Glacier Bancorp - 10-Q quarterly report FY

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


þ		Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2006


o		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 incorporation or organization)	( IRS Employer Identification No.)

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 þ No o

Indicate by checkmark whether the registrant is a large accelerated filer, or an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large Accelerated Filer þ Accelerated Filer o Non-Accelerated Filer o

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of shares of Registrant’s common stock outstanding on July 26, 2006 was 32,455,541. 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 June 30, 2006, and June 30, 2005 and audited December 31, 2005	3

	Condensed Consolidated Statements of Operations – Unaudited six and three months ended June 30, 2006 and 2005	4

	Condensed Consolidated Statements of Stockholders’ Equity and Other Comprehensive Income – Audited year ended December 31, 2005 and unaudited six months ended June 30, 2006	5

	Condensed Consolidated Statements of Cash Flows – Unaudited six months ended June 30, 2006 and 2005	6

	Notes to Condensed Consolidated Financial Statements – Unaudited	7

	Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

	Item 3 – Quantitative and Qualitative Disclosure about Market Risk	28

	Item 4 – Controls and Procedures	28

Part II. Other Information		28

	Item 1 – Legal Proceedings	28

	Item 1A – Risk Factors	29

	Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	29

	Item 3 – Defaults Upon Senior Securities	29

	Item 4 – Submission of Matters to a Vote of Security Holders	29

	Item 5 – Other Information	30

	Item 6 – Exhibits	30

	Signatures	30
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

Glacier Bancorp, Inc.

Condensed Consolidated Statements of Financial Condition


	June 30,			December 31,		June 30,
	2006			2005		2005
(Dollars in thousands, except per share data)	(unaudited)					(unaudited)
Assets:
Cash on hand and in banks	$	124,872			111,418		109,402
Federal funds sold		4,880			7,537		10,576
Interest bearing cash deposits		33,559			15,739		19,657

Cash and cash equivalents		163,311			134,694		139,635

Investment securities, available-for-sale		870,460			967,970		1,084,101
Loans receivable, net		2,630,254			2,374,647		2,093,521
Loans held for sale		30,596			22,540		28,677
Premises and equipment, net		88,883			79,952		69,280
Real estate and other assets owned, net		605			332		2,319
Accrued interest receivable		20,449			19,923		17,820
Deferred tax asset		1,199			—		—
Core deposit intangible, net		7,195			8,015		7,904
Goodwill		79,099			79,099		72,382
Other assets		21,331			19,172		16,296

	$	3,913,382			3,706,344		3,531,935


Liabilities and stockholders’ equity:
Non-interest bearing deposits	$	720,473			667,008		630,983
Interest bearing deposits		1,972,296			1,867,704		1,576,872
Advances from Federal Home Loan Bank of Seattle		435,978			402,191		804,047
Securities sold under agreements to repurchase		151,098			129,530		95,235
Other borrowed funds		162,296			187,692		5,576
Accrued interest payable		9,453			7,437		6,574
Deferred tax liability		—			2,746		9,262
Subordinated debentures		85,000			85,000		85,000
Other liabilities		23,958			23,797		20,627

Total liabilities		3,560,552			3,373,105		3,234,176


Preferred shares, $.01 par value per share. 1,000,000 shares authorized None issued or outstanding		—			—		—
Common stock, $.01 par value per share. 78,125,000 shares authorized		324			322		313
Paid-in capital		269,340			262,383		238,941
Retained earnings — substantially restricted		87,644			69,713		51,808
Accumulated other comprehensive (loss) income		(4,478	)		821		6,697

Total stockholders’ equity		352,830			333,239		297,759

	$	3,913,382			3,706,344		3,531,935


Number of shares outstanding		32,439,173			32,172,547		31,258,586
Book value per share	$	10.88			10.36		9.53

See accompanying notes to condensed consolidated financial statements.

3

Glacier Bancorp, Inc.

Condensed Consolidated Statements of Operations


	Three months ended June 30,						Six months ended June 30,
(Unaudited — dollars in thousands, except per share data)	2006			2005			2006			2005
Interest income:
Real estate loans	$	12,242			8,097			23,231			14,712
Commercial loans		27,479			19,588			53,004			36,112
Consumer and other loans		9,654			7,011			18,519			12,741
Investment securities and other		10,558			11,849			21,131			23,487

Total interest income		59,933			46,545			115,885			87,052


Interest expense:
Deposits		13,761			5,582			25,052			9,651
Federal Home Loan Bank of Seattle advances		4,417			5,770			9,213			11,013
Securities sold under agreements to repurchase		1,471			601			2,761			999
Subordinated debentures		1,284			1,629			2,713			3,184
Other borrowed funds		1,374			876			2,212			1,662

Total interest expense		22,307			14,458			41,951			26,509


Net interest income		37,626			32,087			73,934			60,543
Provision for loan losses		1,355			1,552			2,520			3,042

Net interest income after provision for loan losses		36,271			30,535			71,414			57,501


Non-interest income:
Service charges and other fees		7,392			6,241			13,798			11,445
Miscellaneous loan fees and charges		1,957			1,609			3,768			2,887
Gains on sale of loans		2,770			2,884			4,960			4,976
Loss on sale of investments		—			(107	)		—			(137	)
Other income		779			886			1,528			1,450

Total non-interest income		12,898			11,513			24,054			20,621

Non-interest expense:
Compensation, employee benefits and related expenses		15,739			12,474			31,050			23,418
Occupancy and equipment expense		3,431			3,152			6,922			6,007
Outsourced data processing expense		678			423			1,402			655
Core deposit intangibles amortization		400			384			820			667
Other expenses		6,702			6,043			12,583			10,803

Total non-interest expense		26,950			22,476			52,777			41,550

Earnings before income taxes		22,219			19,572			42,691			36,572

Federal and state income tax expense		7,553			6,482			14,396			11,962

Net earnings	$	14,666			13,090			28,295			24,610


Basic earnings per share	$	0.45			0.42			0.87			0.79
Diluted earnings per share	$	0.45			0.41			0.86			0.78
Dividends declared per share	$	0.16			0.15			0.32			0.29
Return on average assets (annualized)		1.52	%		1.52	%		1.50	%		1.51	%
Return on average equity (annualized)		16.81	%		18.03	%		16.51	%		17.56	%
Average outstanding shares — basic		32,439,173			31,228,123			32,346,182			30,997,527
Average outstanding shares — diluted		32,897,320			31,753,966			32,861,724			31,530,648

See accompanying notes to condensed consolidated financial statements.

4

Glacier Bancorp, Inc.

Condensed Consolidated Statements of Stockholders’ Equity
and Other Comprehensive Income

Audited year ended December 31, 2005 and Unaudited six months ended June 30, 2006


								Retained			Accumulated			Total
								earnings			other comp-			stock-
	Common Stock				Paid-in			substantially			rehensive			holders’
(Dollars in thousands, except per share data)	Shares		Amount		capital			restricted			income (loss)			equity
Balance at December 31, 2004		30,686,763	$	307		227,552			36,391			5,934			270,184

Other Comprehensive income:
Net earnings		—		—		—			52,373			—			52,373
Unrealized loss on securities, net of reclassification adjustment and taxes		—		—		—			—			(5,113	)		(5,113	)

Total other comprehensive income															47,260


Cash dividends declared ($.60 per share)		—		—		—			(19,051	)		—			(19,051	)
Stock options exercised		397,770		4		5,154			—			—			5,158
Stock issued in connection with acquisitions		1,088,014		11		28,427			—			—			28,438
Acquisition of fractional shares		—		—		(8	)		—			—			(8	)
Tax benefit from stock related compensation		—		—		1,258			—			—			1,258

Balance at December 31, 2005		32,172,547	$	322		262,383			69,713			821			333,239

Other comprehensive income:
Net earnings		—		—		—			28,295			—			28,295
Unrealized loss on securities, net of reclassification adjustment and taxes		—		—		—			—			(5,299	)		(5,299	)

Total other comprehensive income															22,996


Cash dividends declared ($.32 per share)		—		—		—			(10,364	)		—			(10,364	)
Stock options exercised		266,626		2		4,102			—			—			4,104
Stock based compensation and tax benefit		—		—		2,855			—			—			2,855

Balance at June 30, 2006 (unaudited)		32,439,173	$	324		269,340			87,644			(4,478	)		352,830

See accompanying notes to condensed consolidated financial statements.

5

Glacier Bancorp, Inc.

Condensed Consolidated Statements of Cash Flows


	Six months ended June 30,
(Unaudited — dollars in thousands)	2006			2005
OPERATING ACTIVITIES :
NET CASH PROVIDED BY OPERATION ACTIVITIES	$	29,695			27,964


INVESTING ACTIVITIES:
Proceeds from sales, maturities and prepayments of investments available-for-sale		127,238			231,317
Purchases of investments available-for-sale		(40,792	)		(103,175	)
Principal collected on installment and commercial loans		561,767			292,459
Installment and commercial loans originated or acquired		(738,245	)		(501,339	)
Principal collections on mortgage loans		186,314			243,728
Mortgage loans originated or acquired		(267,961	)		(265,167	)
Net purchase of FHLB and FRB stock		(434	)		(14	)
Net funds received on acquisition of banks and branches		—			3,651
Net addition of premises and equipment		(11,889	)		(7,044	)

NET CASH USED IN INVESTING ACTIVITIES		(184,002	)		(105,584	)


FINANCING ACTIVITIES:
Net increase in deposits		158,056			128,750
Net increase (decrease) in FHLB advances and other borrowed funds		8,391			(16,367	)
Net increase in securities sold under repurchase agreements		21,568			19,078
Cash dividends paid		(10,365	)		(9,193	)
Excess tax benefits from stock options		1,170			—
Proceeds from exercise of stock options and other stock issued		4,104			2,688
Cash paid for stock split		—			(8	)

NET CASH PROVIDED BY FINANCING ACTIVITIES		182,924			124,948


NET INCREASE IN CASH AND CASH EQUIVALENTS		28,617			47,328
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		134,694			92,307

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	163,311			139,635


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for: Interest	$	39,935			24,799
Income taxes	$	13,029			10,430

See accompanying notes to condensed consolidated financial statements.

6

Notes to Condensed Consolidated Financial Statements (unaudited)

1)		Basis of Presentation

		In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of Glacier Bancorp Inc.’s (the “Company”) financial condition as of June 30, 2006, and June 30, 2005, stockholders’ equity for the six months ended June 30, 2006, the results of operations for the three and six months ended June 30, 2006 and 2005, and cash flows for the six months ended June 30, 2006 and 2005. The condensed consolidated statement of financial condition and statement of stockholders’ equity and other comprehensive income of the Company as of December 31, 2005 have been derived from the audited consolidated statements of the Company as of that date.

		The accompanying condensed consolidated financial statements do not include all of the information and footnotes required by the accounting principals generally accepted in the United States of America for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. Operating results for the six months ended June 30, 2006 are not necessarily indicative of the results anticipated for the year ending December 31, 2006. Certain reclassifications have been made to the 2005 financial statements to conform to the 2006 presentation.

2)		Organizational Structure

		The Company, headquartered in Kalispell, Montana, is a Montana corporation incorporated in 2004 as a successor corporation to the Delaware corporation incorporated in 1990. The Company is the parent company for nine wholly owned banking subsidiaries: Glacier Bank (“Glacier”), First Security Bank of Missoula (“First Security”), Western Security Bank (“Western”), Big Sky Western Bank (“Big Sky”), Valley Bank of Helena (“Valley”), and Glacier Bank of Whitefish (“Whitefish”), all located in Montana, Mountain West Bank (“Mountain West”) which is located in Idaho, Utah, and Washington, Citizens Community Bank (“Citizens”) located in Idaho, and 1st Bank (“1st Bank”, formerly known as “First National Bank”) located in Wyoming. In addition, the Company owns three subsidiaries, Glacier Capital Trust II (“Glacier Trust II”), Glacier Capital Trust III (“Glacier Trust III”), and Citizens (ID) Statutory Trust I (“Citizens Trust I”) for the purpose of issuing trust preferred securities and in accordance with Financial Accounting Standards Board Interpretation 46(R) the subsidiaries are not consolidated into the Company’s financial statements. The Company does not have any off-balance sheet entities.

		On February 1, 2006, Glacier Capital Trust I, whose common equity was wholly owned by the Company, had 1,400,000 shares of trust preferred securities redeemed and the Subordinated Debentures of $35,000,000 paid. The Subordinated Debentures were replaced by Glacier Trust III.

		On January 31, 2006, 35,000 shares of trust preferred shares were issued by Glacier Trust III whose common equity is wholly owned by the Company. The Trust Preferred Securities bear a cumulative fixed interest rate of 6.078% for the first five years and then converts to a three month LIBOR plus 1.29% rate adjustable quarterly for the remaining term until maturity on April 7, 2036. Interest distributions are payable quarterly. The Trust Preferred Securities are subject to mandatory redemption upon repayment of the Subordinated Debentures of $35,000,000 at their stated maturity date or their earlier redemption in an amount equal to their liquidation amount plus accumulated and unpaid distributions to the date of redemption.

7

The following abbreviated organizational chart illustrates the various relationships:

3)		Ratios

		Returns on average assets and average equity were calculated based on daily averages.

4)		Dividends Declared

		On June 28, 2006, the Board of Directors declared a $.16 per share quarterly cash dividend payable on July 20, 2006 to stockholders of record on July 11, 2006.

5)		Computation of Earnings Per Share

		Basic earnings per common share is computed by dividing net earnings by the weighted average number of shares of common stock outstanding during the period presented. Diluted earnings per share is computed by including the net increase in shares as if dilutive outstanding stock options were exercised, using the treasury stock method.

		The following schedule contains the data used in the calculation of basic and diluted earnings per share:


	Three		Three		Six		Six
	months ended		months ended		months ended		months ended
	June 30, 2006		June 30, 2005		June 30, 2006		June 30, 2005
Net earnings available to common stockholders	$	14,666,000		13,090,000		28,295,000		24,610,000

Average outstanding shares — basic		32,439,173		31,228,123		32,346,182		30,997,527
Add: Dilutive stock options		458,147		525,843		515,542		533,121

Average outstanding shares — diluted		32,897,320		31,753,966		32,861,724		31,530,648


Basic earnings per share	$	0.45		0.42		0.87		0.79


Diluted earnings per share	$	0.45		0.41		0.86		0.78

8

There were approximately 484,725 and 297,448 average shares excluded from the six months ended diluted share calculation as of June 30, 2006, and 2005, respectively, due to the option exercise price exceeding the market price.

6) Stock Based Compensation

The Company has three stock based compensation plans outstanding. The Directors 1994 Stock Option Plan was approved to provide for the grant of options to outside Directors of the Company. The Employees 1995 Stock Option Plan was approved to provide the grant of options to certain full-time employees of the Company. The Employees 1995 Stock Option Plan expired in April 2005 and has granted but unexpired options outstanding. The 2005 Stock Incentive Plan was approved by shareholders on April 27, 2005 which provides awards to certain full-time employees of the Company. The 2005 Stock Incentive Plan permits the granting of options, share appreciation rights, restricted shares, restricted share units, and unrestricted shares, deferred share units, and performance awards. Upon exercise of the stock options the shares are obtained from the authorized and unissued stock.

The Company adopted SFAS No. 123 (Revised) Share-Based Payment, as of January 1, 2006 and, accordingly, has determined compensation cost based on the fair value of the option at the grant date. The Company adopted the modified prospective transition method in reporting financial statement results in the current and for future reporting periods. Under the modified prospective method, SFAS No. 123 (Revised) applies to new awards and to awards modified, repurchased, or cancelled after the effective date; accordingly the prior interim and annual periods do not reflect restated amounts. Additionally, the compensation cost for the portion of awards outstanding for which the requisite service has not been rendered that are outstanding as of the required effective date are recognized as the requisite service is rendered on or after the required effective date. For the six months ended June 30, 2006, the compensation cost for the stock option plans was $1,684,000, with a corresponding income tax benefit of $500,000, resulting in a net earnings and cash flow from operations reduction of $1,184,000, or a decrease of $.036 per share for both basic and diluted earnings per share. For the three months ended June 30, 2006, the compensation cost for the stock option plans was $961,000, with a corresponding income tax benefit of $300,000, resulting in a net earnings and cash flow from operations reduction of $661,000, or a decrease of $.02 per share for both basic and diluted earnings per share. Additionally, in the cash flow statement, the excess tax benefit from stock options decreased the net cash provided from operating activities and increased the net cash provided by financing activities by $1,170,000 and $696,000 for the six and three months ended June 30, 2006, respectively. Total unrecognized compensation cost, net of income tax benefit, related to non-vested awards which are expected to be recognized over the next 1.2 years was $2,089,000 as of June 30, 2006. The total fair value of shares vested during the six months ended June 30, 2006 and 2005 was $535,000 and $558,000, respectively. The total fair value of shares vested during the three months ended June 30, 2006 and 2005 was $0 and $21,000, respectively.

Prior to the adoption of SFAS No. 123 (Revised), the Company utilized the intrinsic value method and compensation cost was the excess of the market price of the stock at the grant date over the amount an employee must pay to acquire the stock. The exercise price of all stock options granted has been equal to the fair market value of the underlying stock at the date of grant and, accordingly, the intrinsic value has been $0 and no compensation cost was recognized prior to the adoption of SFAS No. 123 (Revised). The Company did not modify any outstanding options prior to the adoption of the standard. If the Company had determined compensation cost based on fair value of the options at the grant date under SFAS 123 (Revised) prior to the date of adoption, the Company’s net income would have been reduced to the pro forma amounts indicated below:

9


		June 30, 2005			June 30, 2005
		Three months ended			Six months ended
Net earnings (in thousands):	As reported	$	13,090			24,610
	Compensation cost		(207	)		(415	)

	Pro forma		12,883			24,195


Basic earnings per share:	As reported		0.42			0.79
	Compensation cost		(0.01	)		(0.01	)

	Pro forma		0.41			0.78


Diluted earnings per share:	As reported		0.41			0.78
	Compensation cost		—			(0.01	)

	Pro forma		0.41			0.77

The per share weighted-average fair value of stock options granted during 2006 and 2005 was $6.47 and $3.52, respectively, on the date of grant using the Black Scholes option-pricing model with the following assumptions: 2006 – expected dividend yield 2.23%, risk-free interest rate of 4.35%, volatility ratio of 27%, and expected life of 3.3 years: 2005 – expected dividend yield 2.23%, risk-free interest rate of 3.44%, volatility ratio of 18%, and expected life of 3.4 years. Expected volatilities are based on historical volatility and other factors. The Company uses historical data to estimate option exercise and termination with the valuation model. Employee and director awards, which have dissimilar historical exercise behavior, are considered separately for valuation purposes. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield in effect at the time of the grant. The option awards generally vest upon six month or two years of service for directors and employees, respectively, and generally expire in five years.

Change in shares granted for stock options for the six months ended June 30, 2006 and the year ended December 31, 2005, are summarized as follows:


	Options outstanding					Options exercisable
				Weighted					Weighted
				average					average
	Shares			exercise price		Shares			exercise price
Balance, December 31, 2004		1,510,631			14.65		703,015			11.61

Canceled		(29,882	)		21.05		(4,974	)		9.77
Granted		587,761			25.03
Became exercisable							525,759			16.31
Exercised		(398,110	)		12.95		(398,110	)		12.95

Balance, December 31, 2005		1,670,400			18.58		825,690			14.25

Canceled		(39,910	)		23.04		(13,980	)		17.41
Granted		650,792			31.44
Became exercisable							381,340			20.14
Exercised		(266,626	)		15.39		(266,626	)		15.39

Balance, June 30, 2006		2,014,656			23.07		926,424			16.30

10

The range of exercise prices on options outstanding and exercisable at June 30, 2006 is as follows:


					Weighted	Options exercisable
			Weighted		average remaining			Weighted
	Options		average		contractual	Options		average
Price range	Outstanding		exercise price		life of options	Exercisable		exercise price
$5.19 - $6.99		103,430	$	6.32	1.4 years		103,430	$	6.32
$8.96 - $11.32		31,484		9.82	1.7 years		31,484		9.82
$12.17 - $13.20		108,693		12.68	.6 years		108,693		12.68
$14.09 - $17.45		245,533		14.29	1.6 years		245,533		14.29
$19.50 - $21.24		345,273		20.07	2.6 years		340,898		20.06
$24.99 - $28.35		534,123		25.05	3.6 years		96,386		25.01
$31.44		646,120		31.44	4.6 years		—		—

		2,014,656		23.07	3.5 years		926,424		16.30

7)		Investments

		A comparison of the amortized cost and estimated fair value of the Company’s investment securities, available-for-sale, is as follows:

INVESTMENTS AS OF JUNE 30, 2006


										Estimated
	Weighted			Amortized		Gross Unrealized				Fair
(Dollars in thousands)	Yield			Cost		Gains		Losses		Value
U.S. Government and Federal Agencies:
maturing within one year		4.10	%	$	1,491		—	(13	)		1,478
maturing within five years		4.61	%		2,981		—	(34	)		2,947
maturing five years through ten years		7.18	%		355		4	(1	)		358
maturing after ten years		6.19	%		202		1	—			203

		4.70	%		5,029		5	(48	)		4,986

State and Local Governments and other issues:
maturing within one year		3.88	%		2,392		1	(5	)		2,388
maturing one year through five years		4.69	%		3,759		29	(63	)		3,725
maturing five years through ten years		4.96	%		12,228		527	(23	)		12,732
maturing after ten years		5.12	%		282,219		8,482	(652	)		290,049

		5.10	%		300,598		9,039	(743	)		308,894


Mortgage-Backed Securities		4.76	%		58,376		151	(2,565	)		55,962

Real Estate Mortgage Investment Conduits		4.24	%		452,290		13	(12,700	)		439,603

FHLMC and FNMA stock		5.74	%		7,593		—	(541	)		7,052

FHLB and FRB stock, at cost		0.93	%		53,963		—	—			53,963


Total Investments		4.38	%	$	877,849		9,208	(16,597	)		870,460

11

INVESTMENTS AS OF DECEMBER 31, 2005


											Estimated
	Weighted			Amortized		Gross Unrealized					Fair
(Dollars in thousands)	Yield			Cost		Gains		Losses			Value
U.S. Government and Federal Agencies:
maturing within one year		4.54	%	$	1,236		—		(2	)		1,234
maturing one year through five years		4.32	%		3,962		—		(39	)		3,923
maturing five years through ten years		6.55	%		324		6		—			330
maturing after ten years		5.04	%		337		2		—			339

		4.53	%		5,859		8		(41	)		5,826

State and Local Governments and other issues:
maturing within one year		4.16	%		365		3		—			368
maturing one year through five years		4.75	%		6,858		48		(143	)		6,763
maturing five years through ten years		5.08	%		8,728		365		(16	)		9,077
maturing after ten years		5.10	%		287,175		12,476		(225	)		299,426

		5.09	%		303,126		12,892		(384	)		315,634


Mortgage-Backed Securities		4.67	%		65,926		308		(1,599	)		64,635

Real Estate Mortgage Investment Conduits		4.22	%		530,582		154		(9,653	)		521,083

FHLMC and FNMA stock		5.74	%		7,593		—		(330	)		7,263

FHLB and FRB stock, at cost		0.66	%		53,529		—		—			53,529


Total Investments		4.34	%	$	966,615		13,362		(12,007	)		967,970

Interest income includes tax-exempt interest for the six months ended June 30, 2006 and 2005 of $6,947,000 and $6,932,000, respectively, and for the three months ended June 30, 2006 and 2005 of $3,459,000 and $3,465,000, respectively.

Gross proceeds from sales of investment securities for the six months ended June 30, 2006 and 2005 were $0 and $116,014,000 respectively, resulting in gross gains of approximately $0 and $471,000 and gross losses of approximately $0 and $608,000, respectively. The cost of any investment sold is determined by specific identification.

12

8) Loans

The following table summarizes the Company’s loan portfolio:


	At						At						At
TYPE OF LOAN	6/30/2006						12/31/2005						6/30/2005
(Dollars in thousands)	Amount			Percent			Amount			Percent			Amount			Percent
Real Estate Loans:
Residential real estate	$	670,860			25.2	%	$	589,260			24.6	%	$	480,626			22.6	%
Loans held for sale		30,596			1.2	%		22,540			0.9	%		28,677			1.4	%

Total		701,456			26.4	%		611,800			25.5	%		509,303			24.0	%

Commercial Loans:
Real estate		819,287			30.8	%		781,181			32.6	%		623,411			29.3	%
Other commercial		671,175			25.2	%		579,515			24.2	%		595,970			28.1	%

Total		1,490,462			56.0	%		1,360,696			56.8	%		1,219,381			57.4	%

Consumer and other Loans:
Consumer		186,493			7.0	%		175,503			7.3	%		148,144			7.0	%
Home equity		331,716			12.5	%		295,992			12.3	%		285,956			13.5	%

Total		518,209			19.5	%		471,495			19.6	%		434,100			20.5	%
Net deferred loan fees, premiums
and discounts		(8,082	)		-0.3	%		(8,149	)		-0.3	%		(7,669	)		-0.4	%
Allowance for loan losses		(41,195	)		-1.6	%		(38,655	)		-1.6	%		(32,917	)		-1.5	%

Loan receivable, net	$	2,660,850			100.0	%	$	2,397,187			100.0	%	$	2,122,198			100.0	%

The following table sets forth information regarding the Company’s non-performing assets at the dates indicated:


NONPERFORMING ASSETS	At			At			At
(Dollars in thousands)	6/30/2006			12/31/2005			6/30/2005
Non-accrual loans:
Real estate loans	$	1,287			726			8
Commercial loans		2,997			4,045			4,603
Consumer and other loans		868			481			305

Total	$	5,152			5,252			4,916
Accruing Loans 90 days or more overdue:
Real estate loans		512			1,659			261
Commercial loans		2,475			2,199			431
Consumer and other loans		199			647			166

Total	$	3,186			4,505			858

Real estate and other assets owned, net		605			332			2,319

Total non-performing loans and real estate and other assets owned, net	$	8,943			10,089			8,093


As a percentage of total assets		0.23	%		0.26	%		0.23	%

Interest Income (1)	$	190			359			161


(1)		This is the amount of interest that would have been recorded on loans accounted for on a non-accrual basis for the six months ended June 30, 2006 and 2005 and the year ended December 31, 2005, if such loans had been current for the entire period.

13

The following table illustrates the loan loss experience:


	Six months ended			Year ended				Six months ended
ALLOWANCE FOR LOAN LOSS	June 30,			December 31,			June 30,
(Dollars in thousands)	2006			2005				2005
Balance at beginning of period	$	38,655			26,492				26,492
Charge offs:
Real estate loans		(2	)		(115	)			(57	)
Commercial loans		(324	)		(744	)			(562	)
Consumer and other loans		(202	)		(539	)			(269	)

Total charge-offs	$	(528	)		(1,398	)			(888	)


Recoveries:
Real estate loans		295			82				70
Commercial loans		70			414				203
Consumer and other loans		183			415				164

Total recoveries	$	548			911				437


Net recoveries (charge-offs)		20			(487	)			(451	)
Acquisition (1)		—			6,627				3,834
Provision		2,520			6,023				3,042

Balance at end of period	$	41,195			38,655				32,917

Ratio of net recoveries (charge-offs) to average loans outstanding during the period		0.00	%		-0.02	%			-0.02	%


(1)		Acquisition of First State Bank, 1st Bank, Citizens Community Bank, and Bonner’s Ferry branch

The following table summarizes the allocation of the allowance for loan losses:


	June 30, 2006					December 31, 2005					June 30, 2005
			Percent					Percent					Percent
			of loans in					of loans in					of loans in
(Dollars in thousands)	Allowance		category			Allowance		category			Allowance		category
Real estate loans	$	4,940		25.9	%		4,318		25.0	%		3,415		23.6	%
Commercial real estate loans		14,821		30.2	%		14,370		32.0	%		10,646		28.8	%
Other commercial loans		13,589		24.8	%		12,566		23.7	%		12,708		27.6	%
Consumer and other loans		7,845		19.1	%		7,401		19.3	%		6,148		20.0	%

Totals	$	41,195		100.0	%		38,655		100.0	%		32,917		100.0	%

14

9) Intangible Assets

The following table sets forth information regarding the Company’s core deposit intangibles and mortgage servicing rights as of June 30, 2006:


	Core Deposit			Mortgage
(Dollars in thousands)	Intangible			Servicing Rights (1)		Total
Gross carrying value	$	14,816
Accumulated Amortization		(7,621	)

Net carrying value	$	7,195			1,118		8,313


Weighted-Average amortization period
(Period in years)		10.0			9.5		9.9

Aggregate Amortization Expense
For the three months ended June 30, 2006	$	400			46		446
For the six months ended June 30, 2006	$	820			99		919

Estimated Amortization Expense
For the year ended December 31, 2006	$	1,612			139		1,751
For the year ended December 31, 2007		1,508			77		1,585
For the year ended December 31, 2008		1,413			75		1,488
For the year ended December 31, 2009		1,279			72		1,351
For the year ended December 31, 2010		1,069			70		1,139


(1)		The mortgage servicing rights are included in other assets and the gross carrying value and accumulated amortization are not readily available.

10) Deposits

The following table illustrates the amounts outstanding for deposits greater than $100,000 at June 30, 2006, according to the time remaining to maturity. Included in the three month CD maturities are brokered CD’s in the amount of $169,971,000.


	Certificates		Non-Maturity
(Dollars in thousands)	of Deposit		Deposits		Totals
Within three months	$	275,436		1,003,255		1,278,691
Three to six months		46,296		—		46,296
Seven to twelve months		51,650		—		51,650
Over twelve months		28,478		—		28,478

Totals	$	401,860		1,003,255		1,405,115

15

11) Advances and Other Borrowings

The following chart illustrates the average balances and the maximum outstanding month-end balances for Federal Home Loan Bank of Seattle (FHLB) advances and repurchase agreements:


	As of and			As of and			As of and
	for the six			for the			for the six
	months ended			year ended			months ended
(Dollars in thousands)	June 30, 2006			December 31, 2005			June 30, 2005
FHLB Advances:
Amount outstanding at end of period	$	435,978			402,191			804,047
Average balance	$	485,746			673,904			741,002
Maximum outstanding at any month-end	$	572,954			804,047			858,961
Weighted average interest rate		3.82	%		3.19	%		3.00	%

Repurchase Agreements:
Amount outstanding at end of period	$	151,098			129,530			95,235
Average balance	$	137,800			103,522			86,975
Maximum outstanding at any month-end	$	151,098			132,534			95,235
Weighted average interest rate		4.04	%		2.85	%		2.32	%

12) Stockholders’ Equity

The Federal Reserve Board has adopted capital adequacy guidelines that are used to assess the adequacy of capital in supervising a bank holding company. The following table illustrates the Federal Reserve Board’s capital adequacy guidelines and the Company’s compliance with those guidelines as of June 30, 2006.


CONSOLIDATED	Tier 1 (Core)			Tier 2 (Total)			Leverage
(Dollars in thousands)	Capital			Capital			Capital
GAAP Capital	$	352,830			352,830			352,830
Less: Goodwill and intangibles		(86,294	)		(86,294	)		(86,294	)
Other adjustments		(540	)		(540	)		(540	)
Plus: Allowance for loan losses		—			37,688			—
Accumulated other comprehensive
Unrealized loss on AFS securities		4,478			4,478			4,478
Subordinated debentures		85,000			85,000			85,000

Regulatory capital computed	$	355,474			393,162			355,474


Risk weighted assets	$	3,015,041			3,015,041


Total average assets							$	3,818,372


Capital as % of defined assets		11.79	%		13.04	%		9.31	%
Regulatory “well capitalized” requirement		6.00	%		10.00	%		5.00	%

Excess over “well capitalized” requirement		5.79	%		3.04	%		4.31	%

16

13) Other Comprehensive Income

The Company’s only component of other comprehensive income is the unrealized gains and losses on available-for-sale securities.


	For the three months						For the six months
	ended June 30,						ended June 30,
Dollars in thousands	2006			2005			2006			2005
Net earnings	$	14,666			13,090			28,295			24,610

Unrealized holding (loss) gain arising during the period		(7,606	)		10,653			(8,744	)		1,123
Tax benefit expense		2,997			(4,198	)		3,445			(443	)

Net after tax		(4,609	)		6,455			(5,299	)		680
Reclassification adjustment for losses included in net earnings		—			107			—			137
Tax benefit		—			(42	)		—			(54	)

Net after tax		—			65			—			83

Net unrealized (loss) gain on securities		(4,609	)		6,520			(5,299	)		763


Total other comprehensive income	$	10,057			19,610			22,996			25,373

14) Segment Information

The Company evaluates segment performance internally based on individual bank charters, and thus the operating segments are so defined. The following schedule provides selected financial data for the Company’s operating segments. Centrally provided services to the Banks are allocated based on estimated usage of those services. The operating segment identified as “Other” includes the Parent, non-bank units, and eliminations of transactions between segments.


	Six months ended and as of June 30, 2006
				Mountain			First
(Dollars in thousands)	Glacier			West			Security			Western			1st Bank			Big Sky
Revenues from external customers	$	25,772			33,783			25,133			14,056			8,871			10,162
Intersegment revenues		200			15			96			19			354			92
Expenses		(19,473	)		(27,590	)		(18,851	)		(11,150	)		(7,499	)		(7,743	)
Intercompany eliminations		—			—			—			—			—			—

Net Earnings	$	6,499			6,208			6,378			2,925			1,726			2,511

Total Assets	$	744,359			862,075			745,180			424,534			293,717			275,250


													Total
	Valley			Whitefish			Citizens			Other			Consolidated
Revenues from external customers	$	9,079			6,198			6,655			230			139,939
Intersegment revenues		66			—			—			36,032			36,874
Expenses		(7,070	)		(4,833	)		(5,592	)		(1,843	)		(111,644	)
Intercompany eliminations		—			—			—			(36,874	)		(36,874	)

Net Earnings	$	2,075			1,365			1,063			(2,455	)		28,295

Total Assets	$	262,370			182,742			164,215			(41,060	)		3,913,382

17


	Six months ended and as of June 30, 2005
				Mountain			First
(Dollars in thousands)	Glacier			West			Security			Western			1st Bank			Big Sky
Revenues from external customers	$	21,204			25,570			18,572			12,973			4,779			8,617
Intersegment revenues		430			—			13			—			81			—
Expenses		(16,042	)		(20,110	)		(13,167	)		(9,956	)		(3,811	)		(6,366	)
Intercompany eliminations		—			—			—			—			—			—

Net Earnings	$	5,592			5,460			5,418			3,017			1,049			2,251

Total Assets	$	683,773			731,133			616,175			443,278			266,220			268,972


													Total
	Valley			Whitefish			Citizens			Other			Consolidated
Revenues from external customers	$	7,899			5,593			2,687			(221	)		107,673
Intersegment revenues		68			—			—			31,181			31,773
Expenses		(5,973	)		(3,948	)		(2,106	)		(1,584	)		(83,063	)
Intercompany eliminations		—			—			—			(31,773	)		(31,773	)

Net Earnings	$	1,994			1,645			581			(2,397	)		24,610

Total Assets	$	247,736			161,994			132,461			(19,807	)		3,531,935


	Three months ended and as of June 30, 2006
				Mountain			First
(Dollars in thousands)	Glacier			West			Security			Western			1st Bank			Big Sky
Revenues from external customers	$	13,320			17,859			12,875			7,176			4,769			5,244
Intersegment revenues		148			9			18			2			118			92
Expenses		(10,189	)		(14,527	)		(9,684	)		(5,746	)		(3,973	)		(4,024	)
Intercompany eliminations		—			—			—			—			—			—

Net Earnings	$	3,279			3,341			3,209			1,432			914			1,312

Total Assets	$	744,359			862,075			745,180			424,534			293,717			275,250


													Total
	Valley			Whitefish			Citizens			Other			Consolidated
Revenues from external customers	$	4,735			3,202			3,496			155			72,831
Intersegment revenues		33			—			—			18,658			19,078
Expenses		(3,699	)		(2,527	)		(2,981	)		(815	)		(58,165	)
Intercompany eliminations		—			—			—			(19,078	)		(19,078	)

Net Earnings	$	1,069			675			515			(1,080	)		14,666

Total Assets	$	262,370			182,742			164,215			(41,060	)		3,913,382

18


	Three months ended and as of June 30, 2005
				Mountain			First
(Dollars in thousands)	Glacier			West			Security			Western			1st Bank			Big Sky
Revenues from external customers	$	10,869			13,402			9,497			6,602			3,635			4,528
Intersegment revenues		285			—			8			—			81			—
Expenses		(8,301	)		(10,538	)		(6,754	)		(5,085	)		(2,928	)		(3,362	)
Intercompany eliminations		—			—			—			—			—			—

Net Earnings	$	2,853			2,864			2,751			1,517			788			1,166

Total Assets	$	683,773			731,133			616,175			443,278			266,220			268,972


													Total
	Valley			Whitefish			Citizens			Other			Consolidated
Revenues from external customers	$	4,120			2,640			2,687			78			58,058
Intersegment revenues		34			—			—			16,339			16,747
Expenses		(3,129	)		(1,949	)		(2,106	)		(816	)		(44,968	)
Intercompany eliminations		—			—			—			(16,747	)		(16,747	)

Net Earnings	$	1,025			691			581			(1,146	)		13,090

Total Assets	$	247,736			161,994			132,461			(19,807	)		3,531,935

15)

Rate/Volume Analysis

Net interest income can be evaluated from the perspective of relative dollars of change in each period. Interest income and interest expense, which are the components of net interest income, are shown in the following table on the basis of the amount of any increases (or decreases) attributable to changes in the dollar levels of the Company’s interest-earning assets and interest-bearing liabilities (“Volume”) and the yields earned and rates paid on such assets and liabilities (“Rate”). The change in interest income and interest expense attributable to changes in both volume and rates has been allocated proportionately to the change due to volume and the change due to rate.


	Six Months Ended June 30,
	2006 vs. 2005
	Increase (Decrease) due to:
(Dollars in thousands)	Volume			Rate			Net
Interest Income
Residential real estate loans	$	6,540			1,979			8,519
Commercial loans		10,716			6,176			16,892
Consumer and other loans		3,380			2,398			5,778
Investment securities and other		(3,247	)		891			(2,356	)

Total Interest Income		17,389			11,444			28,833

Interest Expense
NOW accounts		80			751			831
Savings accounts		93			576			670
Money market accounts		379			3,350			3,729
Certificates of deposit		4,636			5,535			10,171
FHLB advances		(3,794	)		1,994			(1,800	)
Other borrowings and repurchase agreements		693			1,148			1,841

Total Interest Expense		2,087			13,354			15,442


Net Interest Income	$	15,302			(1,910	)		13,391

19

16)

Average Balance Sheet

The following schedule provides (i) the total dollar amount of interest and dividend income of the Company for earning assets and the resultant average yield; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rate; (iii) net interest and dividend income; (iv) interest rate spread; and (v) net interest margin. Non-accrual loans are included in the average balance of the loans.




	For the Three months ended 6-30-06								For the Six months ended 6-30-06
				Interest		Average					Interest		Average
AVERAGE BALANCE SHEET	Average			and		Yield/			Average		and		Yield/
(Dollars in thousands)	Balance			Dividends		Rate			Balance		Dividends		Rate
ASSETS
Residential Real Estate Loans	$	671,013			12,242		7.30	%	$	645,077		23,231		7.20	%
Commercial Loans		1,459,494			27,479		7.55	%		1,428,464		53,004		7.48	%
Consumer and Other Loans		504,591			9,654		7.67	%		493,009		18,519		7.57	%

Total Loans		2,635,098			49,375		7.52	%		2,566,550		94,754		7.44	%
Tax -Exempt Investment Securities (1)		282,941			3,459		4.89	%		283,325		6,948		4.90	%
Other Investment Securities		673,506			7,099		4.22	%		680,194		14,183		4.17	%

Total Earning Assets		3,591,545			59,933		6.68	%		3,530,069		115,885		6.57	%

Goodwill and Core Deposit Intangible		86,521								87,065
Other Non-Earning Assets		193,026								189,191

TOTAL ASSETS	$	3,871,092							$	3,806,325


LIABILITIES AND STOCKHOLDERS’ EQUITY
NOW Accounts	$	389,133			702		0.72	%	$	368,148		1,172		0.64	%
Savings Accounts		232,209			501		0.86	%		239,031		1,078		0.91	%
Money Market Accounts		544,161			3,907		2.88	%		519,732		6,750		2.62	%
Certificates of Deposit		882,475			8,651		3.93	%		856,079		16,052		3.78	%
FHLB Advances		449,519			4,417		3.94	%		485,746		9,213		3.82	%
Repurchase Agreements and Other Borrowed Funds		337,955			4,129		4.90	%		316,285		7,686		4.90	%

Total Interest Bearing Liabilities		2,835,452			22,307		3.16	%		2,785,021		41,951		3.04	%

Non-interest Bearing Deposits		653,834								642,227
Other Liabilities		31,928								33,573

Total Liabilities		3,521,214								3,460,821


Common Stock		324								323
Paid-In Capital		267,148								265,354
Retained Earnings		83,848								79,716
Accumulated Other
Comprehensive Income		(1,442	)							111

Total Stockholders’ Equity		349,878								345,504

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	3,871,092							$	3,806,325


Net Interest Income				$	37,626						$	73,934

Net Interest Spread							3.52	%						3.53	%
Net Interest Margin on Average Earning assets							4.20	%						4.22	%
Return on Average Assets (annualized)							1.52	%						1.50	%
Return on Average Equity (annualized)							16.81	%						16.51	%


(1) Excludes tax effect on non-taxable investment security income

20

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Impact of Recently Issued Accounting Standards

The Company adopted SFAS No. 123 (Revised) Share-Based Payment, as of January 1, 2006 and, accordingly, has determined compensation cost based on the fair value of the option at the grant date. Net earnings was reduced as a result of the adoption of SFAS 123(R) Share-based Paymentbeginning January 1, 2006, which requires recording the estimated fair value of stock options as compensation expense. For additional information regarding the standard see Note 6 to the Consolidated Financial Statements. The following table illustrates the affect of the adoption of SFAS 123(R) if it would not have been adopted in 2006.


	Three months				Six months
Impact of SFAS 123 (R)	ended June 30,				ended June 30,
(Unaudited $ in thousands, except per share data)	2006		2005		2006		2005
Net earnings	$	14,666		13,090		28,295		24,610
Stock option compensation cost		661		—		1,184		—

Pro forma net operating earnings	$	15,327		13,090		29,479		24,610


Diluted earnings per share	$	0.45		0.41		0.86		0.78
Stock option compensation cost		0.02		—		0.04		—

Pro forma net operating earnings	$	0.47		0.41		0.90		0.78

Pending Acquisitions

On April 21, 2006, Glacier announced the signing of a definitive agreement to acquire Citizens Development Company in a transaction valued at approximately $77 million. Citizens is a Billings, Montana-based bank holding company that owns five community banks located throughout Montana, with principal banking offices in Billings, Lewiston, Hamilton, Columbia Falls and Chinook. At June 30, 2006, Citizens had total assets of $412 million, net loans of $308 million, total deposits of $349 million, and stockholders’ equity of $38 million. The acquisition of the Citizens banks will strengthen the Company’s presence in three of Montana’s strongest markets—Billings, the Flathead Valley, and the Bitterroot Valley, while expanding its operations in central Montana.

On May 31, 2006, Glacier announced the signing of a definitive agreement to acquire First National Bank of Morgan in a transaction valued at approximately $20 million. First National Bank of Morgan is a national banking association with its main office in Morgan, Utah and one branch office in Mountain Green, Utah. At June 30, 2006, First National Bank of Morgan had total assets of $75 million, net loans of $42 million, total deposits of $66 million, and stockholders’ equity of $9 million. The acquisition of First National Bank of Morgan will be the Company’s first whole-bank acquisition in Utah, expanding Glacier’s focused community bank strategy in Utah and complementing its two existing Utah branches.

The two pending acquisitions, which are subject to bank regulatory approval, are both presently expected to close in the later part of August, 2006. The transactions are expected to be immediately accretive to Glacier’s earnings per share. To fund the Citizens acquisition, the Company sold 900,000 shares of its common stock, to settle on August 9, 2006, at $30.50 per share, less underwriter discount, a firm underwritten offering conducted by D.A. Davidson & Co. D.A. Davidson has been granted a 30-day option to purchase up to an additional 100,000 shares at the offering price to cover related over-allotments, if any. For additional acquisition funding, the Company expects to issue $30,000,000 in subordinated debentures with a cumulative fixed interest rate of 7.235% for the first five years and then converts to a three month LIBOR plus 1.57% rate. The Company expects to issue the subordinated debentures prior to August 22, 2006.

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Financial Condition

This section discusses the changes in the Statement of Financial Condition items from June 30, 2005 and December 31, 2005, to June 30, 2006.


	June 30,			December 31,			June 30,			$ change from			$ change from
	2006			2005			2005			December 31,			June 30,
Assets ($ in thousands)	(unaudited)			(audited)			(unaudited)			2005			2005
Cash on hand and in banks	$	124,872			111,418			109,402			13,454			15,470
Investment securities, interest bearing deposits, FHLB stock, FRB stock, and fed funds		908,899			991,246			1,114,334			(82,347	)		(205,435	)
Loans:
Real estate		697,351			607,627			505,296			89,724			192,055
Commercial		1,486,847			1,357,051			1,215,919			129,796			270,928
Consumer and other		517,847			471,164			433,900			46,683			83,947

Total loans		2,702,045			2,435,842			2,155,115			266,203			546,930
Allowance for loan losses		(41,195	)		(38,655	)		(32,917	)		(2,540	)		(8,278	)

Total loans net of allowance for loan losses		2,660,850			2,397,187			2,122,198			263,663			538,652

Other assets		218,761			206,493			186,001			12,268			32,760

Total Assets	$	3,913,382			3,706,344			3,531,935			207,038			381,447

At June 30, 2006 total assets were $3.913 billion, which is $207 million, or 6 percent, greater than the December 31, 2005 assets of $3.706 billion, and $381 million, or 11 percent, greater than the June 30, 2005 assets of $3.532 billion.

Total loans have increased $266 million from December 31, 2005, or 11 percent, with the growth occurring in all loan categories. Commercial loans have increased $130 million, or 10 percent, real estate loans gained $90 million, or 15 percent, and consumer loans grew by $47 million, or 10 percent. Total loans increased $547 million, or 25 percent, with internal loan growth of $435 million from June 30, 2005, with all loan categories showing increases. Including loans acquired, commercial loans increased the most, $271 million, or 22 percent, followed by real estate loans which increased $192 million, or 38 percent, which was the largest percentage gain, and consumer loans, which are primarily comprised of home equity loans, increasing by $84 million, or 19 percent.

Investment securities, including interest bearing deposits in other financial institutions, and federal funds sold have decreased $82 million from December 31, 2005, or 8 percent, and have declined $205 million, or 18 percent, from June 30, 2005. Investment securities at June 30, 2006 represented 23% of total assets versus 32% the prior year, which is a result of the continued use of investment cash flow to fund loan growth.

22


	June 30,		December 31,		June 30,		$ change from			$ change from
	2006		2005		2005		December 31,			June 30,
Liabilities ($ in thousands)	(unaudited)		(audited)		(unaudited)		2005			2005
Non-interest bearing deposits	$	720,473		667,008		630,983		53,465			89,490
Interest bearing deposits		1,972,296		1,867,704		1,576,872		104,592			395,424
Advances from Federal Home Loan Bank		435,978		402,191		804,047		33,787			(368,069	)
Securities sold under agreements to repurchase and other borrowed funds		313,394		317,222		100,811		(3,828	)		212,583
Other liabilities		33,411		33,980		36,463		(569	)		(3,052	)
Subordinated debentures		85,000		85,000		85,000		—			—

Total liabilities	$	3,560,552		3,373,105		3,234,176		187,447			326,376

Non-interest bearing deposits have increased $53 million, or 8 percent, since December 31, 2005, and by $89 million, or 14 percent, since June 30, 2005. This low cost of funding continues to be a primary focus of each of our banks. Interest bearing deposits have increased $105 million from December 31, 2005, of which $22 million was in Internet generated National Market CD’s. Since June 30, 2005 interest bearing deposits have increased $395 million, or 25 percent, with $166 million of that amount from broker and Internet sources. Federal Home Loan Bank (FHLB) advances increased $34 million, and repurchase agreements and other borrowed funds decreased $4 million from December 31, 2005. FHLB advances are $368 million less than the June 30, 2005 balances due primarily to the above described increases in deposits and other funding sources including $158 million in U.S. Treasury Tax and Loan Term Auction funds.

Liquidity and Capital Resources

The objective of liquidity management is to maintain cash flows adequate to meet current and future needs for credit demand, deposit withdrawals, maturing liabilities and corporate operating expenses. The principal source of the Company’s cash revenues is the dividends received from the Company’s banking subsidiaries. The payment of dividends is subject to government regulation, in that regulatory authorities may prohibit banks and bank holding companies from paying dividends which would constitute an unsafe or unsound banking practice. The subsidiaries source of funds is generated by deposits, principal and interest payments on loans, sale of loans and securities, short and long-term borrowings, and net earnings. In addition, all of the banking subsidiaries are members of the FHLB. As of June 30, 2006, the Company had $874 million of available FHLB borrowing line of which $436 million was utilized. Accordingly, management of the Company has a wide range of versatility in managing the liquidity and asset/liability mix for each individual institution as well as the Company as a whole.

Lending Commitments

In the normal course of business, there are various outstanding commitments to extend credit, such as letters of credit and un-advanced loan commitments, which are not reflected in the accompanying condensed consolidated financial statements. Management does not anticipate any material losses as a result of these transactions.

23


	June 30,			December 31,			June 30,			$ change from			$ change from
Stockholders’ equity	2006			2005			2005			December 31,			June 30,
($ in thousands except per share data)	(unaudited)			(audited)			(unaudited)			2005			2005
Common equity	$	357,308			332,418			291,062			24,890			66,246
Accumulated other comprehensive (loss) income		(4,478	)		821			6,697			(5,299	)		(11,175	)

Total stockholders’ equity		352,830			333,239			297,759			19,591			55,071
Core deposit intangible, net, and goodwill		(86,294	)		(87,114	)		(80,286	)		820			(6,008	)

	$	266,536			246,125			217,473			20,411			49,063


Stockholders’ equity to total assets		9.02	%		8.99	%		8.43	%
Tangible stockholders’ equity to total tangible assets		6.96	%		6.80	%		6.30	%
Book value per common share	$	10.88			10.36			9.53			0.52			1.35
Market price per share at end of quarter	$	29.27			30.05			26.13			(0.78	)		3.14

Total equity and book value per share amounts have increased $19.591 million and $.52 per share, respectively, from December 31, 2005, the result of earnings retention and stock options exercised that outpaced the reduction in other comprehensive income. Accumulated other comprehensive income, representing net unrealized gains (losses) on securities available for sale, decreased $11.175 million from June 30, 2005 and $5.299 million from year end, primarily a function of interest rate changes.


	June 30,			December 31,			June 30,
	2006			2005			2005
Credit quality information ($ in thousands)	(unaudited)			(audited)			(unaudited)
Allowance for loan losses	$	41,195		$	38,655			32,917

Non-performing assets	$	8,943			10,089			8,093

Allowance as a percentage of non performing assets		461	%		383	%		407	%

Non-performing assets as a percentage of total assets		0.23	%		0.26	%		0.23	%

Allowance as a percentage of total loans		1.52	%		1.59	%		1.53	%

Net recoveries (charge-offs) as a percentage of loans		0.00	%		(0.02	%)		(0.02	%)

Allowance for Loan Loss and Non-Performing Assets

Non-performing assets as a percentage of total assets at June 30, 2006 were at .23 percent, the same percentage as at June 30, 2005, but decreasing slightly from .26 percent at December 31, 2005. The Company’s ratios compare favorably to the Federal Reserve Bank Peer Group average of .41 percent at March 31, 2006, the most recent information available. The allowance for loan losses was 461 percent of non-performing assets at June 30, 2006, up from 407 percent a year ago. The allowance, including $2.792 million from acquisitions, has increased $8.278 million, or 25 percent, from a year ago. The allowance of $41.195 million, is 1.52 percent of June 30, 2006 total loans outstanding, down slightly from the 1.53 percent a year ago. The second quarter provision for loan losses expense was $1.355 million, a decrease of $197 thousand from the same quarter in 2005. Net charge offs remain low at $11 thousand for the second quarter of 2006. Loan growth, average loan size, and credit quality considerations will determine the level of additional provision expense.

24

Results of Operations – The three months ended June 30, 2006 compared to the three months ended
June 30, 2005.

The company reported net quarterly earnings of $14.666 million, an increase of $1.6 million, or 12 percent, over the $13.090 million for the second quarter of 2005. Net quarterly earnings were reduced by $661,000, or $0.02 per share, due to the January 1, 2006 adoption of SFAS 123(R)Share-based Payment which requires recording the estimated fair value of stock options as compensation expense. Diluted earnings per share for the quarter of $0.45 is an increase of 10 percent over the per share earnings of $0.41 for the same quarter of 2005. Excluding the affects of SFAS 123(R), diluted earnings per share would have been $0.47, or an increase of 15 percent over the prior year quarter. Annualized return on average assets and return on average equity for the quarter were 1.52 percent and 16.81 percent, respectively, which compares with prior year returns for the second quarter of 1.52 percent and 18.03 percent.


Revenue summary	Three months ended June 30,
(Unaudited — $ in thousands)	2006			2005			$ change			% change
Net interest income	$	37,626		$	32,087		$	5,539			17	%

Non-interest income
Service charges, loan fees, and other fees		9,349			7,850			1,499			19	%
Gain on sale of loans		2,770			2,884			(114	)		-4	%
Loss on sale of investments		—			(107	)		107			-100	%
Other income		779			886			(107	)		-12	%

Total non-interest income		12,898			11,513			1,385			12	%

	$	50,524		$	43,600		$	6,924			16	%


Tax equivalent net interest margin		4.34	%		4.14	%

Net Interest Income

Net interest income for the quarter increased $5.539 million, or 17 percent, over the same period in 2005, and $1.318 million from the first quarter of 2006. Total interest income increased $13.388 million from the prior year’s quarter, or 29 percent, while total interest expense is $7.849 million, or increased 54 percent. The increase in interest expense is primarily attributable to the volume increase in interest bearing deposits, and increases in short term interest rates during 2005 continuing into 2006. The Federal Reserve Bank has increased the targeted fed funds rate 12 times, 300 basis points, since January 1, 2005. The tax equivalent net interest margin calculation has been changed to an actual 365 day base from a 360 day base. Previously reported net interest margins have been adjusted to reflect the change. The net interest margin as a percentage of earning assets for the quarter, on a tax equivalent basis, was 4.34 percent which was higher than the restated 4.14 percent result for the second quarter of 2005. The margin for the second quarter of 2006 decreased slightly from the first quarter of 2006 restated margin of 4.38 percent (4.32 originally reported), primarily a result of the continued increase in funding costs.

Non-interest Income

Fee income increased $1.499 million, or 19 percent, over the same period last year, driven primarily by an increased number of loan and deposit accounts from internal growth and acquisitions. Gain on sale of loans decreased $114 thousand, or 4 percent, from the second quarter of last year. Loan origination volume in our markets for housing construction continues to remain very active by historical standards and the recent decline was expected with the slow down from unprecedented activity last year and as interest rates continues to rise.

25


Non-interest expense summary	Three months ended June 30,
(Unaudited — $ in thousands)	2006		2005		$ change		% change
Compensation and employee benefits	$	15,739	$	12,474	$	3,265		26	%
Occupancy and equipment expense		3,431		3,152		279		9	%
Outsourced data processing		678		423		255		60	%
Core deposit intangibles amortization		400		384		16		4	%
Other expenses		6,702		6,043		659		11	%

Total non-interest expense	$	26,950	$	22,476	$	4,474		20	%

Non-interest Expense

Non-interest expense increased by $4.474 million, or 20 percent, from the same quarter of 2005. Compensation and benefit expense increased $3.265 million, or 26 percent, of which $961 thousand was from expensing stock options with the adoption of SFAS 123(R) in 2006. The remaining increase in compensation and benefit expense was primarily attributed to four acquisitions during 2005 and normal compensation increases for job performance and increased cost for benefits. The number of full-time-equivalent employees has increased from 1,057 to 1,171, an 11 percent increase, since June 30, 2005. Occupancy and equipment expense increased $279 thousand, or 9 percent, reflecting the bank acquisitions, cost of additional branch locations and facility upgrades. Other expenses increased $659 thousand, or 11 percent, primarily from acquisitions, additional marketing expenses, and costs associated with new branch offices. The efficiency ratio (non-interest expense/net interest income + non-interest income) was 53 percent for the 2006 quarter, up from 52 percent for the 2005 quarter.

Operating Results for Six Months Ended June 30, 2006 Compared to June 30, 2005

Net earnings for the six months ended June 30, 2006 were $28.295 million, which is an increase of $3.685 million, or 15 percent over the prior year. Diluted earnings per share of $0.86 is an increase of 10 percent over the $0.78 earned in the first six months of 2005. Excluding SFAS 123(R) compensation costs of $1.184 million, diluted earnings per share increased 15 percent for the first six months of 2006. The 2006 six month annualized return on average assets and return on average equity was 1.50 percent and 16.51 percent, respectively, which compares with prior year six month returns of 1.51 percent and 17.56 percent.


Revenue summary	Six months ended June 30,
(Unaudited — $ in thousands)	2006			2005			$ change			% change
Net interest income	$	73,934		$	60,543		$	13,391			22	%

Non-interest income
Service charges, loan fees, and other fees		17,566			14,332			3,234			23	%
Gain on sale of loans		4,960			4,976			(16	)		0	%
Loss on sale of investments		—			(137	)		137			-100	%
Other income		1,528			1,450			78			5	%

Total non-interest income		24,054			20,621			3,433			17	%

	$	97,988		$	81,164		$	16,824			21	%

Tax equivalent net interest margin		4.36	%		4.14	%

Net Interest Income

Net interest income for the six months increased $13.391 million, or 22 percent, over the same period in 2005. Total interest income increased $28.833 million, or 33 percent, while total interest expense was $15.442 million, or 58 percent higher. The increase in interest expense is primarily attributable to the volume increase in interest bearing deposits, and increases in short term interest rates during 2005 and continuing in

26

2006. The tax equivalent net interest margin calculation has been changed to an actual 365 day base from a 360 day base. Previously reported net interest margins have been adjusted to reflect the change. The net interest margin as a percentage of earning assets, on a tax equivalent basis, was 4.36 percent which was 22 basis points higher than the restated 4.14 percent result for 2005.

Non-interest Income

Total non-interest income increased $3.433 million, or 17 percent in 2006. Fee income increased $3.234 million, or 23 percent, over last year, driven primarily by an increased number of loan and deposit accounts, acquisitions, and additional customer product and services offered. Gain on sale of loans decreased $16 thousand, or less than 1 percent, from the first six months of last year. Loan origination volume in our markets for housing construction continues to remain very active by historical standards and the recent decline was expected with the slow down from unprecedented activity last year and as interest rates continue to rise.


Non-interest expense summary	Six months ended June 30,
(Unaudited — $ in thousands)	2006		2005		$ change		% change
Compensation and employee benefits	$	31,050	$	23,418	$	7,632		33	%
Occupancy and equipment expense		6,922		6,007		915		15	%
Outsourced data processing		1,402		655		747		114	%
Core deposit intangibles amortization		820		667		153		23	%
Other expenses		12,583		10,803		1,780		16	%

Total non-interest expense	$	52,777	$	41,550	$	11,227		27	%

Non-interest Expense

Non-interest expense increased by $11.227 million, or 27 percent, from the same six months of 2005. Compensation and benefit expense increased $7.632 million, or 33 percent, of which $1.684 million was from expensing stock options with the adoption of SFAS 123(R) in 2006. The remaining increase in compensation and benefit expense was primarily attributed to four acquisitions during 2005, the addition of four new bank branches in 2006, and normal compensation increases for job performance and increased cost for benefits. Occupancy and equipment expense increased $915 thousand, or 15 percent, reflecting the acquisitions, cost of additional locations and facility upgrades. Other expenses increased $1.780 million, or 16 percent, primarily from acquisitions, additional marketing expenses, and costs associated with new branch offices. The efficiency ratio (non-interest expense/net interest income + non-interest income) increased to 54 percent from 51 percent for the first six months of 2005 largely a result of the recent acquisitions and branch openings.

Critical Accounting Policies

Companies apply certain critical accounting policies requiring management to make subjective or complex judgments, often as a result of the need to estimate the effect of matters that are inherently uncertain. The Company considers its only critical accounting policy to be the allowance for loan losses. The allowance for loan losses is established through a provision for loan losses charged against earnings. The balance of allowance for loan loss is maintained at the amount management believes will be adequate to absorb known and inherent losses in the loan portfolio. The appropriate balance of allowance for loan losses is determined by applying estimated loss factors to the credit exposure from outstanding loans. Estimated loss factors are based on subjective measurements including management’s assessment of the internal risk classifications, changes in the nature of the loan portfolio, industry concentrations and the impact of current local, regional and national economic factors on the quality of the loan portfolio. Changes in these estimates and assumptions are reasonably possible and may have a material impact on the Company’s consolidated financial statements, results of operations and liquidity.

27

Effect of inflation and changing prices

Generally accepted accounting principles require the measurement of financial position and operating results in terms of historical dollars, without consideration for change in relative purchasing power over time due to inflation. Virtually all assets of a financial institution are monetary in nature; therefore, interest rates generally have a more significant impact on a company’s performance than does the effect of inflation.

Forward Looking Statements

This Form 10-Q includes forward looking statements, which describe management’s expectations regarding future events and developments such as future operating results, growth in loans and deposits, continued success of the Company’s style of banking and the strength of the local economies in which it operates. Future events are difficult to predict, and the expectations described above are necessarily subject to risk and uncertainty that may cause actual results to differ materially and adversely. In addition to discussions about risks and uncertainties set forth from time to time in the Company’s public filings, factors that may cause actual results to differ materially from those contemplated by such forward looking statements include, among others, the following possibilities: (1) local, national and international economic conditions are less favorable than expected or have a more direct and pronounced effect on the Company than expected and adversely affect the company’s ability to continue its internal growth at historical rates and maintain the quality of its earning assets; (2) changes in interest rates reduce interest margins more than expected and negatively affect funding sources; (3) projected business increases following strategic expansion or opening or acquiring new banks and/or branches are lower than expected; (4) costs or difficulties related to the integration of acquisitions are greater than expected; (5) competitive pressure among financial institutions increases significantly; (6) legislation or regulatory requirements or changes adversely affect the businesses in which the Company is engaged.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

The Company believes that there have not been any material changes in information about the Company’s market risk than was provided in the Form 10-K report for the year ended December 31, 2005.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of our disclosure controls and procedures (as required by Exchange Act Rules 240.13a-15(b) and 15d-14(c)) as of the date of this quarterly report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s current disclosure controls and procedures are effective and timely, providing them with material information relating to the Company required to be disclosed in the reports we file or submit under the Exchange Act.

Changes in Internal Controls

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the second quarter 2006, to which this report relates that have materially affected, or are reasonably likely to materially affect the Company’s internal controls over financial reporting.

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.

28

Item 1A. Risk Factors

There have not been any material changes to the Company’s risk factors during the second quarter 2006.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

	(a)		Not Applicable

	(b)		Not Applicable

	(c)		Not Applicable

Item 3. Defaults upon Senior Securities

	(a)		Not Applicable

	(b)		Not Applicable

Item 4. Submission of Matters to a Vote of Securities Holders

	(a)		The Company’s Annual Shareholders’ Meeting was held April 26, 2006

	(b)		Not Applicable

	(c)		A brief description of each matter voted upon at the Annual Meeting and the number of votes cast for, against, or withheld, including a separate tabulation with respect to each nominee to serve on the Board is presented below:

(1)

Election of Director for a three-year term expiring in 2008 and until his successor has been elected or qualified.

John W. Murdoch -
Votes Cast For: 27,327,205
Votes Cast Withheld: 523,111

(2)

Election of Directors for three-year terms expiring in 2009 and until their successors have been elected or qualified.

Craig A. Langel –
Votes Cast For: 27,361,135
Votes Cast Withheld: 489,182

L. Peter Larson –
Votes Cast For: 27,305,618
Votes Cast Withheld: 544,698

Everit A. Sliter –
Votes Cast For: 27,064,675
Votes Cast Withheld: 785,641

29

(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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		GLACIER BANCORP, INC.

August 7, 2006		/s/ Michael J. Blodnick

		Michael J. Blodnick
		President/CEO

August 7, 2006		/s/ James H. Strosahl

		James H. Strosahl
		Executive Vice President/CFO

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Glacier Bancorp - 10-Q quarterly report FY

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