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
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
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 August 6, 2003 was 19,300,141. No preferred shares are issued or outstanding.
TABLE OF CONTENTS
GLACIER BANCORP, INC.Quarterly Report on Form 10-Q
Index
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’ Equityand Comprehensive IncomeYear ended December 31, 2002 and Six months ended June 30, 2003
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Glacier Bancorp, Inc.Consolidated Statements of Cash Flows
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Notes to Consolidated Financial Statements
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INVESTMENTS AS OF JUNE 30, 2003
INVESTMENTS AS OF DECEMBER 31, 2002
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9) Intangible Assets
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10) Deposits
11) Advances and Other Borrowings
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12) Stockholders’ Equity:
13) Comprehensive Earnings:
14) Stock Based Compensation
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15) Segment Information
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16) Rate/Volume Analysis
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17) Average Balance Sheet
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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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 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.
Results of Operations – The three months ended June 30, 2003 compared to the three months ended June 30, 2002.
Net Interest IncomeNet interest income for the quarter increased $363 thousand, or 2 percent, over the same period in 2002. Total interest income is $1.894 million, or 6 percent lower than the same quarter in 2002, while total interest expense is $2.257 million or 19 percent lower. The increase in non-interest bearing deposits reduced the need to borrow additional funds and helped reduce interest expense. The net interest margin as a percentage of earning assets, on a tax equivalent basis, decreased from 4.57 percent for the 2002 quarter, 4.35 for the first quarter of 2003, to 4.17 percent in the current quarter. We continue to deploy a strategy of investing in short term securities that carry lower current yields. We believe it is inappropriate in this rate environment to extend maturities in order to achieve higher yields. This strategy in the near term will put pressure on our net interest margin, however from a longer term perspective we are more comfortable with this approach.
Non-interest IncomeFee income increased 10 percent over the same period last year, driven primarily by increased account activity. Gain on sale of loans increased $1.953 million reflecting the low level of mortgage interest rates and resulting purchase and refinancing activity. The income from mortgage origination activity serves as a counter-balance to net interest income reductions from low interest rates. Other income was lower in the current years’ quarter by $93 thousand primarily the result of reduced loan servicing income.
Gains on sale of investments of $3.480 million were realized during the quarter from the sale of approximately $14 million of long term corporate bonds. These bonds were acquired two years ago with the intent of exercising put options available in the bond structures. Market conditions provided an opportunity to sell the bonds, record a
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significant gain, reinvest the principal and gain proceeds into similar maturity municipal bonds, and retain the investment yield. There was an impairment charge in the current quarter of $1.795 million for impairment of value on collateralized mortgage obligations.
Non-interest ExpenseNon-interest expense increased by $1.977 million, or 14 percent, from the same quarter of 2002. Compensation and benefit expense increased $1.517 million, or 20 percent from the second quarter of 2002, with commissions for loan originators, other incentives, additional support staff for increased volumes, and two additional branches in operation in Boise accounting for the majority of the increase. Occupancy and equipment expense decreased $29 thousand, or 1 percent, the net result of adding additional facilities and fully depreciating an investment in computer systems in prior periods. Outsourced data processing expense decreased by $249 thousand, or 48 percent, resulting from bringing the core processing for each subsidiary bank onto our in-house data system. Other expenses increased $807 thousand, or 22 percent, resulting primarily from charges for data conversion of Mountain West Bank to the in-house data system, and start up expenses on implementing the High Performance Checking program at the four banks not previously on the program. The efficiency ratio (non-interest expense/net interest income + non-interest income) was 51 percent for the 2003 quarter which is comparable to the 51 percent for the 2002 quarter.
Results of Operations – The six months ended June 30, 2003 compared to the six months ended June 30, 2002.
Net Interest IncomeNet interest income increased $1.828 thousand, or 4 percent, over the same period in 2002. Total interest income is $2.910 million, or 4 percent lower than in 2002, while total interest expense is $4.738 million or 19 percent lower. Lower interest rates were the main reason for the reduction in interest income and interest
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expense. The net interest margin as a percentage of earning assets, on a tax equivalent basis, decreased from 4.48 percent in 2002 to 4.26 percent in 2003.
Non-interest IncomeFee income increased $1.127 million, or 13 percent, over the same period last year, driven primarily by increased account activity. Gain on sale of loans increased $3.049 million reflecting the low level of mortgage interest rates and resulting purchase and refinancing activity. Other income was lower in the current year by $279 thousand primarily the result of reduced loan servicing income.
Gain on sale of investments of $3.497 million were realized from the sale of approximately $16 million of long term corporate bonds. Market conditions provided an opportunity to realize currently the interest income that would have been generated over several years. The proceeds of the sale were reinvested in municipal securities of like maturity with similar future interest income. There was an impairment charge in the first six months of 2003 of $2.249 million for impairment of value on collateralized mortgage obligations.
Non-interest ExpenseNon-interest expense increased by $2.495 million, or 9 percent, from 2002. Compensation and benefit expense increased $1.714 million, or 11 percent from 2002, with commissions for loan originators, other incentives, additional support staff for increased volumes, and two additional branches in operation in Boise accounting for the majority of the increase. Occupancy and equipment expense increased $105 thousand, or 2 percent, the net result of adding additional facilities and fully depreciating an investment in computer systems in prior periods. Outsourced data processing expense decreased by $133 thousand, or 14 percent, resulting from bringing the core processing for each subsidiary bank onto our in-house data system. Other expenses increased $901 thousand, or 13 percent, resulting from charges for data conversion of Mountain West Bank to the in-house data system, start up expenses on implementing the High Performance Checking program at the four banks not previously on the program, loan collection expenses, operations losses on deposit accounts, losses on other real estate sales, and volume related increases. The efficiency ratio (non-interest expense/net interest income + non-interest income) was 51 percent for 2003 which is down from the 53 percent for 2002.
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
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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 sensitivity. The table illustrates the estimated change in net interest income over a twelve month period based on the six months activity ended June 30, 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 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 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.
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Changes in Internal ControlsThere 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. 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
Directors:
Item 5. Other Information
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Item 6. Exhibits and Reports on Form 8-K.
On May 5, 2003, a Form 8-K was filed announcing first quarter financial results for 2003.
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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