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
Not Applicable
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 October 20, 2004 was 24,510,568. No preferred shares are issued or outstanding.
GLACIER BANCORP, INC.Quarterly Report on Form 10-Q
Index
Glacier Bancorp, Inc.
See accompanying notes to condensed consolidated financial statements.
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Notes to Condensed Consolidated Financial Statements
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INVESTMENTS AS OF SEPTEMBER 30, 2004
INVESTMENTS AS OF DECEMBER 31, 2003
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7) Loans
TYPE OF LOAN
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NONPERFORMING ASSETS
ALLOWANCE FOR LOAN LOSS
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8) Intangible Assets
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9) Deposits
10) Advances and Other Borrowings
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11) Stockholders’ Equity:
CONSOLIDATED
12) Comprehensive Earnings:
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13) Stock Based Compensation
14) Segment Information
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15) Rate/Volume Analysis
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16) Average Balance Sheet
AVERAGE BALANCE SHEET
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Recent acquisition
On June 4, 2004, Glacier Bancorp, Inc. completed its acquisition of the Ione branch in Ione, Washington. The branch had approximately $15 million in deposits, and became a branch of Mountain West Bank, the Company’s Idaho banking subsidiary. In consideration for the assumption of liabilities, the Company received $14.5 million in cash. A portion of the purchase price was allocated to core deposit intangible of $148,000 and goodwill of $425,000.
Financial Condition
This section discusses the changes in Statement of Financial Condition items from September 30, 2003 and December 31, 2003, to September 30, 2004.
At September 30, 2004 total assets were $3.003 billion which is $320 million greater than the September 30, 2003 assets of $2.683 billion, an increase of 12 percent, and $263 million greater than the December 31, 2003 assets of $2.740 billion, a 10 percent increase.
Total loans have increased $219 million from September 30, 2003 and $231 million from December 31, 2003, an increase of 16 percent. Since year end 2003, commercial loans have increased $133 million, or 16 percent, and real estate loans gained $56 million, or 18 percent. Consumer loans have increased $43 million, or 15 percent, primarily from increases in home equity loans which continue to be the primary source of our consumer loan originations. Our banks continue to generate impressive loan volume. For the past two quarters our loan growth has far exceeded our anticipated growth.
Investment securities, including interest bearing deposits in other financial institutions, have increased $99 million from September 30, 2003, and are $40 million more than at December 31, 2003. Additional investments were made to utilize excess funding liquidity, and to invest a portion of the proceeds from the trust preferred securities issued in March.
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. Mortgage loans sold for the nine months ended September 30, 2004 and 2003 were $216 million and $455 million, respectively, and for the three months ended September 30, 2004 and 2003 were $73 million and $163 million. The Company has also been active in generating commercial SBA loans. A portion of some of those loans is sold to other investors. The amount of loans sold and serviced for others at September 30, 2004 was approximately $175 million.
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Non-interest bearing deposits have increased $70 million, or 19 percent, since December 31, 2003 and are $46 million, or 12 percent, greater than the September 30, 2003 balance. This continues to be a primary focus of our banks and the programs we have initiated this past year continue to gain momentum. Total deposits have increased $70 million from the September 30, 2003 balances and $90 million from December 31, 2003. This growth in deposits, a low cost stable funding source, gives us increased flexibility in managing our asset mix. Federal Home Loan Bank advances have also increased, $77 million from December 31, 2003, and $139 million from September 30, 2003, as we continue to take advantage of the flexibility of that funding source in this current period of low interest rates. Repurchase agreements and other borrowed funds also have increased from the prior year and from year end 2003 as we continue to use these cost effective sources of funding. On March 24, 2004, subordinated debentures in the form of trust preferred securities of $45 million, with an interest rate of 5.79 percent, were issued. The proceeds were used for general corporate purposes.
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, 2004, the Company had $1.103 billion of available FHLB line of which $854 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 2004, 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 un-advanced 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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Stockholders’ equity
Total equity and book value per share amounts have increased substantially from the prior year, primarily the result of earnings retention, and stock options exercised. Net unrealized gains on securities available for sale of $8 million at September 30, 2004 is greater than the $7 million at year end 2003 and the $4 million at September 30, 2003, and is primarily a function of interest rate changes.
Allowance for Loan Loss and Non-Performing Assets
Non-performing assets as a percentage of total assets at September 30, 2004 were at .41 percent, a slight increase from .37 percent at June 30, 2004, a decrease from .48 percent at December 31, 2003, and an increase from .39 percent at September 30, 2003. This compares favorably to the Federal Reserve Bank Peer Group average of .59 percent at June 30, 2004, the most recent information available. The allowance for loan losses was 212 percent of non-performing assets at September 30, 2004, compared to 228 percent a year ago. The allowance has increased $2.155 million, or 9 percent, from a year ago to $26.075 million, which is 1.55 percent of September 30, 2004 total loans outstanding, down slightly from the 1.63 percent a year ago. The third quarter provision expense for loan losses was $1.200 million, a decrease of $21 thousand from the same quarter in 2003.
Results of Operations – The three months ended September 30, 2004 compared to the three months endedSeptember 30, 2003.
Operating results include amounts related to the operation of the three branches acquired with the Pend Oreille Bank as of July 15, 2003 and the Ione, Washington branch as of June 4, 2004.
The Company reported net quarterly earnings of $11.680 million, an increase of $1.983 million, or 20 percent, over the $9.697 million for the third quarter of 2003. Diluted earnings per share for the quarter of $.47, is an increase of 21 percent over the per share earnings of $.39 for the same quarter of 2003. Return on average assets and return on average equity for the quarter were 1.57 percent and 18.12 percent, respectively, which compares with prior year returns of 1.49 percent and 17.10 percent.
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Revenue summary
Net Interest Income
Net interest income for the quarter increased $3.721 million, or 16 percent, over the same period in 2003. Total interest income increased $4.537 million, or 14 percent, while total interest expense was $816 thousand higher. The investment portfolio generated approximately 64 percent of the increase in interest income with the remainder coming from the increase in loans outstanding. The increase in interest expense is primarily attributed to the issuance of $45 million in subordinated debentures and the increase in FHLB advances during the current year, which was partially offset by the increase in non-interest bearing deposits and a reduction in rates on maturing fixed term interest bearing deposits. The net interest margin as a percentage of earning assets, on a tax equivalent basis, was 4.11 percent which was near the 4.12 percent result for the third quarter of 2003. The margin for the third quarter increased from the 4.04 percent experienced for the second quarter of 2004. Premium amortization on mortgage related investments for the third quarter was $2.722 million, a decrease of $745 thousand from the second quarter and a decrease of $1.254 million from the third quarter of last year.
Non-interest Income
Fee income increased $1.265 million, or 24 percent, over the same period last year, driven primarily by an increased number of loan and deposit accounts and additional customer services offered. Gain on sale of loans decreased $1.047 million from the third quarter of last year, because of greatly reduced refinance activity, but increased $185 thousand from this years’ second quarter which was $255 thousand higher than the first quarter. Loan origination activity for housing purchases remains quite strong in our markets, with $176 million in residential loans originated in the third quarter and $488 million year to date.
Non-interest expense summary
Non-interest Expense
Non-interest expense increased by $942 thousand, or 6 percent, from the same quarter of 2003 including expenses from the Ione branch acquisition, two additional branches in Boise, Idaho, and a new branch in downtown Bozeman, Montana. Compensation and benefit expense increased $619 thousand, or 7 percent from the third
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quarter of 2003, with the additional bank branches, normal compensation increases for job performance and increased cost for benefits tied to Company performance, accounting for the majority of the increase. Occupancy and equipment expense increased $126 thousand, or 5 percent, reflecting the cost of the additional locations. Outsourced data processing expense decreased by $47 thousand. Other expenses increased $287 thousand, or 7 percent, primarily from additional marketing expenses, and costs associated with new branch offices. The efficiency ratio (non-interest expense/net interest income + non-interest income) was 49 percent for the 2004 third quarter which is a significant improvement from the 52 percent for the 2003 third quarter.
Results of Operations – The nine months ended September 30, 2004 compared to the nine months endedSeptember 30, 2003.
Net earnings for the nine months ended September 30, 2004 were $33.053 million, which is an increase of $4.576 million, or 16 percent over the same period of the prior year. Without the 2003 gain on sale of securities, net year-to-date earnings increased $5.419 million, or 20 percent. Diluted earnings per share of $1.33, is an increase of 14 percent over the $1.17 earned in the first nine months of 2003. The 2004 nine month return on average assets and return on average equity were 1.54 percent and 17.74 percent, respectively, which compares with the prior year nine month returns of 1.58 percent and 17.00 percent.
Net interest income for the first nine months increased $12.088 million, or 18 percent, over the same period in 2003. Total interest income was $11.768 million, or 12 percent higher than the same period in 2003, while total interest expense was $320 thousand lower. The investment portfolio generated approximately 76 percent of the increase in interest income. Additional interest income from the large increase in loans outstanding was partially offset by lower rates on the loan portfolio due to refinancing, and re-pricing of existing loans. The decrease in interest expense is primarily attributed to the increase in non-interest bearing deposits and a reduction in rates on maturing fixed term interest bearing deposits and Federal Home Loan Bank borrowings. The interest expense on the subordinated debentures issued in March 2004 partially offset the above described reductions. The net interest margin as a percentage of earning assets, on a tax equivalent basis, was 4.15 percent which was a decrease from 4.21 percent for the same period in 2003.
Fee income increased $3.082 million, or 21 percent, over the same period last year, driven primarily by an increased number of loan and deposit accounts and the fee income associated with this growth in accounts. Gain on sale of loans decreased $2.732 million, or 31 percent, from last year, because of greatly reduced refinance
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activity. Loan origination activity for housing purchases remains quite strong in our markets. In 2003 gains on sale of investments, net of impairment charge, of $1.253 million were recorded and zero gains were realized in 2004.
Non-interest expense increased by $5.168 million, or 11 percent, from 2003 including expenses from the acquisitions, two additional branches in Boise, Idaho, and a new branch in downtown Bozeman, one of the fastest growing cities in Montana. Compensation and benefit expense increased $3.247 million, or 12 percent, with the additional bank branches, normal compensation increases for job performance and increased cost for benefits tied to Company performance, accounting for the majority of the increase. Occupancy and equipment expense increased $760 thousand, or 10 percent, reflecting the cost of the additional locations. Outsourced data processing expense decreased by $94 thousand, the result of bringing all core processing onto our in-house data systems, offset somewhat by increased item capture expenses for Mountain West Bank resulting from increased volumes. Other expenses increased $1.382 million, or 11 percent, primarily from start up expenses on implementing the High Performance Checking program at the four banks not previously on the program, additional advertising expense, and costs associated with new branch offices and the acquisitions. The efficiency ratio (non-interest expense/net interest income + non-interest income) was 51 percent, improving slightly from the 52 percent in 2003, excluding the gain on sale of securities.
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 allowance for loan loss is maintained at the amount management believes will be adequate to absorb known and inherent losses in the loan portfolio. The appropriate balance of allowance for loan losses is determined by applying estimated loss factors to the credit exposure from outstanding loans. Estimated loss factors are based on subjective measurements including management’s assessment of the internal risk classifications, changes in the nature of the loan portfolio, industry concentrations and the impact of current local, regional and national economic factors on the quality of the loan portfolio. Changes in these estimates and assumptions are reasonably possible and may have a material impact on the Company’s consolidated financial statements, results of operations and liquidity.
Effect of inflation and changing prices
Generally accepted accounting principles require the measurement of financial position and operating results in terms of historical dollars, without consideration for change in relative purchasing power over time due to inflation. Virtually all assets of a financial institution are monetary in nature; therefore, interest rates generally have a more significant impact on a company’s performance than does the effect of inflation.
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Forward Looking Statements
This Form 10-Q may be deemed to include forward looking statements, which management believes are a benefit to shareholders. These forward looking statements 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 economy. The words “will,” “believe,” “expect,” “should,” and “anticipate” and words of similar construction are intended in part to help identify forward looking statements. Future events are difficult to predict, and the expectations described above are 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 filings with the SEC, 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 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; and (7) the Company’s ability to realize the efficiencies it expects to receive from its investments in personnel and infrastructure.
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 that was provided in the Form 10-K report for the year ended December 31, 2003.
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 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
There are no pending material legal proceedings to which the registrant or its subsidiaries are a party.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Not Applicable
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(b) Not Applicable
(c) Not Applicable
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Securities Holders
(d) Not Applicable
Item 5. Other Information
Item 6. Exhibits
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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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