UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
FORM 10-Q
COMMISSION FILE 0-18911
GLACIER BANCORP, INC.
Registrant’s telephone number, including area code (406) 756-4200
N/A
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 [ ]
The number of shares of Registrant’s common stock outstanding on November 5th, 2002 was 17,236,312. No preferred shares are issued or outstanding.
GLACIER BANCORP, INC.Quarterly Report on Form 10-Q
Index
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Glacier Bancorp, Inc.Consolidated Statements of Financial Condition
See accompanying notes to consolidated financial statements
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Glacier Bancorp, Inc.Consolidated Statements of Operations
See accompanying notes to consolidated financial statements.
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Glacier Bancorp, Inc.Consolidated Statements of Stockholders’ Equity and Comprehensive Income Year ended December 31, 2001 and Nine months ended September 30, 2002
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Glacier Bancorp, Inc.Consolidated Statements of Cash Flows
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INVESTMENTS AS OF SEPTEMBER 30, 2002
INVESTMENTS AS OF DECEMBER 31, 2001
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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 September 30, 2001 and December 31, 2001, to September 30, 2002.
At September 30, 2002 total assets were $2.224 billion which is $129 million larger than the September 30, 2001 assets of $2.095 billion, an increase of 6 percent. Total assets have increased $138 million from December 31, 2001.
Total loans, net of the allowance for loan losses, have decreased $30 million from September 30, 2001. With lower interest rates during 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 $57 million. Total loans, net of the allowance for loan losses, have increased $6 million from December 31, 2001, partly due to the increase in commercial loans which have increased $54 million and continue to be the lending focus. Consumer loans have declined $17 million, since September 30, 2001, of which $8 million of the decline occurred in 2002, with a significant portion of the decline attributed to the planned runoff in the WesterFed auto dealer originated consumer loans. We are focusing on home-equity loans as the primary source for the consumer loan portfolio.
Investment securities, including interest bearing deposits in other financial institutions, have increased $163 million from September 30, 2001, of which $141 million occurred in 2002. Much of 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.
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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 increases in interest rates 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 September 30, 2002 was approximately $265 million.
Total deposits have increased $45 and $53 million from September 30, 2001 and December 31, 2001, respectively. Non-interest bearing deposits are up $48 million, or 20 percent, and interest-bearing deposits are down $3 million from September 30, 2001. Federal home loan bank advances, other borrowed funds, and repurchase agreements, have also increased $51 million from September 30, 2001.
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 September 30, 2002, the Company had $761 million of available FHLB line of which $402 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 2002, all seven financial institutions maintained liquidity and regulatory capital levels in excess of regulatory requirements and operational needs.
CommitmentsIn 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.
Allowance for Loan Loss and Non-Performing Assets Non-performing assets as a percentage of total assets at September 30, 2002 were .49 percent versus .53 percent at the same time last year, which compares to the Peer Group average of .63 percent at June 30, 2002, the most recent information available. The allowance for loan losses was 195 percent of non-performing assets at September 30, 2002, up from 167 percent a year ago.
With the continuing change in loan mix from residential real estate to commercial and consumer loans, which historically have greater credit risk, the Company has increased the balance in the allowance for loan losses account. The allowance balance has increased $2.814 million, or 15 percent over September 30, 2001, to $21.342 million, which is 1.58 percent of total loans outstanding, up from 1.35 percent a year ago and 1.39 percent at December 31, 2001. The third quarter provision expense for loan losses was $1.665 million, an increase of $659 thousand from the same quarter in 2001.
The 2002 provision expense for loan losses through September was $4.225 million which is an increase of $796 thousand over the first nine months of 2001. The reserve has increased because of the increased percentage of commercial loans which historically carry a higher risk profile than residential real estate loans which now comprise a smaller percentage of the loans outstanding. Net charged off loans as a percentage of loans outstanding were .11 for the first nine months of 2002 which is down from .12 for the same period in 2001.
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Critical Accounting PoliciesCompanies 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 allowance for loan losses 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 operation or liquidity.
Results of Operations – The three months ended September 30, 2002 compared to the three months endedSeptember 30, 2001.
Net Interest IncomeNet interest income for the quarter increased $2.932 million, or 15 percent, over the same period in 2001. Total interest income is $3.271 million, or 9 percent lower that the same quarter in 2001, while total interest expense is $6.203 million, or 35 percent lower. The increase in non-interest bearing deposits contributed to the reduced interest expense. Lower interest rates in 2002 have also reduced interest income and interest expense. The net interest margin as a percentage of earning assets, on a tax equivalent basis, increased from 3.9 percent for the 2001 quarter to 4.6 percent in 2002. The net interest margin for the third quarter was the same as the prior quarter and an increase over the 4.4 percent margin in the first quarter of 2002.
Non-interest IncomeFee income increased 12 percent over the same period last year, driven primarily by increased deposit account activity, increases in service fee rates, and interchange fees on electronic check cards. The increase in gain on sale of loans reflects the low level of mortgage rates and resulting purchase and refinancing activity. Other non-interest income increases were from a variety of volume related activity increases over this quarter of last year.
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Non-interest Expense Non-interest expense decreased by $1.113 million, or 7 percent, from the same quarter of 2001, however, 2001 includes $325 thousand in merger and conversion expense, and $492 thousand in goodwill amortization. The decrease in goodwill amortization is the result of the adoption of Statement of Financial Accounting Standards 142 and 147, see footnote 15 for further information. During the third quarter of 2002 there was a $323 thousand reversal of a merger related accrual, so non-interest expense from operations is $27 thousand higher than last year. During the third quarter of 2001 the data processing functions for Western Security Bank were converted to our in-house system. This has reduced the outsourced data processing costs and increased compensation and benefits expense. Compensation and benefit expense has increased $149 thousand, or 2 percent from the third quarter of 2001. Core deposit intangible asset amortization was $359 thousand which is a decrease of $24 thousand from the prior year. The efficiency ratio (non-interest expense/net interest income + non-interest income) was 49 percent ratio for the 2002 quarter which is an improvement over the 60 percent ratio for the quarter in 2001.
Results of Operations – The nine months ended September 30, 2002 compared to the nine months endedSeptember 30, 2001.
Net Interest IncomeNet interest income for the nine months ended September 30, 2002 was $64.099 million, an increase of $12.671 million, or 25 percent over the same nine months of 2001. The WesterFed acquisition on February 28, 2001, and the Idaho and Utah branch acquisitions in March 2001 are the primary reasons for the increase. Interest income has decreased $1.724 million, or 2 percent, while interest expense has declined $14.395 million, or 28 percent. The increase in non-interest bearing deposits and significant reductions in rates paid on deposits and borrowed funds, are the primary reasons for the decreased interest expense. As a percentage of earning assets, on a tax equivalent basis, the year-to-date interest margin has improved from 4.0 percent to 4.5 percent.
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Non-interest IncomeFee income increased $1.651 million, or 14 percent, primarily the result of the acquisition in the later part of the first quarter in 2001. Gain on sale of loans increased $731 thousand, or 26 percent. Mortgage interest rates have been very attractive to consumers during the past year and have led to higher levels of mortgage originations from both purchases and refinances. Included in other income in 2001 was a $511 thousand gain-on-sale of the Glacier Bank Cut Bank office, as a result other income was $93 thousand higher this year.
Non-interest ExpenseNon-interest expense increased $1.719 million, or 4 percent, over 2001, however, 2001 also includes $1.250 million in merger and conversion expense, and goodwill amortization of $1.229 million, and 2002 includes a reversal of a merger related accrual of $323 thousand, so non-interest expense from operations has increased $4.521 million over last year. The 2001 acquisitions are much of the reason for this increase. The decrease in goodwill amortization is the result of the adoption of Statement of Financial Accounting Standards 142 and 147, see footnote 15 for further information. During the third quarter of 2001 the data processing functions for Western Security Bank were converted to the in-house system. This has reduced the outsourced data processing costs and increased compensation and benefits expense. Core deposit asset amortization was $1.080 million, which is an increase of $123 thousand. The efficiency ratio in 2002 is 52 percent which is an improvement over the 60 percent ratio in 2001.
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.
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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 balance sheet. This sensitivity analysis is compared to ALCO policy limits which specify a maximum tolerance level for NII exposure over a one year horizon, assuming no balance sheet growth, given a 200 basis point (bp) upward and 100 bp downward shift in interest rates. A parallel and pro rata shift in rates over a 12 month period is assumed. The following reflects the Company’s NII sensitivity analysis as of June 30, 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 sensitivity. The table illustrates the estimated change in net interest income over a twelve month period based on the nine months activity ended September 30, 2002.
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 ProceduresThe 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.
Item 1. Legal Proceedings
There are no pending material legal proceedings to which the registrant or its subsidiaries are a party.
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Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
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 cause this report to be signed on its behalf by the undersigned thereunto duly authorized.
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I, Michael J. Blodnick, certify that:
I have reviewed this quarterly report on Form 10-Q of Glacier Bancorp, Inc.;
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
November 11, 2002
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I, James H. Strosahl, certify that:
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