UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 2008
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________________ to _________________
COMMISSION FILE 0-18911
GLACIER BANCORP, INC.
(Exact name of registrant as specified in its charter)
MONTANA 81-0519541
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
49 Commons Loop, Kalispell, Montana 59901
(Address of principal executive offices) (Zip Code)
(406) 756-4200
Registrant's telephone number, including area code
Not Applicable
(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [X] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [ ]
(Do not check if a smaller reporting company)
Indicate by checkmark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares of Registrant's common stock outstanding on October 21,
2008 was 54,362,092. No preferred shares are issued or outstanding.
GLACIER BANCORP, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Statements of Financial Condition - Unaudited
September 30, 2008, September 30, 2007 and audited December 31, 2007 ..... 3
Condensed Consolidated Statements of Operations -
Unaudited three and nine months ended September 30, 2008 and 2007 ........ 4
Condensed Consolidated Statements of Stockholders' Equity and
Comprehensive Income - audited year ended December 31, 2007
and unaudited nine months ended September 30, 2008 ....................... 5
Condensed Consolidated Statements of Cash Flows -
Unaudited nine months ended September 30, 2008 and 2007 .................. 6
Notes to Condensed Consolidated Financial Statements - Unaudited ......... 7
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations .............................................. 22
Item 3 - Quantitative and Qualitative Disclosure about Market Risk .......... 34
Item 4 - Controls and Procedures ............................................ 34
PART II OTHER INFORMATION ...................................................... 35
Item 1 - Legal Proceedings .................................................. 35
Item 1A - Risk Factors ...................................................... 35
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds ........ 38
Item 3 - Defaults Upon Senior Securities..................................... 39
Item 4 - Submission of Matters to a Vote of Security Holders ................ 39
Item 5 - Other Information .................................................. 39
Item 6 - Exhibits ........................................................... 39
Signatures .................................................................. 40
GLACIER BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, December 31, September 30,
(Dollars in thousands, except per share data) 2008 2007 2007
-------------------------------------------------------------------------- ------------- ------------ -------------
(UNAUDITED) (audited) (unaudited)
ASSETS:
Cash on hand and in banks ............................................. $ 94,865 145,697 128,230
Federal funds sold .................................................... -- 135 2,735
Interest bearing cash deposits ........................................ 25,018 81,777 60,704
----------- ---------- ----------
Cash and cash equivalents .......................................... 119,883 227,609 191,669
Investment securities ................................................. 842,348 700,324 740,406
Loans receivable, net ................................................. 3,815,622 3,516,999 3,403,587
Loans held for sale ................................................... 41,365 40,123 30,860
Premises and equipment, net ........................................... 123,218 123,749 121,045
Real estate and other assets owned, net ............................... 9,506 2,043 1,750
Accrued interest receivable ........................................... 29,486 26,168 29,893
Deferred tax asset .................................................... 8,832 -- 1,122
Core deposit intangible, net .......................................... 11,653 13,963 14,748
Goodwill .............................................................. 140,301 140,301 140,288
Other assets .......................................................... 30,895 26,051 24,889
----------- ---------- ----------
Total assets ....................................................... $ 5,173,109 4,817,330 4,700,257
=========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Non-interest bearing deposits ......................................... $ 754,623 788,087 819,711
Interest bearing deposits ............................................. 2,282,147 2,396,391 2,547,409
Advances from Federal Home Loan Bank of Seattle ....................... 727,243 538,949 251,908
Securities sold under agreements to repurchase ........................ 189,816 178,041 181,301
Other borrowed funds .................................................. 499,717 223,580 214,135
Accrued interest payable .............................................. 9,810 13,281 18,742
Deferred tax liability ................................................ -- 481 --
Subordinated debentures ............................................... 118,559 118,559 118,559
Other liabilities ..................................................... 32,203 31,385 33,220
----------- ---------- ----------
Total liabilities .................................................. 4,614,118 4,288,754 4,184,985
----------- ---------- ----------
Preferred shares, $.01 par value per share. 1,000,000 shares authorized
None issued or outstanding ........................................ -- -- --
Common stock, $.01 par value per share. 117,187,500 shares
authorized ......................................................... 543 536 536
Paid-in capital ....................................................... 387,331 374,728 373,474
Retained earnings - substantially restricted .......................... 176,738 150,195 139,023
Accumulated other comprehensive (loss) income ......................... (5,621) 3,117 2,239
----------- ---------- ----------
Total stockholders' equity ......................................... 558,991 528,576 515,272
----------- ---------- ----------
Total liabilities and stockholders' equity ......................... $ 5,173,109 4,817,330 4,700,257
=========== ========== ==========
Number of shares outstanding .......................................... 54,332,527 53,646,480 53,612,211
Book value per share .................................................. $ 10.29 9.85 9.61
See accompanying notes to condensed consolidated financial statements.
3
GLACIER BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------ -----------------------
(UNAUDITED - dollars in thousands, except per share data) 2008 2007 2008 2007
--------------------------------------------------------- ----------- ---------- ---------- ----------
INTEREST INCOME:
Real estate loans .................................... $ 12,801 15,617 37,792 45,259
Commercial loans ..................................... 41,212 40,379 124,845 115,201
Consumer and other loans ............................. 11,967 12,423 35,864 35,607
Investment securities and other ...................... 9,709 10,011 27,777 29,576
----------- ---------- ---------- ----------
Total interest income .......................... 75,689 78,430 226,278 225,643
----------- ---------- ---------- ----------
INTEREST EXPENSE:
Deposits ............................................. 12,518 21,449 42,861 60,786
Federal Home Loan Bank of Seattle
advances .......................................... 2,337 5,027 12,876 14,119
Securities sold under agreements to repurchase ....... 919 2,012 3,068 5,623
Subordinated debentures .............................. 1,852 2,023 5,578 5,653
Other borrowed funds ................................. 4,487 936 7,390 4,192
----------- ---------- ---------- ----------
Total interest expense ......................... 22,113 31,447 71,773 90,373
----------- ---------- ---------- ----------
NET INTEREST INCOME ..................................... 53,576 46,983 154,505 135,270
Provision for loan losses ............................ 8,715 1,315 16,257 3,720
----------- ---------- ---------- ----------
Net interest income after provision for
loan losses .................................... 44,861 45,668 138,248 131,550
----------- ---------- ---------- ----------
NON-INTEREST INCOME:
Service charges and other fees ....................... 11,285 10,055 31,355 27,801
Miscellaneous loan fees and charges .................. 1,515 1,798 4,629 5,895
Gains on sale of loans ............................... 3,529 3,203 11,654 9,953
Loss on investments .................................. (7,593) -- (7,345) (8)
Other income ......................................... 3,018 1,422 5,104 4,940
----------- ---------- ---------- ----------
Total non-interest income ....................... 11,754 16,478 45,397 48,581
----------- ---------- ---------- ----------
NON-INTEREST EXPENSE:
Compensation, employee benefits
and related expense ............................... 21,188 20,286 63,252 60,386
Occupancy and equipment expense ...................... 5,502 4,840 15,751 14,110
Advertising and promotions expense ................... 1,942 1,676 5,314 4,697
Outsourced data processing expense ................... 556 553 1,870 2,045
Core deposit intangibles amortization ................ 764 827 2,310 2,416
Other expense ........................................ 7,809 7,014 21,320 19,799
----------- ---------- ---------- ----------
Total non-interest expense ........................ 37,761 35,196 109,817 103,453
----------- ---------- ---------- ----------
EARNINGS BEFORE INCOME TAXES ............................ 18,854 26,950 73,828 76,678
Federal and state income tax expense ................. 6,069 9,311 25,185 26,221
----------- ---------- ---------- ----------
NET EARNINGS ............................................ $ 12,785 17,639 48,643 50,457
=========== ========== ========== ==========
Basic earnings per share ................................
$ 0.23 0.33 0.90 0.95
Diluted earnings per share .............................. $ 0.24 0.33 0.90 0.94
Dividends declared per share ............................ $ 0.13 0.13 0.39 0.37
Return on average assets (annualized) ................... 1.01% 1.50% 1.32% 1.48%
Return on average equity (annualized) ................... 9.15% 13.76% 11.85% 13.85%
Average outstanding shares - basic ...................... 54,104,560 53,566,477 53,975,602 53,086,380
Average outstanding shares - diluted .................... 54,305,005 54,004,828 54,148,583 53,604,922
See accompanying notes to condensed consolidated financial statements.
4
GLACIER BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31, 2007 AND UNAUDITED NINE MONTHS ENDED SEPTEMBER 30, 2008
Retained Accumulated Total
Common Stock earnings Other stock-
------------------- Paid-in substantially comprehensive holders'
(Dollars in thousands, except per share data) Shares Amount capital restricted income (loss) equity
--------------------------------------------------------- ---------- ------ ------- ------------- ------------- --------
Balance at December 31, 2006 ............................ 52,302,820 $523 344,265 108,286 3,069 456,143
Comprehensive income:
Net earnings ......................................... -- -- -- 68,603 -- 68,603
Unrealized gain on securities, net of reclassification
adjustment and taxes .............................. -- -- -- -- 48 48
Total comprehensive income .............................. 68,651
-------
Cash dividends declared ($.50 per share) ................ -- -- -- (26,694) -- (26,694)
-------
Stock options exercised ................................. 550,080 6 6,148 -- -- 6,154
Stock issued in connection with acquisition ............. 793,580 7 18,993 -- -- 19,000
Stock based compensation and tax benefit ................ -- -- 5,322 -- -- 5,322
---------- ---- ------- ------- ------ -------
Balance at December 31, 2007 ............................ 53,646,480 $536 374,728 150,195 3,117 528,576
Comprehensive income:
Net earnings ......................................... -- -- -- 48,643 -- 48,643
Unrealized loss on securities, net of reclassification
adjustment and taxes .............................. -- -- -- -- (8,738) (8,738)
-------
Total comprehensive income .............................. 39,905
-------
Cash dividends declared ($.39 per share) ................ -- -- -- (21,103) -- (21,103)
Stock options exercised ................................. 686,047 7 9,183 -- -- 9,190
Cumulative effect of a change in accounting principle ... -- -- -- (997) -- (997)
Stock based compensation and tax benefit ................ -- -- 3,420 -- -- 3,420
---------- ---- ------- ------- ------ -------
Balance at September 30, 2008 (unaudited) ............... 54,332,527 $543 387,331 176,738 (5,621) 558,991
========== ==== ======= ======= ====== =======
See accompanying notes to condensed consolidated financial statements.
5
GLACIER BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
(UNAUDITED - dollars in thousands) 2008 2007
------------------------------------------------------------------------ -------------- --------------
OPERATING ACTIVITIES :
NET CASH PROVIDED BY OPERATING ACTIVITIES ............................ $ 60,649 64,038
----------- ----------
INVESTING ACTIVITIES:
Proceeds from sales, maturities and prepayments of
investments available-for-sale .................................... 250,422 230,485
Purchases of investments available-for-sale .......................... (415,153) (86,938)
Principal collected on installment and commercial loans .............. 820,830 901,555
Installment and commercial loans originated or acquired .............. (1,087,908) (1,143,875)
Principal collections on mortgage loans .............................. 238,797 365,337
Mortgage loans originated or acquired ................................ (286,599) (383,393)
Net purchase of FHLB and FRB stock ................................... (138) (3,803)
Net cash paid for sale of Western's Lewistown branch ................. -- (6,846)
Net cash received from North Side State Bank acquisition ............. -- 8,953
Net addition of premises and equipment ............................... (6,507) (855)
----------- ----------
NET CASH USED IN INVESTING ACTIVITIES ............................. (486,256) (119,380)
----------- ----------
FINANCING ACTIVITIES:
Net (decrease) increase in deposits .................................. (147,708) 85,427
Net increase (decrease) in FHLB advances and other borrowed funds .... 464,431 (10,249)
Net increase in securities sold under repurchase agreements .......... 11,775 11,086
Cash dividends paid .................................................. (21,103) (19,720)
Excess tax benefits from stock options ............................... 1,296 1,667
Proceeds from exercise of stock options and other stock issued ....... 9,190 5,783
----------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES ......................... 317,881 73,994
----------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS .............. (107,726) 18,652
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ..................... 227,609 173,017
----------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ........................... $ 119,883 191,669
=========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for: Interest .......................... $ 75,244 82,462
Income taxes ...................... $ 32,872 24,242
The following schedule summarizes the acquisition of North Side State Bank
in 2007
NORTH SIDE
STATE BANK
--------------
Acquired April 30, 2007
Fair Value of assets acquired $ 128,252
Cash paid for the capital stock 8,953
Capital stock issued 19,000
Liabilities assumed 100,348
See accompanying notes to condensed consolidated financial statements.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1) Basis of Presentation
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of
normal recurring adjustments) necessary for a fair presentation of Glacier
Bancorp Inc.'s (the "Company") financial condition as of September 30, 2008
and 2007, stockholders' equity and comprehensive income for the nine months
ended September 30, 2008, the results of operations for the three and nine
months ended September 30, 2008 and 2007, and cash flows for the nine
months ended September 30, 2008 and 2007. The condensed consolidated
statement of financial condition and statement of stockholders' equity and
comprehensive income of the Company as of December 31, 2007 have been
derived from the audited consolidated statements of the Company as of that
date.
The accompanying condensed consolidated financial statements do not include
all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. These condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes
thereto contained in the Company's Annual Report on Form 10-K for the year
ended December 31, 2007. Operating results for the nine months ended
September 30, 2008 are not necessarily indicative of the results
anticipated for the year ending December 31, 2008. Certain
reclassifications have been made to the 2007 financial statements to
conform to the 2008 presentation.
2) Organizational Structure
The Company, headquartered in Kalispell, Montana, is a Montana corporation
incorporated in 2004 as a successor corporation to the Delaware corporation
incorporated in 1990. As of September 30, 2008, the Company is the parent
holding company for ten wholly-owned, independent community bank
subsidiaries: Glacier Bank ("Glacier"), First Security Bank of Missoula
("First Security"), Western Security Bank ("Western"), Big Sky Western Bank
("Big Sky"), Valley Bank of Helena ("Valley"), First Bank of Montana
("First Bank-MT"), all located in Montana, Mountain West Bank ("Mountain
West") which is located in Idaho, Utah, and Washington, Citizens Community
Bank ("Citizens") located in Idaho, 1st Bank ("1st Bank") located in
Wyoming, and First National Bank of Morgan ("Morgan") located in Utah.
On August 19, 2008, a definitive agreement to acquire Bank of the San Juans
("BSJ"), a community bank based in Durango, Colorado was announced. The
transaction provides for the payment of $9.0 million in cash and 640,000
shares of the Company's common stock. The shares were registered on
September 12, 2008 with the filing of Form S-4 with the Securities and
Exchange Commission ("SEC"). As of September 30, 2008, BSJ had total assets
of $146 million, net loans of $131 million and deposits of $131 million.
The acquisition has received all necessary regulatory approvals and is
expected to close on December 1, 2008. Upon closing, BSJ will become a
wholly-owned subsidiary of the Company.
On April 30, 2008, Glacier Bank of Whitefish ("Whitefish") merged into
Glacier with operations conducted under the Glacier charter. Prior period
activity of Whitefish was combined and included in Glacier's historical
results. The merger was accounted for as a combination of two wholly-owned
subsidiaries without purchase accounting.
In addition, the Company owns four trust subsidiaries, Glacier Capital
Trust II ("Glacier Trust II"), Glacier Capital Trust III ("Glacier Trust
III"), Glacier Capital Trust IV ("Glacier Trust IV"), and
7
Citizens (ID) Statutory Trust I ("Citizens Trust I") for the purpose of issuing
trust preferred securities and, in accordance with Financial Accounting
Standards Board ("FASB") Interpretation 46(R), the subsidiaries are not
consolidated into the Company's financial statements. The Company does not have
any other off-balance sheet entities.
See Note 12 - Segment Information for selected financial data including net
earnings and total assets for the parent company and each of the community bank
subsidiaries. Although the consolidated total assets of the Company was $5.2
billion at September 30, 2008, eight of the ten community banks had total assets
of less than $1 billion. Morgan, the smallest community bank subsidiary had $101
million in total assets, while Glacier Bank, the largest community bank
subsidiary, had $1.2 billion in total assets at September 30, 2008.
The following abbreviated organizational chart illustrates the various
relationships as of September 30, 2008:
-------------------------------
| Glacier Bancorp, Inc. |
| (Parent Holding Company) |
-------------------------------
|
|
----------------------------------------------------------|--------------------------------------------------------------
| Glacier Bank | | Mountain West Bank | | | First Security Bank | | Western Security Bank |
| (MT Community Bank) | | (ID Community Bank) | | | of Missoula | | (MT Community Bank) |
| | | | | | (MT Community Bank) | | |
--------------------- -------------------------- | ------------------------- -------------------------
|
----------------------------------------------------------|--------------------------------------------------------------
| 1st Bank | | Big Sky | | | Valley Bank | | Citizens Community Bank |
| (WY Community Bank) | | Western Bank | | | of Helena | | (ID Community Bank) |
| | | (MT Community Bank) | | | (MT Community Bank) | | |
---------------------- ------------------------- | ------------------------ --------------------------
|
----------------------------------------------------------|--------------------------------------------------------------
| First Bank of Montana | | First National Bank | | | | | |
| (MT Community Bank) | | of Morgan | | | Glacier Capital Trust II | | Glacier Capital Trust III |
| | | (UT Community Bank) | | | | | |
---------------------- ------------------------- | -------------------------- --------------------------
|
----------------------------------------------------------
| Glacier Capital Trust IV | | Citizens (ID) Statutory |
| | | Trust I |
-------------------------- ------------------------
8
3) Investments
A comparison of the amortized cost and estimated fair value of the
Company's investment securities, available-for-sale and other investments
is as follows:
INVESTMENTS AS OF SEPTEMBER 30, 2008
Gross Unrealized Estimated
Weighted Amortized ---------------- Fair
(Dollars in thousands) Yield Cost Gains Losses Value
-------------------------------------------------------------- -------- --------- ------ ------- ---------
AVAILABLE-FOR-SALE:
GOVERNMENT-SPONSORED ENTERPRISES:
maturing within one year .................................. 2.45% 253 -- -- 253
maturing one year through five years ...................... 0.00% -- -- -- --
maturing five years through ten years ..................... 4.49% 252 -- (1) 251
maturing after ten years .................................. 1.70% 70 -- -- 70
-------- ----- ------- -------
3.26% 575 -- (1) 574
-------- ----- ------- -------
STATE AND LOCAL GOVERNMENTS AND OTHER ISSUES:
maturing within one year .................................. 3.98% 713 5 -- 718
maturing one year through five years ...................... 4.53% 4,097 64 -- 4,161
maturing five years through ten years ..................... 5.04% 16,418 778 (2) 17,194
maturing after ten years .................................. 5.07% 276,832 3,841 (5,800) 274,873
-------- ----- ------- -------
5.06% 298,060 4,688 (5,802) 296,946
-------- ----- ------- -------
MORTGAGE-BACKED SECURITIES ................................... 4.93% 492,522 1,529 (9,690) 484,361
-------- ----- ------- -------
TOTAL MARKETABLE SECURITIES ............................ 4.97% 791,157 6,217 (15,493) 781,881
-------- ----- ------- -------
OTHER INVESTMENTS:
Certificates of Deposits with over 90 day maturity, at cost .. 5.25% 99 -- -- 99
FHLB and FRB stock, at cost .................................. 1.73% 59,952 -- -- 59,952
Other stock, at cost ......................................... 3.07% 416 -- -- 416
-------- ----- ------- -------
TOTAL INVESTMENTS ...................................... 4.74% $851,624 6,217 (15,493) 842,348
======== ===== ======= =======
9
INVESTMENTS AS OF DECEMBER 31, 2007
Gross Unrealized Estimated
Weighted Amortized ---------------- Fair
(Dollars in thousands) Yield Cost Gains Losses Value
-------------------------------------------------------------- -------- --------- ------ ------- ---------
AVAILABLE-FOR-SALE:
U.S. GOVERNMENT AND FEDERAL AGENCIES:
maturing within one year .................................. 3.66% $ 2,550 3 -- 2,553
GOVERNMENT-SPONSORED ENTERPRISES:
maturing within one year .................................. 4.86% 947 -- (1) 946
maturing one year through five years ...................... 0.00% -- -- -- --
maturing five years through ten years ..................... 7.06% 280 -- (1) 279
maturing after ten years .................................. 6.47% 87 1 -- 88
-------- ------ ------ -------
5.43% 1,314 1 (2) 1,313
-------- ------ ------ -------
STATE AND LOCAL GOVERNMENTS AND OTHER ISSUES:
maturing within one year .................................. 4.03% 1,328 5 (1) 1,332
maturing one year through five years ...................... 4.30% 3,928 45 (2) 3,971
maturing five years through ten years ..................... 4.96% 16,847 932 (2) 17,777
maturing after ten years .................................. 5.09% 255,109 8,999 (319) 263,789
-------- ------ ------ -------
5.06% 277,212 9,981 (324) 286,869
-------- ------ ------ -------
MORTGAGE-BACKED SECURITIES ................................... 4.55% 346,085 693 (3,405) 343,373
FHLMC AND FNMA STOCK ......................................... 5.74% 7,593 -- (1,804) 5,789
-------- ------ ------ -------
TOTAL MARKETABLE SECURITIES ............................ 4.79% 634,754 10,678 (5,535) 639,897
-------- ------ ------ -------
OTHER INVESTMENTS:
Certificates of Deposits with over 90 day maturity, at cost .. 5.06% 199 -- -- 199
FHLB and FRB stock, at cost .................................. 1.72% 59,815 -- -- 59,815
Other stock, at cost ......................................... 3.09% 413 -- -- 413
-------- ------ ------ -------
TOTAL INVESTMENTS ...................................... 4.52% $695,181 10,678 (5,535) 700,324
======== ====== ====== =======
Interest income includes tax-exempt interest for the nine months ended
September 30, 2008 and 2007 of $9,547,000 and $10,207,000, respectively,
and for the three months ended September 30, 2008 and 2007 of $3,199,000
and $3,279,000, respectively.
Gross proceeds from sale of marketable securities for the nine months ended
September 30, 2008 and 2007 were $97,002,000 and $55,501,000, respectively,
resulting in gross gains of $0 and $1,000, respectively, and gross losses
of $0 and $9,000, respectively. The gross proceeds and gross gains for the
sale of other stock was $248,000 and $0 for the nine months ended September
30, 2008 and 2007, respectively. During the first quarter of 2008, the
Company realized a gain of $130,000 from extinguishment of the Company's
share ownership in Principal Financial Group and a gain of $118,000 from
the mandatory redemption of a portion of Visa, Inc. shares from its recent
initial public offering. During the third quarter of 2008, the Company
incurred a $7,593,000 other than temporary impairment ("OTTI") charge with
respect to its investments in Federal Home Loan Mortgage Corporation
("Freddie Mac") preferred stock and Federal National Mortgage Association
("Fannie Mae") common stock. The Fannie Mae and Freddie Mac stock was
written down to a $0 value, however, the shares were still owned by the
Company at September 30, 2008. The tax benefit associated with the OTTI
charge was based on certain tax planning strategies to achieve capital gain
income on certain transactions sufficient to absorb the potential capital
loss realized upon the future sale of the Freddie Mac preferred stock. Such
tax planning strategies became unnecessary effective with the October 3,
2008 enactment of the Emergency Economic Stabilization Act of 2008, of
which Section 301 provides that loss or gain arising
10
from the future sale of the Company's Freddie Mac preferred stock shall be
treated as ordinary in nature instead of capital in nature. The cost of any
investment sold is determined by specific identification.
The investments in the Federal Home Loan Bank ("FHLB") of Seattle stock are
required investments related to the Company's borrowings from FHLB of
Seattle. FHLB of Seattle obtains its funding primarily through issuance of
consolidated obligations of the FHLB system. The U.S. Government does not
guarantee these obligations, and each of the 12 FHLBs are jointly and
severally liable for repayment of each other's debt.
4) Loans and Leases
The following table summarizes the Company's loan and lease portfolio,
At At At
9/30/08 12/31/2007 9/30/07
TYPE OF LOAN -------------------- -------------------- --------------------
(Dollars in thousands) Amount Percent Amount Percent Amount Percent
----------------------------------------- ---------- ------- ---------- ------- ---------- -------
Real Estate Loans:
Residential real estate $ 731,929 19.0% $ 689,238 19.4% $ 805,125 23.5%
Loans held for sale 41,365 1.1% 40,123 1.1% 30,860 0.9%
---------- ----- ---------- ----- ---------- -----
Total 773,294 20.1% 729,361 20.5% 835,985 24.4%
Commercial Loans:
Real estate 1,818,472 47.1% 1,617,076 45.4% 1,405,532 40.9%
Other commercial 638,285 16.5% 636,351 17.9% 628,596 18.3%
---------- ----- ---------- ----- ---------- -----
Total 2,456,757 63.6% 2,253,427 63.3% 2,034,128 59.2%
Consumer and other Loans:
Consumer 210,557 5.5% 206,724 5.8% 207,330 6.0%
Home equity 490,405 12.7% 432,217 12.2% 420,097 12.2%
---------- ----- ---------- ----- ---------- -----
Total 700,962 18.2% 638,941 18.0% 627,427 18.2%
Net deferred loan fees, premiums
and discounts (8,393) -0.2% (10,194) -0.3% (10,477) -0.3%
Allowance for loan and lease losses (65,633) -1.7% (54,413) -1.5% (52,616) -1.5%
---------- ----- ---------- ----- ---------- -----
Loan receivable, net $3,856,987 100.0% $3,557,122 100.0% $3,434,447 100.0%
========== ===== ========== ===== ========== =====
The following table sets forth information regarding the Company's
non-performing assets at the dates indicated:
September 30, December 31, September 30,
(Dollars in thousands) 2008 2007 2007
---------------------------------------------------------- ------------- ------------ -------------
Real estate and other assets owned $ 9,506 2,043 1,750
Accruing Loans 90 days or more overdue 4,924 2,685 2,467
Non-accrual loans 56,322 8,560 7,505
------- ------ ------
Total non-performing assets $70,752 13,288 11,722
======= ====== ======
Non-performing assets as a percentage of total bank assets 1.30% 0.27% 0.24%
Impaired loans, net of government guaranteed amounts, were $66,695,000,
$23,707,000, $12,152,000 and $9,972,000 as of September 30, 2008, June 30, 2008,
December 31, 2007 and September 30, 2007, respectively. The allowance for loan
and lease loss includes valuation allowances of $7,514,000,
11
$3,030,000, $2,827,000 and $0 specific to impaired loans as of September
30, 2008, June 30, 2008, December 31, 2007, and September 30, 2007,
respectively.
The following table illustrates the loan and lease loss experience:
September December September
(Dollars in thousands) 30, 2008 31, 2007 30, 2007
---------------------- --------- -------- ---------
Balance at the beginning of the period $54,413 49,259 49,259
Charge-offs (5,765) (3,387) (1,975)
Recoveries 728 1,222 973
------- ------ ------
Net charge-offs $(5,037) (2,165) (1,002)
Acquisition (1) -- 639 639
Provision 16,257 6,680 3,720
------- ------ ------
Balance at the end of the period $65,633 54,413 52,616
======= ====== ======
Ratio of net charge-offs to average
loans outstanding during the period 0.134% 0.064% 0.030%
(1) Increase attributable to the April 30, 2007 acquisition of North Side State
Bank ("North Side") of Rock Springs, Wyoming, which was merged into 1st
Bank, the Company's subsidiary bank in Evanston, Wyoming.
5) Intangible Assets
The following table sets forth information regarding the Company's core
deposit intangible and mortgage servicing rights as of September 30, 2008:
Core Mortgage
Deposit Servicing
(Dollars in thousands) Intangible Rights (1) Total
---------------------- ---------- ---------- ------
Gross carrying value $ 25,706
Accumulated Amortization (14,053)
--------
Net carrying value $ 11,653 1,275 12,928
========
WEIGHTED-AVERAGE AMORTIZATION PERIOD
(Period in years) 10.0 9.8 10.0
AGGREGATE AMORTIZATION EXPENSE
For the three months ended September 30, 2008 $ 764 45 809
For the nine months ended September 30, 2008 2,310 137 2,447
ESTIMATED AMORTIZATION EXPENSE
For the year ended December 31, 2008 $ 3,032 158 3,190
For the year ended December 31, 2009 2,738 85 2,823
For the year ended December 31, 2010 2,369 83 2,452
For the year ended December 31, 2011 1,662 81 1,743
For the year ended December 31, 2012 1,300 79 1,379
(1) The mortgage servicing rights are included in other assets and the gross
carrying value and accumulated amortization are immaterial and therefore
not presented.
12
Acquisitions are accounted for using the purchase accounting method as
prescribed by Statement of Financial Accounting Standard ("SFAS") No. 141,
Business Combinations. Purchase accounting requires the total purchase
price to be allocated to the estimated fair values of assets acquired and
liabilities assumed, including certain intangible assets. Goodwill is
recorded for the residual amount in excess of the net fair value.
Adjustment of the allocated purchase price may be related to fair value
estimates for which all information has not been obtained or required for
pre-acquisition contingencies of the acquired entity known or discovered
during the allocation period, the period of time required to identify and
measure the fair values of the assets and liabilities acquired in the
business combination. The allocation period is generally limited to one
year following consummation of a business combination.
6) Deposits
The following table illustrates the amounts outstanding for deposits
$100,000 and greater at September 30, 2008 according to the time remaining
to maturity.
Certificates Non-Maturity
(Dollars in thousands) of Deposit Deposits Totals
---------------------- ------------ ------------ ---------
Within three months ..... $111,414 1,094,012 1,205,426
Three to six months ..... 94,387 -- 94,387
Seven to twelve months .. 82,992 -- 82,992
Over twelve months ...... 49,962 -- 49,962
-------- --------- ---------
Totals $338,755 1,094,012 1,432,767
======== ========= =========
7) Advances and Other Borrowings
The following chart illustrates the average balances and the maximum
outstanding month-end balances of amounts borrowed through FHLB of Seattle,
repurchase agreements, U.S. Treasury Tax and Loan and Federal Reserve Bank
discount window programs:
13
As of and As of and As of and
for the nine for the for the nine
months ended year ended months ended
September 30, December 31, September 30,
(Dollars in thousands) 2008 2007 2007
---------------------- ------------- ------------ -------------
FHLB advances:
Amount outstanding at end of period.... $727,243 538,949 251,908
Average balance........................ $531,961 382,243 376,381
Maximum outstanding at any month-end... $815,860 538,949 509,519
Weighted average interest rate......... 3.22% 4.94% 5.02%
Repurchase agreements:
Amount outstanding at end of period.... $189,816 178,041 181,301
Average balance........................ $185,682 171,290 165,592
Maximum outstanding at any month-end... $196,266 193,421 185,051
Weighted average interest rate......... 2.20% 4.35% 4.54%
U.S. Treasury Tax and Loan:
Amount outstanding at end of period.... $357,095 221,409 211,950
Average balance........................ $172,805 120,188 109,531
Maximum outstanding at any month-end... $357,095 244,012 244,012
Weighted average interest rate......... 2.56% 5.03% 5.24%
Federal Reserve Bank discount window:
Amount outstanding at end of period.... $140,500 -- --
Average balance........................ $217,340 -- --
Maximum outstanding at any month-end... $928,000 -- --
Weighted average interest rate......... 2.25% 0.00% 0.00%
8) Stockholders' Equity
The Federal Reserve Board has adopted capital adequacy guidelines that are
used to assess the adequacy of capital in supervising a bank holding
company. The following table illustrates the Federal Reserve Board's
capital adequacy guidelines and the Company's compliance with those
guidelines as of September 30, 2008.
Tier 1 Tier 2
CONSOLIDATED (Core) (Total) Leverage
(Dollars in thousands) Capital Capital Capital
---------------------- ---------- --------- ----------
Total stockholder's equity ................... $ 558,991 558,991 558,991
Less: Goodwill and intangibles ............... (151,954) (151,954) (151,954)
Plus: Allowance for loan and lease losses .... -- 53,433 --
Accumulated other comprehensive
Unrealized loss on AFS securities ...... 5,621 5,621 5,621
Subordinated debentures ................... 115,000 115,000 115,000
---------- --------- ----------
Regulatory capital computed .................. $ 527,658 581,091 527,658
========== ========= ==========
Risk weighted assets ......................... $4,262,972 4,262,972
========== =========
Total adjusted average assets ................ $4,908,363
==========
Capital as % of risk weighted assets ......... 12.38% 13.63% 10.75%
Regulatory "well capitalized" requirement .... 6.00% 10.00% 5.00%
---------- --------- ----------
Excess over "well capitalized" requirement ... 6.38% 3.63% 5.75%
========== ========= ==========
14
9) Computation of Earnings Per Share
Basic earnings per common share is computed by dividing net earnings by the
weighted average number of shares of common stock outstanding during the
period presented. Diluted earnings per share is computed by including the
net increase in shares as if dilutive outstanding stock options were
exercised, using the treasury stock method.
The following schedule contains the data used in the calculation of basic
and diluted earnings per share:
Three Three Nine Nine
months ended months ended months ended months ended
September 30, 2008 September 30, 2007 September 30, 2008 September 30, 2007
------------------ ------------------ ------------------ -------------------
Net earnings available to common
stockholders ........................ $12,785,000 17,639,000 48,643,000 50,457,000
Average outstanding shares - basic ..... 54,104,560 53,566,477 53,975,602 53,086,380
Add: Dilutive stock options ............ 200,445 438,351 172,981 518,542
----------- ---------- ---------- ----------
Average outstanding shares - diluted ... 54,305,005 54,004,828 54,148,583 53,604,922
=========== ========== ========== ==========
Basic earnings per share ............... $ 0.23 0.33 0.90 0.95
=========== ========== ========== ==========
Diluted earnings per share ............. $ 0.24 0.33 0.90 0.94
=========== ========== ========== ==========
There were approximately 1,442,110 and 699,747 average shares excluded from
the diluted average outstanding share calculation for the nine months ended
September 30, 2008 and 2007, respectively, due to the option exercise price
exceeding the market price.
10) Comprehensive Income
The Company's only component of comprehensive income other than net
earnings is the unrealized gains and losses on available-for-sale
securities.
For the three months For the nine months
ended September 30, ended September 30,
-------------------- -------------------
Dollars in thousands 2008 2007 2008 2007
-------------------- -------- ------ ------- ------
Net earnings ............................................... $ 12,785 17,639 48,643 50,457
Unrealized holding (loss) gain arising during the period ... (13,445) 4,533 (21,765) (1,378)
Tax benefit (expense) ...................................... 5,267 (1,786) 8,546 543
-------- ------ ------ ------
Net after tax ........................................... (8,178) 2,747 (13,219) (835)
Reclassification adjustment for losses included in net
earnings ................................................ 7,593 -- 7,345 8
Tax benefit ................................................ (2,961) -- (2,864) (3)
-------- ------ ------ ------
Net after tax ........................................... 4,632 -- 4,481 5
Net unrealized (loss) gain on securities ................ (3,546) 2,747 (8,738) (830)
-------- ------ ------ ------
Total comprehensive income ........................... $ 9,239 20,386 39,905 49,627
======== ====== ====== ======
15
11) Federal and State Income Taxes
The Company and its financial institution subsidiaries join together in the
filing of consolidated income tax returns in the following jurisdictions:
federal, Montana, Idaho and Utah. Although 1st Bank has operations in
Wyoming and Mountain West has operations in Washington, neither Wyoming nor
Washington impose a corporate level income tax. All required income tax
returns have been timely filed. Income tax returns for the years ended
December 31, 2005, 2006 and 2007 remain subject to examination by federal,
Montana, Idaho and Utah tax authorities and income tax returns for the
years ended December 31, 2003 and 2004 remain subject to examination by the
state of Montana and Idaho.
On January 1, 2007, the Company adopted FASB Interpretation No. 48 ("FIN
48"), Accounting for Uncertainty in Income Taxes. There was no cumulative
effect recognized in retained earnings as a result of adopting FIN 48. The
Company determined its unrecognized tax benefit to be $152,000 as of
September 30, 2008.
If the unrecognized tax benefit amount was recognized, it would decrease
the Company's effective tax rate from 34.1 percent to 33.9 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 nine months ended September 30, 2008 and 2007, the Company recognized
$0 interest expense and recognized $0 penalty with respect to income tax
liabilities. The Company had approximately $37,000 and $50,000 accrued for
the payment of interest at September 30, 2008 and 2007, respectively. The
Company had accrued liabilities of $0 for the payment of penalties at
September 30, 2008 and 2007.
12) Segment Information
The Company defines operating segments and evaluates segment performance
internally based on individual bank charters. The following schedule
provides selected financial data for the Company's operating segments.
Centrally provided services to the banks are allocated based on estimated
usage of those services. The operating segment identified as "Other"
includes limited partnership interests that operate residential rental real
estate properties which have been allocated low income housing tax credits.
Intersegment revenues primarily represents interest income on intercompany
borrowings, management fees, and data processing fees received by
individual banks or the parent company. Intersegment revenues, expenses and
assets are eliminated in order to report results in accordance with
accounting principles generally accepted in the United States of America.
16
Nine months ended and as of September 30, 2008
-------------------------------------------------------------------------------------
Mountain First
(Dollars in thousands) Glacier West Security Western 1st Bank Big Sky Valley
---------------------- ---------- ---------- -------- ------- -------- ------------ ------------
Revenues from external
customers ................... $ 63,728 64,740 41,799 22,730 21,305 18,619 16,278
Intersegment revenues .......... 254 63 1,989 1,253 741 19 399
Expenses ....................... (49,195) (57,870) (32,910) (20,966) (17,491) (14,059) (12,434)
---------- --------- ------- ------- ------- ------- -------
Net Earnings ................ $ 14,787 6,933 10,878 3,017 4,555 4,579 4,243
========== ========= ======= ======= ======= ======= =======
Total Assets ............. $1,186,942 1,161,017 886,303 587,465 480,283 334,758 342,132
========== ========= ======= ======= ======= ======= =======
First Bank Total
Citizens of MT Morgan Parent Other Eliminations Consolidated
---------- ---------- -------- ------- -------- ------------ ------------
Revenues from external
customers ................... $ 10,855 7,036 4,158 293 134 -- 271,675
Intersegment revenues .......... 168 125 254 62,395 27 (67,687) --
Expenses ....................... (9,447) (5,452) (3,985) (14,045) (182) 15,004 (223,032)
-------- ------- ------- ------- ----- -------- ---------
Net Earnings ................ $ 1,576 1,709 427 48,643 (21) (52,683) 48,643
======== ======= ======= ======= ===== ======== =========
Total Assets ............. $212,750 160,349 101,377 691,760 3,348 (975,375) 5,173,109
======== ======= ======= ======= ===== ======== =========
Nine months ended and as of September 30, 2007
-------------------------------------------------------------------------------------
Mountain First
(Dollars in thousands) Glacier West Security Western 1st Bank Big Sky Valley
---------------------- ---------- ---------- -------- ------- -------- ------------ ------------
Revenues from external
customers ................... $ 59,327 65,098 44,051 29,721 19,246 17,596 16,369
Intersegment revenues .......... 116 42 1,590 1,538 1,013 15 144
Expenses ....................... (46,825) (54,500) (35,389) (25,380) (16,243) (13,826) (13,078)
---------- --------- ------- ------- ------- ------- -------
Net Earnings ................ $ 12,618 10,640 10,252 5,879 4,016 3,785 3,435
========== ========= ======= ======= ======= ======= =======
Total Assets ............. $1,090,748 1,005,535 837,202 559,573 438,653 297,721 284,272
========== ========= ======= ======= ======= ======= =======
First Bank Total
Citizens of MT Morgan Parent Other Eliminations Consolidated
---------- ---------- -------- ------- -------- ------------ ------------
Revenues from external
customers ................... $ 11,413 7,131 3,749 376 147 -- 274,224
Intersegment revenues .......... 105 317 920 63,070 20 (68,890) --
Expenses ....................... (9,852) (5,994) (4,009) (12,989) (185) 14,503 (223,767)
-------- ------- ------ ------- ----- -------- ---------
Net Earnings ................ $ 1,666 1,454 660 50,457 (18) (54,387) 50,457
======== ======= ====== ======= ===== ======== =========
Total Assets ............. $189,735 140,501 96,644 650,118 3,405 (893,850) 4,700,257
======== ======= ====== ======= ===== ======== =========
17
Three months ended and as of September 30, 2008
--------------------------------------------------------------------------------------
Mountain First
(Dollars in thousands) Glacier West Security Western 1st Bank Big Sky Valley
---------------------- ----------- ---------- -------- ------- -------- ------------ ------------
Revenues from external customers $ 21,369 21,190 13,890 4,246 7,322 6,159 5,406
Intersegment revenues 172 38 1,054 609 103 19 187
Expenses (17,028) (20,223) (11,156) (5,892) (5,783) (4,635) (4,061)
---------- --------- ------- ------- ------- ------- -------
Net Earnings $ 4,513 1,005 3,788 (1,037) 1,642 1,543 1,532
---------- --------- ------- ------- ------- ------- -------
Total Assets $1,186,942 1,161,017 886,303 587,465 480,283 334,758 342,132
---------- --------- ------- ------- ------- ------- -------
First Bank Total
Citizens of MT Morgan Parent Other Eliminations Consolidated
----------- ---------- -------- ------- -------- ------------ ------------
Revenues from external customers $ 3,848 2,488 1,443 64 18 -- 87,443
Intersegment revenues 3 1 21 17,597 12 (19,816) --
Expenses (3,217) (1,905) (1,310) (4,876) (40) 5,468 (74,658)
-------- ------- ------- ------- ----- -------- ---------
Net Earnings $ 634 584 154 12,785 (10) (14,348) 12,785
-------- ------- ------- ------- ----- -------- ---------
Total Assets $212,750 160,349 101,377 691,760 3,348 (975,375) 5,173,109
======== ======= ======= ======= ===== ======== =========
Three months ended and as of September 30, 2007
--------------------------------------------------------------------------------------
Mountain First
(Dollars in thousands) Glacier West Security Western 1st Bank Big Sky Valley
---------------------- ----------- ---------- -------- ------- -------- ------------ ------------
Revenues from external customers $ 20,789 22,652 14,864 9,266 7,437 6,157 5,702
Intersegment revenues 38 18 670 825 461 -- 49
Expenses (16,407) (18,979) (11,892) (8,477) (6,277) (4,802) (4,508)
---------- --------- ------- ------- ------- ------- -------
Net Earnings $ 4,420 3,691 3,642 1,614 1,621 1,355 1,243
---------- --------- ------- ------- ------- ------- -------
Total Assets $1,090,748 1,005,535 837,202 559,573 438,653 297,721 284,272
---------- --------- ------- ------- ------- ------- -------
First Bank Total
Citizens of MT Morgan Parent Other Eliminations Consolidated
----------- ---------- -------- ------- -------- ------------ ------------
Revenues from external customers $ 3,864 2,527 1,322 266 62 -- 94,908
Intersegment revenues 105 1 288 21,880 (5) (24,330) --
Expenses (3,391) (2,025) (1,407) (4,507) (71) 5,474 (77,269)
-------- ------- ------ ------- ----- -------- ---------
Net Earnings $ 578 503 203 17,639 (14) (18,856) 17,639
-------- ------- ------ ------- ----- -------- ---------
Total Assets $189,735 140,501 96,644 650,118 3,405 (893,850) 4,700,257
======== ======= ====== ======= ===== ======== =========
13) Fair Value Measurement
On January 1, 2008, the Company adopted Financial Accounting Standards
Board ("FASB") issued SFAS No. 157, Fair Value Measurements, which is
effective for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. FASB issued Staff Position ("FSP") SFAS
157-2, Effective Date of SFAS No. 157, which delays the effective date of
SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for
items that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). SFAS 157 has been
applied prospectively as of January 1, 2008.
SFAS 157 defines fair value as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. FAS 157 also establishes a
fair value hierarchy which requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when
measuring fair value. The standard describes three levels of inputs that
may be used to measure fair value:
18
Level 1 Quoted prices in active markets for identical assets or
liabilities
Level 2 Observable inputs other than Level 1 prices, such as quoted
prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are observable
or can be corroborated by observable market data for
substantially the full term of the assets or liabilities
Level 3 Unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets
or liabilities
The following are the assets measured at fair value on a recurring basis at
and for the period ended September 30, 2008.
Quoted prices Significant
in active markets other Significant
for identical observable unobservable Total
assets inputs inputs September 30,
(Dollars in thousands) (Level 1) (Level 2) (Level 3) 2008
---------------------- ----------------- ----------- ------------ -------------
Available-for-sale securities..... $-- 765,802 16,079 781,881
--- ------- ------ -------
Total assets at fair value..... $-- 765,802 16,079 781,881
=== ======= ====== =======
The valuation techniques for available-for-sale securities include
obtaining quoted market prices for identical assets, where available. If
such prices are not available, fair value is based on independent asset
pricing services and models, the inputs of which are market-based or
independently sourced market parameters, including, but not limited to,
yield curves, interest rates, volatilities, and prepayments. There have
been no significant changes in the valuation techniques during the period.
The following is a reconciliation of the beginning and ending balances for
assets measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) during the nine month period ended September
30, 2008.
Significant
unobservable
inputs
(Dollars in thousands) (Level 3)
---------------------- ------------
Balance as of January 1, 2008...................... $16,948
Total unrealized loss included in other
comprehensive income............................ (645)
Amortization, accretion and principal payments..... (224)
-------
Balance as of September 30, 2008................... $16,079
=======
The change in unrealized losses related to available-for-sale securities is
reported in Accumulated Other Comprehensive Income (Loss).
19
14) Rate/Volume Analysis
Net interest income can be evaluated from the perspective of relative
dollars of change in each period. Interest income and interest expense,
which are the components of net interest income, are shown in the following
table on the basis of the amount of any increases (or decreases)
attributable to changes in the dollar levels of the Company's
interest-earning assets and interest-bearing liabilities ("Volume") and the
yields earned and rates paid on such assets and liabilities ("Rate"). The
change in interest income and interest expense attributable to changes in
both volume and rates has been allocated proportionately to the change due
to volume and the change due to rate.
Nine Months Ended
September 30, 2008 vs. 2007
Increase (Decrease) due to:
----------------------------
(Dollars in thousands) Volume Rate Net
---------------------- -------- ------- -------
INTEREST INCOME
Residential real estate loans $(3,693) (3,774) (7,467)
Commercial loans 26,721 (17,077) 9,644
Consumer and other loans 3,887 (3,630) 257
Investment securities and other (1,855) 56 (1,799)
------- ------- -------
Total Interest Income 25,060 (24,425) 635
INTEREST EXPENSE
NOW accounts 59 (1,227) (1,168)
Savings accounts 23 (592) (569)
Money market accounts 685 (7,432) (6,747)
Certificates of deposit (5,121) (4,320) (9,441)
FHLB advances 5,836 (7,079) (1,243)
Other borrowings and
repurchase agreements 12,254 (11,686) 568
------- ------- -------
Total Interest Expense 13,736 (32,336) (18,600)
======= ======= =======
NET INTEREST INCOME $11,324 7,911 19,235
======= ======= =======
20
15) Average Balance Sheet
The following schedule provides (i) the total dollar amount of interest and
dividend income of the Company for earning assets and the resultant average
yield; (ii) the total dollar amount of interest expense on interest-bearing
liabilities and the resultant average rate; (iii) net interest and dividend
income; (iv) interest rate spread; and (v) net interest margin. Non-accrual
loans are included in the average balance of the loans.
AVERAGE BALANCE SHEET
(Dollars in thousands)
For the Three months ended 9-30-08 For the Nine months ended 9-30-08
---------------------------------- ---------------------------------
Interest Average Interest Average
Average and Yield/ Average and Yield/
Balance Dividends Rate Balance Dividends Rate
---------- --------- ------- ---------- --------- -------
ASSETS
Residential real estate loans $ 752,329 12,801 6.81% $ 733,345 37,792 6.87%
Commercial loans 2,429,102 41,212 6.73% 2,352,238 124,845 7.07%
Consumer and other loans 683,876 11,967 6.94% 661,059 35,864 7.23%
---------- ------ ---------- -------
Total Loans 3,865,307 65,980 6.77% 3,746,642 198,501 7.06%
Tax - exempt investment securities (1) 260,093 3,199 4.92% 258,411 9,547 4.93%
Other investment securities 563,454 6,510 4.62% 541,314 18,230 4.49%
---------- ------ ---------- -------
Total Earning Assets 4,688,854 75,689 6.46% 4,546,367 226,278 6.64%
------ -------
Goodwill and core deposit intangible 152,392 153,186
Other non-earning assets 219,072 229,173
---------- ----------
TOTAL ASSETS $5,060,318 $4,928,726
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
NOW accounts $ 457,774 722 0.63% $ 463,094 2,332 0.67%
Savings accounts 273,901 443 0.64% 271,385 1,436 0.70%
Money market accounts 742,205 3,811 2.04% 768,387 13,665 2.37%
Certificates of deposit 841,248 7,542 3.56% 852,116 25,428 3.98%
FHLB advances 301,821 2,337 3.07% 531,961 12,876 3.22%
Repurchase agreements
and other borrowed funds 1,098,834 7,258 2.62% 709,516 16,036 3.01%
---------- ------ ---------- ------
Total Interest Bearing Liabilities 3,715,783 22,113 2.36% 3,596,459 71,773 2.66%
------ ------
Non-interest bearing deposits 748,633 739,962
Other liabilities 39,890 44,025
---------- ----------
Total Liabilities 4,504,306 4,380,446
---------- ----------
Common stock 541 539
Paid-in capital 381,577 379,107
Retained earnings 178,502 167,237
Accumulated other
comprehensive (loss) income (4,608) 1,397
---------- ----------
Total Stockholders' Equity 556,012 548,280
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $5,060,318 $4,928,726
========== ==========
Net interest income $53,576 $154,505
======= ========
Net interest spread 4.10% 3.98%
Net Interest Margin 4.53% 4.53%
Net Interest Margin (Tax Equivalent) 4.65% 4.65%
Return on average assets (annualized) 1.01% 1.32%
Return on average equity (annualized) 9.15% 11.85%
----------
(1) Excludes tax effect of $4,226,000 and $1,416,000 on non-taxable investment
security income for the year and quarter ended September 30, 2008,
respectively.
21
16) Change in Accounting Principle
In September 2006, FASB ratified the consensus reached by the Emerging
Issues Task Force ("EITF") for Issue 06-4, Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar
Life Insurance Arrangement. Effective for fiscal years beginning after
December 15, 2007, the EITF requires policy holders of split dollar life
insurance arrangements to recognize a liability for future benefits to the
employee with the option to recognize the change in accounting principle
through either a cumulative-effective adjustment to beginning retained
earnings or through retrospective application to all periods.
The Company has split-dollar life insurance policies that required
recording a liability for future benefits. The Company opted to recognize a
cumulative-effect adjustment of $997,000 to retained earnings as of January
1, 2008 due to the impracticality of obtaining prior years information.
In February 2007, FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities, including an amendment of SFAS
No. 115. SFAS 159 allows companies to report selected financial assets and
liabilities at fair value. The changes in fair value are recognized in
earnings and the assets and liabilities measured under this methodology are
required to be displayed separately in the balance sheet. While SFAS 159 is
effective beginning January 1, 2008, the Company has not elected the fair
value option that is offered by this statement.
17) Subsequent Events
On November 3, 2008, the Company filed a shelf registration statement on
Form S-3 with the SEC. The shelf registration, which was automatically
declared effective upon filing, will allow the Company to raise capital
from time to time, up to an aggregate of $250 million, through the sale of
the Company's $.01 par value of common stock, $.01 par value preferred
stock or common stock purchase warrants.
The Company also announced that it filed a prospectus supplement with the
SEC for the offer of 4,000,000 shares of common stock. The Company intends
to grant the underwriters an option to purchase up to an additional
600,000, or 15%, of the shares sold to cover any over-allotments. The
Company intends to use the net proceeds from this offering to fund possible
future acquisitions and for general corporate purposes.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS - THE THREE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED
TO JUNE 30, 2008 AND SEPTEMBER 30, 2007
Performance Summary
The Company reported net earnings of $12.785 million for the third quarter, a
decrease of $4.854 million, or 28 percent, from the $17.639 million for the
third quarter of 2007. Diluted earnings per share of $.24 for the quarter
decreased 27 percent from the diluted earnings per share of $.33 for the same
quarter of 2007. Included in net earnings for the third quarter of 2008 is a
nonrecurring charge (after-tax) of $4.602 million for other than temporary
impairment with respect to investments in Freddie Mac preferred stock and Fannie
Mae common stock. Also included in the net earnings for the third quarter is a
nonrecurring gain (after-tax) of $1.0 million ($.02 per share) from the sale and
relocation of Mountain West Bank's office facility in Ketchum, Idaho. Annualized
return on average assets and return on average equity for the third quarter were
1.01 percent and 9.15 percent, respectively, which compares with prior year
returns for the third quarter of 1.50 percent and 13.76 percent, respectively.
22
REVENUE SUMMARY
(UNAUDITED - $ IN THOUSANDS)
Three months ended
-------------------------------------------
September 30, June 30, September 30,
2008 2008 2007
(unaudited) (unaudited) (unaudited)
------------- ----------- -------------
Net interest income
Interest income $ 75,689 $74,573 $78,430
Interest expense 22,113 22,273 31,447
-------- ------- -------
Net interest income 53,576 52,300 46,983
Non-interest income
Service charges, loan fees, and other fees 12,800 12,223 11,853
Gain on sale of loans 3,529 4,245 3,203
Loss on investments (7,593) -- --
Other income 3,018 913 1,422
-------- ------- -------
Total non-interest income 11,754 17,381 16,478
-------- ------- -------
$ 65,330 $69,681 $63,461
======== ======= =======
Tax equivalent net interest margin 4.65% 4.75% 4.50%
======== ======= =======
(UNAUDITED - $ IN THOUSANDS)
$ change from $ change from % change from % change from
June 30, September 30, June 30, September 30,
2008 2007 2008 2007
------------- ------------- ------------- -------------
Net interest income
Interest income $ 1,116 $(2,741) 1% -3%
Interest expense $ (160) $(9,334) -1% -30%
------- -------
Net interest income 1,276 6,593 2% 14%
Non-interest income
Service charges, loan fees, and other fees 577 947 5% 8%
Gain on sale of loans (716) 326 -17% 10%
Loss on investments (7,593) (7,593) n/m n/m
Other income 2,105 1,596 231% 112%
------- -------
Total non-interest income (5,627) (4,724) -32% -29%
------- -------
$(4,351) $ 1,869 -6% 3%
======= =======
----------
n/m - not measurable
Net Interest Income
Net interest income for the quarter increased $1 million, or 2 percent, from the
prior quarter, and increased $7 million, or 14 percent, over the same period in
2007. While total interest income has decreased by $3 million, or 3 percent,
from the same period last year, total interest expense has decreased by $9
million, or 30 percent, from the same period last year. The decrease in total
interest expense is primarily attributable to rate decreases in interest bearing
deposits and lower cost borrowings. The net interest margin as a percentage of
earning assets, on a tax equivalent basis, was 4.65 percent which is 10 basis
points lower than the 4.75 percent achieved for the prior quarter and 15 basis
points higher than the 4.50 percent result for the third quarter of 2007.
Provision for Loan Losses
The Company recorded a provision for loan losses of $8.7 million, an increase of
$7.4 million from the same quarter in 2007. Such increase is primarily
attributable to higher reserves for certain commercial real estate
23
loans in Western Montana and Idaho and the increase in non-performing assets at
September 30, 2008 compared to September 30, 2007. Net charged-off loans during
the three months ended September 30, 2008 was $3.9 million.
The determination of the allowance for loan and lease losses ("ALLL") and the
related provision for loan losses is a critical accounting estimate that
involves management's judgments about current environmental factors which affect
loan losses, such factors including economic conditions, changes in collateral
values, net charge-offs, and other factors discussed in "Financial Condition
Analysis" - Allowance for Loan and Lease Losses.
Non-interest Income
Non-interest income for the quarter decreased $6 million, or 32 percent, from
the prior quarter, and also decreased $5 million, or 29 percent, over the same
period in 2007. The Other Income category of non-interest income includes the
$1.7 million gain from the sale and relocation of Mountain West Bank's office
facility in Ketchum, Idaho. Excluding this nonrecurring item and also excluding
the nonrecurring $7.6 million other than temporary impairment charge on the
Freddie Mac and Fannie Mae stock, non-interest income for the quarter increased
$248 thousand from the prior quarter and $1.1 million over the same period in
2007. Fee income increased $577 thousand, or 5 percent, during the quarter,
compared to the increase of $947 million, or 8 percent, over the same period
last year. The fee income increases are attributable to the continued growth in
the number of checking accounts and related service charges. Gain on sale of
loans decreased $716 thousand, or 17 percent, for the quarter and increased $326
thousand, or 10 percent, over the same period last year.
NON-INTEREST EXPENSE SUMMARY
(UNAUDITED - $ IN THOUSANDS)
Three months ended
-------------------------------------------
September 30, June 30, September 30,
2008 2008 2007
(unaudited) (unaudited) (unaudited)
------------- ----------- -------------
Compensation and employee benefits $21,188 $20,967 $20,286
Occupancy and equipment expense 5,502 5,116 4,840
Advertising and promotion expense 1,942 1,833 1,676
Outsourced data processing 556 647 553
Core deposit intangibles amortization 764 767 827
Other expenses 7,809 7,113 7,014
------- ------- -------
Total non-interest expense $37,761 $36,443 $35,196
======= ======= =======
(UNAUDITED - $ IN THOUSANDS)
$ change from $ change from % change from % change from
June 30, September 30, June 30, September 30,
2008 2007 2008 2007
------------- ------------- ------------- -------------
Compensation and employee benefits $ 221 $ 902 1% 4%
Occupancy and equipment expense 386 662 8% 14%
Advertising and promotion expense 109 266 6% 16%
Outsourced data processing (91) 3 -14% 1%
Core deposit intangibles amortization (3) (63) 0% -8%
Other expenses 696 795 10% 11%
------ ------
Total non-interest expense $1,318 $2,565 4% 7%
====== ======
24
Non-interest Expense
Non-interest expense increased by $1.3 million, or 4 percent, from the prior
quarter and increased by $2.6 million, or 7 percent, from the same quarter of
2007. Compensation and benefit expense increased $221 thousand, or 1 percent,
over the prior quarter, and increased $902 thousand, or 4 percent, over the same
quarter of 2007. The year-over-year increase is primarily attributable to
increased staffing levels, including new branches, as well as increased
compensation and employee benefits, including health insurance. The number of
full-time-equivalent employees has increased from 1,476 to 1,539 since September
30, 2007.
Occupancy and equipment expense increased $662 thousand, or 14 percent, while
other expenses increased $795 thousand, or 11 percent, since September 30, 2007,
reflecting the cost of facility upgrades, additional branch locations, and other
general and administrative costs. Advertising and promotion expense increased
$109 thousand, or 6 percent, from the prior quarter, and increased $266
thousand, or 16 percent, from the same quarter of 2007, such increases
attributable to branch promotions and the banks continuing focus on attracting
and retaining non-interest bearing and other low cost deposits.
Excluding nonrecurring items, the efficiency ratio (non-interest expense/net
interest income plus non-interest income) was 53 percent for the quarter,
compared to 55 percent for the 2007 third quarter, a two percentage point
improvement.
RESULTS OF OPERATIONS - THE NINE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO THE
NINE MONTHS ENDED SEPTEMBER 30, 2007
Performance Summary
Net earnings of $48.643 million for the first nine months of 2008 is a decrease
of $1.814 million, or 4 percent, of the same period last year. Diluted earnings
per share of $0.90 versus $0.94 for the same period last year is a decrease of 4
percent. Included in earnings for the first nine months of 2007 is a
nonrecurring $1.0 million gain ($1.6 million pre-tax) from the sale of Western
Security Bank's Lewistown, Montana branch, which was partially offset by
approximately $500 thousand of nonrecurring expenses from the merger of three of
the acquired Citizens Development Company's ("CDC") five subsidiaries into
Glacier Bancorp, Inc. subsidiaries. Included in earnings for the first nine
months of 2008 are a nonrecurring gain of $150 thousand ($248 thousand pre-tax)
from the first quarter sale of Principal Financial Group and mandatory
redemption of a portion of Visa, Inc. shares, the nonrecurring gain of $1.0
million ($1.7 million pre-tax) from the sale and relocation of the Ketchum
office facility, and the other than temporary impairment charge of $4.6 million
($7.6 million pre-tax) related to the Company's investments in Freddie Mac and
Fannie Mae stock.
25
REVENUE SUMMARY
(UNAUDITED - $ IN THOUSANDS)
Nine months ended September 30,
-----------------------------------------
2008 2007 $ change % change
-------- -------- -------- --------
Interest income $226,278 $225,643 $ 635 0%
Interest expense 71,773 90,373 (18,600) -21%
-------- -------- --------
Net interest income 154,505 135,270 19,235 14%
Non-interest income
Service charges, loan fees, and other fees 35,984 33,696 2,288 7%
Gain on sale of loans 11,654 9,953 1,701 17%
Loss on investments (7,345) (8) (7,337) 91713%
Other income 5,104 4,940 164 3%
-------- -------- --------
Total non-interest income 45,397 48,581 (3,184) -7%
-------- -------- --------
$199,902 $183,851 $ 16,051 9%
======== ======== ========
Tax equivalent net interest margin 4.65% 4.50%
======== ========
Net Interest Income
Net interest income for the current year nine months increased $19 million, or
14 percent, over the same period in 2007. Total interest income increased $635
thousand, while total interest expense decreased $19 million, or 21 percent. The
decrease in interest expense is primarily attributable to the rate decreases on
interest bearing deposits and lower cost borrowings. The net interest margin as
a percentage of earning assets, on a tax equivalent basis, was 4.65 percent, an
increase of 15 basis points from the 4.50 percent for the same period in 2007.
Provision for Loan Losses
The provision for loan loss expense was $16.3 million for the first nine months
of 2008, an increase of $12.5 million, or 337 percent, from the same period in
2007. Non-performing assets as a percentage of total bank assets at September
30, 2008 were at 1.30 percent, up from .24 percent at September 30, 2007. Net
charged-off loans during the nine months ended September 30, 2008 were $5.037
million, compared to $1.002 million of net charged-off loans during the nine
months ended September 30, 2007.
Non-interest Income
Total non-interest income decreased $3 million, or 7 percent in 2008. Excluding
the current year nonrecurring items, consisting of the $7.6 million charge for
other than temporary impairment on the Freddie Mac and Fannie Mae securities,
the $1.7 million gain from the sale and relocation of Mountain West Bank's
branch in Ketchum, Idaho, the first quarter $248 thousand combined gain from the
sale of Principal Financial Group stock and mandatory redemption of a portion of
Visa, Inc. shares, and also excluding the prior year nonrecurring gain from the
first quarter sale of Western Security Bank's Lewistown, Montana branch,
non-interest income for the nine months of 2008 increased $7.2 million from the
same period in 2007. Fee income for the first nine months of 2008 increased $2
million, or 7 percent, over the first nine months of 2007, driven primarily by
an increased number of loan and deposit accounts, as well as additional products
and service offerings. Gain on sale of loans for the first nine months of 2008
increased $2 million, or 17 percent, over the first nine months of last year.
26
NON-INTEREST EXPENSE SUMMARY
(UNAUDITED - $ IN THOUSANDS)
Nine months ended September 30,
-----------------------------------------
2008 2007 $ change % change
-------- -------- -------- --------
Compensation and employee benefits $ 63,252 $ 60,386 $ 2,866 5%
Occupancy and equipment expense 15,751 14,110 1,641 12%
Advertising and promotion expense 5,314 4,697 617 13%
Outsourced data processing 1,870 2,045 (175) -9%
Core deposit intangibles amortization 2,310 2,416 (106) -4%
Other expenses 21,320 19,799 1,521 8%
-------- -------- -------
Total non-interest expense $109,817 $103,453 $ 6,364 6%
======== ======== =======
Non-interest Expense
Non-interest expense increased by $6 million, or 6 percent, from the same period
in 2007. The first nine months of 2007 included approximately $500,000 of
non-recurring expenses and costs, including overtime, associated with the
January 26, 2007 merger of three of the five CDC subsidiaries into Glacier
Bancorp, Inc.'s subsidiaries, and related operating system conversions.
Compensation and employee benefit expense increased $3 million, or 5 percent,
from the first nine months of 2007. Occupancy and equipment expense increased $2
million, or 12 percent, while other expenses increased $2 million, or 8 percent,
since September 30, 2007, reflecting the cost of additional locations and
facility upgrades. Advertising and promotion expense increased $617 thousand, or
13 percent, from 2007, due primarily to branch promotions and the banks
continuing focus on attracting and retaining non-interest bearing and other low
cost deposits. Excluding nonrecurring items, the efficiency ratio (non-interest
expense/net interest income plus non-interest income) was 53 percent for the
first nine months of 2008, compared to 56 percent for the same period in 2007.
FINANCIAL CONDITION ANALYSIS
As reflected in the table below, total assets at September 30, 2008 were $5.173
billion, which is $356 million, or 7 percent, greater than total assets of
$4.817 billion at December 31, 2007, and $473 million, or 10 percent, greater
than the September 30, 2007 total assets of $4.700 billion.
ASSETS ($ IN THOUSANDS)
September 30, December 31, September 30, $ change from $ change from
2008 2007 2007 December 31, September 30,
(unaudited) (audited) (unaudited) 2007 2007
------------- ------------ ------------- ------------- -------------
Cash on hand and in banks $ 94,865 145,697 128,230 (50,832) (33,365)
Investment securities, interest bearing deposits,
FHLB stock, FRB stock, and fed funds 867,366 782,236 803,845 85,130 63,521
Loans:
Real estate 769,860 725,854 832,038 44,006 (62,178)
Commercial 2,452,102 2,247,303 2,029,117 204,799 422,985
Consumer and other 700,658 638,378 625,908 62,280 74,750
---------- --------- --------- ------- -------
Total loans 3,922,620 3,611,535 3,487,063 311,085 435,557
Allowance for loan and lease losses (65,633) (54,413) (52,616) (11,220) (13,017)
---------- --------- --------- ------- -------
Total loans, net of allowance for loan and
lease losses 3,856,987 3,557,122 3,434,447 299,865 422,540
---------- --------- --------- ------- -------
Other assets 353,891 332,275 333,735 21,616 20,156
---------- --------- --------- ------- -------
Total Assets $5,173,109 4,817,330 4,700,257 355,779 472,852
========== ========= ========= ======= =======
At September 30, 2008, total loans were $3.923 billion, an increase of $102
million, or 2.7 percent (11 percent annualized) over total loans of $3.821
billion at June 30, 2008, and an increase of $311 million, or 8.6 percent (11
percent annualized) over total loans of $3.612 billion at December 31, 2007.
Over the first nine months of 2008, commercial loans increased the most with an
increase of $205 million, or 9 percent, followed by consumer loans,
27
which are primarily comprised of home equity loans, increasing by $62 million,
or 10 percent, and real estate loans increased $44 million, or 6 percent from
the fourth quarter of 2007. Since September 30, 2007, total loans have increased
$436 million, or 12 percent, of which commercial loans increased $423 million,
or 21 percent, consumer loans grew by $75 million, or 12 percent, while real
estate loans decreased $62 million, or 7 percent.
Investment securities, including interest bearing deposits in other financial
institutions and federal funds sold, have increased $85 million, or 11 percent,
from December 31, 2007 and have increased $64 million, or 8 percent, from
September 30, 2007. Investment securities represented 17 percent of total assets
at September 30, 2008, compared to 16 percent of total assets at December 31,
2007, and 17 percent at September 30, 2007.
The Company typically sells a majority of long-term mortgage loans originated,
retaining servicing only on loans sold to certain lenders. The sale of loans in
the secondary mortgage market reduces the Company's risk of holding long-term
fixed rate loans in the loan portfolio. Mortgage loans sold with servicing
released for the nine months ended September 30, 2008 and 2007 were $520 million
and $472 million, respectively, and for the three months ended September 30,
2008 and 2007 were $164 million and $163 million, respectively. The Company has
also been active in originating commercial SBA loans, some of which are sold to
investors. The amount of loans sold and serviced for others at September 30,
2008 was approximately $187 million.
Allowance for Loan and Lease Losses
The Company is committed to a conservative management of the credit risk within
the loan and lease portfolios, including the early recognition of problem loans.
The Company's credit risk management includes stringent credit policies,
individual loan approval limits, limits on concentrations of credit, and
committee approval of larger loan requests. Management practices also include
regular internal and external credit examinations, identification and review of
individual loans and leases experiencing deterioration of credit quality,
procedures for the collection of non-performing assets, quarterly monitoring of
the loan and lease portfolios, semi-annual review of loans by industry, and
periodic interest rate shock testing.
Determining the adequacy of the ALLL involves a high degree of judgment and is
inevitably imprecise as the risk of loss is difficult to quantify. The ALLL
methodology is designed to reasonably estimate the probable loan and lease
losses within each subsidiary bank's loan and lease portfolios. Accordingly, the
ALLL is maintained within a range of estimated losses. The determination of the
ALLL and the related provision for credit losses is a critical accounting
estimate that involves management's judgments about all known relevant internal
and external environmental factors that affect loan losses, including the credit
risk inherent in the loan and lease portfolios, economic conditions nationally
and in the local markets in which the banks operate, changes in collateral
values, delinquencies, non-performing assets and net charge-offs. Though not
immune from global, national and local economic developments, the local market
areas in which the banks operate continue to have relatively healthy economies.
Although the Company and the banks continue to actively monitor economic trends,
a softening of economic conditions combined with declines in the values of real
estate that collateralize most of the Company's loan and lease portfolios may
adversely affect the credit risk and potential for loss to the Company.
The Company considers the ALLL balance of $65.633 million adequate to cover
inherent losses in the loan and lease portfolios as of September 30, 2008.
However, no assurance can be given that the Company will not, in any particular
period, sustain losses that are significant relative to the amount reserved, or
that subsequent evaluations of the loan and lease portfolios applying
management's judgment about then current factors, including regulatory
developments, will not require significant changes in the ALLL. Under such
circumstances, this could result in enhanced provisions for credit losses. See
additional risk factors in Part II - Other information, Item 1A - Risk Factors.
The Company's model of ten wholly-owned, independent community banks, each with
it own loan committee, chief credit officer and Board of Directors, provides
substantial local oversight to the lending and credit management function. Loan
relationships exceeding a bank's loan approval limit up to $10 million are
subject to
28
approval by the Executive Loan Committee consisting of the ten banks' chief
credit officers and the Company's Credit Administrator. Loans exceeding $10
million are subject to approval by the Company's Board of Directors. Unlike a
traditional, single-bank holding company, the Company's decentralized business
model affords multiple reviews of larger loans before credit is extended, a
significant benefit in mitigating and managing the Company's credit risk. The
geographic dispersion of the market areas in which the Company and the community
bank subsidiaries operate further mitigates the risk of credit loss. While this
process is intended to limit credit exposure, there can be no assurance that
problem credits will not arise and loan losses incurred, particularly in periods
of rapid economic downturns.
At the end of each quarter, each of the subsidiary community banks analyzes its
loan and lease portfolio and maintain an ALLL at a level that is appropriate and
determined in accordance with accounting principals generally accepted in the
United States of America. The ALLL balance covers estimated credit losses on
individually evaluated loans, including those which are determined to be
impaired, as well as estimated credit losses inherent in the remainder of the
loan and lease portfolios.
The ALLL evaluation is well documented and approved by each subsidiary bank's
Board of Directors and reviewed by the Company's Board of Directors. In
addition, the policy and procedures for determining the balance of the ALLL are
reviewed annually by each subsidiary bank's Board of Directors and the Company's
Board of Directors.
The primary responsibility for credit risk assessment and identification of
problem loans rests with the loan officer of the account. This continuous
process, utilizing each of the bank's internal credit risk rating process, is
necessary to support management's evaluation of ALLL adequacy. An independent
loan review function verifying credit risk ratings evaluates the loan officer
and management's evaluation of the loan portfolio credit quality. The loan
review function also assesses the evaluation process and provides an independent
analysis of the adequacy of the ALLL.
The following table summarizes the allocation of the ALLL:
September 30, 2008 December 31, 2007 September 30, 2007
-------------------------- -------------------------- --------------------------
Allowance Percent Allowance Percent Allowance Percent
for loan and of loans in for loan and of loans in for loan and of loans in
(Dollars in thousands) lease Losses category lease Losses category lease Losses category
------------------------------ ------------ ----------- ------------ ----------- ------------ -----------
Real estate loans $ 5,971 19.7% 4,755 20.2% 5,682 23.9%
Commercial real estate loans 29,388 46.3% 23,010 44.6% 20,121 35.5%
Other commercial loans 19,321 16.2% 17,453 17.6% 17,587 22.7%
Consumer and other loans 10,953 17.8% 9,195 17.6% 9,226 17.9%
------- ----- ------ ----- ------ -----
Totals $65,633 100.0% 54,413 100.0% 52,616 100.0%
======= ===== ====== ===== ====== =====
Each bank's ALLL is generally available to absorb losses from any segment of its
loan and lease portfolio.
The increase in the ALLL for commercial real estate loans was primarily due to
increases in reserves for certain commercial real estate loans in the high
growth areas of Western Montana and Idaho and the increase in non-performing
assets since September 30, 2007.
29
(Dollars in thousands)
Nine months Nine months
ended Year ended ended
September 30, December 31, September 30,
2008 2007 2007
------------- ------------ -------------
Balance at beginning of period $54,413 49,259 49,259
Charge-offs:
Real estate loans (1,211) (306) (103)
Commercial loans (3,692) (2,367) (1,489)
Consumer and other loans (862) (714) (383)
------- ------ ------
Total charge-offs $(5,765) (3,387) (1,975)
------- ------ ------
Recoveries:
Real estate loans 14 208 158
Commercial loans 466 656 520
Consumer and other loans 248 358 295
------- ------ ------
Total recoveries $ 728 1,222 973
------- ------ ------
Net (charge-offs) recoveries (5,037) (2,165) (1,002)
Acquisition (1) -- 639 639
Provision 16,257 6,680 3,720
------- ------ ------
Balance at end of period $65,633 54,413 52,616
======= ====== ======
Ratio of net charge-offs to average
loans outstanding during the period 0.134% 0.064% 0.030%
Allowance for loan and lease lossess as a
percentage of total loan and leases 1.67% 1.51% 1.51%
----------
(1) Increase attributable to the April 30, 2007 acquisition of North Side State
Bank ("North Side") of Rock Springs, Wyoming, which was merged into 1st
Bank, the Company's subsidiary bank in Evanston, Wyoming.
The ALLL has increased $13 million, or 25 percent, from a year ago. The ALLL of
$65.633 million is 1.67 percent of September 30, 2008 total loans outstanding,
up from 1.51 percent at prior year end, and up from 1.51 percent in the third
quarter last year. The first nine months provision for loan and lease loss
expense was $16.3 million, an increase of $12.5 million from the same period in
2007. Net loans and lease charge-offs were $5.0 million, or .134 percent of
average loans and leases in the first nine months of 2008, compared to net
charge-offs of $1 million, or .030 percent of average loans and leases in the
first nine months of 2007.
The banks' charge-off policy is consistent with bank regulatory standards.
Consumer loans generally are charged off when the loan becomes over 120 days
delinquent. Real estate acquired as a result of foreclosure or by deed-in-lieu
of foreclosure is classified as real estate owned until such time as it is sold.
When such property is acquired, it is recorded at estimated fair value, less
estimated cost to sell. Any write-down at the time of recording real estate
owned is charged to the ALLL. Any subsequent write-downs are charged to current
expense.
30
Non-performing Assets
(Dollars in thousands)
At At At
9/30/2008 12/31/2007 9/30/2007
--------- ---------- ---------
Non-accrual loans:
Real estate loans $ 2,475 934 1,286
Commercial loans 52,458 7,192 5,741
Consumer and other loans 1,389 434 478
------- ------ ------
Total $56,322 8,560 7,505
Accruing Loans 90 days or more overdue:
Real estate loans 319 840 979
Commercial loans 3,839 1,216 1,037
Consumer and other loans 766 629 451
------- ------ ------
Total $ 4,924 2,685 2,467
Real estate and other assets owned, net 9,506 2,043 1,750
------- ------ ------
Total non-performing loans and real estate
and other assets owned, net $70,752 13,288 11,722
======= ====== ======
As a percentage of total bank assets 1.30% 0.27% 0.24%
Interest Income (1) $ 2,979 683 447
Allowance for loan and lease losses as a
percentage of non-performing assets 93% 409% 449%
Accruing Loans 30-89 days or more overdue $25,690 45,490 18,099
----------
(1) Amounts represent estimated interest income that would have been recognized
on loans accounted for on a non-accrual basis for the nine months ended
September 30, 2008, year ended December 31, 2007 and nine months ended
September 30, 2007 had such loans performed pursuant to contractual terms.
Non-performing assets as a percentage of total bank assets at September 30, 2008
were at 1.30 percent, up from .58 percent as of June 30, 2008, and up from .24
percent at September 30, 2007. The ALLL was 93 percent of non-performing assets
at September 30, 2008, down from 409 percent for the prior year end and down
from 449 percent a year ago. Each of the subsidiary banks evaluates the level of
its non-performing assets, the values of the underlying real estate and other
collateral, and related trends in net charge-offs. Through pro-active credit
administration, the banks work closely with borrowers to seek favorable
resolution to the extent possible, thereby attempting to minimize net
charge-offs or losses to the Company.
Most of the Company's non-performing assets are secured by real estate. Based on
the most current information available to management, including updated
appraisals where appropriate, the Company believes the value of the underlying
real estate collateral is adequate to minimize significant charge-offs or loss
to the Company.
Loans are reviewed on a regular basis and are placed on a non-accrual status
when the collection of the contractual principal or interest is unlikely. The
Company typically places loans on non-accrual when principal or interest is due
and has remained unpaid for 90 days or more unless the loan is in process of
collection and well-secured by collateral the fair value of which is sufficient
to discharge the debt in full. When a loan is placed on non-accrual status,
interest previously accrued but not collected is generally reversed against
current period interest income. Subsequent payments are either applied to the
outstanding principal balance or recorded as interest income, depending on the
assessment of the ultimate repayment of the loan. Interest accruals are resumed
on such loans only when they are brought fully current with respect to interest
and principal and when, in the judgment of management, the loans are estimated
to be fully collectible as to both principal and interest.
A loan is considered impaired when, based upon current information and events,
it is probable that the Company will be unable to collect the scheduled payments
of principal or interest when due according to the contractual terms of the loan
agreement. The amount of the impairment is measured using cash flows discounted
at the loan's
31
effective interest rate, except when it is determined that repayment of the loan
is expected to be provided solely by the underlying collateral. For collateral
dependent loans, impairment is measured by the fair value of the collateral.
When the ultimate collectibility of the total principal of an impaired loan is
in doubt, all payments are applied to principal under the cost recovery method.
When the ultimate collectibility of the total principal on an impaired loan is
not in doubt, contractual interest is generally credited to interest income when
received under the cash basis method. Total interest income recognized for
impaired loans under the cash basis for the three and nine months ended
September 30, 2008 and 2007 was not significant. Impaired loans, net of
government guaranteed amounts, were $66.70 million and $9.97 million as of
September 30, 2008 and 2007, respectively. The ALLL includes valuation
allowances of $7.5 million and $0 specific to impaired loans as of September 30,
2008 and 2007, respectively.
LIABILITIES ($ IN THOUSANDS)
September 30, December 31, September 30, $ change from $ change from
2008 2007 2007 December 31, September 30,
(unaudited) (audited) (unaudited) 2007 2007
------------- ------------ ------------- ------------- -------------
Non-interest bearing deposits $ 754,623 788,087 819,711 (33,464) (65,088)
Interest bearing deposits 2,282,147 2,396,391 2,547,409 (114,244) (265,262)
Advances from Federal Home Loan Bank 727,243 538,949 251,908 188,294 475,335
Securities sold under agreements to
repurchase and other borrowed funds 689,533 401,621 395,436 287,912 294,097
Other liabilities 42,013 45,147 51,962 (3,134) (9,949)
Subordinated debentures 118,559 118,559 118,559 -- --
---------- --------- --------- ------- -------
Total liabilities $4,614,118 4,288,754 4,184,985 325,364 429,133
========== ========= ========= ======= =======
As of September 30, 2008, non-interest bearing deposits decreased $24 million,
or 3 percent, since June 30, 2008, decreased $33 million, or 4 percent, since
December 31, 2007, and decreased $65 million, or 8 percent, since September 30,
2007. Interest bearing deposits decreased $114 million, or 5 percent, from
December 31, 2007. The decrease of $265 million, or 10 percent, in interest
bearing deposits since September 30, 2007 includes a $201 million decrease in
higher cost brokered CD's in favor of lower cost alternative funding. Federal
Home Loan Bank ("FHLB") advances at September 30, 2008 increased $475 million,
or 189 percent, from September 30, 2007 and increased $188 million, or 35
percent, from December 31, 2007. Repurchase agreements and other borrowed funds
were $690 million at September 30, 2008, an increase of $294 million, or 74
percent, from September 30, 2007, and an increase of $288 million, or 72
percent, from December 31, 2007. Included in this latter category are U.S.
Treasury Tax and Loan funds of $357 million at September 30, 2008, an increase
of $134 million from December 31, 2007, and an increase of $145 million from
September 30, 2007.
STOCKHOLDERS' EQUITY
($ IN THOUSANDS EXCEPT PER SHARE DATA)
September 30, December 31, September 30, $ change from $ change from
2008 2007 2007 December 31, September 30,
(unaudited) (audited) (unaudited) 2007 2007
------------- ------------ ------------- ------------- -------------
Common equity $ 564,612 525,459 513,033 39,153 51,579
Accumulated other comprehensive (loss) income (5,621) 3,117 2,239 (8,738) (7,860)
--------- -------- -------- ------ ------
Total stockholders' equity 558,991 528,576 515,272 30,415 43,719
Core deposit intangible, net, and goodwill (151,954) (154,264) (155,036) 2,310 3,082
--------- -------- -------- ------ ------
$ 407,037 374,312 360,236 32,725 46,801
========= ======== ======== ====== ======
Stockholders' equity to total assets 10.81% 10.97% 10.96%
Tangible stockholders' equity to total tangible
assets 8.11% 8.03% 7.93%
Book value per common share $ 10.29 9.85 9.61 0.44 0.68
Tangible book value per common share $ 7.49 6.98 6.72 0.51 0.77
Market price per share at end of quarter $ 24.77 18.74 22.52 6.03 2.25
32
Total stockholders' equity and book value per share amounts have increased $44
million and $.68 per share, respectively, from September 30, 2007, the result of
earnings retention and exercised stock options. Tangible stockholders equity has
increased $47 million, or 13 percent since September 30, 2007, with tangible
stockholders' equity at 8.11 percent of total tangible assets at September 30,
2008, up from 7.93 percent at September 30, 2007. Accumulated other
comprehensive income, representing net unrealized gains or losses on investment
securities designated as available for sale, decreased $8 million from September
30, 2007.
Cash dividend
On September 24, 2008, the board of directors declared a cash dividend of $.13
per share, payable October 16, 2008 to shareholders of record on October 7,
2008.
Liquidity and Capital Resources
The objective of liquidity management is to maintain cash flows adequate to meet
current and future needs for credit demand, deposit withdrawals, maturing
liabilities and corporate operating expenses. The principal source of the
Company's cash revenues are dividends received from the Company's banking
subsidiaries. The payment of dividends is subject to government regulation, in
that regulatory authorities may prohibit banks and bank holding companies from
paying dividends which would constitute an unsafe or unsound banking practice.
The subsidiaries' source of funds is generated by deposits, principal and
interest payments on loans, sale of loans and securities, short and long-term
borrowings, and net earnings. In addition, all of the banking subsidiaries are
members of the FHLB of Seattle. As of September 30, 2008, the Company had $803
million of available FHLB of Seattle credit of which $727 million was utilized.
Management of the Company has a wide range of versatility in managing the
liquidity and asset/liability mix for each banking subsidiary as well as the
Company as a whole.
In addition, the Company is currently evaluating whether it will apply to
participate in the recently announced U.S. Department of the Treasury TARP
Capital Purchase Program ("CPP"). If the Company applies and is accepted for
participation in the CPP, it would be eligible for a capital investment by the
Department of the Treasury in shares of the Company's preferred stock, in an
amount between approximately $50 million and $150 million. The Company cannot
predict at this time whether it will participate in the CPP, or if it does
determine to participate, the amount of its participation. Under current
published application guidelines, an application for participation in the CPP
must be submitted to the appropriate federal banking agencies by November 14,
2008.
Lending Commitments
In the normal course of business, there are various outstanding commitments to
extend credit, such as letters of credit and un-advanced loan commitments, which
are not reflected in the accompanying condensed consolidated financial
statements. Management does not anticipate any material losses as a result of
these transactions.
Impact of Recently Issued Accounting Standards
In December 2007, FASB issued SFAS No. 141(R), Business Combinations. The
objective of this Statement is to improve the relevance, representational
faithfulness, and comparability of the information that a reporting entity
provides in its financial reports about a business combination and its effects.
The Statement establishes principles and requirements for how the acquirer: a)
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree, b) recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase, and c) determines what
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
33
standard, but does not expect it to have a material effect on the Company's
financial position or results of operations with any future business
combinations.
Merger of Bank Subsidiaries
Effective April 30, 2008, Whitefish merged into Glacier with the combined
operations conducted under the Glacier charter. In connection with the merger,
Russ Porter, President of Whitefish, has joined Mountain West as President and
Chief Operating Officer.
Effect of inflation and changing prices
Generally accepted accounting principles often require the measurement of
financial position and operating results in terms of historical dollars, without
consideration for change in relative purchasing power over time due to
inflation. Virtually all assets of the Company and each subsidiary bank are
monetary in nature; therefore, interest rates generally have a more significant
impact on a company's performance than does the effect of inflation.
Forward Looking Statements
This Form 10-Q includes forward looking statements, which describe management's
expectations regarding future events and developments such as future operating
results, growth in loans and deposits, continued success of the Company's style
of banking and the strength of the local economies in which it operates. Future
events are difficult to predict, and the expectations described above are
necessarily subject to risk and uncertainty that may cause actual results to
differ materially and adversely. In addition to discussions about risks and
uncertainties set forth from time to time in the Company's public filings,
factors that may cause actual results to differ materially from those
contemplated by such forward looking statements include, among others, the
following possibilities: (1) local, national and international economic
conditions are less favorable than expected or have a more direct and pronounced
effect on the Company than expected and adversely affect the company's ability
to continue its internal growth at historical rates and maintain the quality of
its earning assets; (2) changes in interest rates reduce interest margins more
than expected and negatively affect funding sources; (3) projected business
increases following strategic expansion or opening or acquiring new banks and/or
branches are lower than expected; (4) costs or difficulties related to the
integration of acquisitions are greater than expected; (5) competitive pressure
among financial institutions increases significantly; (6) legislation or
regulatory requirements or changes adversely affect the businesses in which the
Company is engaged.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company believes that there have not been any material changes in
information about the Company's market risk than was provided in the Form 10-K
report for the year ended December 31, 2007.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer have reviewed
and evaluated the effectiveness of our disclosure controls and procedures (as
required by Exchange Act Rules 240.13a-15(b) and 15d-14(c)) as of the date of
this quarterly report. Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that the Company's current disclosure
controls and procedures are effective and timely, providing them with material
information relating to the Company required to be disclosed in the reports the
Company files or submits under the Exchange Act.
Changes in Internal Controls
There have not been any changes in the Company's internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the third quarter 2008, to which this
34
report relates that have materially affected, or are reasonably likely to
materially affect the Company's internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no pending material legal proceedings to which the registrant or
its subsidiaries are a party.
ITEM 1A. RISK FACTORS
The Company and its ten wholly-owned, independent community bank subsidiaries
are exposed to certain risks. The following is a discussion of the most
significant risks and uncertainties that may affect the Company's business,
financial condition and future results.
The effect of the national economic situation on the Company's future results of
operations or stock trading price cannot be predicted.
The national economy, and the financial services sector in particular, is
currently facing challenges of a scope unprecedented in recent history. No one
can predict the severity or duration of this downturn. The Company cannot
predict the extent to which the more severe regional and local economic
downturns that have plagued other areas of the country may also occur in the
markets it serves. Any such deterioration in the Company's markets would have an
adverse effect on the business, financial condition, results of operations and
prospects, and could also cause the trading price of the Company's stock to
decline.
The effect of the recently enacted federal rescue plan on the Company cannot be
predicted.
Congress recently enacted the Emergency Economic Stabilization Act of 2008,
which is intended to stabilize the financial markets, including providing
funding of up to $700 billion to purchase troubled assets and loans from
financial institutions. The legislation also increases the amount of deposit
account insurance coverage from $100,000 to $250,000 for interest-bearing
deposit accounts and non-interest bearing transaction accounts, the latter of
which are fully insured until December 31, 2009. Most recently, the federal
government agreed to invest $125 billion in preferred stock of nine U.S.
financial institutions, and to make available up to another $125 billion for
investment in preferred stock of other U.S. financial institutions, on certain
terms and conditions. The full effect of this wide-ranging legislation on the
national economy and financial institutions, particularly on mid-sized
institutions like the Company, cannot now be predicted.
The Company has a high concentration of loans secured by real estate.
The Company has a high concentration of loans secured by real estate, especially
construction and land development loans, which carry a higher degree of risk,
and a continued downturn in the real estate market, for any reason, will hurt
business and prospects. In particular, if the nationwide economic decline
migrates further to the markets the Company serves, the Company could be exposed
to additional risk of losses from real estate related loans. The Company's
business activities and credit exposure are concentrated in loans secured by
real estate. A further downturn in the economies or real estate values in the
markets the Company serves could have a material adverse effect on borrowers'
ability to repay their loans, as well as the value of the real property held as
collateral securing such loans. The ability to recover on defaulted loans by
foreclosing and selling the real estate collateral would then be diminished and
the Company would be more likely to suffer losses on defaulted loans.
The Company's 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 have historically been viewed as
having more risk of default than residential real estate loans or certain other
types of loans or
35
investments. In fact, the Federal Deposit Insurance Company ("FDIC") has issued
pronouncements alerting banks of 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 Company's loan portfolio contains a significant number of
commercial and commercial real estate loans with relatively large balances, the
deterioration of one or more 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 results
of operations and financial condition.
Changes in economic conditions, in particular an economic slowdown in Idaho,
Montana, Washington, Wyoming, Utah or Colorado, could hurt the banking business
generally.
The Company's business is directly affected by factors such as economic, market
and political conditions in its service areas, broad trends in industry and
finance, legislative and regulatory changes, changes in government monetary and
fiscal policies and inflation, all of which are beyond the Company's control. In
recent months the Company has begun to see declines in economic indicators and
real estate values in several of the markets served. A further deterioration in
economic conditions in the states served by the bank subsidiaries could result
in the following consequences, any of which could hurt business materially:
- loan delinquencies may increase;
- problem assets and foreclosures may increase;
- collateral for loans made may decline in value, in turn reducing
customers' borrowing power, reducing the value of assets and
collateral associated with existing loans;
- market values of certain securities in the investment portfolio may
decline;
- demand for banking products and services may decline;
- tightening of liquidity and a decline in borrowing capacity;
- low cost or non-interest bearing deposits may decrease; and
- a reduction of the market value of the Company's common stock.
The Allowance for Loan and Lease Losses may not be adequate to cover actual loan
losses, which could adversely affect earnings.
The Company maintains an ALLL in an amount that is believed adequate to provide
for losses inherent in the portfolio. While the Company strives to monitor
credit quality and to identify loans that may become non-performing, at any time
there are loans in the portfolio that will result in losses that have not been
identified as non-performing or potential problem loans. The Company cannot be
sure that it will be able to identify deteriorating loans before they become
non-performing assets, or that it will be able to limit losses on those loans
that are identified. As a result, future significant additions to the ALLL may
be necessary. Additionally, future additions to the ALLL may be required based
on changes in the composition of the loans comprising the portfolio and changes
in the financial condition of borrowers, such as may result from changes in
economic conditions or as a result of incorrect assumptions by management in
determining the ALLL. Additionally, federal banking regulators, as an integral
part of their supervisory function, periodically review the ALLL. These
regulatory agencies may require the Company to increase the ALLL which could
have a negative effect on the financial condition and results of operation. A
critical element in determining the adequacy of the ALLL is the maintenance of
the underlying collateral values, most of which are in real estate.
Fluctuating interest rates can adversely affect 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 the 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 interest rate spread, and,
36
in turn, profitability. The Company cannot provide assurance that it can
minimize interest rate risk. In addition, interest rates also affect the amount
of money that it can lend. When interest rates rise, the cost of borrowing also
increases. Accordingly, changes in levels of market interest rates could
materially and adversely affect the net interest spread, asset quality, loan
origination volume, business and prospects.
A continued tightening of the credit markets may make it difficult to obtain
adequate funding for loan growth, which could adversely affect earnings.
A continued tightening of the credit markets and the inability to obtain money
to adequately fund loan growth may negatively affect asset growth and, in turn,
negatively impact earnings. In addition to deposit growth and payments of
principal and interest received on loans and investment securities, the Company
also relies on funding from alternative funding sources, including the FHLB and
U.S. Treasury Tax and Loan Programs. In the event of a continued downturn in the
economy, particularly in the housing market, these resources could be negatively
affected, which could limit the funds available to the Company.
Growth through future acquisitions, which could, in some circumstances,
adversely affect profitability measures.
The Company anticipates engaging in selected acquisitions of financial
institutions in the future. There are risks associated with the Company's
acquisition strategy that could adversely impact profitability. These risks
include, among others, incorrectly assessing the asset quality of a particular
institution being acquired, encountering greater than anticipated costs of
incorporating acquired businesses into the Company, and being unable to
profitably deploy funds acquired in an acquisition. Furthermore, the Company
cannot provide any assurance as to the extent to which it can continue to grow
through acquisitions.
The Company anticipates issuing capital stock in connection with additional
acquisitions.
These acquisitions and related issuances of stock may have a dilutive effect on
earnings per share and the percentage ownership of current shareholders. Aside
from the pending Bank of the San Juans acquisition, the Company does not
currently have any definitive understandings or agreements for any acquisitions
that involve the issuance of capital stock. However, as noted above, it is
anticipated that the Company will continue to expand through acquisitions in the
future.
Competition in the Company's market areas may limit 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 its market areas. The
Company is subject to substantial competition for loans and deposits from other
financial institutions. Some of its competitors are not subject to the same
degree of regulation and restriction as the Company is. Some of the Company's
competitors have greater financial resources than the Company does. If the
Company is unable to effectively compete in its market areas, the Company's
business, results of operations and prospects could be adversely affected.
The FDIC has announced that it will increase insurance premiums to rebuild and
maintain the federal deposit insurance fund.
Based on recent events and the state of the economy, the FDIC has announced that
it intends to increase federal deposit insurance premiums in the immediate
future. Depending on the circumstances, this increase may be significant (on
average, it is likely that present premium structure will be doubled) and will
add to the Company's cost of operations. Further, depending upon any future
losses that the FDIC insurance fund may suffer, there can be no assurance that
there will not be additional premium increases in order to replenish the fund.
The Company cannot predict the amount of the anticipated premium increase or the
impact on the Company.
37
Business would be harmed if the Company lost the services of any of the senior
management team.
The Company believes its success to date has been substantially dependent on its
Chief Executive Officer and other members of the executive management team, and
on the Presidents of its subsidiary banks. The loss of any of these persons
could have an adverse affect on the Company's business and future growth
prospects.
The Company operates in a highly regulated environment and may be adversely
affected by changes in federal, state and local laws and regulations.
The Company is subject to extensive regulation, supervision and examination by
federal and state banking authorities. Any change in applicable regulations or
federal, state or local legislation could have a substantial impact on the
Company and its operations. Additional legislation and regulations that could
significantly affect the Company's powers, authority and operations may be
enacted or adopted in the future, which could have a material adverse effect on
its financial condition and results of operations. Further, regulators have
significant discretion and authority to prevent or remedy unsafe or unsound
practices or violations of laws by financial institutions and holding companies
in the performance of their supervisory and enforcement duties. The exercise of
regulatory authority may have a negative impact on the Company's results of
operations and financial condition.
The Company may determine to issue preferred stock under the Capital Purchase
Program, and any shares so issued would have certain priorities over the
Company's common stock.
The Company is currently evaluating whether it will apply to participate in the
recently announced U.S. Department of the Treasury TARP CPP. If the Company
applies and is accepted for participation in the CPP, it would be eligible for a
capital investment by the Department of the Treasury in shares of the Company's
preferred stock, in an amount between approximately $50 million and $150
million. The Company cannot predict at this time whether it will participate in
the CPP, or if it does determine to participate, the amount of its
participation. Under current published application guidelines, an application
for participation in the CPP must be submitted to the appropriate federal
banking agencies by November 14, 2008.
Although a number of aspects of the CPP have not yet been finalized, the
Department of the Treasury has announced the parameters of the program. Senior
Preferred Nonvoting Stock will provide for 5% annual dividends for the first
five years following issuance, and 9% per annum in subsequent years. During the
first three years following issuance, prior consent of the Treasury is required
for any increase in dividends on outstanding common stock or the repurchase of
outstanding common stock. The Senior Preferred Nonvoting Stock may be redeemed
during the first three years following issuance only with proceeds of a
qualified equity offering. The Senior Preferred Nonvoting stock will be
transferable by the holder.
The CPP requires the concurrent issuance of warrants to purchase a number of
shares of common stock equal to 15% of the of the Senior Preferred Nonvoting
Stock investment amount on the date of investment, at a purchase price equal to
the average trading price of such common stock during a period prior to the date
of investment. Such warrants will provide for a 10 year term, are immediately
exercisable, and transferable by the holder. If the Senior Preferred Nonvoting
Stock is redeemed within three years of issuance, any unexercised warrants will
be adjusted to reduce the number of shares of common stock covered by such
warrants by 50%.
The Company is currently evaluating the merits of participating in the CPP of
the Department of the Treasury. If, and to the extent that, the Company
determines to participate in the CPP, it would issue Senior Nonvoting Preferred
Stock that would have rights and preferences, including among other things
liquidation preference and preference with respect to dividends, which would
have a priority over the Company's common stock.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) Not Applicable
38
(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
39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GLACIER BANCORP, INC.
November 6, 2008 /s/ Michael J. Blodnick
----------------------------------------
Michael J. Blodnick
President/CEO
November 6, 2008 /s/ Ron J. Copher
----------------------------------------
Ron J. Copher
Senior Vice President/CFO
40