UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2007 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE 000-18911
GLACIER BANCORP, INC.
MONTANA 81-0519541
(State of Incorporation) (IRS Employer Identification Number)
49 Commons Loop, Kalispell, MT 59901
(Address of Principal Office)
Registrant's telephone number, including area code: (406) 756-4200
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. X Yes No
--- ---
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes X No
--- ---
Indicate by check mark whether the registrant (i) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (ii) has been subject to such filing
requirements for the past 90 days. X Yes No --- ---
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X Yes ---
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
definition 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
smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes X No
--- ---
The aggregate market value of the voting common equity held by non-affiliates of
the Registrant at June 29, 2007 (the last business day of the most recent second
quarter), was $1,045,878,258 (based on the average bid and ask price as quoted
on the NASDAQ Global Select Market at the close of business on that date).
As of February 11, 2008, there were issued and outstanding 53,888,926 shares of
the Registrant's common stock. No preferred shares are issued or outstanding.
DOCUMENT INCORPORATED BY REFERENCE
Portions of the 2008 Annual Meeting Proxy Statement dated March 28, 2008 are
incorporated by reference into Part III of this Form 10-K.
GLACIER BANCORP, INC.
FORM 10-K ANNUAL REPORT
For the year ended December 31, 2007
TABLE OF CONTENTS
Page
----
PART I.
Item 1. Business 3
Item 1a Risk Factors 23
Item 1b Unresolved Staff Comments 24
Item 2. Properties 24
Item 3. Legal Proceedings 25
Item 4. Submission of Matter to a Vote of Security Holders 25
PART II.
Item 5. Market for the Registrant's Common Equity, Related Stockholder
Matters, and Issuer Purchase of Equity Securities 25
Item 6. Selected Financial Data 26
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 28
Item 7a. Quantitative and Qualitative Disclosure about Market Risk 38
Item 8. Financial Statements and Supplementary Data 38
Item 9. Changes in and Disagreements with Accountants in Accounting
and Financial Disclosures 77
Item 9a. Controls and Procedures 77
Item 9b. Other Information 78
PART III.
Item 10. Directors and Executive Officers and Corporate Governance 78
Item 11. Executive Compensation 78
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 78
Item 13. Certain Relationships and Related Transactions, and Director
Independence 78
Item 14 Principal Accountant Fees and Services 79
PART IV.
Item 15. Exhibits and Financial Statement Schedules 79
2
PART I.
This Annual Report and Form 10-K may be deemed to include forward looking
statements, which management believes are a benefit to shareholders. These
forward looking statements describe management's expectations regarding future
events and developments such as future operating results, growth in loans and
deposits, continued success of the Company's style of banking and the strength
of the local economy. The words "will," "believe," "expect," "should," and
"anticipate" and words of similar construction are intended in part to help
identify forward looking statements. Future events are difficult to predict, and
the expectations described above are subject to risk and uncertainty that may
cause actual results to differ materially and adversely. In addition to
discussions about risks and uncertainties set forth from time to time in the
Company's filings with the SEC, factors that may cause actual results to differ
materially from those contemplated by such forward looking statements include,
among others, the following possibilities: (1) local, regional and national
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 strategy to grow its business through internal
growth complimented by selective acquisitions 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)
deterioration of credit quality that could, among other things, increase
defaults and delinquency risks in the loan portfolio; (4) a continued decline in
the real estate market and other factors listed under Risk Factors in Item 1A
could affect the Company's financial performance and could cause actual results
for future periods to differ materially from those anticipated; (5) projected
business increases following strategic expansion or opening or acquiring new
branches are lower than expected; (6) costs or difficulties related to the
integration of acquisitions are greater than expected; (7) competitive pressure
among financial institutions increases significantly; (8) legislation or
regulatory requirements or changes adversely affect the businesses in which the
Company is engaged; and (9) the Company's ability to realize the efficiencies it
expects to receive from its investments in personnel and infrastructure.
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Glacier Bancorp, Inc. headquartered in Kalispell, Montana (the "Company"), is a
Montana corporation incorporated in 2004 as a successor corporation to the
Delaware corporation originally incorporated in 1990. The Company is a regional
multi-bank holding company providing commercial banking services from 94 banking
offices in Montana, Idaho, Wyoming, Utah and Washington. The Company offers a
wide range of banking products and services, including transaction and savings
deposits, commercial, consumer, and real estate loans, mortgage origination
services, and retail brokerage services. The Company serves individuals, small
to medium-sized businesses, community organizations and public entities.
SUBSIDIARIES
The Company is the parent holding company of the following fifteen subsidiaries
which consists of eleven bank subsidiaries and four trust subsidiaries. The
trust subsidiaries are not consolidated for financial statement purposes.
Bank Subsidiaries
Montana Idaho
Glacier Bank ("Glacier") Mountain West Bank ("Mountain West")
First Security Bank of Missoula ("First Security") Citizens Community Bank ("Citizens")
Western Security Bank ("Western")
Big Sky Western Bank ("Big Sky")
Valley Bank of Helena ("Valley")
Glacier Bank of Whitefish ("Whitefish")
First Bank of Montana ("First Bank-MT")
Wyoming Utah
1st Bank ("1st Bank") First National Bank of Morgan ("Morgan")
Trust Subsidiaries
Glacier Capital Trust II ("Glacier Trust II")
Glacier Capital Trust III ("Glacier Trust III")
Glacier Capital Trust IV ("Glacier Trust IV")
Citizens (ID) Statutory Trust I ("Citizens Trust I")
3
The Company formed or acquired Glacier Trust IV, Glacier Trust III, Citizens
Trust I, and Glacier Trust II as financing subsidiaries on August 15, 2006,
January 31, 2006, April 1, 2005, and March 24, 2004, respectively. The trusts
issued preferred securities that entitle the shareholder to receive cumulative
cash distributions from payments on Subordinated Debentures of the Company. For
additional information regarding the Subordinated Debentures, see Note 10 to the
Consolidated Financial Statements in "Item 8 - Financial Statements and
Supplementary Data."
The Company provides full service brokerage services (selling products such as
stocks, bonds, mutual funds, limited partnerships, annuities and other insurance
products) through Raymond James Financial Services, a non-affiliated company.
The Company shares in the commissions generated, without devoting significant
management and staff time to this portion of the business.
RECENT ACQUISITIONS
The Company's strategy has been to profitably grow its business through internal
growth and selective acquisitions. The Company continues to look for profitable
expansion opportunities in existing markets and new markets in the Rocky
Mountain states. During the last five years, the Company has completed the
following acquisitions: On April 30, 2007, North Side State Bank in Rock
Springs, Wyoming was acquired and became a branch of 1st Bank. On October 1,
2006, Citizens Development Company ("CDC") and its five banking subsidiaries
located across Montana were acquired by the Company. On September 1, 2006,
Morgan and its one branch office in Mountain Green, Utah was acquired. On
October 31, 2005, First State Bank of Thompson Falls, Montana was acquired and
its two branches were merged into First Security. On May 20, 2005, Zions
National Bank branch office in Bonners Ferry, Idaho was acquired and became a
branch of Mountain West. On April 1, 2005, Citizens Bank Holding Co. and its
subsidiary bank Citizens Community Bank in Pocatello, Idaho were acquired. On
February 28, 2005, First National Bank-West Co. and its subsidiary bank 1st Bank
in Evanston, Wyoming were acquired.
FDIC, FHLB AND FRB
The Federal Deposit Insurance Corporation ("FDIC") insures each subsidiary
bank's deposit accounts. All subsidiary banks are members of the Federal Home
Loan Bank ("FHLB") of Seattle, which is one of twelve banks which comprise the
Federal Home Loan Bank System. All subsidiaries, with the exception of Mountain
West and Citizens are members of the Federal Reserve Bank ("FRB").
BANK LOCATIONS AT DECEMBER 31, 2007
The following is a list of the Parent and subsidiary bank main office locations
as of December 31, 2007. See "Item 2. Properties."
Glacier Bancorp, Inc. 49 Commons Loop, Kalispell, MT 59901 (406) 756-4200
Mountain West 125 Ironwood Drive, Coeur d'Alene, Idaho 83814 (208) 765-0284
Glacier 202 Main Street, Kalispell, MT 59901 (406) 756-4200
First Security 1704 Dearborn, Missoula, MT 59801 (406) 728-3115
Western 2812 1st Avenue North, Billings, MT 59101 (406) 371-8200
1st Bank 1001 Main Street, Evanston, WY 82930 (307) 789-3864
Big Sky 4150 Valley Commons, Bozeman, MT, 59718 (406) 587-2922
Valley 3030 North Montana Avenue, Helena, MT 59601 (406) 495-2400
Whitefish 319 East Second Street, Whitefish, MT 59937 (406) 751-4930
Citizens 280 South Arthur, Pocatello, ID 83204 (208) 232-5373
First Bank -MT 224 West Main, Lewistown, MT 59457 (406) 538-7471
Morgan 120 North State, Morgan, UT 84050 (801) 829-3402
FINANCIAL INFORMATION ABOUT SEGMENTS
The following abbreviated organizational chart illustrates the various existing
parent and subsidiary relationships at December 31, 2007:
4
|------------------------|
| Glacier Bancorp, Inc. |
|(Parent Holding Company)|
|------------------------|
|
|-----------------------| |-------------------------| | |----------------------| |-------------------------|
| Mountain West Bank | | Glacier Bank | | | First Security Bank | | Western Security Bank |
| (ID Commercial bank) | | (MT Commercial bank) | | | of Missoula | | (MT Commercial bank) |
| | | | | | (MT Commercial bank) | | |
|-----------------------| |-------------------------| | | ---------------------| |-------------------------|
|-----------------------| |-------------------------| | |----------------------| |-------------------------|
| 1st Bank | | Big Sky | | | Valley Bank | | Glacier Bank |
| (WY Commercial bank) | | Western Bank | | | of Helena | | of Whitefish |
| | | (MT Commercial) | | | (MT Commercial bank) | | (MT Commercial bank) |
|-----------------------| |-------------------------| | | ---------------------| |-------------------------|
|-----------------------| |-------------------------| | | ---------------------| |-------------------------|
|Citizens Community Bank| | First Bank of Montana | | | First National Bank | | |
| (ID Commercial bank) | | (MT Commercial bank) | | | of Morgan | |Glacier Capital Trust II |
| | | | | | (UT Commercial bank) | | |
|-----------------------| |-------------------------| | |----------------------| |-------------------------|
|
|-------------------------| |-------------------------| |--------------------------------|
|Glacier Capital Trust III| |Glacier Capital Trust IV | |Citizens (ID) Statutory Trust I |
|-------------------------| |-------------------------| |--------------------------------|
The five subsidiaries acquired as result of the acquisition of CDC include
Citizens State Bank, First Citizens Bank of Billings, First National Bank of
Lewistown, Western Bank of Chinook, and First Citizens Bank, N.A. On January 26,
2007, Citizens State Bank, First Citizens Bank of Billings, and First Citizens
Bank, N.A. were merged into First Security, Western, and Glacier, respectively,
without name change for First Security, Western, and Glacier. On June 21, 2007,
Western Bank of Chinook was merged into First National Bank of Lewistown and
renamed First Bank-MT. As a result of the CDC mergers into the Company
subsidiaries, the financial reporting activity for the year ended December 31,
2006 has been reclassified to and included in the Company subsidiary into which
each CDC bank was merged, unless otherwise noted.
For information regarding the holding company, as separate from the
subsidiaries, see "Item 7 - Management's Discussion & Analysis" and Note 16 to
the Consolidated Financial Statements in "Item 8 - Financial Statements and
Supplementary Data."
The business of the Company's banking subsidiaries (collectively referred to
hereafter as the "Banks") consists primarily of attracting deposit accounts from
the general public and originating commercial, residential, installment and
other loans. The Banks' principal sources of revenue are interest on loans, loan
origination fees, fees on deposit accounts and interest and dividends on
investment securities. The principal sources of expenses are interest on
deposits, FHLB advances, repurchase agreements, subordinated debentures, and
other borrowings, as well as general and administrative expenses.
BUSINESS SEGMENT RESULTS
The Company evaluates segment performance internally based on individual banking
subsidiaries, and thus the operating segments are so defined. The following
schedule provides selected financial data for the Company's operating segments.
Centrally provided services to the Banks are allocated based on estimated usage
of those services. The operating segment identified as "Other" includes the
Parent company, nonbank units, and eliminations of transactions between
segments.
5
Mountain West Glacier First Security
-------------------------------- ------------------------------ -----------------------------
(Dollars in thousands) 2007 2006 2005 2007 2006 2005 2007 2006 2005
--------- ------- ------- ------- ------- ------- ------- ------- -------
Condensed Income Statements
Net interest income 41,115 36,133 29,607 33,008 29,721 26,508 32,674 30,366 24,839
Noninterest income 19,861 16,442 15,812 11,540 10,203 9,136 6,844 5,351 3,990
--------- ------- ------- ------- ------- ------- ------- ------- ------
Total revenues 60,976 52,575 45,419 44,548 39,924 35,644 39,518 35,717 28,829
Provision for loan losses (2,225) (1,500) (1,897) (1,400) (900) (1,500) (1,100) (600) (630)
Core deposit intangible expense (208) (219) (214) (415) (286) (252) (554) (383) (202)
Other noninterest expense (36,745) (31,057) (26,006) (20,805) (18,061) (16,016) (17,295) (15,149) (11,141)
--------- ------- ------- ------- ------- ------- ------- ------- ------
Pretax earnings 21,798 19,799 17,302 21,928 20,677 17,876 20,569 19,585 16,856
Income tax expense (7,701) (6,163) (5,886) (7,642) (7,040) (6,096) (7,027) (6,303) (5,505)
--------- ------- ------- ------- ------- ------- ------- ------- ------
Net income 14,097 13,636 11,416 14,286 13,637 11,780 13,542 13,282 11,351
========= ======= ======= ======= ======= ======= ======= ======= ======
Average Balance Sheet Data
Total assets 966,955 843,438 706,711 842,306 752,013 678,782 812,554 761,947 641,311
Total loans 774,784 634,745 473,639 645,997 538,696 442,151 550,179 503,415 366,927
Total deposits 693,768 622,937 504,063 497,757 463,339 398,969 553,923 490,277 367,375
Stockholders' equity 109,378 89,651 74,357 92,962 77,044 67,513 107,503 91,023 63,231
End of Year Balance Sheet Data
Total assets 1,038,294 918,985 779,538 903,440 801,792 731,468 792,882 829,796 769,094
Loans, net 836,426 701,390 544,429 708,208 598,609 462,761 548,682 537,382 453,814
Total deposits 666,330 693,323 558,280 473,594 491,361 424,739 533,260 547,711 476,253
Stockholders' equity 114,538 98,954 80,008 96,252 87,844 69,257 109,320 102,912 83,447
Performance Ratios
Return on average assets 1.46% 1.62% 1.62% 1.70% 1.81% 1.74% 1.67% 1.74% 1.77%
Return on average equity 12.89% 15.21% 15.35% 15.37% 17.70% 17.45% 12.60% 14.59% 17.95%
Efficiency ratio 60.60% 59.49% 57.73% 47.63% 45.95% 45.64% 45.17% 43.49% 39.35%
Regulatory Capital Ratios &
Other
Tier I risk-based capital ratio 10.45% 10.39% 9.43% 10.75% 11.12% 11.76% 13.67% 13.58% 13.25%
Total risk-based capital ratio 11.67% 11.56% 10.63% 11.92% 12.27% 12.95% 14.92% 14.84% 14.50%
Leverage capital ratio 9.01% 8.52% 7.38% 9.62% 9.43% 9.34% 11.11% 10.47% 10.06%
Full time equivalent employees 354 304 268 221 198 189 181 162 166
Locations 30 25 22 14 15 11 12 13 11
Western 1st Bank Big Sky
------------------------------ ------------------------------ -----------------------------
(Dollars in thousands) 2007 2006 2005 2007 2006 2005 2007 2006 2005
------- ------- ------- ------- ------- ------- ------- ------- -------
Condensed Income Statements
Net interest income 19,069 16,299 14,522 16,861 11,525 8,179 12,610 12,054 11,540
Noninterest income 8,792 5,645 3,966 3,399 2,939 2,340 3,583 2,781 2,475
------- ------- ------- ------- ------- ------- ------- ------- -------
Total revenues 27,861 21,944 18,488 20,260 14,464 10,519 16,193 14,835 14,015
Provision for loan losses -- -- -- (585) (300) (251) (645) (305) (965)
Core deposit intangible expense (675) (329) (224) (531) (408) (371) (23) (23) (26)
Other noninterest expense (15,972) (11,748) (9,741) (10,490) (8,153) (5,636) (7,220) (6,561) (5,509)
------- ------- ------- ------- ------- ------- ------- ------- -------
Pretax earnings 11,214 9,867 8,523 8,654 5,603 4,261 8,305 7,946 7,515
Income tax expense (4,129) (1,797) (2,488) (3,157) (2,358) (1,401) (3,144) (2,703) (2,819)
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income 7,085 8,070 6,035 5,497 3,245 2,860 5,161 5,243 4,696
======= ======= ======= ======= ======= ======= ======= ======= ======
Average Balance Sheet Data
Total assets 544,888 467,996 440,771 416,012 305,340 235,200 286,537 274,077 263,479
Total loans 322,845 274,394 224,213 207,429 133,541 85,723 239,919 216,530 195,547
Total deposits 373,682 297,780 222,765 333,524 237,589 189,723 215,784 201,930 164,687
Stockholders' equity 85,581 58,869 50,054 59,476 42,308 34,932 33,833 29,259 23,725
End of Year Balance Sheet Data
Total assets 508,729 591,378 431,640 456,273 324,560 304,196 315,885 274,888 267,402
Loans, net 321,533 364,899 231,817 246,478 152,197 111,682 262,934 218,482 203,869
Total deposits 345,273 395,245 269,494 365,906 255,834 244,336 215,771 223,605 191,040
Stockholders' equity 83,226 82,764 49,458 67,003 43,911 41,577 35,406 31,282 26,581
Performance Ratios
Return on average assets 1.30% 1.72% 1.37% 1.32% 1.06% 1.22% 1.80% 1.91% 1.78%
Return on average equity 8.28% 13.71% 12.06% 9.24% 7.67% 8.19% 15.25% 17.92% 19.79%
Efficiency ratio 59.75% 55.04% 53.90% 54.40% 59.19% 57.11% 44.73% 44.38% 39.49%
Regulatory Capital Ratios &
Other
Tier I risk-based capital ratio 14.22% 15.12% 14.97% 11.27% 10.24% 11.59% 11.04% 11.50% 10.10%
Total risk-based capital ratio 15.48% 16.39% 16.22% 12.50% 11.49% 12.85% 12.29% 12.75% 11.36%
Leverage capital ratio 11.18% 11.55% 10.36% 7.41% 6.50% 6.28% 11.17% 10.76% 9.24%
Full time equivalent employees 161 115 112 127 94 87 82 78 68
Locations 8 11 7 8 7 7 5 5 4
6
Valley Whitefish Citizens
------------------------------ ------------------------------ -----------------------------
(Dollars in thousands) 2007 2006 2005 2007 2006 2005 2007 2006 2005
------- ------- ------- ------- ------- ------- ------- ------- -------
Condensed Income Statements
Net interest income 10,680 9,893 9,444 7,262 6,958 6,527 7,532 8,247 5,013
Noninterest income 4,655 3,938 3,509 1,933 1,654 1,916 2,550 2,161 1,902
------- ------- ------- ------- ------- ------- ------- ------- -------
Total revenues 15,335 13,831 12,953 9,195 8,612 8,443 10,082 10,408 6,915
Provision for loan losses (405) (485) (375) (180) (180) (300) (75) (900) (105)
Core deposit intangible expense (42) (43) (48) -- -- -- (146) (164) (133)
Other noninterest expense (8,222) (7,649) (6,787) (4,426) (4,003) (3,428) (6,102) (5,898) (4,052)
------- ------- ------- ------- ------- ------- ------- ------- -------
Pretax earnings 6,666 5,654 5,743 4,589 4,429 4,715 3,759 3,446 2,625
Income tax (expense) benefit (1,955) (1,626) (1,783) (1,652) (1,476) (1,698) (1,403) (1,507) (1,022)
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income 4,711 4,028 3,960 2,937 2,953 3,017 2,356 1,939 1,603
======= ======= ======= ======= ======= ======= ======= ======= ======
Average Balance Sheet Data
Total assets 277,076 261,959 245,486 190,114 182,595 167,704 178,994 159,576 102,341
Total loans 191,494 167,735 135,394 151,708 138,884 115,030 134,353 130,232 78,831
Total deposits 189,547 185,475 160,948 113,112 125,640 90,212 137,861 120,464 80,939
Stockholders' equity 25,951 23,166 21,201 18,229 15,967 14,763 26,888 24,420 16,977
End of Year Balance Sheet Data
Total assets 282,643 269,442 254,437 197,672 187,704 174,069 182,769 172,517 144,161
Loans, net 195,682 177,507 151,204 155,045 142,480 125,512 131,988 137,779 113,222
Total deposits 187,657 183,233 174,059 105,596 121,100 112,790 139,228 128,317 110,023
Stockholders' equity 27,323 24,247 21,809 18,995 16,918 14,847 27,808 25,549 23,029
Performance Ratios
Return on average assets 1.70% 1.54% 1.61% 1.54% 1.62% 1.80% 1.32% 1.22% 1.57%
Return on average equity 18.15% 17.39% 18.68% 16.11% 18.49% 20.44% 8.76% 7.94% 9.44%
Efficiency ratio 53.89% 55.61% 52.77% 48.13% 46.48% 40.60% 61.97% 58.24% 60.52%
Regulatory Capital Ratios &
Other
Tier I risk-based capital ratio 11.68% 11.21% 11.56% 10.96% 11.50% 10.06% 11.92% 10.53% 10.35%
Total risk-based capital ratio 12.93% 12.46% 12.79% 12.12% 12.75% 11.21% 13.17% 11.78% 11.60%
Leverage capital ratio 9.03% 8.14% 8.00% 9.63% 8.97% 8.44% 10.10% 9.81% 9.51%
Full time equivalent employees 80 77 71 53 43 40 61 55 51
Locations 6 6 6 2 2 2 5 5 5
First Bank-MT Morgan Other
------------------------------ ---------------------------- --------------------------------
(Dollars in thousands) 2007 2006 2005 2007 2006 2005 2007 2006 2005
------- ------- ------- ------- ------ ------ -------- -------- --------
Condensed Income Statements
Net interest income 6,308 1,580 -- 3,274 1,090 -- (6,924) (5,578) (6,172)
Noninterest income 736 200 -- 813 318 -- 112 210 (420)
------- ------- ------ ------ ------ ------ ------- ------- -------
Total revenues 7,044 1,780 -- 4,087 1,408 -- (6,812) (5,368) (6,592)
Provision for loan losses (20) -- -- (45) (22) -- -- -- --
Core deposit intangible expense (451) (115) -- (157) (54) -- -- -- --
Other noninterest expense (3,426) (691) -- (2,525) (651) -- (1,487) (905) (1,140)
------- ------- ------ ------ ------ ------ ------- ------- -------
Pretax earnings 3,147 974 -- 1,360 681 -- (8,299) (6,273) (7,732)
Income tax (expense) benefit (1,395) (334) -- (325) (248) -- 4,443 298 3,387
------- ------- ------ ------ ------ ------ ------- ------- -------
Net income 1,752 640 -- 1,035 433 -- (3,856) (5,975) (4,345)
======= ======= ====== ====== ====== ====== ======= ======= =======
Average Balance Sheet Data
Total assets 142,401 36,768 -- 94,437 31,734 -- (146,192) (62,355) (30,122)
Total loans 98,402 23,860 -- 47,972 15,028 -- (4,755) (4,535) (3,414)
Total deposits 107,491 29,487 -- 72,776 24,729 -- (23,470) (20,017) (19,747)
Stockholders' equity 26,557 6,202 -- 20,466 6,873 -- (110,431) (82,687) (69,429)
End of Year Balance Sheet Data
Total assets 149,483 148,097 -- 95,054 95,991 -- (105,794) (143,852) (147,030)
Loans, net 98,897 90,595 -- 52,322 45,302 -- (1,073) (1,098) (1,123)
Total deposits 113,692 116,512 -- 73,375 75,348 -- (35,204) (24,056) (26,302)
Stockholders' equity 26,941 25,766 -- 20,520 20,308 -- (98,756) (104,312) (76,774)
Performance Ratios
Return on average assets 1.23% 1.74% 0.00% 1.10% 1.36% 0.00%
Return on average equity 6.60% 10.32% 0.00% 5.06% 6.30% 0.00%
Efficiency ratio 55.04% 45.28% 0.00% 65.62% 50.07% 0.00%
Regulatory Capital Ratios &
Other
Tier I risk-based capital ratio 10.79% 10.88% 0.00% 14.10% 15.63% 0.00%
Total risk-based capital ratio 12.04% 12.14% 0.00% 15.35% 16.88% 0.00%
Leverage capital ratio 9.26% 9.01% 0.00% 10.41% 10.29% 0.00%
Full time equivalent employees 35 122 0 26 23 0 99 85 73
Locations 2 2 0 2 2 0
7
Consolidation
-----------------------------------
(Dollars in thousands) 2007 2006 2005
--------- --------- ---------
Condensed Income Statements
Net interest income 183,469 158,288 130,007
Noninterest income 64,818 51,842 44,626
--------- --------- ---------
Total revenues 248,287 210,130 174,633
Provision for loan losses (6,680) (5,192) (6,023)
Core deposit intangible expense (3,202) (2,024) (1,470)
Other noninterest expense (134,715) (110,526) (89,456)
--------- --------- ---------
Pretax earnings 103,690 92,388 77,684
Income tax (expense) benefit (35,087) (31,257) (25,311)
--------- --------- ---------
Net income 68,603 61,131 52,373
========= ========= =========
Average Balance Sheet Data
Total assets 4,606,082 4,015,088 3,451,663
Total loans 3,360,327 2,772,525 2,114,041
Total deposits 3,265,755 2,779,630 2,159,934
Stockholders' equity 496,393 382,095 297,324
End of Year Balance Sheet Data
Total assets 4,817,330 4,471,298 3,708,975
Loans, net 3,557,122 3,165,524 2,397,187
Total deposits 3,184,478 3,207,533 2,534,712
Stockholders' equity 528,576 456,143 333,239
Performance Ratios
Return on average assets 1.49% 1.52% 1.52%
Return on average equity 13.82% 16.00% 17.62%
Efficiency ratio 55.55% 53.56% 52.07%
Regulatory Capital Ratios & Other
Tier I risk-based capital ratio 12.17% 12.10% 12.00%
Total risk-based capital ratio 13.42% 13.35% 13.26%
Leverage capital ratio 10.48% 9.77% 9.17%
Full time equivalent employees 1480 1356 1125
Locations 94 93 75
INTERNET ACCESS
Copies of the Company's Annual Report on Form 10-K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934 are available free of charge through the Company's website
(www.glacierbancorp.com) as soon as reasonably practicable after the Company has
filed the material with, or furnished it to, the Securities and Exchange
Commission ("SEC"). Copies can also be obtained by accessing the SEC's website
(www.sec.gov).
MARKET AREA
The Company has 94 locations, of which 9 are loan/admin offices, in thirty-one
counties within five states including Montana, Idaho, Wyoming, Utah, and
Washington. The Company has forty-six offices that serve northwest and west
central Montana. In Idaho, there are twenty-two locations serving southeast,
northern and south central Idaho. In Wyoming, there are eight locations
concentrated in southwest Wyoming. In Utah there are four locations. In
Washington, there are three locations.
The market area's economic base primarily focuses on tourism, construction,
manufacturing, service industry, and health care. The tourism industry is highly
influenced by two national parks, several ski resorts, large lakes, and rural
scenic areas. Construction results from the high population growth that has
occurred in the market areas, in particular Idaho and western Montana.
8
COMPETITION
Based on the FDIC summary of deposits survey as of June 30, 2007, the Company
has approximately 20 percent of the total FDIC insured deposits in the thirteen
counties that it services in Montana. In Idaho, the Company has approximately 6
percent of the deposits in the nine counties that it services. In Wyoming, 1st
Bank has 25 percent of the deposits in the three counties it services. In Utah,
the Company has 13 percent of the deposits in the three counties it services. In
Washington, Mountain West has 61 percent of the deposits in Pend Oreille County.
There are a large number of depository institutions including savings banks,
commercial banks, and credit unions in the counties in which the Company has
offices. The Banks, like other depository institutions, are operating in a
rapidly changing environment. Non-depository financial service institutions,
primarily in the securities and insurance industries, have become competitors
for retail savings and investment funds. Mortgage banking/brokerage firms are
actively competing for residential mortgage business. In addition to offering
competitive interest rates, the principal methods used by banking institutions
to attract deposits include the offering of a variety of services including
on-line banking and convenient office locations and business hours. The primary
factors in competing for loans are interest rates and rate adjustment
provisions, loan maturities, loan fees, and the quality of service to borrowers
and brokers.
9
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
AVERAGE BALANCE SHEET
The following three-year schedule provides (i) the total dollar amount of
interest and dividend income of the Company for earning assets and the resultant
average yield; (ii) the total dollar amount of interest expense on
interest-bearing liabilities and the resultant average rate; (iii) net interest
and dividend income; (iv) interest rate spread; and (v) net interest margin.
AVERAGE BALANCE SHEET
For the year ended 12-31-07 For the year ended 12-31-06 For the year ended 12-31-05
------------------------------ ------------------------------ -------------------------------
Interest Average Interest Average Interest Average
Average and Yield/ Average and Yield/ Average and Yield/
(Dollars in Thousands) Balance Dividends Rate Balance Dividends Rate Balance Dividends Rate
---------- --------- ------- ---------- --------- ------- ---------- --------- -------
ASSETS
Residential First Mortgage $ 798,841 59,664 7.47% $ 702,530 52,219 7.43% $ 508,105 34,506 6.79%
Commercial Loans 1,957,252 157,644 8.05% 1,550,481 119,215 7.69% 1,188,925 81,359 6.84%
Consumer and Other Loans 604,234 48,105 7.96% 519,514 40,284 7.75% 417,011 28,696 6.88%
---------- ------- ---------- ------- ---------- -------
Total Loans 3,360,327 265,413 7.90% 2,772,525 211,718 7.64% 2,114,041 144,561 6.84%
Tax-exempt Investment
Securities (1) 272,042 13,427 4.94% 282,883 13,901 4.91% 283,031 13,867 4.90%
Taxable Investment Securities 574,913 25,920 4.51% 652,176 27,707 4.25% 806,143 31,557 3.91%
---------- ------- ---------- ------- ---------- -------
Total Earning Assets 4,207,282 304,760 7.24% 3,707,584 253,326 6.83% 3,203,215 189,985 5.93%
------- ------- -------
Goodwill and Intangibles 149,934 102,789 73,640
Non-Earning Assets 248,866 204,715 174,808
---------- ---------- ----------
TOTAL ASSETS $4,606,082 $4,015,088 $3,451,663
========== ========== ==========
LIABILITIES
NOW Accounts $ 461,341 4,708 1.02% $ 389,042 2,976 0.77% $ 317,334 889 0.28%
Savings Accounts 268,175 2,679 1.00% 243,333 2,336 0.96% 209,004 1,130 0.54%
Money Market Demand Accounts 754,995 27,248 3.61% 584,467 18,043 3.09% 483,423 7,552 1.56%
Certificate Accounts 1,000,797 46,824 4.68% 860,092 34,792 4.05% 567,818 16,134 2.84%
Advances from FHLB 382,243 18,897 4.94% 487,112 20,460 4.20% 673,904 21,489 3.19%
Securities Sold Under
agreements to Reprchase
and Other Borrowed Funds 412,237 20,935 5.08% 329,787 16,431 4.98% 287,991 12,784 4.44%
---------- ------- ---------- ------- ---------- -------
Total Interest Bearing
Liabilities 3,279,788 121,291 3.70% 2,893,833 95,038 3.28% 2,539,474 59,978 2.36%
------- ------- -------
Non-interest Bearing Deposits 781,447 702,696 582,355
Other Liabilities 48,454 36,464 32,510
---------- ---------- ----------
Total Liabilities 4,109,689 3,632,993 3,154,339
---------- ---------- ----------
STOCKHOLDERS' EQUITY
Common Stock 532 497 469
Paid-In Capital 361,003 291,015 239,907
Retained Earnings 132,352 90,624 53,062
Accumulated Other
Comprehensive Income (Loss) 2,506 (41) 3,886
---------- ---------- ----------
Total Stockholders' Equity 496,393 382,095 297,324
---------- ---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $4,606,082 $4,015,088 $3,451,663
========== ========== ==========
NET INTEREST INCOME $183,469 $158,288 $130,007
======== ======== ========
NET INTEREST SPREAD 3.54% 3.55% 3.57%
NET INTEREST MARGIN 4.36% 4.27% 4.06%
NET INTEREST MARGIN (TAX
EQUIVALENT) 4.50% 4.44% 4.25%
RETURN ON AVERAGE ASSETS (2) 1.49% 1.52% 1.52%
RETURN ON AVERAGE EQUITY (3) 13.82% 16.00% 17.62%
(1) Without tax effect on non-taxable securities income of 5,944, 6,154 and
6,189 for the years ended December 31, 2007, 2006, and 2005, respectively.
(2) Net income divided by average total assets
(3) Net income divided by average equity
10
RATE/VOLUME ANALYSIS
Net interest income can be evaluated from the perspective of relative dollars of
change in each period. Interest income and interest expense, which are the
components of net interest income, are shown in the following table on the basis
of the amount of any increases (or decreases) attributable to changes in the
dollar levels of the Company's interest-earning assets and interest-bearing
liabilities ("Volume") and the yields earned and rates paid on such assets and
liabilities ("Rate"). The change in interest income and interest expense
attributable to changes in both volume and rates has been allocated
proportionately to the change due to volume and the change due to rate.
Years Ended December 31, Years Ended December 31,
2007 vs. 2006 2006 vs. 2005
Increase (Decrease) due to: Increase (Decrease) due to:
---------------------------- ----------------------------
(dollars in thousands) Volume Rate Net Volume Rate Net
------- ------- ------- ------- ------- --------
INTEREST INCOME
Real Estate Loans $ 7,159 $ 286 $ 7,445 $13,203 $ 4,510 $17,713
Commercial Loans 31,276 7,153 38,429 24,742 13,114 37,856
Consumer and Other Loans 6,570 1,251 7,821 7,054 4,534 11,588
Investment Securities (3,920) 1,659 (2,261) (6,428) 2,612 (3,816)
------- ------- ------- ------- ------- -------
Total Interest Income 41,085 10,349 51,434 38,571 24,770 63,341
======= ======= ======= ======= ======= =======
INTEREST EXPENSE
NOW Accounts 553 1,179 1,732 201 1,886 2,087
Savings Accounts 238 105 343 186 1,019 1,205
Money Market Accounts 5,264 3,941 9,205 1,578 8,912 10,490
Certificate Accounts 5,692 6,340 12,032 8,305 10,355 18,660
FHLB Advances (4,405) 2,842 (1,563) (5,956) 4,927 (1,029)
Other Borrowings and
Repurchase Agreements 4,109 395 4,504 1,854 1,793 3,647
------- ------- ------- ------- ------- -------
Total Interest Expense 11,451 14,802 26,253 6,168 28,892 35,060
------- ------- ------- ------- ------- -------
NET INTEREST INCOME $29,634 $(4,453) $25,181 $32,403 $(4,122) $28,281
======= ======= ======= ======= ======= =======
Net interest income increased $25 million in 2007 over 2006. The increase was
primarily due to increases in loan volumes and loan rates which combined
outpaced the increase in deposit and borrowing rates. For additional information
see "Item 7 - Management's Discussion and Analysis".
INVESTMENT ACTIVITIES
It has generally been the Company's policy to maintain a liquid portfolio only
slightly above policy limits because higher yields can generally be obtained
from loan originations than from short-term deposits and investment securities.
Liquidity levels may be increased or decreased depending upon yields on
investment alternatives and upon management's judgment as to the attractiveness
of the yields then available in relation to other opportunities and its
expectation of the level of yield that will be available in the future.
The Company's investment securities are generally classified as available for
sale and are carried at estimated fair value with unrealized gains or losses,
net of tax, reflected as an adjustment to stockholders' equity.
The Company uses the federal statutory rate of 35 percent in calculating its tax
equivalent yield. Approximately $270 million of the investment portfolio is
comprised of tax exempt investments which is a decrease of $24 million from the
prior year.
For information about the Company's equity investment in the stock of the FHLB
of Seattle, see "Sources of Funds - Advances and Other Borrowings".
For additional information, see "Item 7 - Management's Discussion & Analysis"
and Note 3 to the Consolidated Financial Statements in "Item 8 - Financial
Statements and Supplementary Data".
11
LENDING ACTIVITY
GENERAL
The Banks focus their lending activity primarily on several types of loans: 1)
first-mortgage, conventional loans secured by residential properties,
particularly single-family, 2) installment lending for consumer purposes (e.g.,
auto, home equity, etc.), and 3) commercial lending that concentrates on
targeted businesses. "Item 7 - Management's Discussion & Analysis" and Note 4 to
the Consolidated Financial Statements in "Item 8 - Financial Statements and
Supplementary Data" contain more information about the loan portfolio.
LOAN PORTFOLIO COMPOSITION
The following table summarizes the Company's loan portfolio:
(dollars in thousands)
At At At At At
12/31/2007 12/31/2006 12/31/2005 12/31/2004 12/31/2003
-------------------- -------------------- -------------------- -------------------- --------------------
TYPE OF LOAN Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------------ ----------- ------- ----------- ------- ----------- ------- ----------- ------- ----------- -------
REAL ESTATE LOANS:
Residential first
mortgage $ 689,238 19.38% $ 758,921 23.97% $ 589,260 24.58% $ 382,750 22.49% $ 305,372 21.35%
Held for sale $ 40,123 1.13% $ 35,135 1.11% $ 22,540 0.94% $ 14,476 0.85% $ 16,973 1.19%
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total $ 729,361 20.51% $ 794,056 25.08% $ 611,800 25.52% $ 397,226 23.34% $ 322,345 22.54%
========== ====== ========== ====== ========== ====== ========== ====== ========== ======
COMMERCIAL LOANS:
Real estate $1,617,076 45.46% $1,165,617 36.83% $ 935,460 39.02% $ 639,732 37.60% $ 483,684 33.82%
Other commercial $ 636,351 17.89% $ 691,667 21.85% $ 425,236 17.74% $ 353,305 20.76% $ 359,030 25.10%
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total $2,253,427 63.35% $1,857,284 58.68% $1,360,696 56.76% $ 993,037 58.36% $ 842,714 58.92%
========== ====== ========== ====== ========== ====== ========== ====== ========== ======
CONSUMER AND OTHER
LOANS:
Consumer $ 206,724 5.81% $ 218,640 6.91% $ 175,503 7.32% $ 95,663 5.62% $ 95,739 6.69%
Home equity $ 432,217 12.15% $ 356,477 11.26% $ 295,992 12.35% $ 248,684 14.61% $ 199,693 13.96%
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total $ 638,941 17.96% $ 575,117 18.17% $ 471,495 19.67% $ 344,347 20.23% $ 295,432 20.65%
========== ====== ========== ====== ========== ====== ========== ====== ========== ======
Net deferred loan
fees, premiums
and discounts ($10,194) -0.29% ($11,674) -0.37% ($ 8,149) -0.34% ($ 6,313) -0.37% ($ 6,136) -0.43%
Allowance for loan
and lease losses ($54,413) -1.53% ($49,259) -1.56% ($38,655) -1.61% ($26,492) -1.56% ($23,990) -1.68%
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
LOANS RECEIVABLE, NET $3,557,122 100.00% $3,165,524 100.00% $2,397,187 100.00% $1,701,805 100.00% $1,430,365 100.00%
========== ====== ========== ====== ========== ====== ========== ====== ========== ======
LOAN PORTFOLIO MATURITIES OR REPRICING TERM
The stated maturities or first repricing term (if applicable) for the loan
portfolio at December 31, 2007 was as follows:
(dollars in thousands) Real Estate Commercial Consumer Totals
---------------------- ----------- ---------- -------- ---------
Variable Rate Maturing or Repricing in:
One year or less $ 236,701 892,892 199,675 1,329,268
One to five years 109,228 533,225 57,080 699,533
Thereafter 5,072 50,703 122 55,897
Fixed Rate Maturing or Repricing in:
One year or less 211,959 362,179 139,735 713,873
One to five years 127,934 335,226 230,441 693,601
Thereafter 38,467 79,202 11,888 129,557
--------- --------- -------- ---------
Totals $ 729,361 2,253,427 638,941 3,621,729
========= ========= ======== =========
REAL ESTATE LENDING
The Company's lending activities consist of the origination of both construction
and permanent loans on residential and commercial real estate. The Company
actively solicits real estate loan applications from real estate brokers,
contractors, existing customers,
12
customer referrals, and walk-ins to their offices. The Company's lending
policies generally limit the maximum loan-to-value ratio on residential mortgage
loans to 90 percent of the lesser of the appraised value or purchase price or
above 90 percent of the loan if insured by a private mortgage insurance company.
The Company also provides interim construction financing for single-family
dwellings. These loans are generally supported by a term take out commitment.
The Company also makes lot acquisition loans to borrowers who intend to
construct their primary residence on the respective lot. These loans are
generally for a term of three to five years and are secured by the developed
lot.
LAND ACQUISITION AND DEVELOPMENT LOANS
Where real estate market conditions warrant, the Company makes land acquisition
and development loans on properties intended for residential and commercial use.
These loans are generally made for a term of 18 months to two years and secured
by the developed property with a loan-to-value not to exceed the lesser of 75
percent of cost or 65 percent of resale appraisal value upon completion of the
improvements. The loans are made to borrowers with real estate development
experience and appropriate financial strength. Generally it is required a
certain percentage of the development be pre-sold or that construction and term
take out commitments are in place prior to funding the loan.
The combined total of lot acquisition loans to borrowers who intend to construct
a primary residence on the lot, and other construction and land acquisition and
development loans is $1,020 million and represents 28.3 percent of the total
loans as of December 31, 2007. The December 31, 2006 total was $789 million, or
24.5 percent of total loans. Increases incurred in each subsidiary with the
largest amounts outstanding centered in the high growth areas of Western
Montana, and Couer d'Alene, Sandpoint, and Boise Idaho. The geographic
dispersion, in addition to the normal credit standards described in the above
paragraphs, further mitigates the risk of loss in this portfolio.
RESIDENTIAL BUILDER GUIDANCE LINES
For borrowers located in strong real estate markets, the Company provides
Builder Guidance Lines that are comprised of pre-sold and spec-home construction
and lot acquisition loans. The spec-home construction and lot acquisition loans
are limited to a set number and maximum amount. Generally the individual loans
will not exceed a one year maturity. The homes under construction are inspected
on a regular basis and advances made on a percentage of completion basis.
COMMERCIAL REAL ESTATE LOANS
Loans are made to purchase, construct and finance commercial real estate
properties. These loans are generally made to borrowers who own and will occupy
the property. Loans to finance investment or income properties are made, but
require additional equity and a higher debt service coverage margin commensurate
with the specific property and projected income.
CONSUMER LENDING
The majority of consumer loans are secured by real estate, automobiles, or other
assets. The Banks intend to continue making such loans because of their
short-term nature, generally between three months and five years. Moreover,
interest rates on consumer loans are generally higher than on mortgage loans.
The Banks also originate second mortgage and home equity loans, especially to
its existing customers in instances where the first and second mortgage loans
are less than 80 percent of the current appraised value of the property.
CREDIT RISK MANAGEMENT
The Company's credit risk management includes stringent credit policies,
individual loan approval limits and committee approval of larger loan requests.
Management practices also includes regular internal and external credit
examinations, management review of loans experiencing deterioration of credit
quality, quarterly monitoring of all spec home loans, semi-annual review of
loans by industry and periodic interest rate shock testing.
LOAN APPROVAL LIMITS
Individual loan approval limits have been established for each lender based on
the loan types and experience of the individual. Each subsidiary bank has an
Officer Loan Committee consisting of senior lenders and members of senior
management. The Officer Loan Committee for each bank has approval authority up
to its respective Bank's Board of Directors loan approval authority. The Banks'
Board of Directors approval authority is $2,000,000 at Morgan, 1st Bank, First
Bank-MT, Big Sky, Citizens, and Valley and $3,500,000 at First Security,
Glacier, Whitefish, Mountain West and Western. Loans over these limits up to
$10,000,000 are subject to approval by the Executive Loan Committee consisting
of the bank's senior loan officers and the Company's Credit Administrator. Loans
greater than $10,000,000 are subject to approval by the Company's Board of
Directors. Under banking laws, loans to one borrower and related entities are
limited to a set percentage of the unimpaired capital and surplus of the bank.
13
LOAN PURCHASES AND SALES
Fixed-rate, long-term mortgage loans are generally sold in the secondary market.
The Company is active in the secondary market, primarily through the origination
of conventional, FHA and VA residential mortgages. The sale of loans in the
secondary mortgage market reduces the Company's risk of holding long-term,
fixed-rate loans during periods of rising rates. The sale of loans also allows
the Company to make loans during periods when funds are not otherwise available
for lending purposes. In connection with conventional loan sales, the Company
typically sells a majority of mortgage loans originated, with servicing
released, retaining servicing only on loans sold to individual investors. The
Company has also been very active in generating commercial SBA loans, and other
commercial loans, with a portion of those loans sold to investors. As of
December 31, 2007, loans serviced for others aggregated approximately $177
million. The Company has not originated any type of subprime mortgages, either
for the loan portfolio or for sale to investors. In addition, the Company has
not purchased securities that were collateralized with subprime mortgages. The
Company did not purchase loans outside the Company or originate loans outside
the existing geographic area.
LOAN ORIGINATION AND OTHER FEES
In addition to interest earned on loans, the Company receives fees for
originating loans. Loan fees generally are a percentage of the principal amount
of the loan and are charged to the borrower, and are normally deducted from the
proceeds of the loan. Loan origination fees are generally 1.0 percent to 1.5
percent on residential mortgages and .5 percent to 1.5 percent on commercial
loans. Consumer loans require a flat fee as well as a minimum interest amount.
The Company also receives other fees and charges relating to existing loans,
which include charges and fees collected in connection with loan modifications
and tax service.
NON-PERFORMING LOANS AND ASSET CLASSIFICATION
Loans are reviewed on a regular basis and are placed on a non-accrual status
when the collection of 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 well secured by
collateral having realizable value sufficient to discharge the debt in full.
When a loan is placed on non-accrual status, interest previously accrued but not
collected is reversed against current period interest income. Subsequent
payments are 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.
The following table sets forth information regarding the Banks' non-performing
assets at the dates indicated:
NON-PERFORMING ASSETS
At At At At At
(dollars in thousands) 12/31/07 12/31/06 12/31/05 12/31/04 12/31/03
-------- -------- -------- -------- --------
NON-ACCRUAL LOANS:
Mortgage loans $ 934 $1,806 $ 726 $ 847 $ 1,129
Commercial loans 7,192 3,721 4,045 4,792 8,246
Consumer loans 434 538 481 311 687
------- ------ ------ ------ -------
Total 8,560 6,065 5,252 5,950 10,062
------- ------ ------ ------ -------
4ACCRUING LOANS 90 DAYS OR MORE OVERDUE:
Mortgage loans 840 554 1,659 179 379
Commercial loans 1,216 638 2,199 1,067 1,798
Consumer loans 629 153 647 396 242
------- ------ ------ ------ -------
Total 2,685 1,345 4,505 1,642 2,419
------- ------ ------ ------ -------
Real estate and other assets owned 2,043 1,484 332 2,016 587
------- ------ ------ ------ -------
TOTAL NON-PERFORMING LOANS AND REAL
ESTATE AND OTHER ASSETS OWNED 13,288 8,894 10,089 9,608 13,068
------- ------ ------ ------ -------
AS A PERCENTAGE OF TOTAL ASSETS 0.27% 0.19% 0.26% 0.32% 0.48%
------- ------ ------ ------ -------
Interest Income (1) $ 683 $ 462 $ 359 $ 372 $ 665
------- ------ ------ ------ -------
(1) Amount of interest that would have been recorded on loans accounted for on
a non-accrual basis as of the end of each period if such loans had been
current for the entire period.
14
Non-performing assets as a percentage of total assets at December 31, 2007 were
..27 percent versus .19 percent at the same time last year, which compares
favorably to the Federal Reserve Bank Peer Group average of .67 percent at
September 30, 2007, the most recent information available. The allowance for
loan and lease losses was 409 percent of non-performing assets at December 31,
2007, down from 554 percent a year ago.
With the continuing change in loan mix from residential real estate to
commercial and consumer loans, which historically have greater credit risk, the
Company has increased the balance in the allowance for loan and lease losses
account. The allowance balance has increased $5,154,000, or 10 percent, to
$54,413,000, which is 1.51 percent of total loans outstanding, down from 1.53
percent of loans at December 31, 2006. Of the $5,154,000 increase, $639,000 is
the result of loans acquired in the North Side acquisition.
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. Impaired loans were $12,152,000 and $6,065,000 as of December 31,
2007 and 2006, respectively.
ALLOWANCE FOR LOAN AND LEASE LOSSES
The Allowance for Loan and Lease Losses ("ALLL") is maintained at a level that
allows for the absorption of loan and lease losses known and inherent within the
Banks' loan portfolios. The Company is committed to the early recognition of
problem loans and to a strong conservative ALLL.
Determining the adequacy of the ALLL involves a high degree of judgment and is
inevitably imprecise. Accordingly, the ALLL is maintained within a range of
estimated losses. The adequacy of the ALLL is based on management's current
judgment about the credit quality of the loan portfolio and considers all known
relevant internal and external environmental factors that affect loan losses. An
evaluation of the adequacy of the ALLL is conducted on a quarterly basis by the
subsidiary banks. The 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 adequacy of the ALLL. An
independent loan review function verifying loan risk ratings evaluates the loan
officer and management's evaluation about the credit quality of the loan
portfolio. The loan review function also assesses the evaluation process and
provides an independent analysis of the adequacy of the ALLL.
The ALLL methodology is designed to reasonably estimate the probable loan and
lease losses within the Banks' loan portfolios. At the end of each quarter, the
Banks analyze the loan and lease portfolio and maintain an ALLL at a level that
is appropriate and determined in accordance with generally accepted accounting
principles (GAAP) in the United States of America. The ALLL balance covers
estimated credit losses on individually evaluated loans that are determined to
be impaired as well as estimated credit losses inherent in the remainder of the
loan and lease portfolios.
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 allowance for loan and lease losses. Any subsequent write-downs
are charged to current expense.
For additional information regarding the ALLL, its relation to the provision for
loan and lease losses and risk related to asset quality, see Note 4 to the
Consolidated Financial Statements in "Item 8 - Financial Statements and
Supplementary Data."
15
LOAN LOSS EXPERIENCE
Years ended December 31,
------------------------------------------------
(Dollars in Thousands) 2007 2006 2005 2004 2003
-------- ------- ------- ------- -------
BALANCE AT BEGINNING OF PERIOD $49,259 38,655 26,492 23,990 20,944
CHARGE-OFFS:
Residential real estate (306) (14) (115) (419) (416)
Commercial loans (2,367) (1,187) (744) (1,150) (912)
Consumer loans (714) (448) (539) (776) (1,078)
------- ------ ------ ------ ------
Total charge offs $(3,387) (1,649) (1,398) (2,345) (2,406)
------- ------ ------ ------ ------
RECOVERIES:
Residential real estate 208 341 82 171 126
Commercial loans 656 331 414 120 274
Consumer loans 358 298 415 361 284
------- ------ ------ ------ ------
Total recoveries $ 1,222 970 911 652 684
------- ------ ------ ------ ------
CHARGE-OFFS, NET OF RECOVERIES (2,165) (679) (487) (1,693) (1,722)
Acquisitions (1) 639 6,091 6,627 - 959
PROVISION FOR LOAN LOSSES 6,680 5,192 6,023 4,195 3,809
------- ------ ------ ------ ------
BALANCE AT END OF PERIOD $54,413 49,259 38,655 26,492 23,990
======= ====== ====== ====== ======
Ratio of net charge-offs to average
loans outstanding during the period 0.06% 0.02% 0.02% 0.10% 0.12%
(1) Acquisition of North Side in 2007, CDC and Morgan in 2006, First State
Bank, Citizens and 1st Bank in 2005, and Pend Oreille Bank in 2003
ALLOCATION OF THE ALLOWANCE FOR LOAN AND LEASE LOSSES
2007 2006 2005 2004 2003
--------------------- --------------------- --------------------- --------------------- ---------------------
Allowance Percent Allowance Percent Allowance Percent Allowance Percent Allowance Percent
for of for of for of for of for of
Loan and loans in Loan and loans in Loan and loans in Loan and loans in Loan and loans in
(dollars in thousands) Lease Losses category Lease Losses category Lease Losses category Lease Losses category Lease Losses category
---------------------- ------------ -------- ------------ -------- ------------ -------- ------------ -------- ------------ --------
Residential first
mortgage and loans
held for sale $ 4,755 20.2% 5,421 24.6% 4,318 25.0% 2,693 22.9% 2,147 21.8%
Commercial real
estate 23,010 44.6% 16,741 36.1% 14,370 38.3% 9,222 36.9% 7,464 33.2%
Other commercial 17,453 17.6% 18,361 21.5% 12,566 17.4% 9,836 20.3% 9,951 24.7%
Consumer and other
loans 9,195 17.6% 8,736 17.8% 7,401 19.3% 4,741 19.9% 4,428 20.3%
------- ----- ------ ----- ------- ----- ------ ----- ------ -----
Totals $54,413 100.0% 49,259 100.0% 38,655 100.0% 26,492 100.0% 23,990 100.0%
======= ===== ====== ===== ======= ===== ====== ===== ====== =====
SOURCES OF FUNDS
GENERAL
Deposits are the most important source of the Banks' funds for lending and other
business purposes. In addition, the Banks derive funds from loan repayments,
advances from the FHLB of Seattle, repurchase agreements, and loan sales. Loan
repayments are a relatively stable source of funds, while interest bearing
deposit inflows and outflows are significantly influenced by general interest
rate levels and money market conditions. Borrowings and advances may be used on
a short-term basis to compensate for reductions in normal sources of funds such
as deposit inflows at less than projected levels. They also may be used on a
long-term basis to support expanded activities and to match maturities of
longer-term assets. Deposits obtained through the Banks have traditionally been
the principal source of funds for use in lending and other business purposes.
Currently, the Banks have a number of different
16
deposit programs designed to attract both short-term and long-term deposits from
the general public by providing a wide selection of accounts and rates. These
programs include regular statement savings, interest-bearing checking, money
market deposit accounts, and fixed rate certificates of deposit with maturities
ranging form three months to five years, negotiated-rate jumbo certificates,
non-interest demand accounts, and individual retirement accounts.
"Item 7 - Management's Discussion and Analysis" contains information relating to
changes in the overall deposit portfolio.
Deposits are obtained primarily from individual and business residents of the
Banks' market area. The Banks issue negotiated-rate certificate of deposits
accounts and have paid a limited amount of fees to brokers to obtain deposits.
The following table illustrates the amounts outstanding for deposits $100,000
and greater, according to the time remaining to maturity. Included in the seven
to twelve month maturity are $1,015,000 of brokered certificate of deposits,
respectively.
Certificate Demand
(dollars in thousands) of Deposits Deposits Totals
---------------------- ----------- --------- -----------
Within three months ......... $ 115,862 1,264,566 1,380,428
Three months to six months .. 82,255 -- 82,255
Seven months to twelve
months..................... 97,646 -- 97,646
Over twelve months .......... 55,229 -- 55,229
--------- --------- ---------
Totals ................... $ 350,992 1,264,566 1,615,558
========= ========= =========
For additional information, see "Item 7 - Management's Discussion & Analysis"
and Note 7 to the Consolidated Financial Statements in "Item 8 - Financial
Statements and Supplementary Data".
In addition to funds obtained in the ordinary course of business, the Company
formed Glacier Trust II, Glacier Trust III, and Glacier Trust IV as financing
subsidiaries and obtained Citizens Trust I in connection with the acquisition of
Citizens on April 1, 2005. The trusts issued preferred securities that entitle
the shareholder to receive cumulative cash distributions from payments on
Subordinated Debentures of the Company. The Subordinated Debentures outstanding
as of December 31, 2007 are $118,559,000. For additional information regarding
the subordinated debentures, see Note 10 to the Consolidated Financial
Statements "Item 8 - Financial Statements and Supplementary Data".
ADVANCES AND OTHER BORROWINGS
As a member of the FHLB of Seattle, the Banks may borrow from such entity on the
security of FHLB of Seattle stock which the Banks are required to own and
certain of its mortgages and other assets (principally, securities which are
obligations of, or guaranteed by, the United States), provided certain standards
related to credit-worthiness have been met. Advances are made pursuant to
several different credit programs, each of which has its own interest rate and
range of maturities. Depending on the program, limitations on the amount of
advances are based either on a fixed percentage of an institution's total assets
or on the FHLB's assessment of the institution's credit-worthiness. FHLB
advances have been used from time to time to meet seasonal and other withdrawals
of savings accounts and to expand lending by matching a portion of the estimated
amortization and prepayments of retained fixed rate mortgages. All subsidiary
banks are members of the FHLB of Seattle.
From time to time, primarily as a short-term financing arrangement for
investment or liquidity purposes, the Banks have made use of repurchase
agreements. This process involves the "selling" of one or more of the securities
in the Banks' portfolio and by entering into an agreement to "repurchase" that
same security at an agreed upon later date. A rate of interest is paid for the
subject period of time. In addition, although the Banks have offered retail
repurchase agreements to its retail customers, the Government Securities Act of
1986 imposed confirmation and other requirements which generally made it
impractical for financial institutions to offer such investments on a broad
basis. Through policies adopted by each of the Banks' Board of Directors, the
Banks enter into repurchase agreements with local municipalities, and certain
customers, and have adopted procedures designed to ensure proper transfer of
title and safekeeping of the underlying securities.
17
The following chart illustrates the average balances and the maximum outstanding
month-end balances for FHLB advances and repurchase agreements:
For the year ended December 31,
-------------------------------
(dollars in thousands) 2007 2006 2005
--------- -------- --------
FHLB Advances
Amount outstanding at end of period $538,949 307,522 402,191
Average balance .................... $382,243 487,112 673,904
Maximum outstanding at any
month-end .......................... $538,949 655,492 804,047
Weighted average interest rate ..... 4.94% 4.20% 3.19%
Repurchase Agreements:
Amount outstanding at end of
period ............................. $178,041 170,216 129,530
Average balance .................... $171,290 153,314 103,522
Maximum outstanding at any
month-end .......................... $193,421 164,338 132,534
Weighted average interest rate ..... 4.35% 4.32% 2.85%
For additional information concerning the Company's advances and repurchase
agreements, see Notes 8 and 9 to the Consolidated Financial Statements in "Item
8 - Financial Statements and Supplementary Data".
EMPLOYEES
As of December 31, 2007, the Company employed 1,580 persons, 1,340 of who were
full time, none of whom were represented by a collective bargaining group. The
Company provides its employees with a comprehensive benefit program, including
medical insurance, dental plan, life and accident insurance, long-term
disability coverage, sick leave, profit sharing plan and employee stock options.
The Company considers its employee relations to be excellent. See Note 13 in the
Consolidated Financial Statements in "Item 8 - Financial Statements and
Supplementary Data" for detailed information regarding profit sharing plan costs
and eligibility.
SUPERVISION AND REGULATION
INTRODUCTION
The following discussion describes elements of the extensive regulatory
framework applicable to the Company and the Banks. This regulatory framework is
primarily designed for the protection of depositors, federal deposit insurance
funds and the banking system as a whole, rather than specifically for the
protection of shareholders. Due to the breadth of this regulatory framework, the
costs of compliance continue to increase in order to monitor and satisfy these
requirements.
To the extent that this section describes statutory and regulatory provisions,
it is qualified in its entirety by reference to those provisions. These statutes
and regulations, as well as related policies, are subject to change by Congress,
state legislatures and federal and state regulators. Changes in statutes,
regulations or regulatory policies applicable to the Company, including
interpretation or implementation thereof, could have a material effect on the
Company's business or operations.
BANK HOLDING COMPANY REGULATION
General. The Company is a bank holding company as defined in the Bank Holding
Company Act of 1956, as amended ("BHCA"), due to its ownership of the subsidiary
banks listed below. Glacier, Whitefish, Valley, First Security, Big Sky, First
Bank-MT and Western are Montana state-chartered banks and are members of the
Federal Reserve System; Mountain West and Citizens are Idaho state-chartered
non-Federal Reserve member FDIC insured banks; 1st Bank is a Wyoming
state-chartered bank and is a member of the Federal Reserve System; and Morgan
is a national bank.
As a bank holding company, the Company is subject to regulation, supervision and
examination by the Federal Reserve. In general, the BHCA limits the business of
bank holding companies to owning or controlling banks and engaging in other
activities closely related to banking. The Company must also file reports with
and provide additional information to the Federal Reserve. Under the Financial
Services Modernization Act of 1999, a bank holding company may apply to the
Federal Reserve to become a financial
18
holding company, and thereby engage (directly or through a subsidiary) in
certain expanded activities deemed financial in nature, such as securities
brokerage and insurance underwriting.
Holding Company Bank Ownership. The BHCA requires every bank holding company to
obtain the prior approval of the Federal Reserve before (i) acquiring, directly
or indirectly, ownership or control of any voting shares of another bank or bank
holding company if, after such acquisition, it would own or control more than 5%
of such shares; (ii) acquiring all or substantially all of the assets of another
bank or bank holding company; or (iii) merging or consolidating with another
bank holding company.
Holding Company Control of Nonbanks. With some exceptions, the BHCA also
prohibits a bank holding company from acquiring or retaining direct or indirect
ownership or control of more than 5% of the voting shares of any company that is
not a bank or bank holding company, or from engaging directly or indirectly in
activities other than those of banking, managing or controlling banks or
providing services for its subsidiaries. The principal exceptions to these
prohibitions involve certain non-bank activities that, by federal statute,
agency regulation or order, have been identified as activities closely related
to the business of banking or of managing or controlling banks.
Transactions with Affiliates. Subsidiary banks of a bank holding company are
subject to restrictions imposed by the Federal Reserve Act on extensions of
credit to the holding company or its subsidiaries, on investments in their
securities, and on the use of their securities as collateral for loans to any
borrower. These regulations and restrictions may limit the Company's ability to
obtain funds from the subsidiary banks for its cash needs, including funds for
payment of dividends, interest and operational expenses.
Tying Arrangements. The Company is prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit, sale or lease of
property or furnishing of services. For example, with certain exceptions,
neither the Company nor the Banks may condition an extension of credit to a
customer on either (i) a requirement that the customer obtain additional
services provided by the Company or Banks; or (ii) an agreement by the customer
to refrain from obtaining other services from a competitor.
Support of Subsidiary Banks. Under Federal Reserve policy, the Company is
expected to act as a source of financial and managerial strength to its Banks.
This means that the Company is required to commit, as necessary, resources to
support the Banks. Any capital loans a bank holding company makes to its
subsidiary banks are subordinate to deposits and to certain other indebtedness
of those subsidiary banks.
State Law Restrictions. As a Montana corporation, the Company is subject to
certain limitations and restrictions under applicable Montana corporate law. For
example, state law restrictions in Montana include limitations and restrictions
relating to indemnification of directors, distributions to shareholders,
transactions involving directors, officers or interested shareholders,
maintenance of books, records and minutes, and observance of certain corporate
formalities.
THE SUBSIDIARIES
Glacier, Whitefish, Valley, First Security, Big Sky, First Bank-MT, and Western
are subject to regulation and supervision by the Montana Department of
Administration's Banking and Financial Institutions Division and the Federal
Reserve as a result of their membership in the Federal Reserve System.
Mountain West and Citizens are subject to regulation by the Idaho Department of
Finance and by the FDIC as state non-member commercial banks. In addition,
Mountain West's Utah and Washington branches are primarily regulated by the Utah
Department of Financial Institutions and the Washington Department of Financial
Institutions, respectively. 1st Bank is a member of the Federal Reserve System
and is subject to regulation and supervision by the Federal Reserve and also the
Wyoming Division of Banking as a Wyoming state chartered commercial bank.
As a national banking association with a home office in Utah, Morgan is subject
to regulation by the Office of the Comptroller of the Currency ("OCC") and, to a
certain extent, the Utah Department of Financial Institutions.
The federal laws that apply to the Banks regulate, among other things, the scope
of their business, their investments, their reserves against deposits, the
timing of the availability of deposited funds, and the nature, amount of, and
collateral for loans. Federal laws also regulate community reinvestment and
insider credit transactions and impose safety and soundness standards.
Community Reinvestment. The Community Reinvestment Act of 1977 requires that, in
connection with examinations of financial institutions within their
jurisdiction, federal bank regulators must evaluate the record of financial
institutions in meeting the credit needs of their local communities, including
low and moderate-income neighborhoods, consistent with the safe and sound
operation of
19
those banks. A bank's community reinvestment record is also considered by the
applicable banking agencies in evaluating mergers, acquisitions, and
applications to open a branch or facility.
Insider Credit Transactions. Banks are also subject to certain restrictions on
extensions of credit to executive officers, directors, principal shareholders,
and their related interests. Extensions of credit (i) must be made on
substantially the same terms, including interest rates and collateral, and
follow credit underwriting procedures that are at least as stringent, as those
prevailing at the time for comparable transactions with persons not covered
above and who are not employees; and (ii) must not involve more than the normal
risk of repayment or present other unfavorable features.
Regulation of Management. Federal law (i) sets forth circumstances under which
officers or directors of a bank may be removed by the institution's federal
supervisory agency; (ii) places restraints on lending by a bank to its executive
officers, directors, principal shareholders, and their related interests; and
(iii) prohibits management personnel of a bank from serving as a director or in
other management positions of another financial institution whose assets exceed
a specified amount or which has an office within a specified geographic area.
Safety and Soundness Standards. Federal law imposes upon banks certain
non-capital safety and soundness standards. These standards cover, among other
things, internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth,
compensation and benefits. Additional standards apply to asset quality, earnings
and stock valuation. An institution that fails to meet these standards must
develop a plan acceptable to its regulators, specifying the steps that the
institution will take to meet the standards. Failure to submit or implement such
a plan may subject the institution to regulatory sanctions.
INTERSTATE BANKING AND BRANCHING
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Act") relaxed prior interstate branching restrictions under federal
law by permitting nationwide interstate banking and branching under certain
circumstances. Generally, bank holding companies may purchase banks in any state
and states may not prohibit such purchases. Additionally, banks are permitted to
merge with banks in other states as long as the home state of neither merging
bank has "opted out." The Interstate Act requires regulators to consult with
community organizations before permitting an interstate institution to close a
branch in a low-income area. Federal bank regulations prohibit banks from using
their interstate branches primarily for deposit production and federal bank
regulatory agencies have implemented a loan-to-deposit ratio screen to ensure
compliance with this prohibition.
With regard to interstate bank mergers, Montana "opted-out" of the Interstate
Act. Subject to certain conditions, an in-state bank that has been in existence
for at least 5 years may merge with an out-of-state bank. Banks, bank holding
companies, and their respective subsidiaries cannot acquire control of a bank
located in Montana if, after the acquisition, the acquiring institution,
together with its affiliates, would directly or indirectly control more than 22%
of the total deposits of insured depository institutions and credit unions
located in Montana. Montana law does not authorize the establishment of a branch
bank in Montana by an out-of-state bank.
Idaho has enacted "opting in" legislation in accordance with the Interstate Act
provisions allowing banks to engage in interstate merger transactions subject to
certain "aging" requirements. Branches may not be acquired or opened separately
in Idaho by an out-of-state bank, but once an out-of-state bank has acquired a
bank within Idaho, either through merger or acquisition of all or substantially
all of the bank's assets, the out-of-state bank may open additional branches
within Idaho.
Utah and Washington have each enacted "opting in" legislation similar in certain
respects to that enacted by Idaho, allowing banks to engage in interstate merger
transactions subject to certain aging requirements. Under Utah law, an
out-of-state bank may acquire a bank branch located in Utah, but it may not
establish a de novo branch in Utah if its home state does not have reciprocal
laws on de novo branching. Under Washington law, an out-of-state bank may,
subject to the Director's approval, open de novo branches in Washington or
acquire an in-state branch so long as the home state of the out-of-state bank
has reciprocal laws with respect to de novo branching or branch acquisitions
Under Wyoming law, banks located in Wyoming may be acquired by out-of-state
banks so long as (i) with certain exceptions, the resulting bank and its
affiliates would not control 30% or more of the total deposits held by all
insured depository institutions in Wyoming; and (ii) the in-state bank has been
in existence for at least three years. Branches may not be acquired or opened
separately in Wyoming by an out-of-state bank, but once an out-of-state bank has
acquired a bank within Wyoming, either through merger or acquisition of all or
substantially all of the bank's assets, the out-of-state bank may open
additional branches within Wyoming.
20
DEPOSIT INSURANCE
In 2006, federal deposit insurance reform legislation was enacted that (i)
required the FDIC to merge the Bank Insurance Fund and the Savings Association
Insurance Fund into a newly created Deposit Insurance Fund, which was completed
in 2006; (ii) increases the amount of deposit insurance coverage for retirement
accounts; (iii) allows for deposit insurance coverage on individual accounts to
be indexed for inflation starting in 2010; (iv) provides the FDIC more
flexibility in setting and imposing deposit insurance assessments; and (v)
provides eligible institutions credits on future assessments.
The deposits of the Banks are currently insured to a maximum of $100,000 per
depositor through the Deposit Insurance Fund. The Banks are required to pay
deposit insurance premiums, which are assessed and paid regularly. The premium
amount is based upon a risk classification system established by the FDIC. Banks
with higher levels of capital and a low degree of supervisory concern are
assessed lower premiums than banks with lower levels of capital or a higher
degree of supervisory concern.
DIVIDENDS
The principal source of the Company's cash is dividends received from the Banks,
which are subject to government regulation and limitation. Regulatory
authorities may prohibit banks and bank holding companies from paying dividends
that would constitute an unsafe or unsound banking practice. In addition, a bank
may not pay cash dividends if that payment could reduce the amount of its
capital below that necessary to meet minimum applicable regulatory capital
requirements. State law and, in the case of Morgan, national banking laws and
related OCC regulations, limits a bank's ability to pay dividends that are
greater than a certain amount without approval of the applicable agency.
CAPITAL ADEQUACY
Regulatory Capital Guidelines. Federal bank regulatory agencies use capital
adequacy guidelines in the examination and regulation of bank holding companies
and banks. The guidelines are "risk-based," meaning that they are designed to
make capital requirements more sensitive to differences in risk profiles among
banks and bank holding companies.
Tier I and Tier II Capital. Under the guidelines, an institution's capital is
divided into two broad categories, Tier I capital and Tier II capital. Tier I
capital generally consists of common shareholders' equity, surplus and undivided
profits. Tier II capital generally consists of the allowance for loan and lease
losses, hybrid capital instruments, and subordinated debt. The sum of Tier I
capital and Tier II capital represents an institution's total capital. The
guidelines require that at least 50% of an institution's total capital consist
of Tier I capital.
Risk-based Capital Ratios. The adequacy of an institution's capital is gauged
primarily with reference to the institution's risk-weighted assets. The
guidelines assign risk weightings to an institution's assets in an effort to
quantify the relative risk of each asset and to determine the minimum capital
required to support that risk. An institution's risk-weighted assets are then
compared with its Tier I capital and total capital to arrive at a Tier I
risk-based ratio and a total risk-based ratio, respectively. The guidelines
provide that an institution must have a minimum Tier I risk-based ratio of 4%
and a minimum total risk-based ratio of 8%.
Leverage Ratio. The guidelines also employ a leverage ratio, which is Tier I
capital as a percentage of total assets, less intangibles. The principal
objective of the leverage ratio is to constrain the maximum degree to which a
bank holding company may leverage its equity capital base. The minimum leverage
ratio is 3%; however, for all but the most highly rated bank holding companies
and for bank holding companies seeking to expand, regulators expect an
additional cushion of at least 1% to 2%.
Prompt Corrective Action. Under the guidelines, an institution is assigned to
one of five capital categories depending on its total risk-based capital ratio,
Tier I risk-based capital ratio, and leverage ratio, together with certain
subjective factors. The categories range from "well capitalized" to "critically
undercapitalized." Institutions that are "undercapitalized" or lower are subject
to certain mandatory supervisory corrective actions.
In 2007, the federal banking agencies, including the FDIC and the Federal
Reserve, approved final rules to implement new risk-based capital requirements.
Presently, this new advanced capital adequacy framework, called Basel II, is
applicable only to large and internationally active banking organizations. Basel
II changes the existing risk-based capital framework by enhancing its risk
sensitivity. Whether Basel II will be expanded to apply to banking organizations
that are the size of the Company or its subsidiary banks is unclear at this
time, and what effect such regulations would have cannot be predicted, but the
Company and the subsidiary banks do not expect that their operations would be
significantly impacted.
21
CORPORATE GOVERNANCE AND ACCOUNTING LEGISLATION
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 (the "Act")
addresses, among other things, corporate governance, auditing and accounting,
enhanced and timely disclosure of corporate information, and penalties for
non-compliance. Generally, the Act (i) requires chief executive officers and
chief financial officers to certify to the accuracy of periodic reports filed
with the Securities and Exchange Commission (the "SEC"); (ii) imposes specific
and enhanced corporate disclosure requirements; (iii) accelerates the time frame
for reporting of insider transactions and periodic disclosures by public
companies; (iv) requires companies to adopt and disclose information about
corporate governance practices, including whether or not they have adopted a
code of ethics for senior financial officers and whether the audit committee
includes at least one "audit committee financial expert;" and (v) requires the
SEC, based on certain enumerated factors, to regularly and systematically review
corporate filings.
To deter wrongdoing, the Act: (i) subjects bonuses issued to top executives to
disgorgement if a restatement of a company's financial statements was due to
corporate misconduct; (ii) prohibits an officer or director misleading or
coercing an auditor; (iii) prohibits insider trades during pension fund
"blackout periods"; (iv) imposes new criminal penalties for fraud and other
wrongful acts; and (v) extends the period during which certain securities fraud
lawsuits can be brought against a company or its officers.
As a publicly reporting company, the Company is subject to the requirements of
the Act and related rules and regulations issued by the SEC and NASDAQ. After
enactment, the Company updated its policies and procedures to comply with the
Act's requirements and has found that such compliance, including compliance with
Section 404 of the Act relating to management control over financial reporting,
has resulted in significant additional expense for the Company. The Company
anticipates that it will continue to incur such additional expense in its
ongoing compliance.
ANTI-TERRORISM LEGISLATION
The Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001, intended to combat terrorism, was
renewed with certain amendments in 2006 (the "Patriot Act"). Certain provisions
of the Patriot Act were made permanent and other sections were made subject to
extended "sunset" provisions. The Patriot Act, in relevant part, (i) prohibits
banks from providing correspondent accounts directly to foreign shell banks;
(ii) imposes due diligence requirements on banks opening or holding accounts for
foreign financial institutions or wealthy foreign individuals; (iii) requires
financial institutions to establish an anti-money-laundering compliance program;
and (iv) eliminates civil liability for persons who file suspicious activity
reports. The Act also includes provisions providing the government with power to
investigate terrorism, including expanded government access to bank account
records. While the Patriot Act has had minimal affect on the Company's and the
Subsidiary Bank's record keeping and reporting expenses, it is not likely that
the renewal and amendment will have a material adverse effect on business or
operations.
FINANCIAL SERVICES MODERNIZATION
Gramm-Leach-Bliley Act of 1999. The Gramm-Leach-Bliley Financial Services
Modernization Act of 1999 brought about significant changes to the laws
affecting banks and bank holding companies. Generally, the Act (i) repeals the
historical restrictions on preventing banks from affiliating with securities
firms; (ii) provides a uniform framework for the activities of banks, savings
institutions and their holding companies; (iii) broadens the activities that may
be conducted by national banks and banking subsidiaries of bank holding
companies; (iv) provides an enhanced framework for protecting the privacy of
consumer information and requires notification to consumers of bank privacy
policies; and (v) addresses a variety of other legal and regulatory issues
affecting both day-to-day operations and long-term activities of financial
institutions. Bank holding companies that qualify and elect to become financial
holding companies can engage in a wider variety of financial activities than
permitted under previous law, particularly with respect to insurance and
securities underwriting activities.
RECENT LEGISLATION
Financial Services Regulatory Relief Act of 2006. In 2006, the President signed
the Financial Services Regulatory Relief Act of 2006 into law (the "Relief
Act"). The Relief Act amends several existing banking laws and regulations,
eliminates some unnecessary and overly burdensome regulations of depository
institutions and clarifies several existing regulations. The Relief Act, among
other things, (i) authorizes the Federal Reserve Board to set reserve ratios;
(ii) amends national banks regulations relating to shareholder voting and
granting of dividends; (iii) amends several provisions relating to such issues
as loans to insiders, regulatory applications, privacy notices, and golden
parachute payments; and (iv) expands and clarifies the enforcement authority of
federal banking regulators. The Company's and the subsidiary banks' business,
expenses, and operations have not been significantly impacted by this
legislation.
REGULATORY OVERSIGHT AND EXAMINATION
The Federal Reserve conducts periodic inspections of bank holding companies,
which are performed both onsite and offsite. The
22
supervisory objectives of the inspection program are to ascertain whether the
financial strength of the bank holding company is being maintained on an ongoing
basis and to determine the effects or consequences of transactions between a
holding company or its non-banking subsidiaries and its subsidiary banks. For
holding companies under $10 billion in assets, the inspection type and frequency
varies depending on asset size, complexity of the organization, and the holding
company's rating at its last inspection.
Banks are subject to periodic examinations by their primary regulators. Bank
examinations have evolved from reliance on transaction testing in assessing a
bank's condition to a risk-focused approach. These examinations are extensive
and cover the entire breadth of operations of the bank. Generally, safety and
soundness examinations occur on an 18-month cycle for banks under $500 million
in total assets that are well capitalized and without regulatory issues, and
12-months otherwise. Examinations alternate between the federal and state bank
regulatory agency or may occur on a combined schedule. The frequency of consumer
compliance and CRA examinations is linked to the size of the institution and its
compliance and CRA ratings at its most recent examinations. However, the
examination authority of the Federal Reserve and the FDIC allows them to examine
supervised banks as frequently as deemed necessary based on the condition of the
bank or as a result of certain triggering events.
EFFECTS OF GOVERNMENT MONETARY POLICY
The Company's earnings and growth are affected by general economic conditions
and by the fiscal and monetary policies of the federal government, particularly
the Federal Reserve. The Federal Reserve implements a national monetary policy
for such purposes as curbing inflation and combating recession, but its open
market operations in U.S. government securities, control of the discount rate
applicable to borrowings from the Federal Reserve, and establishment of reserve
requirements against certain deposits, influence the growth of bank loans,
investments and deposits, and also affect interest rates charged on loans or
paid on deposits. The Company cannot predict with certainty the nature and
impact of future changes in monetary policies, such as the recent lowering of
the Federal Reserve's discount rate, and their impact on the Company or the
Banks.
TAXATION
FEDERAL TAXATION
The Company files a consolidated federal income tax return, using the accrual
method of accounting. All required tax returns have been timely filed.
Financial institutions are subject to the provisions of the Internal Revenue
Code of 1986, as amended, in the same general manner as other corporations. See
Note 12 to the Consolidated Financial Statements in "Item 8 - Financial
Statements and Supplementary Data" for additional information.
STATE TAXATION
Under Montana, Idaho and Utah law, financial institutions are subject to a
corporation tax, which incorporates or is substantially similar to applicable
provisions of the Internal Revenue Code. The corporation tax is imposed on
federal taxable income, subject to certain adjustments. State taxes are incurred
at the rate of 6.75 percent in Montana, 7.6 percent in Idaho, and 5 percent in
Utah. Wyoming and Washington do not impose a corporate tax.
ITEM 1A. RISK FACTORS
The Company and the Banks are exposed to certain risks. The following is a
discussion of the most significant risks and uncertainties that may affect our
business, financial condition and future results.
FLUCTUATING INTEREST RATES CAN ADVERSELY AFFECT OUR PROFITABILITY
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 assure you 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. For discussion concerning Net
Interest Income Simulation, see "Item 7 - Management Discussion & Analysis".
23
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 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 allowance for loan and lease losses 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, but 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 additions to the allowance may be necessary. Additionally, future
additions to the allowance may be required based on changes in the composition
of the loans comprising the portfolio and changes in the financial condition of
borrowers, such as may result from changes in economic conditions or as a result
of incorrect assumptions by management in determining the allowance.
Additionally, federal banking regulators, as an integral part of their
supervisory function, periodically review our allowance for loan and lease
losses. These regulatory agencies may require us to increase the allowance for
loan and lease losses which could have a negative effect on our financial
condition and results of operation.
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. 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 local economy 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 our 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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
At December 31, 2007, the Company owned 76 of its 94 offices, of which 8 are
loan or administration offices. Including its headquarters and other owned
properties there is an aggregate book value of approximately $95 million. The
remaining offices are
24
leased and include 7 offices in Montana, 8 offices in Idaho, 1 office in
Wyoming, 1 office in Utah, and 1 office in Washington. The following schedule
provides property information for the Company's operating segments as of
December 31, 2007.
Properties Properties Net Book
(dollars in thousands) Leased Owned Value
---------------------- ---------- ---------- --------
Mountain West 10 20 $14,643
Glacier 1 13 19,677
First Security 3 9 11,493
Western 1 7 14,716
1st Bank 1 7 7,267
Big Sky 1 4 10,041
Valley -- 6 5,565
Whitefish -- 2 3,319
Citizens -- 5 5,598
First Bank-MT 1 1 554
Morgan -- 2 1,985
--- --- -------
18 76 $94,858
=== === =======
The Company believes that all of its facilities are well maintained, generally
adequate and suitable for the current operations of its business, as well as
fully utilized. In the normal course of business, new locations and facility
upgrades occur.
For additional information concerning the Company's premises and equipment and
lease obligations, see Notes 5 and 19 to the Consolidated Financial Statements
in "Item 8 - Financial Statements and Supplementary Data".
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to various claims, legal actions
and complaints in the ordinary course of their businesses. In the Company's
opinion, all such matters are adequately covered by insurance, are without merit
or are of such kind, or involve such amounts, that unfavorable disposition would
not have a material adverse effect on the consolidated financial position or
results of operations of the Company.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the fourth quarter of
2007.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASE OF EQUITY SECURITIES
The Company's stock trades on the NASDAQ Global Select Market under the symbol:
GBCI. The primary market makers, trading greater than 1 million shares during
the year, are listed below:
Citigroup Global Markets, Inc. Credit Suisse Securities USA D.A. Davidson & Co., Inc.
Goldman, Sachs & Co. Instinet, LLC Interactive Brokers LLC
Keefe, Bruyette & Woods, Inc. Knight Equity Markets, L.P. Lehman Brothers, Inc.
Lime Brokerage, LLC Millenco Merrill Lynch, Pierce, Fenner
Morgan Stanley & Co., Inc. RBC Capital Markets Corp. SG Americas Securities LLC
Timber Hill Inc. UBS Securities, LLC.
The market range of high and low bid prices for the Company's common stock for
the periods indicated are shown below. The sale price information has been
adjusted retroactively for all stock dividends and splits previously issued. As
of December 31, 2007, there
25
were approximately 1,992 shareholders of record of
the Company's common stock. Following is a schedule of quarterly common stock
price ranges:
2007 2006
--------------- ---------------
Quarter High Low High Low
--------- ------ ------ ------ ------
First ... $25.39 $22.76 $21.81 $19.72
Second .. $24.61 $19.55 $21.20 $18.69
Third ... $24.00 $18.41 $23.24 $18.55
Fourth .. $23.85 $17.57 $25.25 $21.99
The Company paid cash dividends on its common stock of $.50 and $.45 per share
for the years ended December 31, 2007 and 2006, respectively.
On August 9, 2006, the Company completed the offering of 1,500,000 common shares
generating net proceeds, after underwriter discounts and offering expenses, of
$29.4 million. The Company used the net proceeds of the offering to fund a
portion of the cash merger consideration payable in connection with the
acquisition of CDC and its subsidiary banks.
UNREGISTERED SECURITIES
There have been no securities of the Company sold within the last three years
which were not registered under the Securities Act.
ISSUER STOCK PURCHASES
The Company made no stock repurchases during 2007.
EQUITY COMPENSATION PLAN INFORMATION
The Company currently maintains two compensation plans that provide for the
issuance of the stock-based compensation to officers and other employees and
directors. These consist of the 1994 Director Stock Option Plan, amended, and
the 2005 Employee Stock Incentive Plan, each of which have been approved by the
shareholders. Although the 1995 Employee Stock Option Plan expired in April
2005, there are issued options outstanding that have not been exercised as of
year end. The following table sets forth information regarding outstanding
options and shares reserved for future issuance under the foregoing plans as of
December 31, 2007:
Number of shares remaining
available for future
Number of shares to be Weighted-average issuance under equity
issued upon exercise of exercise price of compensation plans
outstanding options, outstanding options, (excluding shares
warrants, and rights (1) warrants, and rights reflected in column (a))
Plan Category (a) (b) (c)
----------------------------- ------------------------ -------------------- --------------------------
Equity compensation plans
approved by the shareholders 2,903,517 $15.42 4,047,626
Equity compensation plans not
approved by shareholders -- $ 0 --
(1) Includes shares to be issued upon exercise of options under a plan of
Mountain West, which was assumed as a result of the acquisition.
ITEM 6. SELECTED FINANCIAL DATA
The following financial data of the Company are derived from the Company's
historical audited financial statements and related notes. The information set
forth below should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations and the financial
statements and related notes contained elsewhere in this report.
26
SUMMARY OF OPERATIONS AND SELECTED FINANCIAL DATA
Compounded Annual
At December 31, Growth Rate
----------------------------------------------------------- ---------------------
1-Year 5-Year
(dollars in thousands, except per share data) 2007 2006 2005 2004 2003 2007/2006 2007/2002
--------------------------------------------- ---------- --------- --------- --------- --------- --------- ---------
SUMMARY OF FINANCIAL CONDITION:
Total assets .............................. $4,817,330 4,471,298 3,708,975 3,013,213 2,740,716 7.7% 16.1%
Investment securities, available for sale.. 700,324 825,637 970,055 1,086,929 1,099,243 (15.2%) (2.2%)
Loans receivable, net..................... 3,557,122 3,165,524 2,397,187 1,701,805 1,430,365 12.4% 22.3%
Allowance for loan and lease losses........ (54,413) (49,259) (38,655) (26,492) (23,990) 10.5% 21.0%
Intangibles ............................... 154,264 144,466 87,114 42,315 42,816 6.8% 31.0%
Deposits .................................. 3,184,478 3,207,533 2,534,712 1,729,708 1,597,625 (0.7%) 16.9%
Advances from Federal Home Loan Bank ...... 538,949 307,522 402,191 818,933 777,294 75.3% 2.2%
Securities sold under agreements to
repurchase and other borrowed funds..... 401,621 338,986 317,222 81,215 64,986 18.5% 45.6%
Stockholders' equity ...................... 528,576 456,143 333,239 270,184 237,839 15.9% 20.0%
Equity per common share* .................. 9.85 8.72 6.91 5.87 5.24 13.0% 15.6%
Equity as a percentage of total assets .... 10.97% 10.20% 8.98% 8.97% 8.68% 7.5% 3.4%
Compounded Annual
Years ended December 31, Growth Rate
-------------------------------------------------- ---------------------
1-Year 5-Year
(dollars in thousands, except per share data) 2007 2006 2005 2004 2003 2007/2006 2007/2002
---------------------------------------------- -------- ------- ------- ------- --------- --------- ---------
SUMMARY OF OPERATIONS:
Interest income ........................... $304,760 253,326 189,985 147,285 130,830 20.3% 17.9%
Interest expense .......................... 121,291 95,038 59,978 39,892 38,478 27.6% 20.6%
-------- ------- ------- ------- ---------
Net interest income ..................... 183,469 158,288 130,007 107,393 92,352 15.9% 16.2%
Provision for loan losses ................. 6,680 5,192 6,023 4,195 3,809 28.7% 3.1%
Non-interest income ....................... 64,818 51,842 44,626 34,565 33,562 25.0% 20.1%
Non-interest expense ...................... 137,917 112,550 90,926 72,133 65,944 22.5% 19.0%
-------- ------- ------- ------- ---------
Earnings before income taxes ............ 103,690 92,388 77,684 65,630 56,161 12.2% 16.3%
Income taxes .............................. 35,087 31,257 25,311 21,014 18,153 12.3% 16.4%
-------- ------- ------- ------- ---------
Net earnings ............................ 68,603 61,131 52,373 44,616 38,008 12.2% 16.2%
======== ======= ======= ======= =========
Basic earnings per common share* ........ 1.29 1.23 1.12 0.97 0.84 4.9% 12.0%
Diluted earnings per common share*....... 1.28 1.21 1.09 0.96 0.83 5.8% 12.2%
Dividends declared per share* ........... 0.50 0.45 0.40 0.36 0.32 11.1% 14.0%
At or for the
years ended December 31,
-------------------------------------------
2007 2006 2005 2004 2003
------ ------ ------ ------ -------
RATIOS:
Net earnings as a percent of
average assets ......................... 1.49% 1.52% 1.52% 1.54% 1.53%
average stockholders' .................. 13.82% 16.00% 17.62% 17.61% 16.82%
Dividend payout ratio ........................ 38.76% 36.59% 35.93% 37.36% 38.07%
Average equity to average asset ratio ........ 10.78% 9.52% 8.61% 8.75% 9.10%
Net interest margin on average earning assets
(tax equivalent) ........................ 4.50% 4.44% 4.25% 4.18% 4.22%
Allowance for loan and lease losses as a
percent of loans ........................... 1.51% 1.53% 1.59% 1.53% 1.65%
Allowance for loan and lease losses as a
percent of nonperforming assets ............ 409% 554% 383% 276% 184%
At or for the years ended December 31,
------------------------------------------------------------
(dollars in thousands) 2007 2006 2005 2004 2003
---------------------- ---------- --------- --------- --------- -----------
OTHER DATA:
Loans originated and purchased ............ $2,576,260 2,389,341 2,113,777 1,543,595 1,509,850
Loans serviced for others ................. $ 177,173 177,518 145,279 174,805 189,601
Number of full time equivalent employees .. 1,480 1,356 1,125 857 807
Number of offices ......................... 94 93 75 58 57
Number of shareholders of record .......... 1,992 1,973 1,907 1,784 1,763
* revised for stock splits and dividends
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS YEAR ENDED DECEMBER 31, 2007 COMPARED TO DECEMBER 31, 2006
The following discussion is intended to provide a more comprehensive review of
the Company's operating results and financial condition than can be obtained
from reading the Consolidated Financial Statements alone. The discussion should
be read in conjunction with the audited financial statements and the notes
thereto included later in this report.
HIGHLIGHTS AND OVERVIEW
During the past year, the Company acquired North Side which accounted for an
increase in total assets of $128 million, loans, net of the related ALLL, of $39
million, and deposits of $100 million. The five subsidiaries acquired as result
of the October 2006 acquisition of CDC include Citizens State Bank, First
Citizens Bank of Billings, First National Bank of Lewistown, Western Bank of
Chinook, and First Citizens Bank, N.A. On January 26, 2007, Citizens State Bank,
First Citizens Bank of Billings, and First Citizens Bank, N.A. were merged into
First Security, Western, and Glacier, respectively, without name change for
First Security, Western, and Glacier. On June 22, 2007, Western Bank of Chinook
was merged into First National Bank of Lewistown and renamed First Bank of
Montana.
The Company experienced strong loan growth with total loans outstanding
increasing by $397 million, or 12 percent from the prior year. Without the
acquisition, loans increased $357 million, or 11 percent. The cash flow from
investments was used to fund loans. In addition, the portfolio of North Side was
sold immediately after completing the acquisition with the sale proceeds used to
fund higher yielding loans. Investments, including interest bearing deposits and
fed funds sold, declined $80 million, or 9 percent, from the prior year.
Non-interest bearing deposits decreased $41 million, or 5 percent, during the
year. The Company increased interest bearing deposits by $18 million, or 1
percent. The acquisitions contributed $22 million and $77 million of the
non-interest bearing and interest-bearing deposit growth, respectively. FHLB
advances increased $231 million as a result of the increase in loan growth
exceeding the deposit growth.
Stockholders' equity increased $72 million, or 16 percent, during the year and
the Company and each of the subsidiary banks have remained above the well
capitalized levels required by regulators. Maintaining sufficient stockholders'
equity provides the Company flexibility and mitigates risk during economic
downturns.
The Company also increased non-interest income by $13 million, primarily the
result of volume increases in the loan and deposit portfolios and related fees.
Looking forward, our future performance will depend on many factors including
economic conditions, interest rate changes, increasing competition for deposits
and quality loans, and regulatory burden. The Company's goal of its asset and
liability management practices is to maintain or increase the level of net
interest income within an acceptable level of interest rate risk.
FINANCIAL CONDITION
ASSETS
The results of operations and financial condition include the acquisition of
North Side from April 30, 2007 forward. Cash of $9.0 million and 793,580 shares
of the Company's common stock were issued to North Side shareholders. The
following table provides information on selected classifications of assets and
liabilities acquired:
28
North Side
(UNAUDITED - $ IN THOUSANDS) State Bank
---------------
Acquisition Date April 30, 2007
Total assets 128,252
Investments 71,460
Loans, net of ALLL 38,773
Non-interest bearing deposits 22,101
Interest bearing deposits 77,467
As reflected on the next table, total assets at December 31, 2007 were $4.82
billion, which is $346 million, or 7.7 percent, greater than the total assets of
$4.47 billion at December 31, 2006.
December 31,
-----------------------
ASSETS ($ IN THOUSANDS) 2007 2006 $ change % change
---------- ---------- --------- --------
Cash on hand and in banks $ 145,697 $ 136,591 $ 9,106 7%
Investments, interest bearing deposits,
FHLB stock, FRB stock, and Fed Funds 782,236 862,063 (79,827) -9%
Loans:
Real estate 725,854 789,843 (63,989) -8%
Commercial 2,247,303 1,850,417 396,886 21%
Consumer 638,378 574,523 63,855 11%
---------- ---------- --------- ---
Total loans 3,611,535 3,214,783 396,752 12%
Allowance for loan losses (54,413) (49,259) (5,154) 10%
---------- ---------- --------- ---
Total loans net of allowance for loan losses 3,557,122 3,165,524 391,598 12%
---------- ---------- --------- ---
Other assets 332,275 307,120 25,155 8%
---------- ---------- --------- ---
Total Assets $4,817,330 $4,471,298 $ 346,032 8%
========== ========== ========= ===
Total loans increased $397 million, or 12 percent from December 31, 2006. During
the year, commercial loans have increased $397 million, or 21 percent, consumer
loans grew by $64 million, or 11 percent, while real estate loans decreased $64
million, or 8.1 percent.
Investment securities, including interest bearing deposits in other financial
institutions and federal funds sold, have decreased $80 million from December
31, 2006, or 9.3 percent. The investment portfolio of North Side was sold
immediately after the acquisition was completed with the sale proceeds invested
in higher yielding loans. Investment securities at December 31, 2007 represented
16 percent of total assets versus 19 percent the prior year.
The following table summarizes the major asset components as a percentage of
total assets as of December 31, 2007, 2006, and 2005:
December 31,
---------------------
ASSETS: 2007 2006 2005
----- ----- -----
Cash, and cash equivalents, investment
securities, FHLB and FRB stock .... 19.2% 22.3% 29.7%
Real estate loans .................... 15.0% 17.5% 16.3%
Commercial loans ..................... 45.8% 40.6% 35.9%
Consumer loans ....................... 13.1% 12.7% 12.5%
Other assets ......................... 6.9% 6.9% 5.6%
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
The percentage of assets held as cash, cash equivalents, investment securities,
FHLB and FRB stock has decreased from 22.3 percent at December 31, 2006 to 19.2
percent at December 31, 2007. The decrease is a result of the continuing
principal paydowns on
29
securities and the increase in total assets resulting from the increase in loans
outstanding. The Company continues to focus on quality loan growth of all types.
LIABILITIES
The following table summarizes the liability balances as of December 31, 2007
and 2006, the amount of change, and percentage change during 2007:
December 31,
-----------------------
LIABILITIES ($ IN THOUSANDS) 2007 2006 $ change % change
---------- ---------- -------- --------
Non-interest bearing deposits $ 788,087 $ 829,355 $(41,268) -5%
Interest-bearing deposits 2,396,391 2,378,178 18,213 1%
FHLB Advances 538,949 307,522 231,427 75%
Securities sold under agreements to
repurchase and other borrowed funds 401,621 338,986 62,635 18%
Other liabilities 45,147 42,555 2,592 6%
Subordinated debentures 118,559 118,559 -- 0%
---------- ---------- -------- ----
Total liabilities $4,288,754 $4,015,155 $273,599 7%
========== ========== ======== ====
Non-interest bearing deposits decreased $41 million, or 5.0 percent, since
December 31, 2006. The December 31, 2007 balance of interest bearing deposits
includes $1 million in broker originated certificate of deposits. Since December
31, 2006, interest bearing deposits, excluding a decrease of $172 million in
certificate of deposits from broker sources, increased $190 million, or 9
percent. FHLB advances increased $231 million from December 31, 2006. The
increase in advances is primarily the result of the decrease in certificate of
deposit from broker sources to more favorable rates at the FHLB. Repurchase
agreements and other borrowed funds were $402 million at December 31, 2007, an
increase of $63 million from December 31, 2006.
The following table summarizes the major liability and equity components as a
percentage of total liabilities as of December 31, 2007, 2006, and 2005:
December 31,
---------------------
LIABILITIES AND STOCKHOLDERS' EQUITY: 2007 2006 2005
----- ----- -----
Deposit accounts 66.1% 71.7% 68.4%
FHLB advances 11.2% 6.9% 10.8%
Other borrowings and repurchase agreements 8.3% 7.6% 8.5%
Subordinated debentures 2.5% 2.6% 2.3%
Other liabilities 0.9% 0.9% 0.9%
Stockholders' equity 11.0% 10.3% 9.1%
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
The deposits have decreased from 71.7 percent at December 31, 2006 to 66.1
percent at December 31, 2007. Stockholders equity as a percentage of total
liabilities and stockholders' equity rose throughout the year, primarily a
result of an acquisition and retention of earnings.
30
STOCKHOLDERS' EQUITY
December 31,
---------------------
($ IN THOUSANDS, EXCEPT PER SHARE DATA) 2007 2006 $ change % change
--------- --------- -------- --------
Common equity $ 525,459 $ 453,074 $ 72,385 16%
Accumulated other comprehensive income 3,117 3,069 48 2%
--------- --------- --------
Total stockholders' equity 528,576 456,143 72,433 16%
Core deposit intangible, net, and goodwill (154,264) (144,466) (9,798) 7%
--------- --------- --------
Tangible stockholders' equity $ 374,312 $ 311,677 $ 62,635 20%
========= ========= ========
Stockholders' equity to total assets 10.97% 10.21%
Tangible stockholders' equity to total tangible assets 8.03% 7.21%
Book value per common share $ 9.85 $ 8.72 $ 1.13 13%
Market price per share at end of year $ 18.74 $ 24.44 $ (5.70) -23%
STOCKHOLDERS' EQUITY
Total equity and book value per share amounts have increased $72 million and
$1.13 per share, respectively, from December 31, 2006, the result of earnings
retention, issuance of common stock in connection with an acquisition, and stock
options exercised. Accumulated other comprehensive income, representing net
unrealized gains or losses on investment securities designated as available for
sale, increased $48 thousand from December 31, 2006.
RESULTS OF OPERATIONS
REVENUE SUMMARY
Years ended December 31,
-----------------------------------------
($ IN THOUSANDS) 2007 2006 $ change % change
-------- -------- -------- --------
Net interest income
Interest income $304,760 $253,326 $51,434 20%
Interest expense 121,291 95,038 26,253 28%
-------- -------- --------
Total net interest income 183,469 158,288 25,181 16%
Fees and other revenue:
Service charges, loan fees, and other fees 45,486 37,072 8,414 23%
Gain on sale of loans 13,283 10,819 2,464 23%
Loss on sale of investments (8) (3) (5) 167%
Other income 6,057 3,954 2,103 53%
-------- -------- --------
Total non-interest income 64,818 51,842 12,976 25%
-------- -------- --------
$248,287 $210,130 $38,157 18%
======== ======== ========
Net interest margin (tax equivalent) 4.50% 4.44%
======== ========
NET INTEREST INCOME
Net interest income for the year increased $25.181 million, or 16 percent, over
2006. Total interest income increased $51.434 million, or 20 percent, while
total interest expense increased $26.253 million, or 28 percent. The increase in
interest expense is primarily attributable to the volume and rate increases in
interest bearing deposits. The net interest margin as a percentage of earning
assets, on a tax equivalent basis, was 4.50 percent which is an increase of 6
basis points over the 4.44 percent for 2006. The net interest margin calculation
has been revised to account for intercompany elimination entries and previously
reported net interest margins have been adjusted to reflect such change.
NON-INTEREST INCOME
Total non-interest income increased $12.976 million, or 25 percent in 2007. Fee
income increased $8.414 million, or 23 percent, over last year, driven primarily
by an increased number of loan and deposit accounts, acquisitions, and
additional customer products and services offered. Gain on sale of loans
increased $2.464 million, or 23 percent, from last year. Loan origination
volume, especially in the first half of 2007, was robust versus historical
standards. Other income increased $2.103 million, or 53 percent, over the same
period in 2006. Such increase includes a gain of $1.6 million from the January
19, 2007 sale of Western's Lewistown branch, a regulatory requirement imposed to
complete the acquisition of CDC.
31
NON-INTEREST EXPENSE SUMMARY
Years ended December 31,
----------------------------------------
($ IN THOUSANDS) 2007 2006 $ change % change
-------- -------- -------- --------
Compensation and employee
benefits and related expense $ 79,070 $ 65,419 $ 13,651 21%
Occupancy and equipment expense 19,152 15,268 3,884 25%
Advertising and promotions 6,306 5,468 838 15%
Outsourced data processing 2,755 2,788 (33) -1%
Core deposit intangibles amortization 3,202 2,024 1,178 58%
Other expenses 27,432 21,583 5,849 27%
-------- -------- --------
Total non-interest expense $137,917 $112,550 $ 25,367 23%
======== ======== ========
NON-INTEREST EXPENSE
Non-interest expense increased by $25.367 million, or 23 percent, from 2006.
Compensation and benefit expense increased $13.651 million, or 21 percent, which
is primarily attributable to increased staffing levels, including staffing from
the acquisitions of Morgan and CDC during 2006 and North Side in 2007, de novo
branches, increased compensation, including production based commissions, and
benefits, including health insurance, and overtime associated with the merger
and operating systems conversions in the first half of 2007. Included in 2007
are approximately $500,000 of non-recurring expenses and costs associated with
the January 26, 2007 merger of three of the five CDC subsidiaries into the
Company's subsidiaries. Occupancy and equipment expense increased $3.884
million, or 25 percent, reflecting the acquisitions, cost of additional
locations and facility upgrades. Other expenses increased $6.687 million, or 25
percent, primarily from acquisitions, additional marketing expenses, costs
associated with new branch offices and other general and administrative costs.
The efficiency ratio (non-interest expense/net interest income plus non-interest
income) increased to 56 percent from 54 percent during 2006.
CREDIT QUALITY INFORMATION
December 31, December 31,
------------ ------------
($ IN THOUSANDS) 2007 2006
------------ ------------
Allowance for loan and lease losses $54,413 $49,259
Real estate and other assets owned 2,043 1,484
Accruing Loans 90 days or more overdue 2,685 1,345
Non-accrual loans 8,560 6,065
------- -------
Total non-performing assets 13,288 8,894
Allowance as a percentage of non-performing assets 409% 554%
Non-performing assets as a percentage of total assets 0.27% 0.19%
Allowance as a percentage of total loans 1.51% 1.53%
Net charge-offs as a percentage of loans 0.060% 0.021%
PROVISION FOR LOAN LOSSES
Non-performing assets as a percentage of total bank assets at December 31, 2007
were at .27 percent, up from .19 percent at December 31, 2006. These ratios
compare favorably to the Federal Reserve Bank Peer Group average of .67 percent
at September 30, 2007, the most recent information available. The allowance for
loan losses was 409 percent of non-performing assets at December 31, 2007, down
from 554 percent a year ago. The allowance, including $639 thousand from
acquisitions, has increased $5.2 million, or 10.5 percent, from a year ago. The
allowance of $54.413 million is 1.51 percent of December 31, 2007 total loans
outstanding, down from 1.53 percent in the fourth quarter last year. The
provision for loan loss expense was $6.680 million for 2007, an increase of
$1.488 million, from 2006. Net charged off loans were $2.165 million, or .06
percent of loans, for 2007 which is higher than the $680 thousand of net charge
offs, or .02 percent, in 2006. Loan growth, average loan size, and credit
quality considerations will determine the level of additional provision expense.
EFFECT OF INFLATION AND CHANGING PRICES
32
Generally accepted accounting principles require the measurement of financial
position and operating results in terms of historical dollars, without
consideration for change in relative purchasing power over time due to
inflation. Virtually all assets of a financial institution are monetary in
nature; therefore, interest rates generally have a more significant impact on a
company's performance than does the effect of inflation.
COMMITMENTS
In the normal course of business, there are various outstanding commitments to
extend credit, such as letter of credits and un-advanced loan commitments, and
lease obligation commitments, which are not reflected in the accompanying
consolidated financial statements. Management does not anticipate any material
losses as a result of these transactions. The Company has outstanding debt
maturities, the largest of which are FHLB advances. For the maturity schedule of
advances and schedule of future minimum rental payments see Notes 8 and 19,
respectively, to the Consolidated Financial Statements in "Item 8 - Financial
Statements and Supplementary Data." The following table represents the Company's
contractual obligations as of December 31, 2007:
Payments Due by Period
---------------------------------------------------------------------------------------
Indeterminate
(dollars in thousands) Total Maturity (1) 2008 2009 2010 2011 2012 Thereafter
---------------------- ----------- ------------- ---------- ------ ------ ------ ------ ----------
Deposits ..................... $3,184,478 2,329,873 698,296 88,587 37,156 17,207 10,340 3,019
FHLB advances ................ 538,949 -- 451,224 2,299 774 493 82,000 2,159
Repurchase agreements ........ 178,041 -- 177,942 99 -- -- -- --
Subordinated debentures ...... 118,559 -- -- -- -- -- -- 118,559
Capital lease obligations .... 3,615 -- 228 231 235 239 243 2,439
Operating lease obligations... 16,613 -- 2,030 1,958 1,912 1,596 1,302 7,815
---------- --------- --------- ------ ------ ------ ------ -------
$4,040,255 2,329,873 1,329,720 93,174 40,077 19,535 93,885 133,991
========== ========= ========= ====== ====== ====== ====== =======
(1) Represents interest and non-interest bearing checking, money market, and
savings accounts
MARKET RISK
Market risk is the risk of loss in a financial instrument arising from adverse
changes in market rates/prices such as interest rates, foreign currency exchange
rates, commodity prices, and equity prices. The Company's primary market risk
exposure is interest rate risk. The ongoing monitoring and management of this
risk is an important component of the Company's asset/liability management
process which is governed by policies established by its Board of Directors that
are reviewed and approved annually. The Board of Directors delegates
responsibility for carrying out the asset/liability management policies to the
Asset/Liability Committee (ALCO). In this capacity, ALCO develops guidelines and
strategies impacting the Company's asset/liability management related activities
based upon estimated market risk sensitivity, policy limits and overall market
interest rate levels/trends.
INTEREST RATE RISK
The objective of interest rate risk management is to contain the risks
associated with interest rate fluctuations. The process involves identification
and management of the sensitivity of net interest income to changing interest
rates. Managing interest rate risk is not an exact science. The interval between
repricing of interest rates of assets and liabilities changes from day to day as
the assets and liabilities change. For some assets and liabilities, contractual
maturity and the actual cash flows experienced are not the same. A good example
is residential mortgages that have long term contractual maturities but may be
repaid well in advance of the maturity when current prevailing interest rates
become lower than the contractual rate. Interest-bearing deposits without a
stated maturity could be withdrawn after seven days. However, the Banks'
experience indicates that these funding pools have a much longer duration and
are not as sensitive to interest rate changes as other financial instruments.
Prime based loans generally have rate changes when the Federal Reserve Bank
changes short term interest rates. However, depending on the magnitude of the
rate change and the relationship of the current rates to rate floors and rate
ceilings that may be in place on the loans, the loan rate may not change.
GAP ANALYSIS
The following table gives a description of our GAP position for various time
periods. As of December 31, 2007, the Company had a negative GAP position at six
months and a negative GAP position at twelve months. The cumulative GAP as a
percentage of total assets for six months is a negative 8.67 percent which
compares to a negative 6.11 percent at December 31, 2006 and a negative 6.29
percent at December 31, 2005. The table also shows the GAP earnings sensitivity,
and earnings sensitivity ratio, along with a brief description as to how they
are calculated. The methodology used to compile this GAP information is based on
the Company's mix of assets and liabilities and the historical experience
accumulated regarding their rate sensitivity.
33
Projected maturity or repricing
--------------------------------------------------------
0-6 6-12 1-5 More than
(dollars in thousands) Months Months years 5 years Total
---------------------- ---------- -------- --------- --------- ---------
ASSETS:
Interest bearing deposits and
federal funds sold ................. $ 81,912 -- -- -- 81,912
Investment securities ................ 17,956 25,623 171,888 81,669 297,136
Mortgage-backed securities ........... 82,349 57,620 171,336 32,068 343,373
FHLB stock and FRB stock ............. -- -- 47,373 12,442 59,815
Floating rate loans .................. 1,120,357 208,911 699,533 55,897 2,084,698
Fixed rate loans ..................... 401,233 312,640 693,601 129,557 1,537,031
---------- -------- --------- -------- ---------
TOTAL INTEREST BEARING ASSETS ........... $1,703,807 604,794 1,783,731 311,633 4,403,965
========== ======== ========= ======== =========
LIABILITIES:
Interest-bearing deposits ............ 1,238,819 223,343 152,157 782,072 2,396,391
FHLB advances ........................ 447,509 3,121 86,145 2,173 538,948
Repurchase agreements and other
borrowed funds ..................... 399,474 25 236 1,887 401,622
Subordinated debentures .............. -- -- -- 118,559 118,559
---------- -------- --------- -------- ---------
TOTAL INTEREST BEARING LIABILITIES ...... $2,085,802 226,489 238,538 904,691 3,455,520
========== ======== ========= ======== =========
Repricing gap ........................... $ (381,995) 378,305 1,545,193 (593,058) 948,445
Cumulative repricing gap ................ $ (381,995) (3,690) 1,541,503 948,445
Cumulative gap as a % of interest bearing
assets ................................ -8.67% -0.08% 35.00% 21.54%
Gap Earnings Sensitivity (1) ............ $ (22)
Gap Earnings Sensitivity Ratio (2) ...... -0.03%
(1) Gap Earnings Sensitivity is the estimated effect on earnings, after taxes
of 39.39 percent, of a 1 percent increase or decrease in interest rates (1
percent of ($3,690 - $1,453))
(2) Gap Earnings Sensitivity Ratio is Gap Earnings Sensitivity divided by the
2007 net earnings of $68,603. A 1 percent increase in interest rates has
this estimated percentage decrease on annual net earnings.
This table estimates the repricing maturities of the Company's assets and
liabilities, based upon the Company's assessment of the repricing
characteristics of the various instruments. Interest-bearing checking and
regular savings are included in the more than 5 years category. Money market
balances are included in the less than 6 months category. Mortgage-backed
securities are at the anticipated principal payments based on the
weighted-average-life.
NET INTEREST INCOME SIMULATION
The traditional one-dimensional view of GAP is not sufficient to show a bank's
ability to withstand interest rate changes. Because of limitations in GAP
modeling the Asset/Liability Management Committee (ALCO) of the Company uses a
detailed and dynamic simulation model to quantify the estimated exposure of net
interest income (NII) to sustained interest rate changes. While ALCO routinely
monitors simulated NII sensitivity over a rolling two-year horizon, it also
utilizes additional tools to monitor potential longer-term interest rate risk.
The simulation model captures the impact of changing interest rates on the
interest income received and interest expense paid on all assets and liabilities
reflected on the Company's statement of financial condition. This sensitivity
analysis is compared to ALCO policy limits which specify a maximum tolerance
level for NII exposure over a one year horizon, assuming no balance sheet
growth, given a 200 basis point (bp) upward and 200bp downward shift in interest
rates. A parallel and pro rata shift in rates over a 12-month period is assumed
as a benchmark. Other non-parallel rate movement scenarios are also modeled to
determine the potential impact on net interest income. The following reflects
the Company's NII sensitivity analysis as of December 31, 2007 and 2006 as
compared to the 10 percent policy limit approved by the Company's and Banks'
Board of Directors.
34
2007 2006
------- ------
+200 bp
Estimated sensitivity ....................... -2.8% -2.5%
Estimated decrease in net interest income ... $(5,155) (3,957)
-200 bp
Estimated sensitivity ....................... 1.5% 0.1%
Estimated increase in net interest income ... $ 2,770 158
The preceding sensitivity analysis does not represent a forecast and should not
be relied upon as being indicative of expected operating results. These
hypothetical estimates are based upon numerous assumptions including: the nature
and timing of interest rate levels including yield curve shape, prepayments on
loans and securities, deposit decay rates, pricing decisions on loans and
deposits, reinvestment/replacement of assets and liability cash flows, and
others. While assumptions are developed based upon current economic and local
market conditions, the Company cannot make any assurances as to the predictive
nature of these assumptions including how customer preferences or competitor
influences might change. Also, as market conditions vary from those assumed in
the sensitivity analysis, actual results will also differ due to
prepayment/refinancing levels likely deviating from those assumed, the varying
impact of interest rate change caps or floors on adjustable rate assets, the
potential effect of changing debt service levels on customers with adjustable
rate loans, depositor early withdrawals and product preference changes, and
other internal/external variables. Furthermore, the sensitivity analysis does
not reflect actions that ALCO might take in responding to or anticipating
changes in interest rates.
LIQUIDITY RISK
Liquidity risk is the possibility that the Company will not be able to fund
present and future obligations. The objective of liquidity management is to
maintain cash flows adequate to meet current and future needs for credit demand,
deposit withdrawals, maturing liabilities and corporate operating expenses. Core
deposits, FHLB credit lines, available-for-sale investment securities, and net
income are the key elements in meeting these objectives. All Banks are members
of the FHLB of Seattle. This membership provides for established lines of credit
in the form of advances that are a supplemental source of funds for lending and
other general business purposes. As of December 31, 2007, the Company had $939
million of borrowing capacity with the FHLB of Seattle of which $539 million was
utilized. Accordingly, management of the Company has a wide range of versatility
in managing the liquidity and asset/liability mix for each individual
institution as well as the Company as a whole.
CAPITAL RESOURCES AND ADEQUACY
Maintaining capital strength has been a long term objective. Ample capital is
necessary to sustain growth, provide protection against unanticipated declines
in asset values, and to safeguard the funds of depositors. Capital also is a
source of funds for loan demand and enables the Company to effectively manage
its assets and liabilities. Shareholders' equity increased $72 million during
2007, or 16 percent the net result of earnings of $69 million, common stock
issued for the acquisition of North Side, less cash dividend payments and an
increase of $48 thousand in the net unrealized gains on available-for-sale
investment securities. For additional information see Note 11 in the
Consolidated Financial Statements. Dividend payments were increased by $.05 per
share, or 11 percent in 2007. The payment of dividends is subject to government
regulation in that regulatory authorities may prohibit banks and bank holding
companies from paying dividends that would constitute an unsafe or unsound
banking practice.
CRITICAL ACCOUNTING POLICIES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America often
requires management to use significant judgments as well as subjective and/or
complex measurements in making estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses.
The Company considers its accounting policy for the Allowance for Loan and Lease
Losses to be its only critical accounting policy. The balance of the Allowance
for Loan and Lease Losses is an estimate of probable credit losses that have
occurred in the loan and lease portfolio as of the date of the consolidated
financial statements before losses have been confirmed. The balance of the
Allowance for Loan and Lease Losses is highly dependent upon management's
internal risk classifications, evaluations of borrowers' current and prospective
performance, appraisals and other variables affecting the quality of the loan
and lease portfolio. Changes in management's estimates and assumptions are
reasonably possible and may have a material impact upon the Company's
consolidated financial statements, results of operations or liquidity.
It is the Company's policy to provide an allowance for estimated losses on loans
and leases based upon past loss experience, adjusted for changes in trends and
conditions of the certain items, including:
35
- Adverse situations that may affect specific borrowers' ability to
repay;
- Current collateral values, where appropriate;
- Delinquencies and non-performing loans;
- Amount and timing of future cash flows expected on impaired loans;
- Criticized and classified loans;
- Credit concentrations by credit type, industry, geography;
- Recoveries and dispositions of balances previously charge-off;
- Volume and terms of loans;
- Loan size and complexity;
- Competition and bank size;
- Local market areas and national economic conditions;
- Effects of changes in lending policies and procedures;
- Experience, ability, and depth of lending management and credit
administration staff; and
- Effects of legal and regulatory developments.
Individually significant loans and major lending areas are reviewed periodically
to determine potential problems at an early date. The allowance for loan and
lease losses is increased by charges to earnings and decreased by charge-offs
(net of recoveries). For additional information regarding the allowance for loan
and lease losses, its relation to the provision for loan and lease losses and
risk related to asset quality, see Note 4 to the Consolidated Financial
Statements in "Item 8 - Financial Statements and Supplementary Data."
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
Recent accounting standards that have either been issued during 2007 or are
effective during 2007 or 2008 and may possibly have a material impact on the
Company include Financial Accounting Standards ("FASB') Statement of Financial
Accounting Standard ("SFAS") No. 141(R), Business Combinations, SFAS No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities, SFAS No.,
157, Fair Value Measurements, SFAS No. 156, Accounting for Servicing of
Financial Asset, SFAS No. 155, Accounting for Certain Hybrid Financial
Instruments, Emerging Issue Task Force ("EITF") 06-4 Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life
Insurance Arrangements and FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes. For additional information on the standards and the
impact on the Company see Note 22 to the Consolidated Financial Statements in
"Item 8 - Financial Statements and Supplementary Data."
36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2006 COMPARED TO DECEMBER 31, 2005
REVENUE SUMMARY
Years ended December 31,
-----------------------------------------
($ IN THOUSANDS) 2006 2005 $ change % change
-------- -------- -------- --------
Net interest income $158,288 $130,007 $28,281 22%
Fees and other revenue:
Service charges, loan fees, and other fees 37,072 30,812 6,260 20%
Gain on sale of loans 10,819 11,048 (229) -2%
Loss on sale of investments (3) (138) 135 -98%
Other income 3,954 2,904 1,050 36%
-------- -------- -------
Total non-interest income 51,842 44,626 7,216 16%
-------- -------- -------
$210,130 $174,633 $35,497 20%
======== ======== =======
Net interest margin (tax equivalent) 4.44% 4.25%
======== ========
NET INTEREST INCOME
Net interest income for the year increased $28.3 million, or 22 percent, over
2005. Total interest income increased $63.3 million, or 33 percent, while total
interest expense increased $35.1 million, or 58 percent. The increase in
interest expense is attributable to the volume increase in interest bearing
deposits, and increases in short term interest rates during 2005 and continuing
in 2006. The acquisitions during 2005 and 2006 were also a significant factor in
the level of interest income and expense. The net interest margin as a
percentage of earning assets, on a tax equivalent basis, was 4.44 percent which
was 19 basis points higher than the 4.25 percent result for 2005. The net
interest margin calculation has been revised to account for intercompany
elimination entries and previously reported net interest margins have been
adjusted to reflect the change.
NON-INTEREST INCOME
Total non-interest income increased $7.2 million, or 16 percent in 2006. Fee
income increased $6.3 million, or 20 percent, over last year, driven primarily
by an increased number of loan and deposit accounts, acquisitions, and
additional customer products and services offered. Gain on sale of loans
decreased $229 thousand, or 2 percent, from last year. Loan origination volume
in the Company's markets for housing continues to remain very active by
historical standards and the decline was the result of increased price
competition. Other income increased $1.1 million of which $543 thousand was bank
owned life insurance proceeds.
NON-INTEREST EXPENSE SUMMARY
Years ended December 31,
-----------------------------------------
($ IN THOUSANDS) 2006 2005 $ change % change
-------- -------- -------- --------
Compensation and employee
benefits and related expense $ 65,419 $ 51,385 $ 14,034 27%
Occupancy and equipment expense 15,268 12,851 2,417 19%
Advertising and promotions 5,468 4,640 828 18%
Outsourced data processing 2,788 1,839 949 52%
Core deposit intangibles amortization 2,024 1,470 554 38%
Other expenses 21,583 18,741 2,842 15%
-------- -------- --------
Total non-interest expense $112,550 $ 90,926 $ 21,624 24%
======== ======== ========
NON-INTEREST EXPENSE
Non-interest expense increased by $21.6 million, or 24 percent, from 2005.
Compensation and benefit expense increased $14.0 million, or 27 percent.
Excluding the SFAS 123 (R) compensation cost of $3.0 million, the increase would
have been 21 percent. The remaining
37
increase in compensation and benefit expense was primarily attributed to
increased staffing associated with six de novo branches and six bank
acquisitions during 2006 and 2005, along with normal compensation and merit
increases for job performance, and increased cost of employee benefits.
Occupancy and equipment expense increased $2.4 million, or 19 percent,
reflecting the acquisitions, cost of additional locations and facility upgrades.
Other expenses increased $3.7 million, or 16 percent, primarily from
acquisitions, additional marketing expenses, and costs associated with new
branch offices. The efficiency ratio (non-interest expense/net interest income +
non-interest income) increased to 53.56 percent from 52.07 percent for 2005
largely a result of the acquisitions and branch openings.
CREDIT QUALITY INFORMATION
December 31, December 31,
($ IN THOUSANDS) 2006 2005
------------ ------------
Allowance for loan losses $49,259 $38,655
Non-performing assets 8,894 10,089
Allowance as a percentage of non-performing assets 554% 383%
Non-performing assets as a percentage of total assets 0.19% 0.26%
Allowance as a percentage of total loans 1.53% 1.59%
Net charge-offs as a percentage of loans 0.021 0.020%
PROVISION FOR LOAN LOSSES
Non-performing assets as a percentage of total bank assets at December 31, 2006
was at .19 percent, decreasing from .26 percent at December 31, 2005. The
Company's ratios compare favorably to the Federal Reserve Bank Peer Group
average of .44 percent at September 30, 2006, the most recent information
available. The allowance for loan and lease losses was 554 percent of
non-performing assets at December 31, 2006, up from 383 percent a year ago. The
allowance, including $6.1 million from acquisitions, has increased $10.6
million, or 27 percent, from a year ago. The allowance of $49.3 million, is 1.53
percent of December 31, 2006 total loans outstanding, down slightly from the
1.59 percent a year ago. The fourth quarter provision for loan loss expense was
$1.4 million, a decrease of $22 thousand from the same quarter in 2005. Net
charge-offs were $638 thousand for the fourth quarter of 2006. Loan growth,
average loan size, and credit quality considerations will determine the level of
additional provision expense. The provision for loan loss expense was $5.2
million for 2006, a decrease of $831 thousand, or 14 percent, from 2005. Net
charged-off loans were $680 thousand, or .021 percent of loans, for 2006 which
is slightly higher than the $487 thousand of net charge-offs in 2005.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information regarding "Quantitative and Qualitative Disclosures about Market
Risk" is set fourth under "Item 7 - Management's Discussion and Analysis".
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
38
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Audit Committee, Board of Directors and Stockholders
Glacier Bancorp, Inc.
Kalispell, Montana
We have audited the accompanying consolidated statements of financial condition
of Glacier Bancorp, Inc. as of December 31, 2007, and 2006, and the related
consolidated statements of operations, stockholders' equity and comprehensive
income and cash flows for each of the years in the three-year period ended
December 31, 2007. The Company's management is responsible for these financial
statements. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. Our audits included
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Glacier Bancorp,
Inc. as of December 31, 2007 and 2006, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
2007, in conformity with accounting principles generally accepted in the United
States of America.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), Glacier Bancorp, Inc.'s internal
control over financial reporting as of December 31, 2007, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) and our report dated
February 27, 2008, expressed an unqualified opinion on the effectiveness of the
Company's internal control over financial reporting.
/s/ BKD, LLP
Denver, Colorado
February 27, 2008
39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Audit Committee, Board of Directors and Stockholders
Glacier Bancorp, Inc.
Kalispell, Montana
We have audited Glacier Bancorp, Inc.'s internal control over financial
reporting as of December 31, 2007, based on criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Report of Management. Our responsibility
is to express an opinion on the Company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, Glacier Bancorp, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2007,
based on criteria established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
40
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements of Glacier Bancorp, Inc. and our report dated February 27, 2008,
expressed an unqualified opinion thereon.
/s/ BKD, LLP
Denver Colorado
February 27, 2008
41
GLACIER BANCORP, INC.
Consolidated Statements of Financial Condition
December 31,
----------------------
dollars in thousands, except per share data) 2007 2006
-------------------------------------------- ---------- ----------
Assets:
Cash on hand and in banks ...................................................... $ 145,697 136,591
Federal funds sold ............................................................. 135 6,125
Interest bearing cash deposits ................................................. 81,777 30,301
---------- ----------
Cash and cash equivalents ................................................. 227,609 173,017
Investment securities, available-for-sale ...................................... 700,324 825,637
Loans receivable, net of allowance for loan and lease losses of $54,413
and $49,259 at December 31, 2007 and 2006, respectively ..................... 3,516,999 3,130,389
Loans held for sale ............................................................ 40,123 35,135
Premises and equipment, net .................................................... 123,749 110,759
Real estate and other assets owned, net ........................................ 2,043 1,484
Accrued interest receivable .................................................... 26,168 25,729
Core deposit intangible, net of accumulated amortization of $11,743
and $8,825 at December 31, 2007 and 2006, respectively ...................... 13,963 14,750
Goodwill ....................................................................... 140,301 129,716
Other assets ................................................................... 26,051 24,682
---------- ----------
Total assets .............................................................. $4,817,330 4,471,298
========== ==========
LIABILITIES:
Non-interest bearing deposits .................................................. $ 788,087 829,355
Interest bearing deposits ...................................................... 2,396,391 2,378,178
Advances from Federal Home Loan Bank of Seattle ................................ 538,949 307,522
Securities sold under agreements to repurchase ................................. 178,041 170,216
Other borrowed funds ........................................................... 223,580 168,770
Accrued interest payable ....................................................... 13,281 11,041
Deferred tax liability ......................................................... 481 1,927
Subordinated debentures ........................................................ 118,559 118,559
Other liabilities .............................................................. 31,385 29,587
---------- ----------
Total liabilities ......................................................... 4,288,754 4,015,155
STOCKHOLDERS' EQUITY:
Preferred shares, $.01 par value per share. 1,000,000 shares authorized
none issued or outstanding at December 31, 2007 and 2006 ................... -- --
Common stock, $.01 par value per share. 117,187,500 and 117,187,500
shares authorized, 53,646,480 and 52,302,820 issued and outstanding
at December 31, 2007 and 2006, respectively ................................ 536 523
Paid-in capital ................................................................ 374,728 344,265
Retained earnings - substantially restricted ................................... 150,195 108,286
Accumulated other comprehensive income ......................................... 3,117 3,069
---------- ----------
Total stockholders' equity ................................................ 528,576 456,143
---------- ----------
Total liabilities and stockholders' equity ................................ $4,817,330 4,471,298
========== ==========
See accompanying notes to consolidated financial statements.
42
GLACIER BANCORP, INC.
Consolidated Statements OF Operations
Years ended December 31,
----------------------------------
(dollars in thousands, except per share data) 2007 2006 2005
--------------------------------------------- --------- ---------- ---------
INTEREST INCOME:
Real estate loans .................................... $ 59,664 52,219 34,506
Commercial loans ..................................... 157,644 119,215 81,359
Consumer and other loans ............................. 48,105 40,284 28,696
Investment securities and other ...................... 39,347 41,608 45,424
-------- --------- ---------
Total interest income .............................. 304,760 253,326 189,985
-------- --------- ---------
INTEREST EXPENSE:
Deposits ............................................. 81,459 58,147 25,705
Federal Home Loan Bank of Seattle advances ........... 18,897 20,460 21,489
Securities sold under agreements to repurchase ....... 7,445 6,618 2,948
Subordinated debentures .............................. 7,537 6,050 6,455
Other borrowed funds ................................. 5,953 3,763 3,381
-------- --------- ---------
Total interest expense ............................. 121,291 95,038 59,978
-------- --------- ---------
Net interest income ................................ 183,469 158,288 130,007
Provision for loan losses ............................ 6,680 5,192 6,023
-------- --------- ---------
Net interest income after provision
for loan losses ................................... 176,789 153,096 123,984
NON-INTEREST INCOME:
Service charges and other fees ....................... 37,931 29,701 24,503
Miscellaneous loan fees and charges .................. 7,555 7,371 6,309
Gain on sale of loans ................................ 13,283 10,819 11,048
Loss on sale of investments .......................... (8) (3) (138)
Other income ......................................... 6,057 3,954 2,904
-------- --------- ---------
Total non-interest income .......................... 64,818 51,842 44,626
-------- --------- ---------
NON-INTEREST EXPENSE:
Compensation, employee benefits and related expense .. 79,070 65,419 51,385
Occupancy and equipment expense ...................... 19,152 15,268 12,851
Advertising and promotions ........................... 6,306 5,468 4,640
Outsourced data processing expense ................... 2,755 2,788 1,839
Core deposit intangibles amortization ................ 3,202 2,024 1,470
Other expense ........................................ 27,432 21,583 18,741
-------- --------- ---------
Total non-interest expense ......................... 137,917 112,550 90,926
-------- --------- ---------
Earnings before income taxes .............................. 103,690 92,388 77,684
Federal and state income tax expense ................... 35,087 31,257 25,311
-------- --------- ---------
Net Earnings .............................................. $ 68,603 61,131 52,373
======== ========= =========
BASIC EARNINGS PER SHARE ............................. $ 1.29 1.23 1.12
DILUTED EARNINGS PER SHARE ........................... $ 1.28 1.21 1.09
See accompanying notes to consolidated financial statements.
43
GLACIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005
Retained Accumulated Total
Common Stock earnings other comp- stock-
------------------- Paid-in substantially rehensive holders'
(dollars in thousands, except per share data) Shares Amount capital restricted income equity
--------------------------------------------- ---------- ------ -------- ------------- ----------- --------
Balance at December 31, 2004 .............................. 46,030,145 $460 227,399 36,391 5,934 270,184
Comprehensive income:
Net earnings ......................................... -- -- -- 52,373 -- 52,373
Unrealized loss on securities, net of reclassification
adjustment and taxes .............................. -- -- -- -- (5,113) (5,113)
-------
Total comprehensive income ................................ -- -- -- -- -- 47,260
-------
Cash dividends declared ($.40 per share) .................. -- -- -- (19,051) -- (19,051)
Stock options exercised ................................... 596,655 6 5,152 -- -- 5,158
Stock issued in connection with acquisitions .............. 1,632,021 17 28,421 -- -- 28,438
Acquisition of fractional shares .......................... -- -- (8) -- -- (8)
Tax benefit from stock related compensation ............... -- -- 1,258 -- -- 1,258
---------- ---- -------- ---------- ------ -------
Balance at December 31, 2005 .............................. 48,258,821 $483 262,222 69,713 821 333,239
Comprehensive income:
Net earnings ......................................... -- -- -- 61,131 -- 61,131
Unrealized gain on securities, net of reclassification
adjustment and taxes................................ -- -- -- -- 2,248 2,248
-------
Total comprehensive income ................................ -- -- -- -- -- 63,379
-------
Cash dividends declared ($.45 per share) .................. -- -- -- (22,558) -- (22,558)
Stock options exercised ................................... 639,563 6 6,700 -- -- 6,706
Stock issued in connection with acquisitions .............. 1,904,436 19 41,431 -- -- 41,450
Public offering of stock issued ........................... 1,500,000 15 29,418 29,433
Acquisition of fractional shares .......................... -- -- (5) -- -- (5)
Tax benefit from stock related compensation ............... -- -- 4,499 -- -- 4,499
---------- ---- -------- ---------- ------ -------
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
========== ==== ======== ========== ====== =======
Year ended December 31,
------------------------
2007 2006 2005
---- ------ ------
Disclosure of reclassification amount:
Unrealized and realized holding gain (loss) arising during the year ............. $ 70 3,706 (8,574)
Tax (expense) benefit ......................................................... (27) (1,460) 3,377
---- ------ ------
Net after tax ............................................................ 43 2,246 (5,197)
---- ------ ------
Reclassification adjustment for net loss included in net income ................. 8 3 138
Tax benefit ................................................................... (3) (1) (54)
---- ------ ------
Net after tax ............................................................ 5 2 84
---- ------ ------
Net change in unrealized gain (loss) on available-for-sale securities .. $ 48 2,248 (5,113)
==== ====== ======
See accompanying notes to consolidated financial statements.
44
GLACIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
---------------------------------------
(dollars in thousands) 2007 2006 2005
---------------------- ----------- ---------- ----------
OPERATING ACTIVITIES :
Net earnings ......................................................... $ 68,603 61,131 52,373
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Mortgage loans held for sale originated or acquired ................ (618,523) (484,170) (455,429)
Proceeds from sales of mortgage loans held for sale ................ 626,818 482,394 462,115
Provision for loan losses .......................................... 6,680 5,192 6,023
Depreciation of premises and equipment ............................. 8,508 6,746 5,349
Amortization of core deposit intangible ............................ 3,202 2,024 1,470
Loss on sale of investments ........................................ 8 3 138
Gain on sale of loans .............................................. (13,283) (10,819) (11,048)
Amortization of investment securities premiums and discounts, net .. 2,737 4,853 8,846
Federal Home Loan Bank of Seattle stock dividends .................. -- -- (180)
Gain on sale of Western's Lewistown branch ......................... (1,575) -- --
Deferred tax expense (benefit) ..................................... 1,569 (931) (2,204)
Stock compensation expense, net of tax benefits .................... 2,187 2,149 --
Excess tax benefits related to the exercise of stock options ....... (1,745) (1,217) --
Tax benefit from stock related compensation ........................ -- -- 1,258
Net decrease (increase) in accrued interest receivable ............. 44 (1,611) (890)
Net increase in accrued interest payable ........................... 2,162 2,398 1,949
Net increase in current income taxes ............................... 970 1,791 1,308
Net (increase) decrease in other assets ............................ (1,890) (1,439) 2,394
Net increase (decrease) in other liabilities ....................... 1,988 (772) 3,512
----------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES ....................... 88,460 67,722 76,984
----------- ---------- ----------
INVESTING ACTIVITIES:
Proceeds from sales, maturities and prepayments of investment
securities available-for-sale .................................... 273,323 223,064 419,524
Purchases of investment securities available-for-sale ................ (88,715) (59,007) (164,901)
Principal collected on installment and commercial loans .............. 1,125,275 1,050,666 781,848
Installment and commercial loans originated or acquired .............. (1,598,253) (1,348,217) (1,150,877)
Principal collections on mortgage loans .............................. 455,713 438,319 470,450
Mortgage loans originated or acquired ................................ (359,484) (556,954) (507,471)
Net purchase of FHLB and FRB stock ................................... (3,854) (455) (1,995)
Net cash received for acquisition of banks and branches .............. 8,953 43,086 6,265
Net cash paid for sale of Western's Lewistown branch ................. (6,846) -- --
Net addition of premises and equipment ............................... (18,033) (22,241) (17,359)
----------- ---------- ----------
NET CASH USED IN INVESTING ACTIVITIES ........................... (211,921) (231,739) (164,516)
----------- ---------- ----------
FINANCING ACTIVITIES:
Net (decrease) increase in deposits .................................. (97,214) 243,088 346,577
Net increase (decrease) in FHLB advances ............................. 231,427 (96,219) (439,545)
Net increase in securities sold under repurchase agreements .......... 7,825 31,424 53,372
Net increase (decrease) in other borrowed funds ...................... 54,810 (18,925) 182,634
Proceeds from issuance of subordinated debentures .................... -- 65,000 --
Repayment of subordinated debentures ................................. -- (35,000) --
Cash dividends paid .................................................. (26,694) (22,558) (19,051)
Excess tax benefits related to the exercise of stock options ......... 1,745 1,217 --
Proceeds from exercise of stock options and other stock issued ....... 6,154 36,403 5,158
Cash paid for stock dividends ........................................ -- (5) (8)
----------- ---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES ........................ 178,053 204,425 129,137
----------- ---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS ............................ 54,592 40,408 41,605
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ....................... 173,017 132,609 91,004
----------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR ............................. $ 227,609 173,017 132,609
=========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest ............................... $ 118,840 90,230 57,404
Cash paid during the year for income taxes ........................... $ 34,798 31,031 24,808
The following schedule summarizes the acquisition of Bank Holding Co. and
subsidiaries in 2007, 2006 and 2005
NORTH SIDE CITIZENS DEVELOP FIRST NATIONAL FIRST STATE CITIZENS BANK FIRST NATIONAL
STATE BANK COMPANY BANK OF MORGAN BANK HOLDING CO. BANKS - WEST CO.
-------------- --------------- -------------- ------------- ------------- ----------------
Acquired April 30, 2007 Oct. 1, 2006 Sept, 1, 2006 Oct, 31, 2005 April 1, 2005 Feb, 28, 2005
Fair Value of assets acquired $ 128,252 457,027 88,595 152,592 126,394 267,126
Cash paid for the capital stock 8,953 47,176 10,109 2,100 8,602 41,000
Capital stock issued 19,000 31,451 9,999 19,723 8,715 --
Liabilities assumed 100,348 379,831 68,486 130,663 109,077 226,126
See accompanying notes to consolidated financial statements.
45
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) GENERAL
Glacier Bancorp, Inc. ("Company") is a Montana corporation incorporated in 2004
as a successor corporation to the Delaware corporation incorporated in 1990. The
Company is a multi-bank holding company that provides a full range of banking
services to individual and corporate customers in Montana, Idaho, Wyoming, Utah
and Washington through its subsidiary banks. The subsidiary banks are subject to
competition from other financial service providers. The subsidiary banks are
also subject to the regulations of certain government agencies and undergo
periodic examinations by those regulatory authorities.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the valuations
related to investments, business combinations and real estate acquired in
connection with foreclosures or in satisfaction of loans. In connection with the
determination of the allowance for loan and lease losses and other valuation
estimates management obtains independent appraisals for significant items.
(B) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its eleven wholly-owned operating 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"), Glacier Bank
of Whitefish ("Whitefish"), and First Bank of Montana ("First Bank-MT"), all
located in Montana, Mountain West Bank ("Mountain West") and Citizens Community
Bank ("Citizens") located in Idaho, 1st Bank ("1st Bank") located in Wyoming,
and First National Bank of Morgan ("Morgan") located in Utah. All significant
inter-company transactions have been eliminated in consolidation.
On April 30, 2007, North Side State Bank ("North Side") in Rock Springs, Wyoming
was acquired and became a branch of 1st Bank. On October 1, 2006, Citizens
Development Company ("CDC") and its five banking subsidiaries located across
Montana were acquired. The CDC subsidiaries include Citizens State Bank, First
Citizens Bank of Billings, First National Bank of Lewistown, Western Bank of
Chinook, and First Citizens Bank, N.A. On January 26, 2007, Citizens State Bank,
First Citizens Bank of Billings, and First Citizens Bank, N.A. were merged into
First Security, Western, and Glacier, respectively, without name change for
First Security, Western, and Glacier. On June 22, 2007, Western Bank of Chinook
was merged into First National Bank of Lewistown and renamed First Bank of
Montana. On September 1, 2006, Morgan including its one branch office in
Mountain Green, Utah was acquired.
(C) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, cash held as demand deposits at
various banks and regulatory agencies, interest bearing deposits and federal
funds sold with original maturities of three months or less.
(D) INVESTMENT SECURITIES
Debt securities for which the Company has the positive intent and ability to
hold to maturity are classified as held-to-maturity and are stated at amortized
cost. Debt and equity securities held primarily for the purpose of selling in
the near term are classified as trading securities and are reported at fair
market value, with unrealized gains and losses included in income. Debt and
equity securities not classified as held-to-maturity or trading are classified
as available-for-sale and are reported at fair value with unrealized gains and
losses, net of income taxes, shown as a separate component of stockholders'
equity. As of December 31, 2007 and 2006, the Company only holds
available-for-sale securities. For additional information relating to
investments, see Note 3.
Premiums and discounts on investment securities are amortized or accreted into
income using a method that approximates the level-yield interest method. The
cost of any investment, if sold, is determined by specific identification.
Declines in the fair value of securities below carrying value that are other
than temporary are charged to expense as realized losses and the related
carrying value is reduced to fair value.
The Company holds stock in the Federal Home Loan Bank ("FHLB") of Seattle and
the Federal Reserve Bank ("FRB"). FHLB and FRB stocks are restricted because
they may only be sold to another member institution or the FHLB or FRB at their
par values. Due to restrictive terms, and the lack of a readily determinable
market value, FHLB and FRB stocks are carried at cost.
46
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES...CONTINUED
(E) LOANS RECEIVABLE
Loans that are intended to be held to maturity are reported at their unpaid
principal balance less charge-offs, specific valuation accounts, and any
deferred fees or costs on originated loans. Purchased loans are reported net of
unamortized premiums or discounts. Interest income is reported on the interest
method and includes discounts and premiums on purchased loans and net loan fees
on originated loans which are amortized over the expected life of loans using
methods that approximate the effective interest method. For additional
information relating to loans, see Note 4.
Loans on which the accrual of interest has been discontinued are designated as
nonaccrual loans. Accrual of interest on loans is discontinued either when
reasonable doubt exists as to the full, timely collection of interest or
principal or when a loan becomes contractually past due by ninety days or more
with respect to interest or principal unless such past due loan is well secured
and in the process of collection. When a loan is placed on nonaccrual status,
interest previously accrued but not collected is reversed against current period
interest income. Interest accruals are resumed on such loans only when they are
brought fully current with respect to interest and principal and when, in the
judgment of management, the loans are estimated to be fully collectible as to
both principal and interest.
(F) LOANS HELD FOR SALE
Mortgage and commercial loans originated and intended for sale in the secondary
market are carried at the lower of cost or estimated market value in the
aggregate. Net unrealized losses are recognized by charges to income. A sale is
recognized when the Company surrenders control of the loan and consideration,
other than beneficial interests in the loan, is received in exchange. A gain is
recognized to the extent the selling price exceeds the carrying value.
(G) ALLOWANCE FOR LOAN AND LEASE LOSSES
Based upon management's analysis of the Company's loan and lease portfolio, the
balance of the allowance is an estimate of probable credit losses known and
inherent in the loan and lease portfolio as of the date of the consolidated
financial statements. The allowance for loan and lease losses is increased by
provisions for credit losses which are charged to expense. The portions of loan
balances determined by management to be uncollectible are charged off in
reduction of the allowance. Recoveries of amounts previously charged off are
credited as an increase to the allowance.
The allowance for estimated losses on loans and leases is determined by each
bank subsidiary based upon past loss experience, adjusted for changes in trends
and conditions of the certain items, including:
- Adverse situations that may affect specific borrowers' ability to
repay;
- Current collateral values, where appropriate;
- Delinquencies and non-performing loans;
- Amount and timing of future cash flows expected on impaired loans;
- Criticized and classified loans;
- Credit concentrations by credit type, industry, geography;
- Recoveries and dispositions of balances previously charge-off;
- Volume and terms of loans;
- Loan size and complexity;
- Competition and bank size;
- Local market areas and national economic conditions;
- Effects of changes in lending policies and procedures;
47
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES...CONTINUED
- Experience, ability, and depth of lending management and credit
administration staff; and
- Effects of legal and regulatory developments.
Individually significant loans and major lending areas are reviewed periodically
to determine potential problems at an early date. The allowance for loan and
lease losses is increased by charges to earnings and decreased by charge-offs
(net of recoveries).
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
current value of the collateral, reduced by anticipated costs of disposition.
The Company considers its investment in one-to-four residential loans, consumer
and home equity loans to be homogeneous and therefore evaluates such loans for
impairment on a pooled basis.
(H) PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less depreciation. Depreciation is
computed on a straight-line method over the estimated useful lives or the term
of the related lease. The estimated useful life for office buildings is 15 - 40
years and the estimated useful life for furniture, fixtures, and equipment is 3
- 10 years. Interest is capitalized for any significant building projects. For
additional information relating to premises and equipment, see Note 5.
(I) REAL ESTATE OWNED
Property acquired by foreclosure or deed in lieu of foreclosure is carried at
the lower of cost or estimated fair value, less selling costs. Costs, excluding
interest, relating to the improvement of property are capitalized, whereas those
relating to holding the property are charged to expense. Fair value is
determined as the amount that could be reasonably expected in a current sale
(other than a forced or liquidation sale) between a willing buyer and a willing
seller. If the fair value of the asset minus the estimated cost to sell is less
than the cost of the property, a loss is recognized and the asset carrying value
is reduced.
(J) BUSINESS COMBINATIONS AND INTANGIBLE ASSETS
Acquisitions are accounted for using the purchase accounting method as
prescribed by Statement of Financial Accounting Standard ("SFAS") Number ("No.")
141, Business Combinations. Purchase accounting requires the total purchase
price to be allocated to the estimated fair values of assets acquired and
liabilities assumed, including certain intangible assets. Goodwill is recorded
for the residual amount in excess of the net fair values.
Adjustment of the allocated purchase price may be 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.
Core deposit intangible represents the intangible value of depositor
relationships resulting from deposit liabilities assumed in acquisitions and are
amortized using an accelerated method based on an estimated runoff of the
related deposits, not exceeding 10 years. The useful life of the core deposit
intangible is reevaluated on an annual basis, with any changes in estimated
useful life accounted for prospectively over the revised remaining life. For
additional information relating to core deposit intangibles, see Note 6.
On an annual basis, as required by SFAS No. 142, Goodwill and Other Intangible
Assets, the Company tests goodwill for impairment at the subsidiary level
annually during the third quarter. In addition, goodwill of a subsidiary shall
be tested for impairment between annual tests if an event occurs or
circumstances change that would more likely than not reduce the fair value of a
reporting unit below its carrying amount. For additional information relating to
goodwill, see Note 6.
(K) INCOME TAXES
Deferred tax assets and liabilities are recognized for estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of assets and liabilities and their respective tax bases. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. For
additional information relating to income taxes, see Note 12.
48
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES...CONTINUED
(L) ADVERTISING AND PROMOTION
Advertising and promotion costs are recognized in the period incurred.
(M) STOCK-BASED COMPENSATION
In December 2004, the FASB issued SFAS No. 123 (R), Share-Based Payment, which
replaces SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No. 123 (R)
requires that the compensation cost relating to the share-based payment
transactions be recognized in the financial statements over the requisite
service period. The Statement covers a wide range of share-based compensation
arrangements including stock options, restricted share plans, performance-based
awards, share appreciation rights, and employee purchase plans. The Statement
requires entities to measure the cost of the employee services received in
exchange for stock options based on the grant-date fair value of the award, and
to recognize the cost over the period the employee is required to provide
services for the award. SFAS No. 123 (R) permits entities to use any
option-pricing model that meets the fair value objective in the Statement.
The Company adopted SFAS No. 123 (R) Share-Based Payment, as of January 1, 2006
and, accordingly, has determined compensation cost based on the fair value of
the stock options at the grant date. FASB also issued several Staff Positions
during 2005 and 2006 and all applicable positions are being followed by the
Company. The Company adopted the modified prospective transition method in
reporting financial statement results in the current and for future reporting
periods. Under the modified prospective method, SFAS No. 123 (R) applies to new
awards and to awards modified, repurchased, or cancelled after the effective
date; accordingly, the prior interim and annual periods do not reflect restated
amounts. Compensation cost has been measured using the fair value of an award on
the grant date and is recognized over the service period, which is the vesting
period. Compensation cost related to the non- vested portion of awards
outstanding as of the date was based on the grant-date fair value of those
awards as calculated under the original provisions of SFAS No. 123; that is, the
Company is not required to re-measure the grant-date fair value estimate of the
unvested portion of award granted prior to the effective date of SFAS No. 123
(R).
The Company had applied APB Opinion No. 25 and related interpretations in
accounting for the stock-based compensation prior to January 1, 2006. Stock
options issued under the Company's stock option plan have no intrinsic value at
the grant date, and, therefore, no compensation cost was recognized in prior
years. For additional information relating to stock-based compensation, see Note
15.
(N) LONG-LIVED ASSETS
Long-lived assets, including core deposit intangibles, are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. An asset is deemed impaired
if the sum of the expected future cash flows is less than the carrying amount of
the asset. If impaired, an impairment loss is recognized to reduce the carrying
value of the asset to fair value. At December 31, 2007 and 2006, no assets were
considered impaired.
(O) MORTGAGE SERVICING RIGHTS
The Company recognizes the rights to service mortgage loans for others, whether
acquired or internally originated. Loan servicing rights are initially recorded
at fair value based on comparable market quotes and are amortized as other
expense in proportion to and over the period of estimated net servicing income.
Loan servicing rights are evaluated quarterly for impairment by discounting the
expected future cash flows, taking into consideration the estimated level of
prepayments based on current industry expectations and the predominant risk
characteristics of the underlying loans including loan type, note rate and loan
term. Impairment adjustments, if any, are recorded through a valuation
allowance. For additional information relating to mortgage servicing rights, see
Note 6.
As of December 31, 2007 and 2006, the carrying value of mortgage servicing
rights was approximately $1,262,000 and $1,168,000, respectively. Amortization
expense of $188,000, $193,000, and $276,000 was recognized in the years ended
December 31, 2007, 2006, and 2005, respectively. The servicing rights are
included in other assets on the balance sheet and are amortized over the period
of estimated net servicing income. There was no impairment of carrying value at
December 31, 2007 or 2006. At December 31, 2007, the fair value of mortgage
servicing rights was approximately $1,519,000.
(P) EARNINGS PER SHARE
Basic earnings per share represents income available to common stockholders
divided by the weighted-average number of shares of common stock outstanding
during the year. Diluted earnings per share reflects additional common shares
that would have been outstanding if dilutive potential shares had been issued,
as well as any adjustment to income that would result from the issuance.
Potential common shares that may be issued by the Company relate to outstanding
stock options, and are determined using the treasury stock method. Previous
period amounts are restated for the effect of stock dividends and splits. For
additional information relating earnings per share, see Note 14.
49
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES...CONTINUED
(Q) STOCK SPLIT
On November 29, 2006, the Board of Directors declared a three-for-two stock
split, payable to shareholders of record on December 11, 2006, payable December
14, 2006. On April 26, 2005 the Board of Directors declared a five-for-four
stock split, payable to shareholders of record on May 10, 2005, payable May 26,
2005. All prior period amounts have been restated to reflect the stock splits.
(R) LEASES
The Company leases certain land, premises and equipment from third parties under
operating and capital leases. The lease payments for operating lease agreements
are recognized on a straight-line basis. The present value of the future minimum
rental payments for capital leases is recognized as an asset when the lease is
formed. Lease improvements incurred at the inception of the lease are recorded
as an asset and depreciated over the initial term of the lease and lease
improvements incurred subsequently are depreciated over the remaining term of
the lease. For additional information relating to leases, see Note 19.
(S) COMPREHENSIVE INCOME
Comprehensive income includes net income, as well as other changes in
stockholders' equity that result from transactions and economic events other
than those with stockholders. The Company's only significant element of other
comprehensive income is unrealized gains and losses, net of tax expense
(benefit), on available-for-sale securities.
(T) RECLASSIFICATIONS
Certain reclassifications have been made to the 2006 and 2005 financial
statements to conform to the 2007 presentation.
2. CASH ON HAND AND IN BANKS
The subsidiary banks are required to maintain an average reserve balance with
either the Federal Reserve or in the form of cash on hand. The amount of this
required reserve balance at December 31, 2007 was $9,500,000.
50
3. INVESTMENT SECURITIES, AVAILABLE FOR SALE
A comparison of the amortized cost and estimated fair value of the Company's
investment securities designated as available-for-sale is presented below.
INVESTMENTS AS OF DECEMBER 31, 2007
Gross Unrealized Estimated
Weighted Amortized ------------------- Fair
(dollars in thousands) Yield Cost Gains Losses Value
---------------------- -------- --------- ------- -------- ----------
US GOVERNMENT AND FEDERAL AGENCY:
maturing within one year .......................... 3.66% $ 2,550 3 -- 2,553
GOVERNMENT SPONSORED ENTERPRISES:
maturing within one year .......................... 4.86% 947 -- (1) 946
maturing after one year through five years ........ 0.00% -- -- -- --
maturing after 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 .......................... 3.82% 1,741 5 (1) 1,745
maturing after one year through five years ........ 4.30% 3,928 45 (2) 3,971
maturing after 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% 277,625 9,981 (324) 287,282
-------- ------- -------- -------
MORTGAGE-BACKED SECURITIES .......................... 4.55% 346,085 693 (3,405) 343,373
FHLMC AND FNMA STOCK ................................ 5.74% 7,593 -- (1,804) 5,789
OTHER INVESTMENTS:
CERTIFICATES OF DEPOSITS WITH OVER 90 DAY MATURITY .. 5.06% 199 -- -- 199
FHLB AND FRB STOCK, AT COST ......................... 1.72% 59,815 -- -- 59,815
-------- ------- -------- -------
TOTAL INVESTMENTS .............................. 4.52% $695,181 10,678 (5,535) 700,324
======== ======= ======== =======
51
3. INVESTMENT SECURITIES, AVAILABLE FOR SALE...CONTINUED
INVESTMENTS AS OF DECEMBER 31, 2006
Gross Unrealized Estimated
Weighted Amortized ------------------- Fair
(dollars in thousands) Yield Cost Gains Losses Value
---------------------- -------- --------- ------- --------- ---------
US GOVERNMENT AND FEDERAL AGENCY:
maturing within one year .......................... 478.00% $ 10,982 -- (6) 10,976
GOVERNMENT SPONSORED ENTERPRISES:
maturing within one year .......................... 49.00% 8,177 -- (17) 8,160
maturing after one year through five years ........ 515.00% 648 -- -- 648
maturing after five years through ten years ....... 773.00% 352 5 -- 357
maturing after ten years .......................... 668.00% 153 1 -- 154
-------- ------- -------- -------
505.00% 9,330 6 (17) 9,319
-------- ------- -------- -------
STATE AND LOCAL GOVERNMENTS AND OTHER ISSUES:
maturing within one year .......................... 365.00% 2,190 2 (1) 2,191
maturing after one year through five years ........ 408.00% 5,736 43 (21) 5,758
maturing after five years through ten years ....... 492.00% 15,180 818 (11) 15,987
maturing after ten years .......................... 512.00% 276,756 11,794 (86) 288,464
-------- ------- -------- -------
508.00% 299,862 12,657 (119) 312,400
-------- ------- -------- -------
MORTGAGE-BACKED SECURITIES .......................... 421.00% 434,224 195 (7,869) 426,550
FHLMC AND FNMA STOCK ................................ 574.00% 7,593 218 -- 7,811
OTHER INVESTMENTS:
CERTIFICATES OF DEPOSITS WITH OVER 90 DAY MATURITY .. 483.00% 2,864 -- -- 2,864
FHLB AND FRB STOCK, AT COST ......................... 126.00% 55,717 -- -- 55,717
-------- ------- -------- -------
TOTAL INVESTMENTS .............................. 436.00% $820,572 13,076 (8,011) 825,637
======== ======= ======== =======
Maturities of securities do not reflect repricing opportunities present in
adjustable rate securities, nor do they reflect expected shorter maturities
based upon early prepayment of principal. Weighted yields on tax-exempt
investment securities exclude the tax effect.
The amortized cost of securities was as follows at:
December 31,
(dollars in thousands) 2005
---------------------- ------------
Government Sponsored Enterprises .................... $ 5,859
State and Local Governments and Other Issues ........ 303,126
Mortgage-backed Securities .......................... 596,508
FHLMC and FNMA stock ................................ 7,593
Certificates of Deposits with over 90 day maturity .. 2,085
FHLB and FRB stock .................................. 53,529
--------
$968,700
========
52
3. INVESTMENT SECURITIES, AVAILABLE FOR SALE...CONTINUED
Investments with an unrealized loss position at December 31, 2007:
Less than 12 months 12 months or more Total
-------------------- -------------------- --------------------
Fair Unrealized Fair Unrealized Fair Unrealized
(dollars in thousands) Value Loss Value Loss Value Loss
---------------------- ------- ---------- ------- ---------- ------- ----------
Government Sponsored Enterprises ............................. $ 739 2 -- -- 739 2
State and Local Governments and other issues ................. 19,762 287 4,371 37 24,133 324
Mortgage-backed Securities ................................... 34,178 388 222,449 3,017 256,627 3,405
FHLMC stock .................................................. 5,696 1,804 -- -- 5,696 1,804
------- ----- ------- ------- ------- -----
Total temporarily impaired securities ........................ $60,375 2,481 226,820 3,054 287,195 5,535
======= ===== ======= ======= ======= =====
Investments with an unrealized loss position at December 31, 2006:
Less than 12 months 12 months or more Total
-------------------- -------------------- --------------------
Fair Unrealized Fair Unrealized Fair Unrealized
(dollars in thousands) Value Loss Value Loss Value Loss
---------------------- ------- ---------- ------- ---------- ------- ----------
US Government and Federal Agency ............................. $10,976 6 -- -- 10,976 6
Government Sponsored Enterprises ............................. 4,688 2 4,003 15 8,691 17
State and Local Governments and other issues ................. 7,241 43 9,039 76 16,280 119
Mortgage-backed Securities ................................... 6,393 26 406,218 7,843 412,611 7,869
------- -- ------- ----- ------- -----
Total temporarily impaired securities ........................ $29,298 77 419,260 7,934 448,558 8,011
======= == ======= ===== ======= =====
As of December 31, 2007, there were 188 investments in an unrealized loss
position and were considered to be temporarily impaired and therefore an
impairment charge has not been recorded. Mortgage-backed securities have the
largest unrealized loss. These securities have underlying collateral consisting
of U.S. Government Sponsored Enterprise guaranteed mortgages. The unrealized
losses are primarily a function of changes in market interest rates between the
issue dates and the current measurement date. The fair value of these securities
declined from $412,611,000 at December 31, 2006 to $256,627,000 at December 31,
2007, and the unrealized loss declined from 1.9 percent of fair value to 1.3
percent of fair value for those same years. With the continued principal
reductions on these securities, and the potential for increased fair value in
the event of declines in intermediate term interest rates, the unrealized losses
are considered temporary.
Interest income includes tax-exempt interest for the years ended December 31,
2007, 2006, and 2005 of $13,427,000, $13,901,000, and $13,867,000, respectively.
Gross proceeds from sales of investment securities for the years ended December
31, 2007, 2006, and 2005 were approximately $55,501,000, $488,000 and
$116,139,000, respectively, resulting in gross gains of approximately $1,000, $0
and $471,000 and gross losses of approximately $9,000, $3,000 and $609,000
respectively. The cost of any investment sold is determined by specific
identification.
At December 31, 2007, the Company had investment securities with carrying values
of approximately $576,963,000 pledged as security for deposits of several local
government units, securities sold under agreements to repurchase, and as
collateral for treasury borrowings. At December 31, 2007, the Company had
qualified investment securities with carrying values of approximately
$24,646,000 pledged as collateral for advances with the FHLB.
53
4. LOANS RECEIVABLE, NET AND LOANS HELD FOR SALE
The following is a summary of loans receivable, net and loans held for sale at:
December 31,
-------------------------
(dollars in thousands) 2007 2006
---------------------- ----------- ----------
Residential first mortgage ..................... $ 689,238 758,921
Loans held for sale ............................ 40,123 35,135
Commercial real estate ......................... 1,617,076 1,165,617
Other commercial ............................... 636,351 691,667
Consumer ....................................... 206,724 218,640
Home equity .................................... 432,217 356,477
---------- ----------
3,621,729 3,226,457
Net deferred loan fees, premiums and discounts .. (10,194) (11,674)
Allowance for loan and lease losses ............. (54,413) (49,259)
---------- ----------
$3,557,122 3,165,524
========== ==========
The following is a summary of activity in allowance for loan and lease losses:
Years ended December 31,
------------------------------
(dollars in thousands) 2007 2006 2005
---------------------- -------- ------- -------
Balance, beginning of period .. $49,259 38,655 26,492
Acquisitions .................. 639 6,091 6,627
Net charge offs ............... (2,165) (679) (487)
Provision ..................... 6,680 5,192 6,023
------- ------- -------
Balance, end of period ........ $54,413 49,259 38,655
======= ======= =======
Following is an allocation of the allowance for loan and lease losses and the
percent of loans in each category at:
DECEMBER 31, 2007 December 31, 2006
--------------------- ----------------------
PERCENT OF Percent of
OF LOANS IN of loans in
(dollars in thousands) AMOUNT CATEGORY Amount category
---------------------- ------- ----------- ------- -----------
Residential first mortgage and loans held for sale .. $ 4,755 20.2% $ 5,421 24.6%
Commercial real estate .............................. 23,010 44.6% 16,741 36.1%
Other commercial .................................... 17,453 17.6% 18,361 21.5%
Consumer ............................................ 4,680 11.9% 4,649 6.8%
Home equity ......................................... 4,515 5.7% 4,087 11.0%
------- ----- ------- -----
$54,413 100.0% $49,259 100.0%
======= ===== ======= =====
54
4. LOANS RECEIVABLE, NET AND LOANS HELD FOR SALE...CONTINUED
The following is a summary of the non-performing loans:
Years ended December 31,
------------------------
(dollars in thousands) 2007 2006 2005
---------------------- ------- ----- -----
Impaired loans .................................. $12,152 6,065 5,252
Average recorded investment in impaired loans ... 7,311 5,451 5,090
Impairment allowance ............................ 2,827 -- --
Non-accrual loans ............................... 8,560 6,065 5,252
Accruing loans 90 days or more overdue .......... 2,685 1,345 4,505
Interest income that would have been recorded on non-accrual loans if such loans
had been current for the entire period would have been approximately $683,000,
$462,000, and $359,000 for the years ended December 31, 2007, 2006, and 2005.
Interest income recognized on non-accruing loans for the years ended December
31, 2007, 2006, and 2005 was not significant.
At December 31, 2007, the Company had $2,084,698,000 in variable rate loans and
$1,537,031,000 in fixed rate loans. The weighted average interest rate on loans
was 7.90 percent and 7.64 percent at December 31, 2007 and 2006, respectively.
At December 31, 2007, 2006 and 2005, loans sold and serviced for others were
$177,173,000, $177,518,000, and $145,279,000, respectively. At December 31,
2007, the Company had qualified loans of approximately $1,678,830,000 pledged as
collateral for advances with the FHLB.
Substantially all of the Company's loan receivables are with customers within
the Company's market areas. Although the Company has a diversified loan
portfolio, a substantial portion of its customers' ability to honor their
contracts is dependent upon the economic performance in the Company's market
areas. The subsidiary banks are subject to regulatory limits for the amount of
loans to any individual borrower and all subsidiary banks are in compliance as
of December 31, 2007. No borrower had outstanding loans or commitments exceeding
10 percent of the Company's consolidated stockholders' equity as of December 31,
2007.
The combined total of lot acquisition loans to borrowers who intend to construct
a primary residence on the lot, and other construction and land acquisition and
development loans is $1,020,901,000 and represents 28.3 percent of the total
loans as of December 31, 2007. The December 31, 2006 total was $789,000,000, or
24.5 percent of total loans. Increases incurred in each subsidiary with the
largest amounts outstanding centered in the high growth areas of Western
Montana, and Couer d'Alene, Sandpoint, and Boise Idaho. The geographic
dispersion, in addition to the normal credit standards described in the above
paragraphs, further mitigates the risk of loss in the portfolio.
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and letters of
credit, and involve, to varying degrees, elements of credit risk. The Company's
exposure to credit loss in the event of nonperformance by the other party to the
financial instrument for commitments to extend credit is represented by the
contractual amount of those instruments. The Company uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments. The Company did not have any outstanding
commitments on impaired loans as of December 31, 2007.
The Company had outstanding commitments as follows:
December 31,
--------------------
(dollars in thousands) 2007 2006
---------- -------
Loans and loans in process ........ $ 682,679 653,056
Unused consumer lines of credit ... 249,397 224,455
Letters of credit ................. 72,105 63,375
---------- -------
$1,004,181 940,886
========== =======
Substantially all of the loans held for sale at December 31, 2007 and 2006 were
committed to be sold.
55
4. LOANS RECEIVABLE, NET AND LOANS HELD FOR SALE...CONTINUED
The Company has entered into transactions with its executive officers,
directors, significant shareholders, and their affiliates. The aggregate amount
of loans to such related parties at December 31, 2007 and 2006 was approximately
$97,790,000 and $93,258,000. During 2007, new loans to such related parties were
approximately $59,047,000 and repayments were approximately $54,515,000.
5. PREMISES AND EQUIPMENT, NET
Premises and equipment, net consist of the following at:
December 31,
--------------------
(dollars in thousands) 2007 2006
---------------------- --------- --------
Land ............................................ $ 19,339 18,573
Office buildings and construction in progress ... 104,281 91,964
Furniture, fixtures and equipment ............... 47,806 42,187
Leasehold improvements .......................... 5,347 4,302
Accumulated depreciation ........................ (53,024) (46,267)
-------- -------
$123,749 110,759
======== =======
Depreciation expense for the years ended December 31, 2007, 2006, and 2005 was
$8,508,000, $6,746,000, and $5,349,000, respectively. Interest expense
capitalized for various construction projects for the years ended December 31,
2007 and 2006 was $264,000 and $297,000, respectively, and there was no interest
capitalized for the year ended December 31, 2005.
56
6. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table sets forth information regarding the Company's core deposit
intangibles and mortgage servicing rights:
Mortgage
Core Deposit Servicing
(dollars in thousands) Intangible Rights (1) Total
---------------------- ------------ ---------- ------
AS OF DECEMBER 31, 2007
Gross carrying value $ 25,706
Accumulated amortization (11,743)
--------
Net carrying value $ 13,963 1,262 15,225
========
AS OF DECEMBER 31, 2006
Gross carrying value $ 23,575
Accumulated amortization (8,825)
--------
Net carrying value $ 14,750 1,168 15,918
========
WEIGHTED-AVERAGE AMORTIZATION PERIOD
(Period in years) 10.0 9.8 10.0
AGGREGATE AMORTIZATION EXPENSE
For the year ended December 31, 2007 $ 3,202 188 3,390
For the year ended December 31, 2006 $ 2,024 193 2,217
For the year ended December 31, 2005 1,470 276 1,746
ESTIMATED AMORTIZATION EXPENSE
For the year ended December 31, 2008 $ 3,032 85 3,117
For the year ended December 31, 2009 2,738 83 2,821
For the year ended December 31, 2010 2,369 81 2,450
For the year ended December 31, 2011 1,662 79 1,741
For the year ended December 31, 2012 1,300 76 1,376
(1) Gross carrying value and accumulated amortization are not readily
available
The following is a summary of activity in goodwill for the year ended December
31, 2007.
(dollars in thousands) Goodwill
---------------------- --------
Balance as of December 31, 2006 $129,716
Sale of Western's Lewistown branch (454)
Adjustment for FCB-Billings' building (760)
Adjustment for FCB-Billings' loan 3,605
Acquisition of North Side State Bank 8,233
Other adjustments (39)
--------
Balance as of December 31, 2007 $140,301
========
On April 30, 2007, North Side was acquired and became a branch of 1st Bank. The
purchase price included core deposit intangible of $2,524,000 and goodwill of
$8,233,000.
As a condition of acquiring First Citizens Bank of Billings, a subsidiary of CDC
which was acquired on October 1, 2006, bank regulators required Western to
divest of Western's branch in Lewistown, Montana. Western was acquired in
February 2001 through the purchase of WesterFed Financial Corporation
("WesterFed"), its parent company. The WesterFed acquisition was accounted for
57
6. GOODWILL AND OTHER INTANGIBLE ASSETS...CONTINUED
using the purchase method of accounting with a portion of goodwill allocated to
Western's Lewistown branch. With the January 2007 sale of the Lewistown branch,
$454,000 of goodwill associated with such branch was removed.
In March 2007, Western adjusted its purchase price allocation for First Citizens
Bank of Billings based upon new information available to management concerning
the estimated fair value of property as of the acquisition date. Accordingly,
the fair value of such property was increased by $1,250,000 with a related
$490,000 increase in deferred tax liability, resulting in a $760,000 decrease in
goodwill.
In February 2007, Western became aware of a preacquisition contingency in
regards to a loan that was impaired as of the October 1, 2006 acquisition of
First Citizens Bank of Billings. After taking into consideration recoveries, the
amount of impairment determined to have occurred on or before the acquisition
date is estimated to be $5,948,000 which was considered a reduction of the fair
value of the loans on acquisition date with a corresponding after-tax adjustment
of $3,605,000 to goodwill. No further adjustment to the fair value of the loan
is expected. Management continues to pursue additional recoveries and remedies
from the guarantors and other third parties, with any recoveries occurring after
September 30, 2007 recorded in earnings in the period in which the recoveries
were received or accrued.
7. DEPOSITS
Deposits consist of the following at:
DECEMBER 31, 2007 December 31, 2006
----------------------------------- -------------------------------------
WEIGHTED Weighted
(DOLLARS IN THOUSANDS) AVERAGE RATE AMOUNT PERCENT Average Rate Amount Percent
---------------------- ------------ ---------- ------- ------------ ---------- -------
Demand accounts 0.0% $ 788,087 248.0% 0.0% $ 829,355 259.0%
---------- ----- ---------- -----
NOW accounts ................................... 1.0% 472,936 149.0% 8.0% 452,766 141.0%
Savings accounts ............................... 1.0% 265,182 83.0% 1.0% 271,932 85.0%
Money market demand accounts ................... 36.0% 803,668 252.0% 31.0% 708,384 221.0%
Certificate of deposits:
100% and lower ............................ 1,659 1.0% 2,289 1.0%
101% to 200% .............................. 1,375 0.0% 9,469 3.0%
201% to 300% .............................. 33,130 1.0% 73,793 23.0%
301% to 400% .............................. 154,511 49.0% 179,558 56.0%
401% to 500% .............................. 353,404 111.0% 290,015 9.0%
501% to 600% .............................. 309,345 97.0% 216,682 67.0%
601% to 700% .............................. 134 0.0% 257 0.0%
701% and higher ............................ 32 0.0% 18 0.0%
Brokered 290 to 310% ....................... 1,015 0.0% 173,015 54.0%
---------- ----- ---------- -----
Total certificate of deposits ...... 47.0% 854,605 259.0% 4.0% 945,096 294.0%
---------- ----- ---------- -----
Total interest bearing deposits ................ 33.0% 2,396,391 743.0% 28.0% 2,378,178 741.0%
---------- ----- ---------- -----
Total deposits ................................. 25.0% $3,184,478 991.0% 21.0% $3,207,533 100.0%
========== ===== ========== =====
Deposits with a balance $100,000 and greater ... $1,615,558 $1,649,029
========== ==========
58
7. DEPOSITS...CONTINUED
At December 31, 2007, scheduled maturities of certificate of deposits are as
follows:
Years ending December 31,
-----------------------------------------------------------------
(dollars in thousands) TOTAL 2008 2009 2010 2011 Thereafter
------------------------- -------- -------- -------- -------- -------- ----------
1.00% and lower .......... $ 1,659 1,547 112 -- -- --
1.01% to 2.00% ........... 1,375 1,257 114 -- 2 2
2.01% to 3.00% ........... 33,130 28,804 3,358 153 120 695
3.01% to 4.00% ........... 154,511 122,818 20,089 6,219 2,903 2,482
4.01% to 5.00%............ 353,404 284,584 36,577 20,648 5,687 5,908
5.01% to 6.00% ........... 309,345 258,147 28,337 10,113 8,495 4,253
6.01% to 7.00% ........... 134 111 -- 23 -- --
7.01% to 8.00%............ 32 13 -- -- -- 19
Brokered 2.90 to 5.05% ... 1,015 1,015 -- -- -- --
-------- ------- ------ ------ ------ ------
$854,605 698,296 88,587 37,156 17,207 13,359
======== ======= ====== ====== ====== ======
Interest expense on deposits is summarized as follows:
Years ended December 31,
----------------------------
(dollars in thousands) 2007 2006 2005
------------------------------ ------- ------ --------
NOW accounts .................... $ 4,708 2,976 889
Savings accounts ................ 2,679 2,336 1,130
Money market demand accounts ... 27,248 18,043 7,552
Certificate of deposits ......... 46,824 34,792 16,134
------- ------- -------
$81,459 58,147 25,705
======= ======= =======
The Company reclassified approximately $4,115,000 and $3,837,000 of overdraft
demand deposits to loans as of December 31, 2007 and 2006, respectively. The
Company has entered into transactions with its executive officers, directors,
significant shareholders, and their affiliates. The aggregate amount of deposits
with such related parties at December 31, 2007, and 2006 was approximately
$67,241,000 and $70,991,000, respectively.
8. ADVANCES FROM FHLB OF SEATTLE
Advances from the FHLB consist of the following:
Totals as of
Maturing in years ending December 31, December 31,
----------------------------------------------------- -----------------
(dollars in thousands) 2008 2009 2010 2011 2012 Thereafter 2007 2006
---------------------- -------- ----- ----- ---- ------ ---------- ------- -------
2.01% to 3.00% ...... $ -- -- -- -- -- -- -- 87,500
3.01% to 4.00% ...... 3,000 250 750 -- 40,000 -- 44,000 57,600
4.01% to 5.00% ...... 429,917 2,000 -- 493 42,000 804 475,214 46,075
5.01% to 6.00% ...... 18,133 1 -- -- -- 1,105 19,239 114,878
6.01% to 7.00% ...... 74 48 24 -- -- 250 396 1,069
7.01% to 8.00% ...... 100 -- -- -- -- -- 100 400
-------- ----- --- --- ------ ----- ------- -------
$451,224 2,299 774 493 82,000 2,159 538,949 307,522
======== ===== === === ====== ===== ======= =======
These advances are collateralized by stock of the FHLB of Seattle owned by the
Company and a blanket assignment of the unpledged qualifying loans and
investments. The total amount of advances available, subject to collateral
availability, as of December 31, 2007 was approximately $399,563,000.
59
8. ADVANCES FROM FHLB OF SEATTLE...CONTINUED
The weighted average fixed interest rate on these advances was 4.41 percent and
4.15 percent at December 31, 2007 and 2006, respectively. As of December 31,
2007, the FHLB holds callable options, which may be exercised after a
predetermined time as shown below as of December 31, 2007:
Interest Earliest
(dollars in thousands) Amount Rate Maturity Call
---------------------- -------- ------------- -------- --------
Call Terms
Quarterly at FHLB option ........................ $ 3,000 5.37% 2008 2008
Quarterly at FHLB option ........................ 15,000 5.52% 2008 2008
If three month LIBOR is greater than 8% on
quarterly measurement date after initial term.. 82,000 3.49% - 4.83% 2012 2008
--------
$100,000
========
9. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase consist of the following at:
DECEMBER 31, 2007
BOOK MARKET
WEIGHTED VALUE OF VALUE OF
REPURCHASE AVERAGE UNDERLYING UNDERLYING
(DOLLARS IN THOUSANDS) AMOUNT FIXED RATE ASSETS ASSETS
---------------------- ---------- ---------- ---------- ----------
SECURITIES SOLD UNDER AGREEMENTS
TO REPURCHASE WITHIN:
OVERNIGHT..................... $177,392 3.56% 183,909 183,404
TERM OVER 90 DAYS............. 649 5.05% 654 658
-------- -------- -------
$178,041 3.57% $184,563 184,062
======== ======== =======
December 31, 2006
(dollars in thousands)
----------------------
Securities sold under agreements
to repurchase within:
Overnight ...................... $150,601 4.57% 155,622 154,561
Term up to 30 days ............. 10,191 3.62% 9,386 9,331
Term over 90 days .............. 9,424 5.07% 9,743 10,096
-------- -------- -------
$170,216 4.54% $174,751 173,988
======== ======== =======
The securities, consisting of U.S. Agency and U.S. Government Sponsored
Enterprises issued or guaranteed mortgage-backed securities, subject to
agreements to repurchase are for the same securities originally sold, and are
held in a custody account by a third party. For the years ended December 31,
2007 and 2006, securities sold under agreements to repurchase averaged
approximately $171,290,000 and $153,314,000, respectively, and the maximum
outstanding at any month end during the year was approximately $193,421,000 and
$164,338,000, respectively.
60
10. SUBORDINATED DEBENTURES
Trust Preferred Securities were issued by the Company's four trust subsidiaries,
whose common stock is wholly-owned by the Company, in conjunction with the
Company issuing Subordinated Debentures to the trust subsidiaries. The terms of
the Subordinated Debentures are the same as the terms of the Trust Preferred
Securities. The Company guaranteed the payment of distributions and payments for
redemption or liquidation of the Trust Preferred Securities to the extent of
funds held by the trust subsidiaries. The obligations of the Company under the
Subordinated Debentures together with the guarantee and other back-up
obligations, in the aggregate, constitute a full and unconditional guarantee by
the Company of the obligations of all trusts under the Trust Preferred
Securities.
The Trust Preferred Securities are subject to mandatory redemption upon
repayment of the Subordinated Debentures at their stated maturity date or the
earlier redemption in an amount equal to their liquidation amount plus
accumulated and unpaid distributions to the date of redemption. Interest
distributions are payable quarterly. The Company may defer the payment of
interest at any time from time to time for a period not exceeding 20 consecutive
quarters provided that the deferral period does not extend past the stated
maturity. During any such deferral period, distributions on the Trust Preferred
Securities will also be deferred and the Company's ability to pay dividends on
its common shares will be restricted.
Subject to approval by the Federal Reserve Bank, the Trust Preferred Securities
may be redeemed at par prior to maturity at the Company's option on or after the
redemption date. The Trust Preferred Securities may also be redeemed at any time
in whole (but not in part) for the Trusts in the event of unfavorable changes in
laws or regulations that result in (1) subsidiary trusts becoming subject to
federal income tax on income received on the Subordinated Debentures, (2)
interest payable by the Company on the Subordinated
Debentures becoming non-deductible for federal tax purposes, (3) the requirement
for the trusts to register under the Investment Company Act of 1940, as amended,
or (4) loss of the ability to treat the Trust Preferred Securities as "Tier 1
Capital" under the Federal Reserve Bank capital adequacy guidelines.
The terms of the Subordinated Debentures, arranged by maturity date, is
reflected in the table below:
RATE AT RATE UPON
DEBENTURES ISSUED TO DECEMBER FIXED/ CONVERSION MATURITY REDEMPTION
(dollars in thousands) AMOUNT 31, 2007 VARIABLE TO VARIABLE DATE DATE
---------------------- -------- --------------------- ------------- --------------------- -------- ----------
Glacier Capital Trust II.... $ 46,393 5.788% Fixed 5 years 3 mo LIBOR plus 2.75% 04/07/34 04/07/09
Citizens Capital Trust I.... 5,155 3 mo Libor plus 2.65% Variable unchanged 06/17/34 06/17/09
Glacier Capital Trust III... 36,083 6.078% Fixed 5 years 3 mo LIBOR plus 1.29% 04/07/36 04/07/11
Glacier Capital Trust IV.... 30,928 7.235% Fixed 5 years 3 mo LIBOR plus 1.57% 09/15/36 09/15/11
--------
$118,559
========
61
11. REGULATORY CAPITAL
The Federal Reserve Bank has adopted capital adequacy guidelines pursuant to
which it assesses the adequacy of capital in supervising a bank holding company.
The following table illustrates the Federal Reserve Bank's adequacy guidelines
and the Company's and subsidiaries banks' compliance with those guidelines as of
December 31, 2007. Three of the five subsidiaries acquired as result of the
acquisition of CDC were merged into other Company subsidiaries during 2007 and
their regulatory capital was moved to the subsidiary they merged into. For the
year ended December 31, 2006 regulatory capital, the regulatory capital is
combined for the five CDC subsidiaries.
Minimum capital Well capitalized
Actual requirement requirement
--------------- --------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------- ------
Tier 1 capital (to risk weighted assets)
Consolidated......................... 484,394 12.17% 159,261 4.00% 238,892 6.00%
Mountain West........................ 88,962 10.45% 34,056 4.00% 51,085 6.00%
Glacier.............................. 85,467 10.75% 31,810 4.00% 47,715 6.00%
First Security....................... 87,818 13.67% 25,705 4.00% 38,558 6.00%
Western.............................. 57,212 14.22% 16,092 4.00% 24,139 6.00%
1st Bank............................. 32,659 11.27% 11,589 4.00% 17,383 6.00%
Big Sky ............................. 33,497 11.04% 12,136 4.00% 18,204 6.00%
Valley .............................. 24,948 11.68% 8,545 4.00% 12,817 6.00%
Whitefish............................ 18,671 10.96% 6,814 4.00% 10,221 6.00%
Citizens............................. 17,724 11.92% 5,948 4.00% 8,923 6.00%
First Bank-MT......... 12,353 10.79% 4,578 4.00% 6,867 6.00%
Morgan............................... 8,841 14.10% 2,508 4.00% 3,761 6.00%
Total capital (to risk weighted assets)
Consolidated.............. 534,221 13.42% 318,523 8.00% 398,153 10.00%
Mountain West........................ 99,351 11.67% 68,113 8.00% 85,141 10.00%
Glacier.............................. 94,773 11.92% 63,620 8.00% 79,525 10.00%
First Security....................... 95,878 14.92% 51,410 8.00% 64,263 10.00%
Western.............................. 62,263 15.48% 32,185 8.00% 40,231 10.00%
1st Bank............................. 36,218 12.50% 23,178 8.00% 28,972 10.00%
Big Sky ............................. 37,300 12.29% 24,273 8.00% 30,341 10.00%
Valley .............................. 27,621 12.93% 17,089 8.00% 21,362 10.00%
Whitefish............................ 20,651 12.12% 13,629 8.00% 17,036 10.00%
Citizens............................. 19,588 13.17% 11,897 8.00% 14,871 10.00%
First Bank-MT........................ 13,785 12.04% 9,156 8.00% 11,445 10.00%
Morgan............................... 9,625 15.35% 5,015 8.00% 6,269 10.00%
Tier 1 capital (to average assets)
Consolidated......................... 484,394 10.48% 184,865 4.00% 231,081 5.00%
Mountain West........................ 88,962 9.01% 39,497 4.00% 49,371 5.00%
Glacier.............................. 85,467 9.62% 35,553 4.00% 44,441 5.00%
First Security....................... 87,818 11.11% 31,619 4.00% 39,523 5.00%
Western.............................. 57,212 11.18% 20,470 4.00% 25,588 5.00%
1st Bank............................. 32,659 7.41% 17,623 4.00% 22,029 5.00%
Big Sky ............................. 33,497 11.17% 11,997 4.00% 14,996 5.00%
Valley 24,948 9.03% 11,057 4.00% 13,821 5.00%
Whitefish 18,671 9.63% 7,753 4.00% 9,691 5.00%
Citizens 17,724 10.10% 7,017 4.00% 8,772 5.00%
First Bank-MT 12,353 9.26% 5,334 4.00% 6,668 5.00%
Morgan 8,841 10.41% 3,398 4.00% 4,248 5.00%
62
11. REGULATORY CAPITAL... CONTINUED
The following table illustrates the Federal Reserve Bank's adequacy guidelines
and the Company's and subsidiary banks' compliance with those guidelines as of
December 31, 2006:
Minimum capital Well capitalized
Actual requirement requirement
--------------- --------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------- ------
Tier 1 capital (to risk weighted assets)
Consolidated......................... 424,479 12.10% 140,350 4.00% 210,525 6.00%
Mountain West........................ 74,222 10.39% 28,567 4.00% 42,851 6.00%
Glacier.............................. 71,462 11.12% 25,696 4.00% 38,544 6.00%
First Security....................... 76,408 13.58% 22,501 4.00% 33,752 6.00%
CDC.................................. 33,711 10.88% 12,388 4.00% 18,582 6.00%
Western.............................. 46,949 15.12% 12,422 4.00% 18,633 6.00%
1st Bank............................. 19,899 10.24% 7,773 4.00% 11,660 6.00%
Big Sky ............................. 29,696 11.50% 10,332 4.00% 15,497 6.00%
Valley .............................. 21,852 11.31% 7,731 4.00% 11,596 6.00%
Whitefish............................ 16,803 11.50% 5,847 4.00% 8,770 6.00%
Citizens............................. 15,470 10.53% 5,877 4.00% 8,816 6.00%
Morgan............................... 8,749 15.63% 2,239 4.00% 3,359 6.00%
Total capital (to risk weighted assets)
Consolidated......................... 468,504 13.35% 280,700 8.00% 350,876 10.00%
Mountain West........................ 82,563 11.56% 57,135 8.00% 71,418 10.00%
Glacier.............................. 78,802 12.27% 51,393 8.00% 64,241 10.00%
First Security....................... 83,471 14.84% 45,003 8.00% 56,254 10.00%
CDC.................................. 37,603 12.14% 24,776 8.00% 30,970 10.00%
Western.............................. 50,906 16.39% 24,845 8.00% 31,056 10.00%
1st Bank............................. 22,329 11.49% 15,546 8.00% 19,433 10.00%
Big Sky ............................. 32,934 12.75% 20,663 8.00% 25,829 10.00%
Valley .............................. 24,270 12.56% 15,462 8.00% 19,327 10.00%
Whitefish............................ 18,630 12.75% 11,693 8.00% 14,617 10.00%
Citizens............................. 17,312 11.78% 11,755 8.00% 14,694 10.00%
Morgan............................... 9,450 16.88% 4,479 8.00% 13,000 10.00%
Tier 1 capital (to average assets)
Consolidated......................... 424,479 9.77% 173,825 4.00% 217,281 5.00%
Mountain West........................ 74,222 8.52% 34,842 4.00% 43,553 5.00%
Glacier.............................. 71,462 9.43% 30,316 4.00% 37,895 5.00%
First Security....................... 76,408 10.47% 29,179 4.00% 36,474 5.00%
CDC.................................. 33,711 9.01% 14,966 4.00% 18,708 5.00%
Western.............................. 46,949 11.55% 16,263 4.00% 20,329 5.00%
1st Bank............................. 19,899 6.50% 12,246 4.00% 15,307 5.00%
Big Sky ............................. 29,696 10.76% 11,037 4.00% 13,797 5.00%
Valley .............................. 21,852 8.14% 10,744 4.00% 13,430 5.00%
Whitefish............................ 16,803 8.97% 7,493 4.00% 9,367 5.00%
Citizens............................. 15,470 9.81% 6,310 4.00% 7,888 5.00%
Morgan............................... 8,749 10.29% 3,400 4.00% 4,249 5.00%
The Federal Deposit Insurance Corporation Improvement Act generally restricts a
depository institution from making any capital distribution (including payment
of a dividend) or paying any management fee to its holding company if the
institution would thereafter be capitalized at less than 8 percent total capital
(to risk weighted assets), 4 percent tier 1 capital (to risk weighted assets),
or a 4
63
11. REGULATORY CAPITAL... CONTINUED
percent tier 1 capital (to average assets). At December 31, 2007 and 2006, each
of the subsidiary banks' capital measures exceed the highest supervisory
threshold, which requires total capital (to risk weighted assets) of at least 10
percent, tier 1 capital (to risk weighted assets) of at least 6 percent, and a
tier 1 capital (to average assets) of at least 5 percent. Each of the subsidiary
banks was considered well capitalized by the respective regulator as of December
31, 2007 and 2006. There are no conditions or events since year-end that
management believes have changed the Company's or subsidiaries risk-based
capital category.
The subsidiary banks are subject to certain restrictions on the amount of
dividends that they may declare without prior regulatory approval. At December
31, 2007, approximately $111,038,000 of retained earnings was available for
dividend declaration without prior regulatory approval.
12. FEDERAL AND STATE INCOME TAXES
The following is a summary of consolidated income tax expense for:
Years ended December 31,
--------------------------
(dollars in thousands) 2007 2006 2005
---------------------- ------- ------ -------
Current:
Federal................................ $29,016 26,740 22,099
State.................................. 6,491 6,317 5,416
------- ------ ------
Total current tax expense .......... 35,507 33,057 27,515
------- ------ ------
Deferred:
Federal................................ (348) (1,453) (1,955)
State.................................. (72) (347) (249)
------- ------ ------
Total deferred tax (income) expense.. (420) (1,800) (2,204)
------- ------ ------
Total income tax expense .......... $35,087 31,257 25,311
======= ====== ======
Combined federal and state income tax exp federal statutory corporate tax rate
as for
Years ended December 31,
------------------------
2007 2006 2005
---- ---- ----
Federal statutory rate........................... 35.0% 35.0% 35.0%
State taxes, net of federal income tax benefit .. 4.0% 4.2% 4.3%
Tax-exempt interest income ...................... -4.4% -5.0% -5.9%
Other, net....................................... -0.8% -0.4% -0.8%
---- ---- ----
33.8% 33.8% 32.6%
==== ==== ====
64
12. FEDERAL AND STATE INCOME TAXES...CONTINUED
The tax effect of temporary differences which give rise to a significant portion
of deferred tax assets and deferred tax liabilities are as follows:
December 31,
-------------------
(dollars in thousands) 2007 2006
---------------------- -------- -------
Deferred tax assets:
Allowance for loan and lease losses................ $ 21,359 19,777
Deferred compensation.............................. 2,542 2,535
Stock based compensation........................... 2,236 909
Other.............................................. 1,555 2,371
-------- -------
Total gross deferred tax assets ........ 27,692 25,592
-------- -------
Deferred tax liabilities:
Federal Home Loan Bank stock dividends............ (10,033) (10,629)
Fixed assets, due to differences in depreciation.. (5,025) (4,781)
Intangibles....................................... (6,930) (6,030)
Deferred loan costs............................... (2,745) (2,514)
Available-for-sale securities .................... (2,027) (1,996)
Other............................................. (1,413) (1,569)
-------- -------
Total gross deferred tax liabilities .......... (28,173) (27,519)
-------- -------
Net deferred tax liability .............. $ (481) (1,927)
======== =======
The Company and its subsidiary banks 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 has operations in
Washington, neither Wyoming nor Washington imposes a corporate level income tax.
All required income tax returns have been timely filed. Income tax returns for
the years ended December 31, 2004, 2005, 2006 and 2007 remain subject to
examination by federal, Montana, Idaho and Utah tax authorities and income tax
returns for the year ended December 31, 2003 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. In accordance
with FIN 48, the Company reclassified the unrecognized tax benefit amount from a
deferred tax liability to a current tax liability. A reconciliation of the
beginning and ending amounts of unrecognized tax benefits is as follows:
Dollars in
Thousands
----------
Balance at January 1, 2007.................................. $300
Reduction of unrecongized tax benefits for expired periods.. (90)
----
Balance at December 31, 2007................................ $210
====
If the unrecognized tax benefit amount at December 31, 2007 was recognized, it
would decrease the Company's effective tax rate from 33.8 percent to 33.6
percent. The Company 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 years
ended December 31, 2007 and 2006, the Company recognized $0 interest expense and
recognized $0 penalty with respect to income tax liabilities. The Company had
approximately $50,000 and $0 accrued for the payment of interest at December 31,
2007 and 2006, respectively. The Company had accrued $0 for the payment of
penalties at December 31, 2007 and 2006, respectively.
65
12. FEDERAL AND STATE INCOME TAXES...CONTINUED
There is no valuation allowance at December 31, 2007 and 2006 because management
believes that it is more likely than not that the Company's deferred tax assets
will be realized by offsetting future taxable income from reversing taxable
temporary differences and anticipated future taxable income.
Retained earnings at December 31, 2007 includes approximately $3,600,000 for
which no provision for federal income tax has been made. This amount represents
the base year federal bad debt reserve, which is essentially an allocation of
earnings to pre-1988 bad debt deductions for income tax purposes only. This
amount is treated as a permanent difference and deferred taxes are not
recognized unless it appears that this bad debt reserve will be reduced and
thereby result in taxable income in the foreseeable future. The Company is not
currently contemplating any changes in its business or operations which would
result in a recapture of this federal bad debt reserve into taxable income.
13. EMPLOYEE BENEFIT PLANS
The Company has a profit sharing plan that is subject to a "safe harbor"
provision requiring an annual 3 percent non-elective contribution by the
Company. To be considered eligible for the plan, an employee must be 21 year of
age and have been employed for a full calendar quarter. In addition, elective
contributions, depending on the Company's profitability, may be made to the
plan. To be considered eligible for the elective contributions, an employee must
be 21 years of age, worked 501 hours in the plan year and be employed as of the
last day of the plan year. Participants are at all times fully vested in all
contributions. The total plan expense for the years ended December 31, 2007,
2006, and 2005 was approximately $3,964,000, $4,730,000 and $4,057,000
respectively.
The Company also has an employees' savings plan. The plan allows eligible
employees to contribute up to 60 percent of their monthly salaries. The Company
matches an amount equal to 50 percent of the employee's contribution, up to 6
percent of the employee's total pay. Participants are at all times fully vested
in all contributions. The Company's contribution to the savings plan for the
years ended December 31, 2007, 2006 and 2005 was approximately $1,333,000,
$1,120,000, and $930,000, respectively.
The Company has a non-funded deferred compensation plan for directors and senior
officers. The plan provides for the deferral of cash payments of up to 50
percent of a participants' salary, and for 100 percent of bonuses and directors
fees, at the election of the participant. The total amount deferred was
approximately $543,000, $643,000, and $483,000, for the years ending December
31, 2007, 2006, and 2005, respectively. The participant receives an earnings
credit at a rate equal to 50 percent of the Company's return on equity. The
total earnings for the years ended 2007, 2006, and 2005 for this plan were
approximately $259,000, $226,000, and $190,000, respectively. In connection with
several acquisitions, the Company assumed the obligations of deferred
compensation plans for certain key employees. As of December 31, 2007, the
liability related to the obligations was approximately $1,871,000 and was
included in other liabilities of the Consolidated Statements of Financial
Condition. The amount expensed related to the obligations during 2007 was
insignificant.
The Company has a Supplemental Executive Retirement Plan (SERP) which is
intended to supplement payments due to participants upon retirement under the
Company's other qualified plans. The Company credits the participant's account
on annual basis for an amount equal to employer contributions that would have
otherwise been allocated to the participant's account under the tax-qualified
plans were it not for limitations imposed by the Internal Revenue Service, or
the participation in the non-funded deferred compensation plan. Eligible
employees include participants of the non-funded deferred compensation plan and
employees whose benefits were limited as a result of IRS regulations. The
Company's required contribution to the SERP for the years ended December 31,
2007, 2006 and 2005 was approximately $70,000, $102,000, and $74,000,
respectively. The participant receives an earnings credit at a rate equal to 50
percent of the Company's return on equity. The total earnings for the years
ended 2007, 2006, and 2005 for this plan were approximately $52,000, $48,000,
and $190,000, respectively.
The Company has elected as of January 1, 2007 to self-insure certain costs
related to employee health and accident benefit programs. Costs resulting from
noninsured losses are expensed as incurred. The Company has purchased insurance
that limits its exposure on an aggregate and individual claims basis.
The Company has entered into employment contracts with nineteen senior officers
that provide benefits under certain conditions following a change in control of
the Company.
66
14. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
For the Years Ended December 31,
-------------------------------------
2007 2006 2005
----------- ---------- ----------
Net earnings available to common
stockholders, basic and diluted.... $68,603,000 61,131,000 52,373,000
Average outstanding shares - basic.... 53,236,489 49,727,299 46,943,741
Add: Dilutive stock options 511,909 769,878 895,333
----------- ---------- ----------
Average outstanding shares - diluted.. 53,748,398 50,497,177 47,839,074
=========== ========== ==========
Basic earnings per share.............. $ 1.29 1.23 1.12
=========== ========== ==========
Diluted earnings per share............ $ 1.28 1.21 1.09
=========== ========== ==========
There were approximately 701,000, 606,000, and 148,000 options excluded from the
diluted share calculation for December 31, 2007, 2006, and 2005, respectively,
due to the option exercise price exceeding the market price of the Company's
common stock.
15. STOCK OPTION PLANS
The Company has stock-based compensation plans outstanding. The Directors 1994
Stock Option Plan was approved to provide for the grant of stock options to
outside Directors of the Company. The Employees 1995 Stock Option Plan was
approved to provide the grant of stock options to certain full-time employees of
the Company. The Employees 1995 Stock Option Plan expired in April 2005 and has
granted but unexpired stock options outstanding. The 2005 Stock Incentive Plan
was approved by shareholders on April 27, 2005 which provides awards to certain
full-time employees of the Company. The 2005 Stock Incentive Plan permits the
granting of stock options, share appreciation rights, restricted shares,
restricted share units, and unrestricted shares, deferred share units, and
performance awards. Upon exercise of the stock options, the shares are obtained
from the authorized and unissued stock.
The 1994, 1995, and 2005 plans also contain provisions authorizing the grant of
limited stock rights, which permit the optionee, upon a change in control of the
Company, to surrender his or her stock options for cancellation and receive cash
or common stock equal to the difference between the exercise price and the fair
market value of the shares on the date of the grant. The option price at which
the Company's common stock may be purchased upon exercise of stock options
granted under the plans must be at least equal to the per share market value of
such stock at the date the option is granted. All stock option shares are
adjusted for stock splits and stock dividends. The term of the stock options may
not exceed five years from the date the options are granted. The employee stock
options generally vest over a period of two years and the director options vest
over a period of six months.
The Company adopted SFAS No. 123 (Revised) Share-Based Payment, as of January 1,
2006 and, accordingly, has determined compensation cost based on the fair value
of stock options at the grant date. Additionally, the compensation cost for the
portion of awards outstanding for which the requisite service has not been
rendered that are outstanding as of the required effective date are recognized
as the requisite service is rendered on or after the required effective date.
For the twelve months ended December 31, 2007, the compensation cost for the
stock option plans was $3,578,000, with a corresponding income tax benefit of
$1,390,000, resulting in a net earnings and cash flow from operations reduction
of $2,187,000, or a decrease of $.04 per share for both basic and diluted
earnings per share. Additionally, in the Consolidated Statement of Cash Flows,
the excess tax benefit from stock options decreased the net cash provided from
operating activities and increased the net cash provided by financing activities
by $1,745,000 the twelve months ended December 31, 2007. Total unrecognized
compensation cost, net of income tax benefit, related to non-vested awards which
are expected to be recognized over the next weighted period of 1 year was
$1,987,000 as of December 31, 2007. The total fair value of shares vested for
the year ended December 31, 2007 and 2006 was $2,013,000 and $1,266,000,
respectively.
67
15. STOCK OPTION PLANS...CONTINUED
Prior to the adoption of SFAS No. 123 (R), the Company utilized the intrinsic
value method and compensation cost was the excess of the market price of the
stock at the grant date over the amount an employee must pay to acquire the
stock. The exercise price of all stock options granted has been equal to the
fair market value of the underlying stock at the date of grant and, accordingly,
the intrinsic value has been $0 and no compensation cost was recognized prior to
the adoption of SFAS No. 123 (R). The Company did not modify any outstanding
stock options prior to the adoption of the standard. If the Company had
determined compensation cost based on fair value of the stock options at the
grant date under SFAS 123 (R) prior to the date of adoption, the Company's net
income would have been reduced to the pro forma amounts indicated below:
Year ended
December 31, 2005
-----------------
Net earnings (in thousands):
As reported $52,373
Compensation cost (1,308)
-------
Pro forma 51,065
=======
Basic earnings per share:
As reported 1.12
Compensation cost (0.03)
-------
Pro forma 1.09
=======
Diluted earnings per share:
As reported 1.09
Compensation cost (0.02)
-------
Pro forma 1.07
=======
The per share weighted-average fair value of stock options on the date of grant
was based on the Black Scholes option-pricing model. The Company uses historical
data to estimate option exercise and termination within the valuation model.
Employee and director awards, which have dissimilar historical exercise
behavior, are considered separately for valuation purposes. The risk-free
interest rate for periods within the contractual life of the stock option is
based on the U.S. Treasury yield in effect at the time of the grant. The stock
option awards generally vest upon six months or two years of service for
directors and employees, respectively, and generally expire in five years.
Expected volatilities are based on historical volatility and other factors. The
following lists the various assumptions and fair value of the grants awarded
during the year.
Options granted during
-----------------------
2007 2006 2005
----- ----- -----
Fair Value of Stock Options - Black Scholes.. $5.05 $4.31 $2.35
Expected Volatility.......................... 26% 27% 18%
Expected Dividends........................... 2.12% 2.23% 2.23%
Risk Free Interest Rate...................... 4.80% 4.35% 3.44%
Expected Life................................ 3.47 3.30 3.40
At December 31, 2007, total shares available for stock option grants to
employees and directors are 4,047,626. Changes in shares granted for stock
options for the years ended December 31, 2007, 2006, and 2005, respectively, are
summarized as follows:
68
15. STOCK OPTION PLANS...CONTINUED
Weighted
average
Options exercise price
--------- --------------
Outstanding at December 31, 2006... 2,733,923 15.82
Canceled........................... (54,056) 20.88
Granted............................ 773,720 23.44
Exercised.......................... (550,070) 11.10
---------
Outstanding at December 31, 2007... 2,903,517 18.62
=========
Excercisable at December 31, 2007.. 1,526,917 15.42
=========
The range of exercise prices on options outstanding and exercisable at December
31, 2007 is as follows:
Options exercisable
----------------------------
Weighted Weighted Weighted
Options average average Options average
Price range Outstanding exercise price life of options Exercisable exercise price
--------------- ----------- -------------- --------------- ----------- --------------
$0 - $6.18 54,061 $ 4.53 .5 years 54,061 $ 4.53
$6.19 -$12.36 230,350 9.58 .1 years 230,350 9.58
$12.37 - $18.54 949,556 15.47 1.7 years 949,556 15.47
$18.55 and over 1,669,550 22.11 3.4 years 292,950 21.87
--------- ---------
2,903,517 18.62 2.6 years 1,526,917 15.42
========= =========
69
16. PARENT COMPANY INFORMATION (CONDENSED)
The following condensed financial information is the unconsolidated (parent
company only) information for Glacier Bancorp, Inc.:
STATEMENTS OF FINANCIAL CONDITION
December 31,
------------------
(dollars in thousands) 2007 2006
---------------------- -------- -------
Assets:
Cash........................................ $ 2,374 567
Interest bearing cash deposits.............. 19,686 13,839
-------- -------
Cash and cash equivalents................ 22,060 14,406
Investment securities, available-for-sale... 1,274 1,291
Other assets................................ 10,225 7,822
Investment in subsidiaries.................. 627,333 562,893
-------- -------
$660,892 586,412
======== =======
Liabilities and Stockholders' Equity:
Dividends payable .......................... $ 6,974 6,276
Subordinated debentures..................... 118,559 118,559
Other liabilities........................... 6,783 5,434
Total liabilities........................ 132,316 130,269
Common stock ............................... 536 523
Paid-in capital............................. 374,728 344,265
Retained earnings........................... 150,195 108,286
Accumulated other comprehensive income...... 3,117 3,069
-------- -------
Total stockholders' equity............... 528,576 456,143
-------- -------
$660,892 586,412
======== =======
STATEMENTS OF OPERATIONS
Years ended December 31,
-------------------------
(dollars in thousands) 2007 2006 2005
---------------------- ------- ------ ------
Revenues
Dividends from subsidiaries....................................... $40,550 25,400 21,950
Other income ..................................................... 889 754 60
Intercompany charges for services................................. 11,345 9,711 8,365
------- ------ ------
Total revenues................................................. 52,784 35,865 30,375
Expenses
Employee compensation and benefits................................ 7,564 6,508 5,144
Other operating expenses.......................................... 12,969 10,230 11,013
------- ------ ------
Total expenses................................................. 20,533 16,738 16,157
Earnings before income tax benefit and equity in undistributed
earnings of subsidiaries....................................... 32,251 19,127 14,218
Income tax benefit................................................ 4,444 298 3,386
------- ------ ------
Income before equity in undistributed earnings of subsidiaries.... 36,695 19,425 17,604
Subsidiary earnings in excess of dividends distributed 31,908 41,706 34,769
------- ------ ------
Net earnings......................................................... $68,603 61,131 52,373
======= ====== ======
70
16. PARENT COMPANY INFORMATION (CONDENSED)...CONTINUED
STATEMENTS OF CASH FLOWS
Years ended December 31,
------------------------------
(dollars in thousands) 2007 2006 2005
---------------------- -------- ------- -------
Operating Activities
Net earnings .................................................... $ 68,603 61,131 52,373
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Loss on sale of investments available-for-sale .................. -- -- 451
Subsidiary earnings in excess of dividends distributed .......... (31,908) (41,706) (34,769)
Excess tax benefits related to the exercise of stock options .... (1,745) (1,217) --
Net increase in other assets and other liabilities .............. 5,316 4,986 4,709
-------- ------- -------
Net cash provided by operating activities........................... 40,266 23,194 22,764
-------- ------- -------
Investing activities
Proceeds from sales, maturities and prepayments of securities
available-for-sale ........................................... -- -- 17,796
Equity contribution to subsidiary banks ......................... (10,416) (65,035) (56,206)
Net addition of premises and equipment .......................... (3,401) (1,902) (949)
-------- ------- -------
Net cash used by investing activities .............................. (13,817) (66,937) (39,359)
-------- ------- -------
Financing activities
Proceeds from issuance of subordinated debentures ............... -- 65,000 --
Repayment of subordinated debentures ............................ -- (35,000) --
Cash dividends paid ............................................. (26,694) (22,558) (19,051)
Excess tax benefits from stock options .......................... 1,745 1,217 --
Proceeds from exercise of stock options and other stock issued... 6,154 36,403 5,158
Cash paid for stock dividends ................................... -- (5) (8)
-------- ------- -------
Net cash (used) provided by financing activities ................... (18,795) 45,057 (13,901)
-------- ------- -------
Net increase (decrease) in cash and cash equivalents ............... 7,654 1,314 (30,496)
Cash and cash equivalents at beginning of year ..................... 14,406 13,092 43,588
-------- ------- -------
Cash and cash equivalents at end of year ........................... $ 22,060 14,406 13,092
======== ======= =======
17. UNAUDITED QUARTERLY FINANCIAL DATA
Summarized unaudited quarterly financial data is as follows (dollars in
thousands except per share amounts):
QUARTERS ENDED, 2007
-------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------- ------------- ------------- -------------
Interest income .................................................. $ 71,920 75,293 78,430 79,117
Interest expense............................................... .. 28,829 30,097 31,447 30,918
------------- ------------- ------------- -------------
Net interest income............................................... 43,091 45,196 46,983 48,199
Provision for loan losses......................................... 1,195 1,210 1,315 2,960
Earnings before income taxes...................................... 24,405 25,323 26,950 27,012
Net earnings ..................................................... 16,093 16,725 17,639 18,146
Basic earnings per share.......................................... 0.31 0.31 0.33 0.34
Diluted earnings per share........................................ 0.30 0.31 0.33 0.34
Dividends per share .............................................. 0.12 0.12 0.13 0.13
Market range high-low ........................................... $25.39-$22.76 $24.61-$19.55 $24.00-$18.41 $23.85-$17.57
71
17. UNAUDITED QUARTERLY FINANCIAL DATA...CONTINUED
Quarters Ended, 2006
-------------------------------------------------------------
March 31 June 30 September 30 December 31
------------- ------------- ------------- -------------
Interest income ............... $ 55,952 59,933 63,892 73,549
Interest expense............... 19,644 22,307 24,887 28,200
------------- ------------- ------------- -------------
Net interest income............ 36,308 37,626 39,005 45,349
Provision for loan losses...... 1,165 1,355 1,320 1,352
Earnings before income taxes... 20,472 22,219 23,603 26,094
Net earnings .................. 13,629 14,666 15,806 17,030
Basic earnings per share....... 0.28 0.30 0.32 0.33
Diluted earnings per share..... 0.28 0.30 0.31 0.32
Dividends per share ........... 0.11 0.11 0.11 0.12
Market range high-low ........ $21.81-$19.72 $21.20-$18.69 $23.24-$18.55 $25.25-$21.99
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments have been defined to generally mean cash or a contract
that implies an obligation to deliver cash or another financial instrument to
another entity. For purposes of the Company's Consolidated Statement of
Financial Condition, this includes the following items:
2007 2006
----------------------- ----------------------
(dollars in thousands) AMOUNT FAIR VALUE Amount Fair Value
---------------------- ---------- ---------- --------- ----------
Financial Assets:
Cash on hand and in banks....................... $ 145,697 145,697 136,591 136,591
Federal funds sold 135 135 6,125 6,125
Interest bearing cash deposits ................. 81,777 81,777 30,301 30,301
Investment securities .......................... 297,136 297,136 343,370 343,370
Mortgage-backed securities ..................... 343,373 343,373 426,550 426,550
FHLB and FRB stock ............................. 59,815 59,815 55,717 55,717
Loans receivable, net........................... 3,557,122 3,580,202 3,165,524 3,139,276
Accrued interest receivable..................... 26,168 26,168 25,729 25,729
Financial Liabilities:
Deposits ....................................... $3,184,478 3,192,594 3,207,533 3,206,007
Advances from the FHLB of Seattle............... 538,949 538,949 307,522 302,441
Repurchase agreements and other borrowed funds.. 401,621 401,628 338,986 338,986
Subordinated debentures......................... 118,559 110,420 118,559 117,435
Accured interest payable........................ 13,281 13,281 11,041 11,041
Financial assets and financial liabilities other than securities are not traded
in active markets. The above estimates of fair value require subjective
judgments. Changes in the following methodologies and assumptions could
significantly affect the estimates. These estimates may also vary significantly
from the amounts that could be realized in actual transactions.
Financial Assets - The estimated fair value is the book value of cash, federal
funds sold, interest bearing cash deposits, and accrued interest receivable. For
investment and mortgage-backed securities, the fair value is based on quoted
market prices. The fair value of FHLB of Seattle and FRB stock is book value,
due to the restrictions that such stock may only be sold to another member
institution or the FHLB or FRB at their par value. The fair value of loans is
estimated by discounting future cash flows using current rates at which similar
loans would be made.
Financial Liabilities - The estimated fair value of demand and savings deposits
is the book value since rates are regularly adjusted to market rates. The
estimated fair value of accrued interest payable is the book value. Certificate
accounts fair value is estimated by discounting the future cash flows using
current rates for similar deposits. The fair value of advances from the FHLB of
Seattle is estimated by discounting future cash flows using current rates for
advances with similar weighted average maturities.
72
18. FAIR VALUE OF FINANCIAL INSTRUMENTS...CONTINUED
Repurchase agreements and other borrowed funds have variable interest rates, or
are short term, such that book value approximates fair value. The subordinated
debentures' fair value is based on quoted market prices or comparison pricing to
a similar obligations outstanding at year-end.
Off-balance sheet financial instruments - Commitments to extend credit and
letters of credit represent the principal categories of off-balance sheet
financial instruments. Rates for these commitments are set at time of loan
closing, such that no adjustment is necessary to reflect these commitments at
market value. See Note 4 to consolidated financial statements.
19. CONTINGENCIES AND COMMITMENTS
The Company leases certain land, premises and equipment from third parties under
operating and capital leases. Total rent expense for the years ended December
31, 2007, 2006, and 2005 was approximately $2,099,000, $1,784,000, and
$1,334,000, respectively. Amortization of building capital lease assets is
included in depreciation. One of the Company's subsidiaries has entered into
lease transactions with two of its directors and the related party rent expense
for the years ended December 31, 2007, 2006, and 2005 was approximately
$346,000, $333,000, and $273,000. The total future minimum rental commitments
required under operating and capital leases that have initial or remaining
noncancelable lease terms in excess of one year at December 31, 2007 are as
follows (dollars in thousands):
Capital Operating
Years ended December 31, Leases Leases Total
------------------------ ------- --------- ------
2008 $ 228 2,030 2,258
2009 231 1,958 2,189
2010 235 1,912 2,147
2011 239 1,596 1,835
2012 243 1,302 1,545
Thereafter 2,439 7,815 10,254
------ ------ ------
Total minimum lease payments $3,615 16,613 20,228
====== ======
Less: Amounts representing interest 1,433
------
Present value of minimum lease payments 2,182
Less: Current portion of obligations
under capital leases 59
------
Long-term portion of obligations under
capital leases 2,123
======
The Company is a defendant in legal proceedings arising in the normal course of
business. In the opinion of management, the disposition of pending litigation
will not have a material effect on the Company's consolidated financial
position, results of operations or liquidity.
20. ACQUISITIONS
On April 30, 2007, 1st Bank completed the acquisition of North Side with total
assets of $128,252,000, loans of $38,773,000, and deposits of $99,568,000. The
purchase price included core deposit intangible of $2,524,000 and goodwill of
$8,223,000
On October 1, 2006, CDC and its five banking subsidiaries located across Montana
were acquired. These subsidiaries include Citizens State Bank, First Citizens
Bank of Billings, First National Bank of Lewistown, Western Bank of Chinook, and
First Citizens Bank, N.A. The acquisition included total assets of $457,023,000,
loans of $303,804,000, and deposits of $362,561,000. The purchase price included
core deposit intangible of $7,863,000 and goodwill of $42,418,000. On January
26, 2007, Citizens State Bank, First Citizens Bank of Billings, and First
Citizens Bank, N.A. were merged into First Security, Western, and Glacier,
respectively, without name change to First Security, Western, and Glacier. On
June 22, 2007, Western Bank of Chinook was merged into First National Bank of
Lewistown and renamed First Bank of Montana.
73
20. ACQUISITIONS...CONTINUED
On September 1, 2006, the Company completed the acquisition of Morgan with total
assets of $88,595,000, loans of $40,944,000, and deposits of $67,172,000. The
purchase price included core deposit intangible of $896,000 and goodwill of
$10,791,000. The acquisitions were accounted for under the purchase method of
accounting.
21. OPERATING SEGMENT INFORMATION
SFAS No. 131, Financial Reporting for Segments of a Business Enterprise,
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. Operating segments are
defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance.
The Company evaluates segment performance internally based on individual bank
charter, and thus the operating segments are so defined. The five subsidiaries
acquired as result of the acquisition of CDC included Citizens State Bank, First
Citizens Bank of Billings, First National Bank of Lewistown, Western Bank of
Chinook, and First Citizens Bank, N.A. On January 26, 2007, Citizens State Bank,
First Citizens Bank of Billings, and First Citizens Bank, N.A. were merged into
First Security, Western, and Glacier, respectively, without name change for
First Security, Western, and Glacier. On June 21, 2007, Western Bank of Chinook
was merged into First National Bank of Lewistown and renamed First Bank of
Montana. As a result of the CDC mergers into the Company subsidiaries, the
financial reporting activity for the year ended December 31, 2006 has been
reclassified and included in the Company subsidiary into which each CDC bank was
merged. All segments, except for the segment defined as "other," are based on
commercial banking operations. The operating segment defined as "other" includes
the Parent company, non-bank operating units, and eliminations of transactions
between segments.
The accounting policies of the individual operating segments are the same as
those of the Company described in Note 1. Transactions between operating
segments are conducted at fair value, resulting in profits that are eliminated
for reporting consolidated results of operations. Expenses for centrally
provided services are allocated based on the estimated usage of those services.
74
The following is a summary of selected operating segment information for
the years ended and as of December 31, 2007, 2006, and
2005.
(dollars in thousands)
Mountain First 1st
2007 West Glacier Security Western Bank Big Sky Valley
------- ------------ -------- -------- -------- -------- -------- --------
Net interest income ......... $ 41,115 33,008 32,674 19,069 16,861 12,610 10,680
Provision for loan losses ... (2,225) (1,400) (1,100) - (585) (645) (405)
----------- ------- ------- ------- ------- ------- -------
Net interest income after
provision for loan losses .. 38,890 31,608 31,574 19,069 16,276 11,965 10,275
Noninterest income .......... 19,861 11,540 6,844 8,792 3,399 3,583 4,655
Core deposit amortization ... (208) (415) (554) (675) (531) (23) (42)
Other noninterest expense ... (36,745) (20,805) (17,295) (15,972) (10,490) (7,220) (8,222)
----------- ------- ------- ------- ------- ------- -------
Earnings before income
taxes ...................... 21,798 21,928 20,569 11,214 8,654 8,305 6,666
Income tax (expense)
benefit .................... (7,701) (7,642) (7,027) (4,129) (3,157) (3,144) (1,955)
----------- ------- ------- ------- ------- ------- -------
Net income .................. $ 14,097 14,286 13,542 7,085 5,497 5,161 4,711
=========== ======= ======= ======= ======= ======= =======
Assets ...................... $ 1,038,294 903,440 792,882 508,729 456,273 315,885 282,643
Loans, net .................. 836,426 708,208 548,682 321,533 246,478 262,934 195,682
Goodwill .................... 23,159 8,640 18,582 22,311 30,742 1,752 1,770
Deposits .................... 666,330 473,594 533,260 345,273 365,906 215,771 187,657
Stockholders' equity ........ 114,538 96,252 109,320 83,226 67,003 35,406 27,323
First Bank
2007 Whitefish Citizens of MT Morgan Other Consolidated
------- --------- ---------- -------- ------- --------- ------------
Net interest income ......... 7,262 7,532 6,308 3,274 (6,924) 183,469
Provision for loan losses ... (180) (75) (20) (45) - (6,680)
------- ------- ------- ------ -------- ---------
Net interest income after
provision for loan losses .. 7,082 7,457 6,288 3,229 (6,924) 176,789
Noninterest income .......... 1,933 2,550 736 813 112 64,818
Core deposit amortization ... - (146) (451) (157) - (3,202)
Other noninterest expense ... (4,426) (6,102) (3,426) (2,525) (1,487) (134,715)
------- ------- ------- ------ -------- ---------
Earnings before income
taxes ...................... 4,589 3,759 3,147 1,360 (8,299) 103,690
Income tax (expense)
benefit .................... (1,652) (1,403) (1,395) (325) 4,443 (35,087)
------- ------- ------- ------ -------- ---------
Net income .................. 2,937 2,356 1,752 1,035 (3,856) 68,603
======= ======= ======= ====== ======== =========
Assets ...................... 197,672 182,769 149,483 95,054 (105,794) 4,817,330
Loans, net .................. 155,045 131,988 98,897 52,322 (1,073) 3,557,122
Goodwill .................... 260 9,553 12,556 10,976 - 140,301
Deposits .................... 105,596 139,228 113,692 73,375 (35,204) 3,184,478
Stockholders' equity ........ 18,995 27,808 26,941 20,520 (98,756) 528,576
(dollars in thousands)
Mountain First 1st
2006 West Glacier Security Western Bank Big Sky Valley
-------- ---------- -------- -------- ------- ------- ------- -------
Net interest income ......... $ 36,133 29,721 30,366 16,299 11,525 12,054 9,893
Provision for loan losses ... (1,500) (900) (600) - (300) (305) (485)
---------- ------- ------- ------- ------- ------- -------
Net interest income after
provision for loan losses .. 34,633 28,821 29,766 16,299 11,225 11,749 9,408
Noninterest income .......... 16,442 10,203 5,351 5,645 2,939 2,781 3,938
Core deposit amortization ... (219) (286) (383) (329) (408) (23) (43)
Other noninterest expense ... (31,057) (18,061) (15,149) (11,748) (8,153) (6,561) (7,649)
---------- ------- ------- ------- ------- ------- -------
Earnings before income
taxes ...................... 19,799 20,677 19,585 9,867 5,603 7,946 5,654
Income tax (expense)
benefit .................... (6,163) (7,040) (6,303) (1,797) (2,358) (2,703) (1,626)
---------- ------- ------- ------- ------- ------- -------
Net income .................. $ 13,636 13,637 13,282 8,070 3,245 5,243 4,028
========== ======= ======= ======= ======= ======= =======
Assets ...................... $ 918,985 801,792 829,796 591,378 324,560 274,888 269,442
Loans, net .................. 701,390 598,609 537,382 364,899 152,197 218,482 177,507
Goodwill .................... 23,159 8,656 18,605 19,892 22,508 1,752 1,770
Deposits .................... 693,323 491,361 547,711 395,245 255,834 223,605 183,233
Stockholders' equity ........ 98,954 87,844 102,912 82,764 43,911 31,282 24,247
First Bank
2006 Whitefish Citizens of MT Morgan Other Consolidated
-------- --------- -------- ---------- ------ -------- ------------
Net interest income ......... 6,958 8,247 1,580 1,090 (5,578) 158,288
Provision for loan losses ... (180) (900) - (22) - (5,192)
------- ------- -------- ------ -------- ---------
Net interest income after ...
provision for loan losses .. 6,778 7,347 1,580 1,068 (5,578) 153,096
Noninterest income .......... 1,654 2,161 200 318 210 51,842
Core deposit amortization ... - (164) (115) (54) - (2,024)
Other noninterest expense ... (4,003) (5,898) (691) (651) (905) (110,526)
------- ------- -------- ------ -------- ---------
Earnings before income
taxes ...................... 4,429 3,446 974 681 (6,273) 92,388
Income tax (expense)
benefit .................... (1,476) (1,507) (334) (248) 298 (31,257)
------- ------- -------- ------ -------- ---------
Net income .................. 2,953 1,939 640 433 (5,975) 61,131
======= ======= ======== ====== ======== =========
Assets ...................... 187,704 172,517 148,097 95,991 (143,852) 4,471,298
Loans, net .................. 142,480 137,779 90,595 45,302 (1,098) 3,165,524
Goodwill .................... 260 9,553 12,660 10,901 - 129,716
Deposits .................... 121,100 128,317 116,512 75,348 (24,056) 3,207,533
Stockholders' equity ........ 16,918 25,549 25,766 20,308 (104,312) 456,143
75
21. OPERATING SEGMENT INFORMATION...CONTINUEDl
(dollars in thousands)
Mountain First 1st
2005 West Glacier Security Western Bank Big Sky Valley
------------ ----------- -------- -------- -------- -------- -------- --------
Net interest income .......... $ 29,607 26,508 24,839 14,522 8,179 11,540 9,444
Provision for loan losses .... (1,897) (1,500) (630) - (251) (965) (375)
---------- ------- ------- ------- ------- ------- -------
Net interest income after
provision for loan losses ... 27,710 25,008 24,209 14,522 7,928 10,575 9,069
Noninterest income ........... 15,812 9,136 3,990 3,966 2,340 2,475 3,509
Core deposit amortization .... (214) (252) (202) (224) (371) (26) (48)
Other noninterest expense .... (26,006) (16,016) (11,141) (9,741) (5,636) (5,509) (6,787)
---------- ------- ------- ------- ------- ------- -------
Earnings before income taxes.. 17,302 17,876 16,856 8,523 4,261 7,515 5,743
Income tax (expense) benefit.. (5,886) (6,096) (5,505) (2,488) (1,401) (2,819) (1,783)
---------- ------- ------- ------- ------- ------- -------
Net income ................... $ 11,416 11,780 11,351 6,035 2,860 4,696 3,960
========== ======= ======= ======= ======= ======= =======
Assets ....................... $ 779,538 731,468 769,094 431,640 304,196 267,402 254,437
Loans, net ................... 544,429 462,761 453,814 231,817 111,682 203,869 151,204
Goodwill ..................... 23,159 4,084 12,165 3,848 22,508 1,752 1,770
Deposits ..................... 558,280 424,739 476,253 269,494 244,336 191,040 174,059
Stockholders' equity ......... 80,008 69,257 83,447 49,458 41,577 26,581 21,809
2005 Whitefish Citizens Other Consolidated
------------ --------- -------- --------- ------------
Net interest income .......... 6,527 5,013 (6,172) 130,007
Provision for loan losses .... (300) (105) - (6,023)
------- ------- -------- ---------
Net interest income after
provision for loan losses ... 6,227 4,908 (6,172) 123,984
Noninterest income ........... 1,916 1,902 (420) 44,626
Core deposit amortization .... - (133) - (1,470)
Other noninterest expense .... (3,428) (4,052) (1,140) (89,456)
------- ------- -------- ---------
Earnings before income taxes.. 4,715 2,625 (7,732) 77,684
Income tax (expense) benefit.. (1,698) (1,022) 3,387 (25,311)
------- ------- -------- ---------
Net income ................... 3,017 1,603 (4,345) 52,373
======= ======= ======= =========
Assets ....................... 174,069 144,161 (147,030) 3,708,975
Loans, net ................... 125,512 113,222 (1,123) 2,397,187
Goodwill ..................... 260 9,553 - 79,099
Deposits ..................... 112,790 110,023 (26,302) 2,534,712
Stockholders' equity ......... 14,847 23,029 (76,774) 333,239
22. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2007, the FASB issued Statement of Financial Accounting Standard
("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 c)
Determines what 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.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. This Statement permits entities to
choose to measure many financial instruments and certain other items at fair
value. The objective is to improve financial reporting by providing entities
with the opportunity to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. This Statement is effective as of the
beginning of an entity's first fiscal year that begins after November 15, 2007.
Early adoption is permitted as of the beginning of a fiscal year that begins on
or before November 15, 2007, provided the entity also elects to apply the
provisions of FASB Statement No. 157, Fair Value Measurement. The Company has
evaluated the impact of the adoption of this standard and determined there will
not be a material effect on the Company's financial position or results of
operations. At present, the Company has chosen not to measure the permitted
items at fair value.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands disclosures about
fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, FASB having
previously concluded in those accounting pronouncements that fair value is the
relevant measurement attribute. Accordingly, this Statement does not require any
new fair value measurements. SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. 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.
In September 2006, the FASB EITF issued EITF 06-4, Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life
Insurance Arrangements. The EITF determined that for an endorsement split-dollar
life insurance arrangement within the scope of the Issue, the employer should
recognize a liability for future benefits in accordance with SFAS No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions, or APB
Opinion 12, Omnibus Opinion-1967, based on the substantive agreement with the
employee. The Issue is effective for fiscal years beginning after December 15,
2007, with earlier
76
22. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS . . .CONTINUED
application permitted. The Company expects to adopt the Interpretation during
the first quarter of 2008 without material effect on the Company's financial
position or results of operations.
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty
in Income Taxes, which provides clarification for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with SFAS No.
109, Accounting for Income Taxes. This Interpretation prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
This Interpretation also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. The Interpretation is effective for fiscal years beginning after
December 31, 2006. The Company adopted the Interpretation January 1, 2007
without material effect on the Company's financial position or results of
operations.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of
Financial Assets, which amends SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, with respect
to the accounting for servicing of financial assets. SFAS No. 156 requires that
all separately recognized servicing rights be initially measured at fair value,
if practicable. SFAS No. 156 permits an entity to choose either of the following
subsequent measurement methods: (1) the amortization of servicing assets or
liabilities in proportion to and over the net servicing income period or net
servicing loss periods or (2) the reporting of servicing assets or liabilities
at fair value at each reporting date and reporting changes in fair value in
earnings in the periods in which the change occur. SFAS No. 156 is effective the
earlier of the date an entity adopts the requirements of SFAS No. 156, or as of
the beginning of its first fiscal year beginning after September 15, 2006. The
Company adopted the Statement beginning January 1, 2007 and chose the
amortization of servicing assets over the net servicing income or loss period
without material effect on the Company's financial position or results of
operations.
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments, which amends SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, and SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities. The
Statement resolves issues addressed in SFAS No. 133 Implementation Issue No. D1,
"Application of Statement to Beneficial Interest in Securitized Financial
Assets." This Statement is effective for all financial instruments acquired or
issued after the beginning of the Company's first fiscal year that begins after
September 15, 2006. The Company adopted the Statement beginning January 1, 2007
without material effect on the Company's financial position or results of
operations.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes or disagreements with accountants on accounting and
financial disclosure.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. An evaluation was carried out
under the supervision and with the participation of the Company's management,
including the Chief Executive Officer ("CEO") and Chief Financial Officer
("CFO"), of the effectiveness of the disclosure controls and procedures. Based
on that evaluation, the CEO and CFO have concluded that as of the end of the
period covered by this report, the disclosure controls and procedures are
effective to provide reasonable assurance that information required to be
disclosed by the Company in reports that are filed or submitted under the
Securities Exchange Act of 1934 are recorded, processed, summarized and timely
reported as provided in the SEC's rules and forms. As a result of this
evaluation, there were no significant changes in the internal control over
financial reporting during the three months ended December 31, 2007 that have
materially affected, or are reasonable likely to materially affect, the internal
control over financial reporting.
Management's Report on Internal Control Over Financial Reporting Management is
responsible for establishing and maintaining effective internal control over
financial reporting as it relates to its financial statements presented in
conformity with U.S. generally accepted accounting principles. The Company's
internal control system was designed to provide reasonable assurance to the
Company's management and Board of Directors regarding the preparation and fair
presentation of published financial statements in accordance with U.S. generally
accepted accounting principles. Internal control over financial reporting
includes self monitoring mechanisms and actions are taken to correct
deficiencies as they are identified.
There are inherent limitations in any internal control, no matter how well
designed, misstatements due to error or fraud may occur and not be detected,
including the possibility of circumvention or overriding of controls.
Accordingly, even an effective internal control
77
system can provide only reasonable assurance with respect to financial
statement preparation. Further, because of changes in conditions, the
effectiveness of an internal control system may vary over time.
Management assessed its internal control structure over financial reporting as
of December 31, 2007. This assessment was based on criteria for effective
internal control over financial reporting described in "Internal Control -
Integrated Framework" issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this assessment, management asserts that the
Company and subsidiaries maintained effective internal control over financial
reporting as it relates to its financial statements presented in conformity with
accounting principles generally accepted in the Unites States of America.
BKD LLP, the independent registered public accounting firm that audited the
financial statements for the year ended December 31, 2007, has issued an
attestation report on the Company's internal control over financial reporting.
Such attestation report expresses an unqualified opinion on the effectiveness of
the Company's internal control over financial reporting as of December 31, 2007.
ITEM 9B. OTHER INFORMATION
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information regarding "Directors and Executive Officers" is set forth under the
headings "Information with Respect to Nominees and Other Directors - Background
of Nominees and Continuing Directors" and "Security Ownership of Certain
Beneficial Owners and Management - Executive Officers who are not Directors" of
the Company's 2008 Annual Meeting Proxy Statement ("Proxy Statement") and is
incorporated herein by reference.
Information regarding "Compliance with Section 16(a) of the Exchange Act" is set
forth under the section "Compliance with Section 16 (a) Filing Requirements" of
the Company's Proxy Statement and is incorporated herein by reference.
Information regarding the Company's audit committee financial expert is set
forth under the heading "Meetings and Committees of Board of Directors -
Committee Membership" in our Proxy Statement and is incorporated by reference.
Consistent with the requirements of the Sarbanes-Oxley Act, the Company has a
Code of Ethics applicable to senior financial officers including the principal
executive officer. The Code of Ethics can be accessed electronically by visiting
the Company's website at www.glacierbancorp.com. The Code of Ethics is also
listed as Exhibit 14 to this report, and is incorporated by reference to the
Company's 2003 annual report Form 10K.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding "Executive Compensation" is set forth under the headings
"Compensation of Directors" and "Executive Compensation" of the Company's Proxy
Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information regarding "Security Ownership of Certain Beneficial Owners and
Management" is set forth under the headings "Information with Respect to
Nominees and Other Directors" and "Security Ownership of Certain Beneficial
Owners and Management" of the Company's Proxy Statement and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
Information regarding "Certain Relationships and Related Transactions and
Director Independence" is set forth under the heading "Transactions with
Management" and "Corporate Governance - Director Independence" of the Company's
Proxy Statement and is
78
incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information regarding "Principal Accounting Fees and Services" is set forth
under the heading "Registered Public Accountants" of the Company's Proxy
Statement and is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) and (2) Financial Statements and Financial Statement Schedules
The financial statements and related documents listed in the index set forth in
Item 8 of this report are filed as part of this report.
All other schedules to the consolidated financial statements required by
Regulation S-X are omitted because they are not applicable, not material or
because the information is included in the consolidated financial statements or
related notes.
79
(1) The following exhibits are included as part of this Form 10-K:
EXHIBIT NO. EXHIBIT
-------------- -------
3(a) Amended and Restated Articles of Incorporation (1)
3(b) Amended and Restated Bylaws (2)
10(a) * Amended and Restated 1995 Employee Stock Option Plan and related agreements (3)
10(b) * Amended and Restated 1994 Director Stock Option Plan and related agreements (3)
10(c) * Deferred Compensation Plan effective January 1, 2005 (4)
10(d) * Supplemental Executive Retirement Agreement (4)
10(e) * 2005 Stock Incentive Plan and related agreements (5)
10(f) * Employment Agreement dated January 1, 2008 between the Company, Glacier Bancorp, Inc. and
Michael J. Blodnick (6)
10(g) * Employment Agreement dated January 1, 2008 between the Company, Glacier Bancorp, Inc. and
Ron J. Copher (6)
10(h) * Employment Agreement date January 1, 2008 between the Company, Glacier Bancorp, Inc. and
Don Chery (6)
10(i) * Employment agreement dated January 1, 2008, between Mountain West Bank and Jon W. Hippler (6)
14 Code of Ethics (7)
21 Subsidiaries of the Company (See item 1, "Subsidiaries")
23 Consent of BKD LLP
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of
2002
(1) Incorporated by reference to Exhibit 3(a), included in the Company's Form
10-K for the year ended December 31, 2006.
(2) Incorporated by reference to Exhibit 3.ii included in the Company's
Quarterly Report on form 10-Q for the quarter ended June 30, 2004.
(3) Incorporated by reference to Exhibit 99.1 - 99.4 of the Company's S-8
Registration Statement (No. 333-105995).
(4) Incorporated by reference to exhibits 10(g) and 10(h) of the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2004.
(5) Incorporated by reference to exhibits 99.1 through 99.3 of the Company's
S-8 Registration Statement (No. 333-125024).
(6) Incorporated by reference to Exhibits 10.1 through 10.4 included in the
Company's Form 8-K filed by the Company on December 27, 2007.
(7) Incorporated by reference to Exhibit 14, included in the Company's Form
10-K for the year ended December 31, 2003.
* Compensatory Plan or Arrangement
80
SIGNATURES
PURSUANT to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on February 27, 2008.
GLACIER BANCORP, INC.
By: /s/ Michael J. Blodnick
------------------------------
Michael J. Blodnick
President/CEO/Director
PURSUANT to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on February 27, 2008, by the following persons in the
capacities indicated.
/s/Michael J. Blodnick President, CEO, and Director
-------------------------------------- (Principal Executive Officer)
Michael J. Blodnick
/s/Ron J. Copher Senior Vice President and CFO
-------------------------------------- (Principal Financial Accounting Officer)
Ron J. Copher
Majority of the Board of Directors
/s/ Everit A. Sliter Chairman
--------------------------------------
Everit A. Sliter
/s/ James M. English Director
--------------------------------------
James M. English
/s/ Allen Fetscher Director
--------------------------------------
Allen J. Fetscher
/s/ Jon W. Hippler Director
--------------------------------------
Jon W. Hippler
/s/ Craig A. Langel Director
--------------------------------------
Craig A. Langel
/s/ L. Peter Larson Director
--------------------------------------
L. Peter Larson
/s/ Douglas J. McBride Director
--------------------------------------
Douglas J. McBride
/s/ John W. Murdoch Director
--------------------------------------
John W. Murdoch
81