2007. Repurchase agreements and other
borrowed funds were $532 million at June 30, 2008, an increase of $141 million
from June 30, 2007, and an increase of $130 million from December 31, 2007.
Included in this latter category are U.S. Treasury Tax and Loan funds of $199
million at June 30, 2008, a decrease of $17 million from December 31, 2007, and
a decrease of $27 million from June 30, 2007.
30
June 30, December 31, June 30, $ change from $ change from
STOCKHOLDERS' EQUITY 2008 2007 2007 December 31, June 30,
($ IN THOUSANDS EXCEPT PER SHARE DATA) (unaudited) (audited) (unaudited) 2007 2007
------------ ------------- ------------ -------------- --------------
Common equity $ 551,718 525,459 500,179 26,259 51,539
Accumulated other comprehensive (loss) income (2,075) 3,117 (508) (5,192) (1,567)
------------ ------------- ------------ -------------- --------------
Total stockholders' equity 549,643 528,576 499,671 21,067 49,972
Core deposit intangible, net, and goodwill (152,717) (154,264) (155,593) 1,547 2,876
------------ ------------- ------------ -------------- --------------
$396,926 374,312 344,078 22,614 52,848
============ ============= ============ ============== ==============
Stockholders' equity to total assets 10.93% 10.97% 10.69%
Tangible stockholders' equity to total tangible
assets 8.14% 8.03% 7.62%
Book value per common share $ 10.18 9.85 9.34 0.33 0.84
Market price per share at end of quarter $ 15.99 18.74 20.35 (2.75) (4.36)
Total stockholders' equity and book value per share amounts have increased $50
million and $.84 per share, respectively, from June 30, 2007, the result of
earnings retention and exercised stock options. Tangible stockholders equity has
increased $53 million, or 15 percent since June 30, 2007, with tangible
stockholders' equity at 8.14 percent of total tangible assets at June 30, 2008,
up from 7.62 percent at June 30, 2007. Accumulated other comprehensive income,
representing net unrealized gains or losses on investment securities designated
as available for sale, decreased $2 million from June 30, 2007.
Cash dividend
On June 25, 2008, the board of directors declared a cash dividend of $.13
payable July 17, 2008 to shareholders of record on April 8, 2008, which is an
increase of 8 percent over the $.12 dividend declared in the first quarter of
last year.
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 are 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 of Seattle. As of June 30, 2008, the Company had $951
million of available FHLB of Seattle credit of which $658 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.
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.
Impact of Recently Issued Accounting Standards
In December 2007, FASB issued SFAS No. 141(R), Business Combinations. The
objective of this Statement is to improve the relevance, representational
faithfulness, and comparability of the information that a reporting entity
provides in its financial reports about a business combination and its effects.
The Statement establishes principles and requirements for how the acquirer: a)
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree, b) recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase, and c) determines what
31
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. This Statement
applies prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. An entity may not apply it before that date. The
Company is currently evaluating the impact of the adoption of this standard, but
does not expect it to have a material effect on the Company's financial position
or results of operations with any future business combinations.
Merger of Bank Subsidiaries
Effective April 30, 2008, Whitefish merged into Glacier with the combined
operations conducted under the Glacier charter. In connection with the merger,
Russ Porter, President of Whitefish, has joined Mountain West as President and
Chief Operating Officer.
Effect of inflation and changing prices
Generally accepted accounting principles often require the measurement of
financial position and operating results in terms of historical dollars, without
consideration for change in relative purchasing power over time due to
inflation. Virtually all assets of the Company and each subsidiary bank 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, 2007.
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 the
Company files or submits under the Exchange Act.
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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 second quarter 2008, to which this report relates that
have materially affected, or are reasonably likely to materially affect the
Company's internal control over financial reporting.
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
The Company and the community bank subsidiaries are exposed to certain risks.
The following is a discussion of the most significant risks and uncertainties
that may affect the Company's business, financial condition and future results.
Fluctuating interest rates can adversely affect our profitability
The Company's profitability is dependent to a large extent upon net interest
income, which is the difference (or "spread") between the interest earned on
loans, securities and other interest-earning assets and interest paid on
deposits, borrowings, and other interest-bearing liabilities. Because of the
differences in maturities and repricing characteristics of our interest-earning
assets and interest-bearing liabilities, changes in interest rates do not
produce equivalent changes in interest income earned on interest-earning assets
and interest paid on interest-bearing liabilities. Accordingly, fluctuations in
interest rates could adversely affect the Company's interest rate spread, and,
in turn, the profitability. The Company cannot provide assurance that it can
minimize interest rate risk. In addition, interest rates also affect the amount
of money the Company can lend. When interest rates rise, the cost of borrowing
also increases. Accordingly, changes in levels of market interest rates could
materially and adversely affect the net interest spread, asset quality, loan
origination volume, business and prospects.
A tightening of the credit market may make it difficult to obtain available
money to fund loan growth, which could adversely affect our earnings
A tightening of the credit market and the inability to obtain adequate money to
fund continued loan growth may negatively affect asset growth and, therefore,
earnings capability. In addition to any deposit growth, maturity of investment
securities and loan payments, the Company also relies on alternative funding
sources through correspondent banking and a borrowing line with the FHLB of
Seattle to fund loans. In the event of a downturn in the economy, particularly
in the housing market, these resources could be negatively affected, which would
limit the funds available to the Company.
Allowance for Loan and Lease Losses may not be adequate to cover actual loan
losses, which could adversely affect earnings
The Company maintains an ALLL in an amount that is believed adequate to provide
for losses inherent in the portfolio. While the Company strives to carefully
monitor credit quality and to identify loans that may become non-performing, at
any time there are loans included in the portfolio that will result in losses
that have not been identified as non-performing or potential problem loans. The
Company cannot be sure that it will be able to identify deteriorating loans
before they become non-performing assets, or that it will be able to limit
losses on those loans that are identified. As a result, future significant
additions to the ALLL may be necessary. Additionally, future additions to the
ALLL may be required based on changes in the composition of the loans comprising
the portfolio and changes in the financial condition of borrowers, such as may
result from changes in economic conditions or as a result of incorrect
assumptions by management in determining the ALLL. Additionally, federal banking
regulators, as an integral part of their supervisory function, periodically
review
33
the Company's ALLL. These regulatory agencies may require the Company to
increase the ALLL which could have a negative effect on the Company's financial
condition and results of operation. A critical element in determining the
adequacy of the ALLL is the maintenance of the underlying collateral values,
most of which are in real estate.
Concentration in Real Estate Market
The Company has a high concentration of loans secured by real estate and a
downturn in the real estate market, for any reason, could hurt business and
prospects. In particular, if the nationwide economic decline migrates further to
the markets the Company serves, the Company could be exposed to additional risk
of losses from real estate related loans. Business activities and credit
exposure are concentrated in loans secured by real estate. A decline in the real
estate market could negatively affect the business because the collateral
securing those loans may decrease in value. A downturn in the economics of the
markets the Company serves could have a material adverse effect both on the
borrowers' ability to repay these loans, as well as the value of the real
property held as collateral. The ability to recover on defaulted loans by
foreclosing and selling the real estate collateral would then be diminished and
the Company would more likely to suffer losses on defaulted loans.
Loan portfolio mix could result in increased credit risk in an economic downturn
The loan portfolio contains a high percentage of commercial, commercial real
estate, real estate acquisition and development loans in relation to the total
loans and total assets. These types of loans generally are viewed as having more
risk of default than residential real estate loans or certain other types of
loans or investments. In fact, the FDIC has issued a pronouncement alerting
banks its concern about banks with a heavy concentration of commercial real
estate loans. These types of loans also typically are larger than residential
real estate loans and other commercial loans. Because the loan portfolio
contains a significant number of commercial and commercial real estate loans
with relatively large balances, the deterioration of one or a few of these loans
may cause a significant increase in non-performing loans. An increase in
non-performing loans could result in a loss of earnings from these loans, an
increase in the provision for loan losses, or an increase in loan charge-offs,
which could have an adverse impact on the results of operations and financial
condition.
Competition in our market area may limit our future success
Commercial banking is a highly competitive business. The Company competes with
other commercial banks, savings and loan associations, credit unions, finance,
insurance and other non-depository companies operating in the Company's market
area. The Company is subject to substantial competition for loans and deposits
from other financial institutions. Some of the Company's competitors are not
subject to the same degree of regulation and restriction as it is. Some of its
competitors have greater financial resources than the Company. If the Company is
unable to effectively compete in its market area, the business and results of
operations could be adversely affected.
The FDIC likely will increase insurance premiums to rebuild and maintain the
federal deposit insurance fund
Based on recent events and the state of the economy, it is likely that the FDIC
may increase federal deposit insurance premiums as early as September 2008.
Depending on the circumstances, this increase may be relatively significant and
will add to the Company's cost of operations. It is too soon to predict the
exact amount of any premium increase or the impact on the Company.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) Not Applicable
(b) Not Applicable
(c) Not Applicable
34
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) Not Applicable
(b) Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
(a) The Company's Annual Shareholders' Meeting was held April 30, 2008
(b) Not Applicable
(c) A brief description of each matter voted upon at the Annual Meeting
and the number of votes cast for, against, or withheld, including a
separate tabulation with respect to each nominee to serve on the Board
is presented below:
(1) Election of Directors for three-year terms expiring in 2011 and
until their successors have been elected and have qualified.
Michael J. Blodnick
Votes Cast For: 45,528,380
Votes Cast Withheld: 484,097
Allen J. Fetscher
Votes Cast For: 45,463,750
Votes Cast Withheld: 548,727
John W. Murdoch
Votes Cast For: 45,307,712
Votes Cast Withheld: 704,766
(2) To approve an amendment to the Company's Articles of
Incorporation to eliminate the current staggered terms of the
board of directors and instead provide for the annual election
of all directors.
Votes Cast For: 37,835,271
Votes Cast Withheld: 951,514
(d) None
ITEM 5. OTHER INFORMATION
(a) Not Applicable
(b) Not Applicable
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ITEM 6. EXHIBITS
Exhibit 3.i. - Amended and Restated Articles of Incorporation
Exhibit 3.ii.- Amended and Restated Bylaws
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
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.
August 8, 2008 /s/ Michael J. Blodnick
-----------------------
Michael J. Blodnick
President/CEO
August 8, 2008 /s/ Ron J. Copher
-------------------------
Ron J. Copher
Senior Vice President/CFO
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