UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2007 [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _________________ to _________________ COMMISSION FILE 0-18911 GLACIER BANCORP, INC. (Exact name of registrant as specified in its charter) <TABLE> <S> <C> MONTANA 81-0519541 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) </TABLE> <TABLE> <S> <C> 49 Commons Loop, Kalispell, Montana 59901 (Address of principal executive offices) (Zip Code) </TABLE> (406) 756-4200 Registrant's telephone number, including area code Not Applicable (Former name, former address, and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by checkmark whether the registrant is a large accelerated filer, or an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Large Accelerated Filer [X] Accelerated Filer [ ] Non-Accelerated Filer [ ] Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] The number of shares of Registrant's common stock outstanding on April 30, 2007 was 52,689,338. No preferred shares are issued or outstanding.
GLACIER BANCORP, INC. QUARTERLY REPORT ON FORM 10-Q INDEX <TABLE> <CAPTION> Page # ------ <S> <C> PART I. FINANCIAL INFORMATION Item 1 - Financial Statements Condensed Consolidated Statements of Financial Condition - Unaudited March 31, 2007, and March 31, 2006 and December 31, 2006 ................... 3 Condensed Consolidated Statements of Operations - Unaudited three months ended March 31, 2007 and 2006 ............................................. 4 Condensed Consolidated Statements of Stockholders' Equity and Comprehensive Income - Year ended December 31, 2006 and unaudited three months ended March 31, 2007 .................................. 5 Condensed Consolidated Statements of Cash Flows - Unaudited three months ended March 31, 2007 and 2006 ............................................. 6 Notes to Condensed Consolidated Financial Statements - Unaudited ...................................... 7 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations ............ 21 Item 3 - Quantitative and Qualitative Disclosure about Market Risk .................................... 27 Item 4 - Controls and Procedures ........................... 27 PART II. OTHER INFORMATION .......................................... 28 Item 1 - Legal Proceedings ................................. 28 Item 1A - Risk Factors ..................................... 28 Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds ....................................... 28 Item 3 - Defaults Upon Senior Securities ................... 28 Item 4 - Submission of Matters to a Vote of Security Holders ........................................ 28 Item 5 - Other Information ................................. 28 Item 6 - Exhibits .......................................... 28 Signatures ................................................. 29 </TABLE>
GLACIER BANCORP, INC. CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION <TABLE> <CAPTION> March 31, December 31, March 31, (Dollars in thousands, except per share data) 2007 2006 2006 - --------------------------------------------- ----------- ------------ ----------- (UNAUDITED) (unaudited) <S> <C> <C> <C> ASSETS: Cash on hand and in banks ................ $ 123,697 136,591 105,474 Federal funds sold ....................... 2,752 6,125 9,155 Interest bearing cash deposits ........... 88,112 30,301 21,343 ----------- ---------- ---------- Cash and cash equivalents ............. 214,561 173,017 135,972 Investment securities .................... 773,364 825,637 923,382 Loans receivable, net .................... 3,124,368 3,130,389 2,502,279 Loans held for sale ...................... 32,778 35,135 25,153 Premises and equipment, net .............. 115,123 110,759 86,179 Real estate and other assets owned, net .. 1,727 1,484 778 Accrued interest receivable .............. 25,340 25,729 19,317 Core deposit intangible, net ............. 13,861 14,750 7,594 Goodwill ................................. 132,303 129,716 79,099 Other assets ............................. 25,588 24,682 23,036 ----------- ---------- ---------- $ 4,459,013 4,471,298 3,802,789 =========== ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY: Non-interest bearing deposits ............ $ 788,426 829,355 683,201 Interest bearing deposits ................ 2,410,668 2,378,178 2,010,198 Advances from Federal Home Loan Bank of Seattle ............................... 455,625 307,522 505,209 Securities sold under agreements to repurchase ............................ 162,491 170,216 132,207 Other borrowed funds ..................... 5,930 168,770 2,774 Accrued interest payable ................. 12,980 11,041 8,537 Deferred tax liability ................... 94 1,927 2,098 Subordinated debentures .................. 118,559 118,559 87,631 Other liabilities ........................ 31,804 29,587 26,543 ----------- ---------- ---------- Total liabilities ...................... 3,986,577 4,015,155 3,458,398 ----------- ---------- ---------- Preferred shares, $.01 par value per share. 1,000,000 shares authorized None issued or outstanding ............ -- -- -- Common stock, $.01 par value per share 117,187,5000 shares authorized ........ 527 523 485 Paid-in capital .......................... 350,065 344,265 265,603 Retained earnings - substantially restricted ............................ 118,054 108,286 78,171 Accumulated other comprehensive income ... 3,790 3,069 132 ----------- ---------- ---------- Total stockholders' equity ............ 472,436 456,143 344,391 ----------- ---------- ---------- $ 4,459,013 4,471,298 3,802,789 =========== ========== ========== Number of shares outstanding ............. 52,656,162 52,302,820 48,471,168 Book value per share ..................... $ 8.97 8.72 7.11 </TABLE> See accompanying notes to condensed consolidated financial statements. 3
GLACIER BANCORP, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, (UNAUDITED - dollars in thousands, ---------------------------- except per share data) 2007 2006 - ---------------------------------- ----------- ----------- <S> <C> <C> INTEREST INCOME: Real estate loans ................... $ 14,441 10,989 Commercial loans .................... 36,652 25,525 Consumer and other loans ............ 11,314 8,865 Investment securities and other ..... 9,513 10,573 ----------- ----------- Total interest income ............ 71,920 55,952 ----------- ----------- INTEREST EXPENSE: Deposits ............................ 18,807 11,291 Federal Home Loan Bank of Seattle advances ......................... 5,042 4,796 Securities sold under agreements to repurchase .................... 1,887 1,290 Subordinated debentures ............. 1,814 1,429 Other borrowed funds ................ 1,279 838 ----------- ----------- Total interest expense ........... 28,829 19,644 ----------- ----------- NET INTEREST INCOME .................... 43,091 36,308 Provision for loan losses ........... 1,195 1,165 ----------- ----------- Net interest income after provision for loan losses ........ 41,896 35,143 ----------- ----------- NON-INTEREST INCOME: Service charges and other fees ...... 8,263 6,406 Miscellaneous loan fees and charges .......................... 1,822 1,811 Gains on sale of loans .............. 3,042 2,190 Loss on sale of investments ......... (8) -- Other income ........................ 2,573 749 ----------- ----------- Total non-interest income ........ 15,692 11,156 ----------- ----------- NON-INTEREST EXPENSE: Compensation, employee benefits and related expenses ............. 19,506 15,311 Occupancy and equipment expense ..... 4,458 3,491 Outsourced data processing expense .......................... 812 724 Core deposit intangibles amortization ..................... 780 420 Other expenses ...................... 7,627 5,881 ----------- ----------- Total non-interest expense ....... 33,183 25,827 ----------- ----------- EARNINGS BEFORE INCOME TAXES ........... 24,405 20,472 ----------- ----------- Federal and state income tax expense .......................... 8,312 6,843 ----------- ----------- NET EARNINGS ........................... $ 16,093 13,629 =========== =========== Basic earnings per share ............... $ 0.31 0.28 Diluted earnings per share ............. $ 0.30 0.28 Dividends declared per share ........... $ 0.12 0.11 Return on average assets (annualized) .. 1.48% 1.48% Return on average equity (annualized) .. 14.02% 16.21% Average outstanding shares - basic ..... 52,500,395 48,378,237 Average outstanding shares - diluted ... 53,239,346 49,239,701 </TABLE> See accompanying notes to condensed consolidated financial statements. 4
GLACIER BANCORP, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME YEAR ENDED DECEMBER 31, 2006 AND UNAUDITED THREE MONTHS ENDED MARCH 31, 2007 <TABLE> <CAPTION> Retained Accumulated Total Common Stock earnings Other stock- ------------------ Paid-in substantially comprehensive holders' (Dollars in thousands, except per share data) Shares Amount capital restricted income equity --------------------------------------------- ---------- ------ ------- ------------- ------------- -------- <S> <C> <C> <C> <C> <C> <C> 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) Stock based compensation and tax benefit................. -- -- 4,499 -- -- 4,499 ---------- ---- ------- ------- ----- ------- Balance at December 31, 2006............................. 52,302,820 $523 344,265 108,286 3,069 456,143 Comprehensive income: Net earnings.......................................... -- -- -- 16,093 -- 16,093 Unrealized gain on securities, net of reclassification adjustment and taxes............................... -- -- -- -- 721 721 ------- Total comprehensive income............................... 16,814 ------- Cash dividends declared ($.12 per share)................. -- -- -- (6,325) -- (6,325) Stock options exercised.................................. 353,342 4 3,711 -- -- 3,715 Stock based compensation and tax benefit................. -- -- 2,089 -- -- 2,089 ---------- ---- ------- ------- ----- ------- Balance at March 31, 2007 (unaudited).................... 52,656,162 $527 350,065 118,054 3,790 472,436 ========== ==== ======= ======= ===== ======= </TABLE> See accompanying notes to condensed consolidated financial statements. 5
GLACIER BANCORP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, -------------------- (UNAUDITED - dollars in thousands) 2007 2006 ---------------------------------- --------- -------- <S> <C> <C> OPERATING ACTIVITIES : NET CASH PROVIDED BY OPERATING ACTIVITIES................................ $ 25,755 18,854 --------- -------- INVESTING ACTIVITIES: Proceeds from sales, maturities and prepayments of investments available-for-sale........................................ 61,768 43,209 Purchases of investments available-for-sale.............................. (7,481) (792) Principal collected on installment and commercial loans.................. 262,076 249,640 Installment and commercial loans originated or acquired.................. (299,714) (350,179) Principal collections on mortgage loans.................................. 123,188 89,622 Mortgage loans originated or acquired.................................... (103,330) (117,881) Net purchase of FHLB and FRB stock....................................... (1,693) (434) Net cash paid for sale of Western's Lewistown branch..................... (6,846) -- Net addition of premises and equipment................................... (5,295) (7,715) --------- -------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES................... 22,673 (94,530) --------- -------- FINANCING ACTIVITIES: Net increase in deposits ................................................ 16,970 158,688 Net decrease in FHLB advances and other borrowed funds .................. (14,737) (81,900) Net (decrease) increase in securities sold under repurchase agreements... (7,724) 2,677 Cash dividends paid...................................................... (6,325) (5,171) Excess tax benefits from stock options................................... 1,217 474 Proceeds from exercise of stock options and other stock issued........... 3,715 2,186 --------- -------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES................... (6,884) 76,954 --------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS............................. 41,544 1,278 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD......................... 173,017 134,694 --------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD............................... $ 214,561 135,972 ========= ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for: Interest................................ $ 26,891 18,544 Income taxes............................ $ 2,400 380 </TABLE> See accompanying notes to condensed consolidated financial statements. 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1) Basis of Presentation In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of Glacier Bancorp Inc.'s (the "Company") financial condition as of March 31, 2007, and March 31, 2006, stockholders' equity for the three months ended March 31, 2007, the results of operations for the three months ended March 31, 2007 and 2006, and cash flows for the three months ended March 31, 2007 and 2006. The condensed consolidated statement of financial condition and statement of stockholders' equity and comprehensive income of the Company as of December 31, 2006 have been derived from the audited consolidated statements of the Company as of that date. The accompanying condensed consolidated financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2006. Operating results for the three months ended March 31, 2007 are not necessarily indicative of the results anticipated for the year ending December 31, 2007. Certain reclassifications have been made to the 2006 financial statements to conform to the 2007 presentation. 2) Organizational Structure The Company, headquartered in Kalispell, Montana, is a Montana corporation incorporated in 2004 as a successor corporation to the Delaware corporation incorporated in 1990. The Company is the parent company for twelve wholly-owned banking subsidiaries: Glacier Bank ("Glacier"), First Security Bank of Missoula ("First Security"), Western Security Bank ("Western"), Big Sky Western Bank ("Big Sky"), Valley Bank of Helena ("Valley"), Glacier Bank of Whitefish ("Whitefish"), First National Bank of Lewistown and Western Bank of Chinook, all located in Montana, Mountain West Bank ("Mountain West") which is located in Idaho, Utah, and Washington, Citizens Community Bank ("Citizens") located in Idaho, 1st Bank ("1st Bank") located in Wyoming, and First National Bank of Morgan ("Morgan") located in Utah. In addition, the Company owns four trust subsidiaries, Glacier Capital Trust II ("Glacier Trust II"), Glacier Capital Trust III ("Glacier Trust III"), Glacier Capital Trust IV ("Glacier Trust IV"), and Citizens (ID) Statutory Trust I ("Citizens Trust I") for the purpose of issuing trust preferred securities and in accordance with Financial Accounting Standards Board Interpretation ("FASB") 46(R) the subsidiaries are not consolidated into the Company's financial statements. The Company does not have any off-balance sheet entities. On October 1, 2006, the Company acquired Citizens Development Company ("CDC") and its five subsidiaries which include: Citizens State Bank, First Citizens Bank of Billings ("FCB-Billings"), First National Bank of Lewistown, Western Bank of Chinook, and First Citizens Bank, N.A. On January 26, 2007, Citizens State Bank, FCB-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. First National Bank of Lewistown and Western Bank of Chinook are one reporting segment for purposes of financial reporting for the three months ended March 31, 2007. It is anticipated that during June of 2007, Western Bank of Chinook will merge into First National Bank of Lewistown. 7
The following abbreviated organizational chart illustrates the various relationships: <TABLE> <S> <C> <C> <C> ------------------------ 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 Bank) (MT Commercial bank) (MT Commercial bank) - ----------------------- ------------------------ -------------------- ------------------------ - ----------------------- ------------------------ -------------------- ------------------------ Citizens Community Bank Citizens Development First National Bank Glacier Capital Trust II (ID Commercial bank) Company - 2 Subsidiaries of Morgan (MT Commercial Banks) (UT Commercial bank) - ----------------------- ------------------------ -------------------- ------------------------ ------------------------- ------------------------ ------------------------------- Glacier Capital Trust III Glacier Capital Trust IV Citizens (ID) Statutory Trust I ------------------------- ------------------------ ------------------------------- </TABLE> 3) Ratios Returns on average assets and average equity were calculated based on daily averages. 4) Dividends Declared On March 28, 2007, the Board of Directors declared a $.12 per share cash dividend payable on April 19, 2007 to stockholders of record on April 10, 2007. 5) Computation of Earnings Per Share Basic earnings per common share is computed by dividing net earnings by the weighted average number of shares of common stock outstanding during the period presented. Diluted earnings per share is computed by including the net increase in shares as if dilutive outstanding stock options were exercised, using the treasury stock method. The following schedule contains the data used in the calculation of basic and diluted earnings per share: 8
<TABLE> <CAPTION> Three Three months ended months ended March 31, 2007 March 31, 2006 -------------- -------------- <S> <C> <C> Net earnings available to common stockholders........................ $16,093,000 13,629,000 Average outstanding shares - basic..... 52,500,395 48,378,237 Add: Dilutive stock options............ 738,951 861,464 ----------- ---------- Average outstanding shares - diluted... 53,239,346 49,239,701 =========== ========== Basic earnings per share............... $ 0.31 0.28 =========== ========== Diluted earnings per share............. $ 0.30 0.28 =========== ========== </TABLE> There were approximately 12,750 and 215,463 average shares excluded from the three months ended diluted share calculation as of March 31, 2007, and 2006, respectively, due to the option exercise price exceeding the market price. 6) Investments A comparison of the amortized cost and estimated fair value of the Company's investment securities, available-for-sale and other investments, is as follows: 9
INVESTMENTS AS OF MARCH 31, 2007 <TABLE> <CAPTION> Gross Unrealized Estimated Weighted Amortized ---------------- Fair (Dollars in thousands) Yield Cost Gains Losses Value ---------------------- -------- --------- ------ ------ --------- <S> <C> <C> <C> <C> <C> AVAILABLE-FOR-SALE: U.S. GOVERNMENT AND FEDERAL AGENCIES: maturing within one year .......................... 4.85% $ 2,300 -- -- 2,300 GOVERNMENT-SPONSORED ENTERPRISES: maturing within one year .......................... 5.07% 7,485 -- (11) 7,474 maturing one year through five years .............. 5.15% 149 -- -- 149 maturing five years through ten years ............. 7.88% 286 1 -- 287 maturing after ten years .......................... 6.77% 151 1 -- 152 -------- ------ ------ ------- 5.20% 8,071 2 (11) 8,062 -------- ------ ------ ------- STATE AND LOCAL GOVERNMENTS AND OTHER ISSUES: maturing within one year .......................... 4.40% 1,444 1 1,445 maturing one year through five years .............. 4.77% 4,774 34 (20) 4,788 maturing five years through ten years ............. 5.72% 15,482 767 (8) 16,241 maturing after ten years .......................... 5.18% 273,814 11,372 (50) 285,136 -------- ------ ------ ------- 5.20% 295,514 12,174 (78) 307,610 -------- ------ ------ ------- MORTGAGE-BACKED SECURITIES ........................... 4.78% 48,650 154 (1,121) 47,683 REAL ESTATE MORTGAGE INVESTMENT CONDUITS ............. 4.18% 345,797 46 (5,094) 340,749 FHLMC AND FNMA STOCK ................................. 5.74% 7,593 182 -- 7,775 OTHER INVESTMENTS: CERTIFICATES OF DEPOSITS WITH OVER 90 DAY MATURITY.... 4.94% 1,775 -- -- 1,775 FHLB AND FRB STOCK, AT COST .......................... 1.40% 57,410 -- -- 57,410 -------- ------ ------ ------- TOTAL INVESTMENTS ............................... 4.43% $767,110 12,558 (6,304) 773,364 ======== ====== ====== ======= </TABLE> 10
INVESTMENTS AS OF DECEMBER 31, 2006 <TABLE> <CAPTION> Gross Unrealized Estimated Weighted Amortized ---------------- Fair (Dollars in thousands) Yield Cost Gains Losses Value ---------------------- -------- --------- ------ ------ --------- <S> <C> <C> <C> <C> <C> AVAILABLE-FOR-SALE: U.S. GOVERNMENT AND FEDERAL AGENCIES: maturing within one year ........................... 4.78% $ 10,982 -- (6) 10,976 GOVERNMENT-SPONSORED ENTERPRISES: maturing within one year ........................... 4.90% 8,177 -- (17) 8,160 maturing one year through five years ............... 5.15% 648 -- -- 648 maturing five years through ten years .............. 7.73% 352 5 -- 357 maturing after ten years ........................... 6.68% 153 1 -- 154 -------- ------ ------ ------- 5.05% 9,330 6 (17) 9,319 -------- ------ ------ ------- STATE AND LOCAL GOVERNMENTS AND OTHER ISSUES: maturing within one year ........................... 3.65% 2,190 2 (1) 2,191 maturing one year through five years ............... 4.08% 5,736 43 (21) 5,758 maturing five years through ten years .............. 4.92% 15,180 818 (11) 15,987 maturing after ten years ........................... 5.12% 276,756 11,794 (86) 288,464 -------- ------ ------ ------- 5.08% 299,862 12,657 (119) 312,400 -------- ------ ------ ------- MORTGAGE-BACKED SECURITIES ............................ 4.74% 51,673 150 (1,235) 50,588 REAL ESTATE MORTGAGE INVESTMENT CONDUITS .............. 4.14% 382,551 45 (6,634) 375,962 FHLMC AND FNMA STOCK .................................. 5.74% 7,593 218 -- 7,811 OTHER INVESTMENTS: CERTIFICATES OF DEPOSITS WITH OVER 90 DAY MATURITY .... 4.83% 2,864 -- -- 2,864 FHLB AND FRB STOCK, AT COST ........................... 1.26% 55,717 -- -- 55,717 -------- ------ ------ ------- TOTAL INVESTMENTS ................................ 4.36% $820,572 13,076 (8,011) 825,637 ======== ====== ====== ======= </TABLE> Interest income includes tax-exempt interest for the three months ended March 31, 2007 and 2006 of $3,452,000 and $3,489,000, respectively. Gross proceeds from sales of investment securities for the three months ended March 31, 2007 and 2006 were $1,355,000 and $0, respectively, resulting in gross gains of approximately $0 and $0, respectively, and gross losses of approximately $8,000 and $0, respectively. The cost of any investment sold is determined by specific identification. 7) Loans The following table summarizes the Company's loan portfolio: 11
<TABLE> <CAPTION> TYPE OF LOAN At At At (Dollars in thousands) 3/31/2007 12/31/2006 3/31/2006 ---------------------- -------------------- -------------------- -------------------- Amount Percent Amount Percent Amount Percent ---------- ------- ---------- ------- ---------- ------- <S> <C> <C> <C> <C> <C> <C> Real Estate Loans: Residential real estate $ 737,561 23.4% $ 758,921 24.0% $ 617,486 24.4% Loans held for sale 32,778 1.0% 35,135 1.1% 25,153 1.0% ---------- ----- ---------- ----- ---------- ----- Total 770,339 24.4% 794,056 25.1% 642,639 25.4% Commercial Loans: Real estate 964,239 30.5% 954,290 30.2% 812,727 32.2% Other commercial 893,185 28.3% 902,994 28.5% 626,615 24.8% ---------- ----- ---------- ----- ---------- ----- Total 1,857,424 58.8% 1,857,284 58.7% 1,439,342 57.0% Consumer and other Loans: Consumer 214,798 6.8% 218,640 6.9% 194,806 7.7% Home equity 375,911 11.9% 356,477 11.3% 298,564 11.8% ---------- ----- ---------- ----- ---------- ----- Total 590,709 18.7% 575,117 18.2% 493,370 19.5% Net deferred loan fees, premiums and discounts (10,786) -0.3% (11,674) -0.4% (8,068) -0.3% Allowance for loan losses (50,540) -1.6% (49,259) -1.6% (39,851) -1.6% ---------- ----- ---------- ----- ---------- ----- Loan receivable, net $3,157,146 100.0% $3,165,524 100.0% $2,527,432 100.0% ========== ===== ========== ===== ========== ===== </TABLE> The following table sets forth information regarding the Company's non-performing assets at the dates indicated: NONPERFORMING ASSETS (Dollars in thousands) <TABLE> <CAPTION> At At At 3/31/2007 12/31/2006 3/31/2006 --------- ---------- --------- <S> <C> <C> <C> Non-accrual loans: Real estate loans $ 1,134 1,806 595 Commercial loans 3,849 3,721 3,474 Consumer and other loans 614 538 247 ------- ----- ------ Total $ 5,597 6,065 4,316 Accruing Loans 90 days or more overdue: Real estate loans 697 554 1,516 Commercial loans 2,778 638 3,196 Consumer and other loans 507 153 520 ------- ----- ------ Total $ 3,982 1,345 5,232 Real estate and other assets owned, net 1,727 1,484 778 ------- ----- ------ Total non-performing loans and real estate and other assets owned, net $11,306 8,894 10,326 ======= ===== ====== As a percentage of total bank assets 0.25% 0.19% 0.27% Interest Income (1) $ 109 462 78 </TABLE> (1) Amounts represent interest income that would have been recognized on loans accounted for on a non-accrual basis for the three months ended March 31, 2007, the year ended December 31, 2006 and the three months ended March 31, 2006, had such loans performed pursuant to contractual terms. 12
The following table illustrates the loan loss experience: ALLOWANCE FOR LOAN LOSSES <TABLE> <CAPTION> Three months ended Year ended Three months ended March 31, December 31, March 31, (Dollars in thousands) 2007 2006 2006 ---------------------- ------------------ ------------ ------------------ <S> <C> <C> <C> Balance at beginning of period $49,259 38,655 38,655 Charge offs: Real estate loans (42) (14) (6) Commercial loans (212) (1,187) (45) Consumer and other loans (96) (448) (102) ------- ------ ------ Total charge-offs $ (350) (1,649) (153) ------- ------ ------ Recoveries: Real estate loans 89 341 55 Commercial loans 245 331 20 Consumer and other loans 102 298 109 ------- ------ ------ Total recoveries $ 436 970 184 ------- ------ ------ Net recoveries (charge-offs) 86 (679) 31 Acquisition (1) -- 6,091 -- Provision 1,195 5,192 1,165 ------- ------ ------ Balance at end of period $50,540 49,259 39,851 ======= ====== ====== Ratio of net recoveries (charge-offs) to average loans outstanding during the period 0.003% -0.025% 0.001% </TABLE> (1) Acquisition of Citizen's Development Company and First National Bank of Morgan The following table summarizes the allocation of the allowance for loan losses: <TABLE> <CAPTION> March 31, 2007 December 31, 2006 March 31, 2006 ----------------------- ----------------------- ----------------------- Percent Percent Percent of loans in of loans in of loans in (Dollars in thousands) Allowance category Allowance category Allowance category ---------------------- --------- ----------- --------- ----------- --------- ----------- <S> <C> <C> <C> <C> <C> <C> Real estate loans $ 5,303 23.9% 5,421 24.6% 4,518 24.9% Commercial real estate loans 17,315 30.0% 16,741 29.6% 14,374 31.6% Other commercial loans 18,889 27.8% 18,361 28.0% 13,254 24.3% Consumer and other loans 9,033 18.3% 8,736 17.8% 7,705 19.2% ------- ----- ------ ----- ------ ----- Totals $50,540 100.0% 49,259 100.0% 39,851 100.0% ======= ===== ====== ===== ====== ===== </TABLE> 13
8) Intangible Assets The following table sets forth information regarding the Company's core deposit intangible and mortgage servicing rights as of March 31, 2007: <TABLE> <CAPTION> Core Deposit Mortgage Servicing (Dollars in thousands) Intangible Rights (1) Total ---------------------- ------------ ------------------ ------ <S> <C> <C> <C> Gross carrying value $23,182 Accumulated Amortization (9,321) ------- Net carrying value $13,861 1,170 15,031 ======= WEIGHTED-AVERAGE AMORTIZATION PERIOD (Period in years) 10.0 9.6 10.0 AGGREGATE AMORTIZATION EXPENSE For the three months ended March 31, 2007 $ 780 49 829 ESTIMATED AMORTIZATION EXPENSE For the year ended December 31, 2007 $ 3,034 109 3,143 For the year ended December 31, 2008 2,779 79 2,858 For the year ended December 31, 2009 2,486 77 2,563 For the year ended December 31, 2010 2,117 74 2,191 For the year ended December 31, 2011 1,410 72 1,482 </TABLE> (1) The mortgage servicing rights are included in other assets and the gross carrying value and accumulated amortization are not readily available. The following is a summary of activity in goodwill for the three months ended March 31, 2007. <TABLE> <CAPTION> (Dollars in thousands) Goodwill ---------------------- -------- <S> <C> 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 3,801 -------- Balance as of March 31, 2007 $132,303 ======== </TABLE> Acquisitions are accounted for using the purchase accounting method as prescribed by Statement of Financial Accounting Standard Number 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 value. Adjustment of the allocated purchase price may be related to fair value estimates for which all information has not been obtained or required for pre-acquisition contingencies of the acquired entity known or discovered during the allocation period, the period of time required to identify and measure the fair values of the assets and liabilities acquired in the business combination. The allocation period is generally limited to one year following consummation of a business combination. 14
As a condition of acquiring FCB - 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 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 thousand of goodwill associated with such branch was removed. In March 2007, Western adjusted its purchase price allocation for FCB - 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 certain property was increased by $1.25 million with a related $490 thousand increase in deferred tax liability, resulting in a $760 thousand 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 FCB - - Billings. After taking into consideration recoveries, the amount of impairment determined to have occurred on or before the acquisition date is estimated to be $6.3 million with such amount charged off against the loan balance. No further loss is expected as the balance of the loan, after such charge-off, has been collected. On an after tax basis, the increase to goodwill is $3.8 million. Management continues to pursue additional recoveries and remedies from the guarantors and other third parties. Additional recoveries, if any, occurring on or before September 30, 2007, i.e., the expected end of the allocation period will be an adjustment of goodwill, with any recoveries occurring after such date recorded in earnings in the period in which the recoveries are received or accrued. 9) Deposits The following table illustrates the amounts outstanding for deposits $100,000 and greater at March 31, 2007 according to the time remaining to maturity. Included in the CD maturities are brokered CDs in the amount of $205,447,000. <TABLE> <CAPTION> Certificates Non-Maturity (Dollars in thousands) of Deposit Deposits Totals ---------------------- ------------ ------------ --------- <S> <C> <C> <C> Within three months ....... $116,930 1,141,038 1,257,968 Three to six months ....... 74,638 -- 74,638 Seven to twelve months .... 261,621 -- 261,621 Over twelve months ........ 48,229 -- 48,229 -------- --------- --------- Totals ................. $501,418 1,141,038 1,642,456 ======== ========= ========= </TABLE> 10) Advances and Other Borrowings The following chart illustrates the average balances and the maximum outstanding month-end balances for Federal Home Loan Bank of Seattle (FHLB) advances and repurchase agreements: 15
<TABLE> <CAPTION> As of and As of and As of and for the three for the for the three months ended year ended months ended (Dollars in thousands) March 31, 2007 December 31, 2006 March 31, 2006 ---------------------- -------------- ----------------- -------------- <S> <C> <C> <C> FHLB Advances: Amount outstanding at end of period ...... $455,625 307,522 505,209 Average balance .......................... $419,216 487,112 522,376 Maximum outstanding at any month-end ..... $509,519 655,492 572,954 Weighted average interest rate ........... 4.88% 4.20% 3.72% Repurchase Agreements: Amount outstanding at end of period ...... $162,491 170,216 132,207 Average balance .......................... $166,733 153,314 133,020 Maximum outstanding at any month-end ..... $168,395 164,338 135,661 Weighted average interest rate ........... 5.17% 4.32% 3.93% </TABLE> 11) Stockholders' Equity The Federal Reserve Board has adopted capital adequacy guidelines that are used to assess the adequacy of capital in supervising a bank holding company. The following table illustrates the Federal Reserve Board's capital adequacy guidelines and the Company's compliance with those guidelines as of March 31, 2007. <TABLE> <CAPTION> CONSOLIDATED Tier 1 (Core) Tier 2 (Total) Leverage (Dollars in thousands) Capital Capital Capital ---------------------- ------------- -------------- --------- <S> <C> <C> <C> GAAP Capital .................................. $ 472,436 472,436 472,436 Less: Goodwill and intangibles ................ (146,164) (146,164) (146,164) Accumulated other comprehensive Unrealized gain on AFS securities ....... (3,790) (3,790) (3,790) Other adjustments .......................... 81 81 81 Plus: Allowance for loan losses ............... -- 45,632 -- Subordinated debentures .................... 118,559 118,559 118,559 ---------- --------- --------- Regulatory capital computed ................... $ 441,122 486,754 441,122 ========== ========= ========= Risk weighted assets .......................... $3,554,356 3,554,356 ========== ========= Total average assets .......................... $4,365,608 ========== Capital as % of defined assets ................ 12.41% 13.69% 10.10% Regulatory "well capitalized" requirement ..... 6.00% 10.00% 5.00% ---------- --------- --------- Excess over "well capitalized" requirement .... 6.41% 3.69% 5.10% ========== ========= ========= </TABLE> 12) Federal and State Income Taxes The Company and its financial institution subsidiaries join together in the filing of consolidated income tax returns in the following jurisdictions: federal, Montana, Idaho and Utah. Although 1st Bank has operations in Wyoming and Mountain West has operations in Washington, neither Wyoming nor Washington imposes a corporate level income tax. All required income tax returns have been timely filed. Income tax returns for the years ended December 31, 2003, 2004, 2005, and 2006, remain subject to examination by federal, Montana, Idaho and Utah tax authorities. 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 16
48. The Company determined its unrecognized tax benefit to be $300,012 as of March 31, 2007. In accordance with FIN 48, the Company reclassified such amount from a deferred tax liability to a current tax liability. If the unrecognized tax benefit amount was recognized, it would decrease the Company's effective tax rate from 34.1 percent to 33.7 percent. Management believes that it is unlikely that the balance of its unrecognized tax benefits will significantly increase or decrease over the next twelve months. The Company recognizes interest related to unrecognized income tax benefits in interest expense and penalties are recognized in other expense. During the three months ended March 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 March 31, 2007 and 2006, respectively. The Company had accrued $0 for the payment of penalties at March 31, 2007 and 2006. 13) Comprehensive Income The Company's only component of comprehensive income other than net earnings is the unrealized gains and losses on available-for-sale securities. <TABLE> <CAPTION> For the three months ended March 31, -------------------- Dollars in thousands 2007 2006 -------------------- ------- ------- <S> <C> <C> Net earnings ............................................... $16,093 13,629 Unrealized holding gain (loss) arising during the period ... 1,181 (1,137) Tax benefit expense ........................................ (465) 448 ------- ------ Net after tax ........................................ 716 (689) Reclassification adjustment for losses included in net earnings ................................ 8 -- Tax benefit ................................................ (3) -- ------- ------ Net after tax ........................................ 5 -- Net unrealized gain (loss) on securities ............. 721 (689) ------- ------ Total comprehensive income ........................ $16,814 12,940 ======= ====== </TABLE> 17
14) Segment Information The Company evaluates segment performance internally based on individual bank charters, and thus the operating segments are so defined. The following schedule provides selected financial data for the Company's operating segments. Centrally provided services to the Banks are allocated based on estimated usage of those services. The operating segment identified as "Other" includes the Parent, non-bank units, and elimination of transactions between segments. <TABLE> <CAPTION> Three months ended and as of March 31, 2007 ---------------------------------------------------------------------- Mountain First (Dollars in thousands) West Glacier Security Western 1st Bank Big Sky Valley ---------------------- -------- ------- -------- ------- -------- ------- ------- <S> <C> <C> <C> <C> <C> <C> <C> Revenues from external customers $ 20,306 15,420 14,423 11,048 5,068 5,545 5,124 Intersegment revenues 11 39 277 164 250 1 37 Expenses (17,122) (12,139) (11,431) (8,542) (4,366) (4,411) (4,121) Intercompany eliminations -- -- -- -- -- -- -- -------- ------- ------- ------- ------- ------- ------- Net Earnings $ 3,195 3,320 3,269 2,670 952 1,135 1,040 ======== ======= ======= ======= ======= ======= ======= Total Assets $933,133 801,815 792,768 505,130 313,410 282,326 274,941 ======== ======= ======= ======= ======= ======= ======= </TABLE> <TABLE> <CAPTION> Total Whitefish Citizens CDC Morgan Other Consolidated --------- -------- ------- ------ ------- ------------ <S> <C> <C> <C> <C> <C> <C> Revenues from external customers $ 3,418 3,729 2,225 1,206 100 87,612 Intersegment revenues -- -- 215 305 20,231 21,530 Expenses (2,764) (3,202) (1,984) (1,263) (174) (71,519) Intercompany eliminations -- -- -- -- (21,530) (21,530) -------- ------- ------- ------ ------- --------- Net Earnings $ 654 527 456 248 (1,373) 16,093 ======== ======= ======= ====== ======= ========= Total Assets $186,330 170,213 140,704 94,081 (35,838) 4,459,013 ======== ======= ======= ====== ======= ========= </TABLE> <TABLE> <CAPTION> Three months ended and as of March 31, 2006 ------------------------------------------------------------ Mountain First (Dollars in thousands) West Glacier Security Western 1st Bank Big Sky ---------------------- -------- ------- -------- ------- -------- ------- <S> <C> <C> <C> <C> <C> <C> Revenues from external customers $ 15,924 12,452 12,258 6,880 4,102 4,918 Intersegment revenues 6 52 78 17 236 -- Expenses (13,063) (9,284) (9,167) (5,404) (3,526) (3,719) Intercompany eliminations -- -- -- -- -- -- -------- ------- ------- ------- ------- ------- Net Earnings $ 2,867 3,220 3,169 1,493 812 1,199 ======== ======= ======= ======= ======= ======= Total Assets $809,759 697,266 734,092 428,263 284,398 275,158 ======== ======= ======= ======= ======= ======= </TABLE> <TABLE> <CAPTION> Total Valley Whitefish Citizens Other Consolidated -------- --------- -------- ------- ------------ <S> <C> <C> <C> <C> <C> Revenues from external customers $ 4,344 2,996 3,159 75 67,108 Intersegment revenues 33 -- -- 17,374 17,796 Expenses (3,371) (2,306) (2,611) (1,028) (53,479) Intercompany eliminations -- -- -- (17,796) (17,796) -------- ------- ------- ------- --------- Net Earnings $ 1,006 690 548 (1,375) 13,629 ======== ======= ======= ======= ========= Total Assets $258,165 175,912 153,204 (16,059) 3,800,158 ======== ======= ======= ======= ========= </TABLE> 18
15) Rate/Volume Analysis Net interest income can be evaluated from the perspective of relative dollars of change in each period. Interest income and interest expense, which are the components of net interest income, are shown in the following table on the basis of the amount of any increases (or decreases) attributable to changes in the dollar levels of the Company's interest-earning assets and interest-bearing liabilities ("Volume") and the yields earned and rates paid on such assets and liabilities ("Rate"). The change in interest income and interest expense attributable to changes in both volume and rates has been allocated proportionately to the change due to volume and the change due to rate. <TABLE> <CAPTION> Three Months Ended March 31, 2007 vs. 2006 Increase (Decrease) due to: ---------------------------- (Dollars in thousands) Volume Rate Net - ---------------------- ------- ------ ------ <S> <C> <C> <C> INTEREST INCOME Residential real estate loans $ 2,670 782 3,452 Commercial loans 8,323 2,804 11,127 Consumer and other loans 1,784 665 2,449 Investment securities and other (1,374) 314 (1,060) ------- ------ ------ Total Interest Income 11,403 4,565 15,968 INTEREST EXPENSE NOW accounts 117 503 620 Savings accounts 48 32 80 Money market accounts 1,220 2,351 3,571 Certificates of deposit 1,031 2,213 3,244 FHLB advances (947) 1,194 247 Other borrowings and repurchase agreements 1,168 257 1,425 ------- ------ ------ Total Interest Expense 2,637 6,550 9,187 ------- ------ ------ NET INTEREST INCOME $ 8,766 (1,985) 6,781 ======= ====== ====== </TABLE> 19
16) Average Balance Sheet The following schedule provides (i) the total dollar amount of interest and dividend income of the Company for earning assets and the resultant average yield; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rate; (iii) net interest and dividend income; (iv) interest rate spread; and (v) net interest margin. Non-accrual loans are included in the average balance of the loans. AVERAGE BALANCE SHEET <TABLE> <CAPTION> For the Three months ended 3-31-07 ---------------------------------- Interest Average Average and Yield/ (Dollars in thousands) Balance Dividends Rate - ---------------------- ---------- --------- ------- <S> <C> <C> <C> ASSETS Residential real estate loans $ 769,196 14,441 7.51% Commercial loans 1,852,657 36,652 8.02% Consumer and other loans 578,166 11,314 7.94% ---------- ------ Total Loans 3,200,019 62,407 7.91% Tax - exempt investment securities (1) 280,205 3,452 4.90% Other investment securities 564,311 6,061 4.31% ---------- ------ Total Earning Assets 4,044,535 71,920 7.11% ------ Goodwill and core deposit intangible 143,827 Other non-earning assets 232,081 ---------- TOTAL ASSETS $4,420,443 ========== LIABILITIES AND STOCKHOLDERS' EQUITY NOW accounts $ 433,209 1,091 1.02% Savings accounts 266,579 658 1.00% Money market accounts 707,579 6,414 3.68% Certificates of deposit 944,895 10,644 4.57% FHLB advances 419,216 5,042 4.88% Repurchase agreements and other borrowed funds 391,044 4,980 5.17% ---------- ------ Total Interest Bearing Liabilities 3,162,522 28,829 3.70% ------ Non-interest bearing deposits 747,585 Other liabilities 44,651 ---------- Total Liabilities 3,954,758 ---------- Common stock 525 Paid-in capital 345,966 Retained earnings 116,514 Accumulated other Comprehensive income 2,680 ---------- Total Stockholders' Equity 465,685 ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,420,443 ========== Net interest income $43,091 ======= Net interest spread 3.41% Net interest margin on average earning assets 4.32% Return on average assets (annualized) 1.48% Return on average equity (annualized) 14.02% </TABLE> (1) Excludes tax effect on non-taxable investment security income 20
17) Recent Acquisitions On April 30, 2007, the Company completed the acquisition of North Side State Bank of Rock Springs, Wyoming, which was merged into 1st Bank, the Company's Evanston, Wyoming subsidiary. As of March 31, 2007, North Side had approximate total assets of $122 million, loans of $40 million, and deposits of $102 million. Acquisitions are accounted for under the purchase method of accounting. Accordingly, the assets and liabilities of the acquired banks are recorded by the Company at their respective fair values at the date of the acquisition and the results of operations are included with those of the Company since the date of acquisition. The excess of the Company's purchase price over the net fair value of the assets acquired and liabilities assumed, including identifiable intangible assets, is recorded as goodwill. Adjustment of the allocated purchase price may be related to fair value estimates for which all information has not been obtained or required for pre-acquisition contingencies of the acquired entity known or discovered during the allocation period, the period of time required to identify and measure the fair values of the assets and liabilities acquired in the business combination. The allocation period is generally limited to one year following consummation of a business combination. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Impact of Recently Issued Accounting Standards In February 2007, the FASB issued Statement No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities--including an amendment of FASB Statement No. 115" (Statement 159). Statement 159 permits entities to choose to measure many financial instruments and certain other items at fair value and amends Statement 115 to, among other things, require certain disclosures for amounts for which the fair value option is applied. This standard is effective as of the beginning of an entity's first fiscal year that begins after November 15, 2007, or January 1, 2008 for the Company. 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 Statement 157. The Company has not completed its assessment of SFAS 159 and the impact, if any, on the consolidated financial statements. In September 2006, the Financial Accounting Standards Board (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. Financial Condition This section discusses the changes in the Statement of Financial Condition items from March 31, 2006 and December 31, 2006, to March 31, 2007. 21
<TABLE> <CAPTION> March 31, March 31 $ change from $ change from 2007 December 31, 2006 December 31, March 31, ASSETS ($ IN THOUSANDS) (unaudited) 2006 (unaudited) 2006 2006 - ----------------------- ------------ ------------ ----------- ------------- ------------- <S> <C> <C> <C> <C> <C> Cash on hand and in banks $ 123,697 136,591 105,474 (12,894) 18,223 Investment securities, interest bearing deposits, FHLB stock, FRB stock, and fed funds 864,228 862,063 953,880 2,165 (89,652) Loans: Real estate 766,421 789,843 638,529 (23,422) 127,892 Commercial 1,851,139 1,850,417 1,435,731 722 415,408 Consumer and other 590,126 574,523 493,023 15,603 97,103 ---------- --------- --------- ------- ------- Total loans 3,207,686 3,214,783 2,567,283 (7,097) 640,403 Allowance for loan losses (50,540) (49,259) (39,851) (1,281) (10,689) ---------- --------- --------- ------- ------- Total loans net of allowance for loan losses 3,157,146 3,165,524 2,527,432 (8,378) 629,714 ---------- --------- --------- ------- ------- Other assets 313,942 307,120 216,003 6,822 97,939 ---------- --------- --------- ------- ------- Total Assets $4,459,013 4,471,298 3,802,789 (12,285) 656,224 ========== ========= ========= ======= ======= </TABLE> At March 31, 2007, total assets were $4.459 billion, which is $12 million, or 0.28 percent, lower than the December 31, 2006 assets of $4.471 billion, and $656 million, or 17 percent, greater than the March 31, 2006 assets of $3.803 billion. Total loans decreased $7 million from December 31, 2006. Commercial loans have increased $722 thousand, or 0.04 percent, real estate loans decreased $23 million, or 3 percent, and consumer loans grew by $16 million, or 3 percent. Total loans have increased $640 million, or 25 percent, from March 31, 2006, with all loan categories showing increases. Commercial loans grew the most with an increase of $415 million, or 29 percent, followed by real estate loans which increased $128 million, or 20 percent, and consumer loans, which are primarily comprised of home equity loans, increasing by $97 million, or 20 percent. Investment securities, including interest bearing deposits in other financial institutions and federal funds sold, have increased $2 million from December 31, 2006, or 0.25 percent, and have declined $90 million, or 9 percent, from March 31, 2006. Investment securities at March 31, 2007 represented 19% of total assets versus 25% the prior year. The Company typically sells a majority of long-term mortgage loans originated, retaining servicing only on loans sold to certain lenders. The sale of loans in the secondary mortgage market reduces the Company's risk of holding long-term, fixed rate loans in the loan portfolio. Mortgage loans sold for the three months ended March 31, 2007 and 2006 were $142 million and $90 million, respectively. The Company has also been active in generating commercial SBA loans. A portion of some of those loans is sold to other investors. The amount of loans sold and serviced for others at March 31, 2007 was approximately $169 million. 22
<TABLE> <CAPTION> March 31, March 31 $ change from $ change from 2007 December 31, 2006 December 31, March 31, LIABILITIES ($ IN THOUSANDS) (unaudited) 2006 (unaudited) 2006 2006 - ---------------------------- ----------- ------------ ----------- ------------- ------------- <S> <C> <C> <C> <C> <C> Non-interest bearing deposits $ 788,426 829,355 683,201 (40,929) 105,225 Interest bearing deposits 2,410,668 2,378,178 2,010,198 32,490 400,470 Advances from Federal Home Loan Bank 455,625 307,522 505,209 148,103 (49,584) Securities sold under agreements to repurchase and other borrowed funds 168,421 338,986 134,981 (170,565) 33,440 Other liabilities 44,878 42,555 37,178 2,323 7,700 Subordinated debentures 118,559 118,559 87,631 -- 30,928 ---------- --------- ---------- ------- ------- Total liabilities $3,986,577 4,015,155 3,458,398 (28,578) 528,179 ========== ========= ========== ======= ======= </TABLE> Non-interest bearing deposits have decreased $41 million, or 5 percent, since December 31, 2006, and increased by $105 million, or 15 percent, since March 31, 2006. Increasing non-interest bearing deposits continues to be a primary focus of each of our banks. Interest bearing deposits increased $32 million from December 31, 2006, with such change attributable to growth in broker originated certificates of deposits. The March 31, 2007 balance of interest bearing deposits includes $205 million in broker originated CD's and $2 million in Internet generated National Market CD's. Since March 31, 2006, interest bearing deposits increased $400 million, or 20 percent, net of a decrease of $83 million in CD's from broker and Internet sources. Federal Home Loan Bank (FHLB) advances increased $148 million, and repurchase agreements and other borrowed funds decreased $171 million from December 31, 2006, primarily from the redemption of $162 million in U. S. Treasury Tax and Loan Term Auction funds. FHLB advances are $50 million less than the March 31, 2006 balances due primarily to the above described increases in deposits. Liquidity and Capital Resources The objective of liquidity management is to maintain cash flows adequate to meet current and future needs for credit demand, deposit withdrawals, maturing liabilities and corporate operating expenses. The principal source of the Company's cash revenues is the dividends received from the Company's banking subsidiaries. The payment of dividends is subject to government regulation, in that regulatory authorities may prohibit banks and bank holding companies from paying dividends which would constitute an unsafe or unsound banking practice. The subsidiaries' source of funds is generated by deposits, principal and interest payments on loans, sale of loans and securities, short and long-term borrowings, and net earnings. In addition, all of the banking subsidiaries, except Western Bank of Chinook, N.A., are members of the FHLB. As of March 31, 2007, the Company had $818 million of available FHLB credit of which $456 million was utilized. Accordingly, management of the Company has a wide range of versatility in managing the liquidity and asset/liability mix for each individual institution as well as the Company as a whole. Lending Commitments In the normal course of business, there are various outstanding commitments to extend credit, such as letters of credit and un-advanced loan commitments, which are not reflected in the accompanying condensed consolidated financial statements. Management does not anticipate any material losses as a result of these transactions. 23
STOCKHOLDERS' EQUITY ($ IN THOUSANDS EXCEPT PER SHARE DATE) <TABLE> <CAPTION> March 31, March 31 $ change from $ change from 2007 December 31, 2006 December 31, March 31, (unaudited) 2006 (unaudited) 2006 2006 ------------ ------------ ----------- ------------- ------------- <S> <C> <C> <C> <C> <C> Common equity $ 468,646 453,074 344,259 15,572 124,387 Accumulated other comprehensive income 3,790 3,069 132 721 3,658 --------- -------- ------- ------ ------- Total stockholders' equity 472,436 456,143 344,391 16,293 128,045 Core deposit intangible, net, and goodwill (146,164) (144,466) (86,693) (1,698) (59,471) --------- -------- ------- ------ ------- $ 326,272 311,677 257,698 14,595 68,574 ========= ======== ======= ====== ======= Stockholders' equity to total assets 10.60% 10.21% 9.06% Tangible stockholders' equity to total tangible assets 7.57% 7.21% 6.93% Book value per common share $ 8.97 8.72 7.11 0.25 1.86 Market price per share at end of quarter $ 24.04 24.44 20.70 (0.40) 3.34 </TABLE> Total equity and book value per share amounts have increased $16 million and $.25 per share, respectively, from December 31, 2006, the result of earnings retention, and stock options exercised. Accumulated other comprehensive income, representing net unrealized gains on securities designated as available for sale, increased $721 thousand during the quarter, such increase primarily a function of interest rate changes and the decreased balance of securities. <TABLE> <CAPTION> March 31, March 31, 2007 December 31, 2006 CREDIT QUALITY INFORMATION ($ IN THOUSANDS) (unaudited) 2006 (unaudited) ----------- ------------ ----------- <S> <C> <C> <C> Allowance for loan losses $50,540 $ 49,259 $39,851 Non-performing assets $11,306 8,894 10,325 Allowance as a percentage of non performing assets 447% 554% 386% Non-performing assets as a percentage of total bank assets 0.25% 0.19% 0.27% Allowance as a percentage of total loans 1.58% 1.53% 1.55% Net recoveries (charge-offs) as a percentage of loans 0.003% (0.021%) 0.001% </TABLE> Allowance for Loan Loss and Non-Performing Assets Non-performing assets as a percentage of total assets at March 31, 2007 were at ..25 percent, down from .27 percent at March 31, 2006, but increasing slightly from .19 percent at December 31, 2006. The Company ratios compare favorably to the Federal Reserve Bank Peer Group average of .43 percent at December 31, 2006, the most recent information available. The allowance for loan losses was 447 percent of non-performing assets at March 31, 2007, up from 386 percent a year ago. The allowance, including $6.091 million from acquisitions, has increased $10.689 million, or 27 percent, from a year ago. The allowance of $50.540 million, is 1.58 percent of March 31, 2007 total loans outstanding, up slightly from the 1.55 percent a year ago. The first quarter provision for loan losses expense was $1.195 million, an increase of $30 thousand from the same quarter in 2006, and was a decrease of $157 thousand from the fourth quarter of 2006. Recovery of previously charged-off loans exceeded amounts charged-off during the quarter by $86 thousand. Loan growth, average loan size, and credit quality considerations will determine the level of additional provision expense. 24
RESULTS OF OPERATIONS - THE THREE MONTHS ENDED MARCH 31, 2007 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2006. The Company reported net earnings of $16.093 million, an increase of $2.5 million, or 18 percent, over the $13.629 million for the first quarter of 2006. Diluted earnings per share for the quarter of $.30 is an increase of 7 percent over the diluted earnings per share of $.28 for the first quarter of 2006. Net earnings was reduced by $547,230, or $.01 per share, for share-based compensation expense. Annualized return on average assets and return on average equity for the quarter were 1.48 percent and 14.02 percent, respectively, which compares with prior year returns for the first quarter of 1.48 percent and 16.21 percent. Included in net earnings for the quarter is a $1.0 million gain (pre-tax gain of $1.6 million) from the January 19, 2007 sale of Western Security Bank's Lewistown branch as a condition imposed by bank regulators to complete the acquisition of Citizens Development Company ("CDC"). On January 26, 2007, three of the five CDC subsidiaries, i.e., Citizens State Bank, First Citizens Bank of Billings, and First Citizens Bank, N.A., were merged into Company subsidiaries, i.e., First Security Bank of Missoula, Western Security Bank and Glacier Bank, respectively. Costs associated with merging and converting these CDC subsidiaries, the Lewistown branch divestiture and other non-recurring expenses during the quarter were nearly $500 thousand. During June 2007, the remaining two CDC subsidiaries will be merged together. REVENUE SUMMARY (UNAUDITED - $ IN THOUSANDS) <TABLE> <CAPTION> Three months ended March 31, --------------------------------------- 2007 2006 $ change % change ------- ------- -------- -------- <S> <C> <C> <C> <C> Net interest income $43,091 $36,308 $6,783 19% Non-interest income Service charges, loan fees, and other fees 10,085 8,217 1,868 23% Gain on sale of loans 3,042 2,190 852 39% Loss on sale of investments (8) -- (8) n/m Other income 2,573 749 1,824 244% ------- ------- ------- --- Total non-interest income 15,692 11,156 4,536 41% ------- ------- ------- --- $58,783 $47,464 $11,319 24% ======= ======= ======= === Tax equivalent net interest margin 4.36% 4.39% ======= ======= </TABLE> Net Interest Income Net interest income for the quarter increased $6.783 million, or 19 percent, over the same period in 2006, and decreased $2.258 million, or 5 percent, from the fourth quarter of 2006. Total interest income increased $15.968 million from the prior year's quarter, or 29 percent, while total interest expense was $9.185 million, or 47 percent higher. The increase in interest expense is primarily attributable to the volume increase in interest bearing liabilities, and the inverted to flat yield curve on the short end and flat on intermediate to long-term maturities. The net interest margin as a percentage of earning assets, on a tax equivalent basis, was 4.36 percent which was 3 basis points lower than the 4.39 percent result for the first quarter of 2006. Non-interest Income Fee income increased $1.868 million, or 23 percent, over the same period last year, driven primarily by an increased number of loan and deposit accounts from internal growth and acquisitions. Gain on sale of loans increased $852 thousand, or 39 percent, from the first quarter of last year. Other income of $2.573 million includes the $1.6 million gain from the sale of the Lewistown branch. Loan origination activity for housing construction and purchases remains strong in our markets. 25
NON-INTEREST EXPENSE SUMMARY (UNAUDITED - $ IN THOUSANDS) <TABLE> <CAPTION> Three months ended March 31, ---------------------------------------- 2007 2006 $ change % change ------- ------- -------- -------- <S> <C> <C> <C> <C> Compensation and employee benefits $19,506 $15,311 $4,195 27% Occupancy and equipment expense 4,458 3,491 967 28% Outsourced data processing 812 724 88 12% Core deposit intangibles amortization 780 420 360 86% Other expenses 7,627 5,881 1,746 30% ------- ------- ------ --- Total non-interest expense $33,183 $25,827 $7,356 28% ======= ======= ====== === </TABLE> Non-interest Expense Non-interest expense increased by $7.355 million, or 28 percent, from the same quarter of 2006. Compensation and benefit expense increased $4.195 million, or 27 percent, which is primarily attributable to increased staffing levels, including staffing from the acquisitions of First National Bank of Morgan and CDC during 2006, new branches, as well as compensation and merit increases for job performance, increased cost of benefits, and overtime associated with the three CDC banks mergers and related conversions of their operating systems in the first quarter of 2007. The number of full-time-equivalent employees has increased from 1,147 to 1,395, a 22 percent increase since March 31, 2006. Occupancy and equipment expense increased $966 thousand, or 28 percent, reflecting the bank acquisitions, cost of additional branch locations and facility upgrades. Other expenses increased $1.746 million, or 30 percent, primarily from acquisitions, data conversions, additional marketing expenses, and costs associated with new branch offices. The efficiency ratio (non-interest expense/net interest income + non-interest income) was 56 percent for the 2007 first quarter, up from 54 percent for the 2006 first quarter. Critical Accounting Policies Companies apply certain critical accounting policies requiring management to make subjective or complex judgments, often as a result of the need to estimate the effect of matters that are inherently uncertain. The Company considers its only critical accounting policy to be the allowance for loan losses. The allowance for loan losses is established through a provision for loan losses charged against earnings. The balance of allowance for loan loss is maintained at the amount management believes will be adequate to absorb known and inherent losses in the loan portfolio. The appropriate balance of allowance for loan losses is determined by applying estimated loss factors to the credit exposure from outstanding loans. Estimated loss factors are based on subjective measurements including management's assessment of the internal risk classifications, changes in the nature of the loan portfolio, industry concentrations and the impact of current local, regional and national economic factors on the quality of the loan portfolio. Changes in these estimates and assumptions are reasonably possible and may have a material impact on the Company's consolidated financial statements, results of operations and liquidity. Effect of inflation and changing prices Generally accepted accounting principles require the measurement of financial position and operating results in terms of historical dollars, without consideration for change in relative purchasing power over time due to inflation. Virtually all assets of a financial institution are monetary in nature; therefore, interest rates generally have a more significant impact on a company's performance than does the effect of inflation. Forward Looking Statements This Form 10-Q includes forward looking statements, which describe management's expectations regarding future events and developments such as future operating results, growth in loans and deposits, continued success of the Company's style of banking and the strength of the local economies in which it operates. Future events are difficult to predict, and the expectations described above are necessarily subject to risk and uncertainty that may cause actual results to differ materially and adversely. In addition to discussions about 26
risks and uncertainties set forth from time to time in the Company's public filings, factors that may cause actual results to differ materially from those contemplated by such forward looking statements include, among others, the following possibilities: (1) local, national and international economic conditions are less favorable than expected or have a more direct and pronounced effect on the Company than expected and adversely affect the company's ability to continue its internal growth at historical rates and maintain the quality of its earning assets; (2) changes in interest rates reduce interest margins more than expected and negatively affect funding sources; (3) projected business increases following strategic expansion or opening or acquiring new banks and/or branches are lower than expected; (4) costs or difficulties related to the integration of acquisitions are greater than expected; (5) competitive pressure among financial institutions increases significantly; (6) legislation or regulatory requirements or changes adversely affect the businesses in which the Company is engaged. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company believes that there have not been any material changes in information about the Company's market risk than was provided in the Form 10-K report for the year ended December 31, 2006. ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures The Company's Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of our disclosure controls and procedures (as required by Exchange Act Rules 240.13a-15(b) and 15d-14(c)) as of the date of this quarterly report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's current disclosure controls and procedures are effective and timely, providing them with material information relating to the Company required to be disclosed in the reports we file or submit under the Exchange Act. Changes in Internal Controls There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the first quarter 2007, to which this report relates that have materially affected, or are reasonably likely to materially affect the Company's internal control over financial reporting. 27
PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There are no pending material legal proceedings to which the registrant or its subsidiaries are a party. ITEM 1A. RISK FACTORS There have not been any material changes to the Company's risk factors during the first quarter 2007. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS (a) Not Applicable (b) Not Applicable (c) Not Applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES (a) Not Applicable (b) Not Applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS (a) None (b) Not Applicable (c) None (d) None ITEM 5. OTHER INFORMATION (a) Not Applicable (b) Not Applicable ITEM 6. EXHIBITS Exhibit 31.1 - Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002 Exhibit 31.2 - Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002 Exhibit 32 - Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002 28
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GLACIER BANCORP, INC. May 7, 2007 /s/ Michael J. Blodnick ---------------------------------------- Michael J. Blodnick President/CEO May 7, 2007 /s/ Ron J. Copher ---------------------------------------- Ron J. Copher Senior Vice President/CFO 29