UNITED STATESSECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
COMMISSION FILE 0-18911
GLACIER BANCORP, INC.
Registrant’s telephone number, including area code (406) 756-4200
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
The number of shares of Registrant’s common stock outstanding on May 6th, 2003 was 17,516,770. No preferred shares are issued or outstanding.
TABLE OF CONTENTS
GLACIER BANCORP, INC.Quarterly Report on Form 10-Q
Index
Glacier Bancorp, Inc.
See accompanying notes to consolidated financial statements
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See accompanying notes to consolidated financial statements.
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Notes to Consolidated Financial Statements
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INVESTMENTS AS OF MARCH 31, 2003
INVESTMENTS AS OF DECEMBER 31, 2002
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Financial Condition
This section discusses the changes in Statement of Financial Condition items from March 31, 2002 and December 31, 2002, to March 31, 2003.
At March 31, 2003 total assets were $2.323 billion which is $239 million greater than the March 31, 2002 assets of $2.084 billion, or 11 percent, of which $41 million of the increase occurred during the first quarter of 2003.
Total loans, net of the allowance for loan losses, have increased $7 million from March 31, 2002 and decreased $9 million from December 31, 2002. With interest rates at the lowest level in decades the past year, a large number of real estate loans have been refinanced, which coupled with our decision to sell the majority of the real estate loan production, has resulted in a reduction in real estate loans of $64 million, of which $38 million of the decrease occurred during the first quarter of 2003. Since March 31, 2002 Commercial loans have increased $79 million, or 13 percent, and continue to be the focus of our lending. Approximately 40 percent, or $31 million, of the increase in commercial loans has occurred since December 31, 2002. Consumer loans over the last twelve months have declined $6 million with a significant portion of the decline attributed to the planned runoff in the WesterFed auto dealer originated consumer loans. Home-equity loans continue to be the primary source of our consumer loan originations and have increased approximately 15 percent from a year ago. Home equity loans comprise 63 percent of consumer loans at March 31, 2003.
Investment securities, including interest bearing deposits in other financial institutions, have increased $225 million since March 31, 2002 and $56 million from December 31, 2002. The cash received from the reduction in real estate loans has been redeployed in mortgage related investment securities with characteristics that result in less interest rate risk than retaining 30 year loans. Additional investments were made to use funding liquidity that exceeds loan growth opportunities.
The Company typically sells a majority of 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. The Company has also been active in generating commercial SBA loans. A portion of some of those loans are sold to other investors. The amount of loans sold and serviced for others on March 31, 2003 was approximately $237 million.
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Total deposits have increased $49 million from the March 31, 2002 balances and $16 million from December 31, 2002. There was a significant increase of $69 million, or 29 percent, in non-interest bearing deposits, of which $13 million occurred during the first quarter 2003. This growth in low cost stable funding gives us increased flexibility in managing our asset mix. Interest-bearing deposits are down $20 million, or 2 percent, most of which was a reduction in certificates of deposit. The small increase of $4 million in interest-deposits since December 31, 2002 is attributable to the seasonal fluctuation in deposits. Federal home loan bank advances, other borrowed funds, and repurchase agreements, have also increased $148 million from March 31, 2002 and $17 million from December 31, 2002 as we continue to take advantage of these funding sources.
Pending Acquisition and additional location
On April 24, 2003, a definitive agreement to acquire Pend Oreille Bank, which operates from two locations in Sandpoint, Idaho and one location in Newport, Washington, was signed. The bank is approximately $65 million in total assets with deposits of $57 million. These locations will become additional branches of Mountain West Bank, the Company’s Idaho based subsidiary. The transaction is all cash in the amount of $10.4 million. It is expected that the acquisition, which is scheduled to close as early as June 30, 2003, will be immediately accretive to earnings.
Mountain West Bank opened an additional location in the growing Boise market bringing the total locations in the Boise, Nampa area to five.
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 income. In addition, all seven banking subsidiaries are members of the FHLB. As of March 31, 2003, the Company had $776 million of available FHLB line of which $500 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. During 2003, all seven financial institutions maintained liquidity and regulatory capital levels in excess of regulatory requirements and operational needs.
Commitments
In the normal course of business, there are various outstanding commitments to extend credit, such as letters of credit and unadvanced loan commitments, which are not reflected in the accompanying consolidated financial statements. Management does not anticipate any material losses as a result of these transactions.
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Each of the equity ratios and book value per share amounts have increased substantially from the prior year, primarily the result of earnings retention, stock options exercised, and net unrealized gains on securities. Our equity to asset ratio is near historic highs for the Company which creates challenges for effective deployment of capital to maintain an appropriate return on equity. The Company declared a 10 percent stock dividend, payable in common stock on May 22, 2003 to shareholders of record on May 13, 2003.
Allowance for Loan Loss and Non-Performing Assets
Non-performing assets as a percentage of total assets at March 31, 2003 were ..43 percent, a decrease from .61 percent at March 31, 2002 and .51 percent at December 31, 2002. This compares to the Peer Group average of .62 percent at December 31, 2002, the most recent information available. The reserve for loan losses was 216 percent of non-performing assets at March 31, 2003, up from 153 percent a year ago and 181 percent from December 31, 2002.
With the continuing change in loan mix from residential real estate to commercial and consumer loans, which historically have greater credit risk, the Company has increased the balance in the reserve for loan losses account. The reserve balance has increased $2.129 million, or 11 percent, to $21.627 million, which is 1.65 percent of total loans outstanding, up from 1.50 percent a year ago and 1.58 percent from December 31, 2002. The first quarter provision expense for loan losses was $841 thousand, a decrease of $459 thousand from the same quarter in 2002.
Critical Accounting Policies
Companies may 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
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allowance for loan losses are 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 operation or liquidity.
Net Interest Income
Net interest income for the quarter increased $1.011 million, or 5 percent, over the same period in 2002. Total interest income is $1.470 million, or 4 percent lower that the same quarter in 2002, while total interest expense is $2.481 million or 19 percent lower. Lower interest rates were the main reason for the reduction in interest income and interest expense. The increase in non-interest bearing deposits also resulted in reduced interest expense. The net interest margin as a percentage of earning assets, on a tax equivalent basis, decreased from 4.4 percent for the 2002 quarter to 4.3 percent in 2003. We recorded increased amortization of premiums in 2003 on mortgage backed securities, resulting from prepayments due to the continuing low interest rates. The additional amortization expense accounted for most of the reduction in the net interest margin. We continue to invest in short term securities with low yields rather than extending maturities to obtain higher current yields with corresponding interest rate risk. This also results in lower current interest margins.
Non-interest Income
Fee income increased 12 percent over the same period last year, driven primarily by increased deposit account activity, increases in service fee income, and interchange fees on electronic check cards. The increase in gain on sale of loans reflects the low level of mortgage interest rates and resulting purchase and refinancing activity. Other income was lower in the current years’ quarter by $25 thousand.
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Non-interest Expense
Non-interest expense increased by $518 thousand, or 4 percent, from the same quarter of 2002. Compensation and benefit expense increased $197 thousand, or 3 percent from the first quarter of 2002. Occupancy and equipment expense increased $134 thousand, or 6 percent, and outsourced data processing expense increased by $116 thousand, or 26 percent. Other expenses increased $94 thousand, or 3 percent. The increased expenses were primarily the result of increases in the volume of transactions handled. The outsourced data processing expense is expected to decrease as Mountain West Bank is converting its core processing to the Company’s in-house data system in the second quarter of 2003. The efficiency ratio (non-interest expense/net interest income + non-interest income) was 52 percent for the 2003 quarter which is an improvement over the 55 percent for the 2002 quarter.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Market Risk:
Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates/prices such as interest rates, foreign currency exchange rates, commodity prices, and equity prices. The Company’s primary market risk exposure is interest rate risk. The ongoing monitoring and management of this risk is an important component of the Company’s asset/liability management process which is governed by policies established by its Board of Directors that are reviewed and approved annually. The Board of Directors delegates responsibility for carrying out the asset/liability management policies to the Asset/Liability Committee (ALCO). In this capacity ALCO develops guidelines and strategies impacting the Company’s asset/liability management related activities based upon estimated market risk sensitivity, policy limits and overall market interest rate levels/trends.
Interest Rate Risk:
Interest rate risk represents the sensitivity of earnings to changes in market interest rates. As interest rates change, the interest income and expense streams associated with the Company’s financial instruments also change thereby impacting net interest income (NII), the primary component of the Company’s earnings. ALCO utilizes the results of a detailed and dynamic simulation model to quantify the estimated exposure of NII to sustained interest rate changes. While ALCO routinely monitors simulated NII sensitivity over a rolling two-year horizon, it also utilizes additional tools to monitor potential longer-term interest rate risk. The simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all assets and liabilities reflected on the Company’s statement of financial condition. This sensitivity analysis is compared to ALCO policy limits which specify a maximum tolerance level for NII exposure over a one year horizon, assuming no balance sheet growth, given a 200 or 100 basis point (bp) upward and downward shift in interest rates. A parallel and pro rata shift in rates over a 12-month period is assumed as a benchmark. Other non-parallel rate movement scenarios are also modeled to determine the potential impact on net interest income. The following reflects the Company’s NII sensitivity analysis as of December 31, 2002, the most recent information available, as compared to the 10% Board approved policy limit (dollars in thousands). There have been no significant changes in operation or the market that would materially affect the estimated
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sensitivity. The table illustrates the estimated change in net interest income over a twelve month period based on the three months activity ended March 31, 2003.
The preceding sensitivity analysis does not represent a Company forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including: the nature and timing of interest rate levels including yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of assets and liability cashflows, and others. While assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurances as to the predictive nature of these assumptions including how customer preferences or competitor influences might change.
Also, as market conditions vary from those assumed in the sensitivity analysis, actual results will also differ due to: prepayment/refinancing levels likely deviating from those assumed, the varying impact of interest rate change caps or floors on adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early withdrawals and product preference changes, and other internal/external variables. Furthermore, the sensitivity analysis does not reflect actions that ALCO might take in responding to or anticipating changes in interest rates.
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 defined in Exchange Act Rules 240.13a-14(c) and 15d-14(c)) as of a date within 90 days before the filing 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 significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. We are not aware of any significant deficiencies or material weaknesses, therefore no corrective actions were taken.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
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Item 4. Submission of Matters to a Vote of Securities Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K.
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.
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CERTIFICATIONS
I, Michael J. Blodnick, certify that:
May 12, 2003
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I, James H. Strosahl, certify that:
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