UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2001 [ ] 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) DELAWARE 81-0519541 - -------------------------------------------------------------------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 49 Commons Loop, Kalispell, Montana 59901 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (406) 756-4200 - -------------------------------------------------------------------------------- N/A - -------------------------------------------------------------------------------- (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 [X] No [ ] The number of shares of Registrant's common stock outstanding on October 30, 2001 was 16,769,033. No preferred shares are issued or outstanding. 1
GLACIER BANCORP, INC. QUARTERLY REPORT ON FORM 10-Q INDEX Page # ------ PART I. FINANCIAL INFORMATION Item 1 -- Financial Statements Consolidated Statements of Financial Condition -- September 30, 2001, December 31, and September 30, 2000 (unaudited).... 3 Consolidated Statements of Operations -- Three and Nine months ended September 30, 2001 and 2000 (unaudited).... 4 Consolidated Statements of Stockholders' Equity and Comprehensive Income -- Years ended December 31, 1999 2000 and Nine months ended September 30, 2001 (unaudited).............. 5 Consolidated Statements of Cash Flows -- Nine months ended September 30, 2001 and 2000 (unaudited).............. 6 Notes to 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 ...... 26 PART II. OTHER INFORMATION ........................................................ 27 Item 1 -- Legal Proceedings............................................... 27 Item 2 -- Changes in Securities and Use of proceeds....................... 27 Item 3 -- Defaults Upon Senior Securities................................. 27 Item 4 -- Submission of Matters to a Vote of Security Holders............. 28 Item 5 -- Other Information............................................... 28 Item 6 -- Exhibits and Reports on Form 8-K................................ 28 Signatures ............................................................... 28 2
GLACIER BANCORP, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited - dollars in thousands except per share data) SEPTEMBER 30, December 31, September 30, 2001 2000 2000 ------------ ------------ ------------ ASSETS: Cash on hand and in banks .......................................... $ 64,064 41,456 33,700 Interest bearing cash deposits ..................................... 9,790 10,330 4,255 ------------ ------------ ------------ Cash and cash equivalents .................................... 73,854 51,786 37,955 ------------ ------------ ------------ Investments: Investment securities, available-for-sale .................... 154,721 71,415 65,419 Mortgage backed securities, available-for-sale ............... 346,019 140,473 138,430 ------------ ------------ ------------ Total investments ....................................... 500,740 211,888 203,849 ------------ ------------ ------------ Net loans receivable: Real estate loans ............................................ 441,232 231,215 236,071 Commercial Loans ............................................. 627,110 340,391 325,974 Consumer and other loans ..................................... 308,010 169,754 168,789 Allowance for loan losses .................................... (18,528) (7,799) (7,808) ------------ ------------ ------------ Total loans, net ........................................ 1,357,824 733,561 723,026 ------------ ------------ ------------ Premises and equipment, net ........................................ 52,071 25,016 25,005 Real estate and other assets owned, net ............................ 727 291 97 Federal Home Loan Bank of Seattle stock, at cost ................... 31,839 16,436 16,146 Federal Reserve stock, at cost ..................................... 4,237 1,662 1,639 Accrued interest receivable ........................................ 14,388 6,637 6,233 Core deposit intangible, net ....................................... 8,630 1,547 1,597 Goodwill, net ...................................................... 35,381 4,946 5,031 Deferred tax asset ................................................. -- -- 1,512 Other assets ....................................................... 15,274 2,942 3,951 ------------ ------------ ------------ $ 2,094,965 1,056,712 1,026,041 ============ ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY: Deposits - non-interest bearing .................................... $ 244,450 141,207 152,022 Deposits - interest bearing ........................................ 1,209,469 579,363 564,965 Advances from Federal Home Loan Bank of Seattle .................... 360,654 196,791 177,909 Securities sold under agreements to repurchase ..................... 29,392 24,877 20,699 Other borrowed funds ............................................... 12,020 4,652 7,985 Accrued interest payable ........................................... 10,657 4,591 3,387 Current income taxes ............................................... 3,371 17 941 Deferred tax liability ............................................. 2,685 578 -- Trust preferred securities ......................................... 35,000 -- -- Minority interest .................................................. -- 338 325 Other liabilities .................................................. 15,672 6,185 5,970 ------------ ------------ ------------ Total liabilities ............................................ 1,923,370 958,599 934,203 ------------ ------------ ------------ Preferred shares, 1,000,000 shares authorized. None outstanding .... -- -- -- Common stock, $.01 par value per share, 50,000,000 shares authorized ...................................................... 167 114 114 Paid-in capital .................................................... 163,384 101,828 101,756 Retained earnings (deficit) - substantially restricted ............. 3,761 (4,087) (6,057) Accumulated other comprehensive income (loss) ...................... 4,283 258 (3,975) ------------ ------------ ------------ Total stockholders' equity ................................... 171,595 98,113 91,838 ------------ ------------ ------------ $ 2,094,965 1,056,712 1,026,041 ============ ============ ============ Number of shares outstanding ....................................... 16,728,482 11,447,150 11,441,234 Book value of equity per share ..................................... $ 10.26 8.57 8.03 Tangible book value per share ...................................... $ 7.63 8.00 7.45 See accompanying notes to consolidated financial statements 3
GLACIER BANCORP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited - dollars in thousands except per share data) THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, ------------------------------ ------------------------------ 2001 2000 2001 2000 ----------- ----------- ----------- ----------- INTEREST INCOME: Real estate loans ...................................... $ 9,332 4,891 26,313 14,136 Commercial loans ....................................... 12,824 7,638 34,524 20,943 Consumer and other loans ............................... 6,733 4,002 19,221 11,259 Investments ............................................ 8,211 3,869 22,080 11,601 ----------- ----------- ----------- ----------- Total interest income ............................ 37,100 20,400 102,138 57,939 ----------- ----------- ----------- ----------- INTEREST EXPENSE: Deposits ............................................... 11,452 6,025 33,250 16,246 FHLB Advances .......................................... 5,212 3,540 14,049 10,237 Securities sold under agreements to repurchase ......... 266 272 791 643 Trust preferred securities ............................. 904 -- 2,410 -- Other borrowed funds ................................... 67 44 210 234 ----------- ----------- ----------- ----------- Total interest expense ........................... 17,901 9,881 50,710 27,360 ----------- ----------- ----------- ----------- NET INTEREST INCOME ........................................ 19,199 10,519 51,428 30,579 Provision for loan losses .............................. 1,006 491 3,429 1,483 ----------- ----------- ----------- ----------- Net interest income after provision for loan losses 18,193 10,028 47,999 29,096 ----------- ----------- ----------- ----------- NON-INTEREST INCOME: Service charges and other fees ......................... 3,270 1,997 9,009 5,911 Miscellaneous loan fees and charges .................... 995 508 2,728 1,344 Gains on sale of loans ................................. 1,111 545 2,766 1,512 Gains (losses) on sale of investments, net ............. 24 (5) 88 (5) Other income ........................................... 395 536 2,085 1,335 ----------- ----------- ----------- ----------- Total non-interest income ......................... 5,795 3,581 16,676 10,097 ----------- ----------- ----------- ----------- NON-INTEREST EXPENSE: Compensation, employee benefits and related expenses ............................ 7,392 3,992 20,182 12,078 Occupancy and equipment expense ........................ 2,187 1,221 6,147 3,568 Data processing expense ................................ 707 264 2,007 1,143 Core deposit intangibles amortization .................. 383 50 957 150 Goodwill amortization .................................. 492 91 1,229 269 Other expenses ......................................... 3,948 1,839 10,427 5,842 Minority interest ...................................... -- 16 35 45 ----------- ----------- ----------- ----------- Total non-interest expense ........................ 15,109 7,473 40,984 23,095 ----------- ----------- ----------- ----------- EARNINGS BEFORE INCOME TAXES ............................... 8,879 6,136 23,691 16,098 Federal and state income tax expense ................... 3,172 2,283 8,462 5,825 ----------- ----------- ----------- ----------- NET EARNINGS ............................................... $ 5,707 3,853 15,229 10,273 =========== =========== =========== =========== Basic earnings per share ................................... $ 0.34 0.34 0.99 0.90 Diluted earnings per share ................................. $ 0.33 0.33 0.96 0.89 Dividends declared per share ............................... $ 0.15 0.15 0.45 0.44 Return on average assets (annualized) ...................... 1.06% 1.50% 1.06% 1.37% Return on average equity (annualized) ..................... 13.50% 17.30% 13.41% 15.82% Return on tangible average equity (annualized) ............. 18.09% 18.76% 17.91% 17.18% Average outstanding shares - basic ......................... 16,676,275 11,441,234 15,344,475 11,439,462 Average outstanding shares - diluted ....................... 17,078,578 11,536,174 15,828,650 11,547,895 See accompanying notes to consolidated financial statements. 4
GLACIER BANCORP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME YEARS ENDED DECEMBER 31, 2000, 1999, AND NINE MONTHS ENDED SEPTEMBER 30, 2001 Retained earnings Accumulated (accumulated other comp- Total Common Stock deficit) rehensive stock- (Unaudited - dollars in thousands ------------------------ Paid-in substantially income holders' except per share data) Shares Amount capital restricted (loss) equity ---------- ----------- ----------- ------------- ------------ ----------- Balance at December 31, 1998 ................ 9,344,093 $ 93 66,180 16,700 1,173 84,146 Comprehensive income: Net earnings ........................... -- -- -- 12,352 -- 12,352 Unrealized loss on securities, net of reclassification adjustment ... -- -- -- -- (6,604) (6,604) ----------- Total comprehensive income .................. 5,748 ----------- Cash dividends declared ($.64 per share) .... -- -- -- (6,076) -- (6,076) Stock options exercised ..................... 113,049 1 1,091 -- -- 1,092 Tax benefit from stock related compensation .............................. -- -- 240 -- -- 240 10% stock dividend .......................... 936,899 10 19,876 (19,905) -- (19) Fiscal year conforming adjustment ........... -- -- -- (75) -- (75) ----------- ----------- ----------- ----------- ----------- ----------- Balance at December 31, 1999 ................ 10,394,041 104 87,387 2,996 (5,431) 85,056 Comprehensive income: Net earnings ........................... -- -- -- 14,003 -- 14,003 Unrealized gain on securities, net of reclassification adjustment .......... -- -- -- -- 5,689 5,689 ----------- Total comprehensive income .................. 19,692 ----------- Cash dividends declared ($.59 per share) .... -- -- -- (6,752) -- (6,752) Stock options exercised ..................... 14,161 -- 134 -- -- 134 Tax benefit from stock related compensation.. -- -- 16 -- -- 16 10% stock dividend .......................... 1,039,608 10 14,302 (14,334) -- (22) Dissenting Mountain West shareholders ....... (660) -- (11) -- -- (11) ----------- ----------- ----------- ----------- ----------- ----------- Balance at December 31, 2000 ................ 11,447,150 114 101,828 (4,087) 258 98,113 Comprehensive income: Net earnings ........................... -- -- -- 15,229 -- 15,229 Unrealized gain on securities, net of reclassification adjustment .......... -- -- -- -- 4,025 4,025 ----------- Total comprehensive income .................. 19,254 ----------- Cash dividends declared ($.45 per share) .... -- -- -- (7,381) -- (7,381) Stock options exercised ..................... 750,870 7 5,888 -- -- 5,895 Stock issued in connection with merger of WesterFed Financial Corporation ........... 4,530,462 46 55,668 -- -- 55,714 ----------- ----------- ----------- ----------- ----------- ----------- Balance at September 30, 2001 ............... 16,728,482 $ 167 163,384 3,761 4,283 171,595 =========== =========== =========== =========== =========== =========== See accompanying notes to consolidated financial statements 5
GLACIER BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited -dollars in thousands except per share data) NINE MONTHS ENDED SEPTEMBER 30, ------------------------------ 2001 2000 ---------- ------------ OPERATING ACTIVITIES: Net cash provided in operating activities ................................. $ 11,660 30,280 INVESTING ACTIVITIES: Proceeds from sales, maturities and prepayments of investments available-for-sale ........................................ 158,134 31,007 Purchases of investments available-for-sale ............................... (256,425) (23,213) Principal collected on installment and commercial loans ................... 272,133 181,586 Installment and commercial loans originated or acquired ................... (352,595) (261,127) Principal collections on mortgage loans ................................... 245,170 98,727 Mortgage loans originated or acquired ..................................... (170,680) (109,556) Net purchase of FHLB and FRB stock ........................................ (3,490) (439) Acquisition of WesterFed Financial Corporation and several branches, net of cash and cash equivalents acquired of $162,254 ................ 107,239 -- Sale of branches net of cash paid of $53,454 .............................. (53,131) -- Net decrease (increase) in premises and equipment ......................... 541 (938) --------- --------- NET CASH USED IN INVESTING ACTIVITIES ................................ (53,104) (83,953) --------- --------- FINANCING ACTIVITIES: Net increase in deposits .................................................. 26,404 72,881 Net increase (decrease) in FHLB advances and other borrowed funds ......... 6,194 (29,604) Net (decrease) increase in securities sold under repurchase agreements .... (3,336) 933 Proceeds from issuance of trust preferred securities ...................... 35,000 -- Cash dividends paid to stockholders ....................................... (6,645) (5,010) Proceeds from exercise of stock options and other stock issued ............ 5,895 63 --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES ............................. 63,512 39,263 --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .................. 22,068 (14,410) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .......................... 51,786 52,365 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................ $ 73,854 37,955 ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for: Interest ................................. $ 52,230 19,036 Income taxes ............................. $ 6,101 5,333 NON-CASH INVESTING AND FINANCING ACTIVITIES During the first quarter ended March 31, 2001, the Company purchased a bank and seven branches with net loans of $650,398 and deposits of $787,523. During the second quarter ended June 30, 2001, the Company sold six branches with net loans of $21,800 and deposits of $81,700. At September 30, 2001 and 2000, the Company had declared dividends, but not yet paid of $2,509 and $1,701, respectively. Dividends payable are included in other liabilities. See accompanying notes to consolidated financial statements. 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1) Basis of Presentation: In the opinion of management, the accompanying unaudited 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 and stockholders' equity as of September 30, 2001, December 31, 2000, and September 30, 2000 and the results of operations and cash flows for the three and nine months ended September 30, 2001 and 2000. The accompanying consolidated financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These 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, 2000. Operating results for the nine months ended September 30, 2001 are not necessarily indicative of the results anticipated for the year ending December 31, 2001. Certain reclassifications have been made to the 2000 financial statements to conform to the 2001 presentation. 2) Organizational Structure: The Company, headquartered in Kalispell, Montana, is the successor Delaware corporation to a Delaware corporation incorporated in 1990, pursuant to the reorganization of Glacier Bank, FSB into a bank holding company. The Company is the parent company for nine wholly owned subsidiaries: Glacier Bank ("Glacier"); Glacier Bank of Whitefish ("Whitefish"); First Security Bank of Missoula ("Missoula"); Valley Bank of Helena ("Helena"), Big Sky Western Bank ("Big Sky"), Western Security Bank ("Western"), Glacier Capital Trust I ("Glacier Trust"), and Community First, Inc. ("CFI"), all located in Montana, and Mountain West Bank ("Mountain West") which is located in Idaho and Utah. On July 31, 2001, Glacier Bank of Eureka was merged into Whitefish and the minority interest of both banks was redeemed. The Company formed Glacier Trust as a financing subsidiary on December 18, 2000. On January 31, 2001, Glacier Trust sold 1,400,000 preferred securities at $25 per preferred security. The purchase of the securities entitles the shareholder to receive cumulative cash distributions at an annual interest rate of 9.40% from payments on the junior subordinated debentures of Glacier Bancorp, Inc. The subordinated debentures will mature and the preferred securities must be redeemed by February 1, 2031. In exchange for the Company's capital contribution, the Company obtained all of the outstanding common securities of the trust. CFI provides full service brokerage services through Raymond James Financial Services, Inc. 7
The following abbreviated organizational chart illustrates the various relationships: Glacier Bancorp, Inc. (Parent Holding Company) Glacier Bank First Security Bank Glacier Bank Big Sky (Commercial bank) of Missoula of Whitefish Western Bank (Commercial bank) (Commercial bank) (Commercial bank) Western Security Bank Valley Bank Mountain West Bank Community First, Inc. (Commercial bank) of Helena of Coeur d'Alene (Brokerage services) (Commercial bank) (Commercial bank) Glacier Capital Trust I 3) Ratios: Returns on average assets and average equity were calculated based on daily averages. 4) Cash Dividend Declared: On September 26, 2001, the Board of Directors declared a $.15 per share quarterly cash dividend to stockholders of record on October 9, 2001, payable on October 18, 2001. 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 if dilutive outstanding stock options were exercised, using the treasury stock method. Previous period amounts are restated for the effect of the 2000 stock dividend. 8
The following schedule contains the data used in the calculation of basic and diluted earnings per share. Three Three Nine Nine months ended months ended months ended months ended Sept 30, 2001 Sept 30, 2000 Sept 30, 2001 Sept 30, 2000 ------------- ------------- ------------- ------------- Net earnings available to common stockholders, basic ....................... $ 5,707,016 3,852,805 15,229,360 10,272,821 After tax effect of interest on convertible subordinated debentures .... 4,000 4,000 12,000 12,000 ----------- ----------- ----------- ----------- Net earnings available to common stockholders, diluted ..................... $ 5,711,016 3,856,805 15,241,360 10,284,821 =========== =========== =========== =========== Average outstanding shares - basic ........... $16,676,275 11,441,234 15,344,475 11,439,462 Add: Dilutive stock options ................. 369,278 94,940 451,150 108,433 Convertible subordinated debentures .... 33,025 33,025 33,025 33,025 ----------- ----------- ----------- ----------- Average outstanding shares - diluted ......... $17,078,578 11,569,199 15,828,650 11,580,920 =========== =========== =========== =========== Basic earnings per share ..................... $ 0.34 0.34 0.99 0.90 =========== =========== =========== =========== Diluted earnings per share ................... $ 0.33 0.33 0.96 0.89 =========== =========== =========== =========== 6) Investments: A comparison of the amortized cost and estimated fair value of the Company's investments is as follows: INVESTMENTS AS OF SEPTEMBER 30, 2001 (Dollars in thousands) Gross Unrealized Estimated Weighted Amortized ---------------------- Fair Yield Cost Gains Losses Value ------- --------- -------- -------- --------- U.S. GOVERNMENT AND FEDERAL AGENCIES maturing after ten years ....................... 4.65% $ 1,455 13 (5) 1,463 -------- -------- -------- -------- 4.65% 1,455 13 (5) 1,463 -------- -------- -------- -------- STATE AND LOCAL GOVERNMENTS AND OTHER ISSUES: maturing within one year ....................... 3.81% 5,188 34 (9) 5,213 maturing one year through five years ........... 5.68% 14,065 368 (84) 14,349 maturing five years through ten years .......... 5.53% 2,449 87 (1) 2,535 maturing after ten years ....................... 5.88% 129,860 2,874 (1,573) 131,161 -------- -------- -------- -------- 5.78% 151,562 3,363 (1,667) 153,258 -------- -------- -------- -------- MORTGAGE-BACKED SECURITIES ....................... 5.98% 143,834 1,932 (115) 145,651 REAL ESTATE MORTGAGE INVESTMENT CONDUITS ......... 6.36% 196,808 3,609 (49) 200,368 -------- -------- -------- -------- TOTAL AVAILABLE-FOR-SALE INVESTMENTS ...... 6.07% $493,659 8,917 (1,836) 500,740 ======== ======== ======== ======== 9
INVESTMENTS AS OF DECEMBER 31, 2000 (Dollars in thousands) Gross Unrealized Estimated Weighted Amortized ---------------------- Fair Yield Cost Gains Losses Value ------- --------- -------- -------- --------- U.S. GOVERNMENT AND FEDERAL AGENCIES maturing within one year ....................... 5.05% $ 500 -- (3) 497 maturing one year through five years ........... 6.33% 4,975 5 (25) 4,955 maturing five years though ten years ........... 6.92% 3,050 24 (11) 3,063 maturing after ten years ....................... 7.20% 1,070 -- (12) 1,058 -------- -------- -------- -------- 6.55% 9,595 29 (51) 9,573 -------- -------- -------- -------- STATE AND LOCAL GOVERNMENTS AND OTHER ISSUES: maturing within one year ....................... 5.47% 600 1 (19) 582 maturing one year through five years ........... 5.17% 1,635 41 (1) 1,675 maturing five years through ten years .......... 7.53% 4,047 34 (99) 3,982 maturing after ten years ....................... 5.50% 54,561 1,612 (570) 55,603 -------- -------- -------- -------- 5.63% 60,843 1,688 (689) 61,842 -------- -------- -------- -------- MORTGAGE-BACKED SECURITIES ....................... 6.79% 39,374 268 (157) 39,485 REAL ESTATE MORTGAGE INVESTMENT CONDUITS ......... 6.94% 101,635 396 (1,043) 100,988 -------- -------- -------- -------- TOTAL AVAILABLE FOR SALE INVESTMENTS ........ 6.52% $211,447 2,381 (1,940) 211,888 ======== ======== ======== ======== 7) Loans The following table summarizes the Company's loan portfolio. The loans mature or are repriced at various times. (Dollars in Thousands) At At 9/30/01 12/31/00 ------------------------ ---------------------------- Amount Percent Amount Percent TYPE OF LOAN REAL ESTATE LOANS: Residential first mortgage loans $ 419,054 30.86% $ 224,631 30.62% Loans held for sale $ 23,118 1.70% $ 7,058 0.96% ----------- ----------- Total $ 442,172 32.56% $ 231,689 31.58% COMMERCIAL LOANS: Real estate $ 376,308 27.71% $ 198,414 27.05% Other commercial loans $ 252,969 18.63% $ 142,519 19.43% ----------- ----------- Total $ 629,277 46.34% $ 340,933 46.48% INSTALLMENT AND OTHER LOANS: Consumer loans $ 147,648 10.87% $ 86,336 11.77% Home equity loans $ 159,414 11.74% $ 83,539 11.39% ----------- ----------- Total $ 307,062 22.61% $ 169,875 23.16% Net deferred loan fees, premiums and discounts $ (2,159) -0.15% $ (1,137) -0.16% Allowance for Losses $ (18,528) -1.36% $ (7,799) -1.06% ----------- ----------- NET LOANS $ 1,357,824 100.00% $ 733,561 100.00% =========== =========== 10
The following table sets forth information regarding the Bank's non-performing assets at the dates indicated: NONPERFORMING ASSETS (Dollars in Thousands) At At 9/30/01 12/31/00 ------- -------- NON-ACCRUAL LOANS: Mortgage loans $ 3,851 $ 687 Commercial loans 3,833 442 Consumer loans 691 25 ------- ------- TOTAL 8,375 1,154 ACCRUING LOANS 90 DAYS OR MORE OVERDUE: Mortgage loans 563 576 Commercial loans 1,385 91 Consumer loans 220 83 ------- ------- TOTAL 2,168 750 Troubled debt restructuring: -- -- Real estate and other assets owned, net 727 291 ------- ------- TOTAL NON-PERFORMING LOANS, TROUBLED DEBT RESTRUCTURINGS, AND REAL ESTATE AND OTHER ASSETS OWNED, NET $11,270 $ 2,195 ======= ======= AS A PERCENTAGE OF TOTAL ASSETS 0.54% 0.21% Interest Income (1) $ 513 $ 101 (1) This is the amount of interest that would have been recorded on loans accounted for on a non-performing basis as of the end of each period if such loans had been current for the entire period. The following table illustrates the loan loss experience: Nine months ended Year ended (Dollars in Thousands) September 30, December 31, 2001 2000 ----------------- ------------ BALANCE AT BEGINNING OF PERIOD $ 7,799 6,722 CHARGE OFFS: Residential real estate (352) (98) Commercial loans (401) (450) Consumer loans (1,410) (424) -------- -------- Total charge offs $ (2,163) (972) -------- -------- RECOVERIES: Residential real estate 20 5 Commercial loans 142 43 Consumer loans 408 137 -------- -------- Total recoveries $ 570 185 -------- -------- CHARGEOFFS, NET OF RECOVERIES (1,593) (787) PURCHASED RESERVE 8,893 -- PROVISION 3,429 1,864 -------- -------- BALANCE AT END OF PERIOD $ 18,528 7,799 ======== ======== RATIO OF NET CHARGE OFFS TO AVERAGE LOANS OUTSTANDING DURING THE PERIOD 0.13% 0.11% 11
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES September 30, 2001 December 31, 2000 -------------------------- --------------------------- Percent Percent of loans in of loans in (Dollars in thousands) Allowance category Allowance category --------- ----------- --------- ------------ Residential first mortgage and loans held for sale $ 5,943 32.0% 1,227 31.2% Commercial real estate 5,058 27.3% 2,300 26.7% Other commercial 3,400 18.4% 2,586 19.2% Consumer 4,127 22.3% 1,686 22.9% ------- ----- ------- ----- Totals $18,528 100.0% 7,799 100.0% ======= ===== ======= ===== 8) Deposits The following table illustrates the amounts outstanding for deposits greater than $100,000 at September 30, 2001, according to the time remaining to maturity: Certificates Demand (Dollars in thousands) of Deposit Deposits Totals ----------- --------- ------- Within three months ....... $ 57,184 251,504 308,688 Three to six months ....... 24,509 -- 24,509 Seven to twelve months .... 24,479 -- 24,479 Over twelve months ........ 7,758 -- 7,758 -------- -------- -------- Totals ................. $113,930 251,504 365,434 ======== ======== ======== 9) Advances and Other Borrowings The following chart illustrates the average balances and the maximum outstanding month-end balances for FHLB advances and repurchase agreements: (Dollars in thousands) September 30, December 31, 2001 2000 ------------ ------------ FHLB Advances Amount outstanding at end of period ..... $360,654 196,791 Average balance ......................... $346,691 211,217 Maximum outstanding at any month-end .... $416,222 234,688 Weighted average interest rate .......... 5.42% 6.35% Repurchase Agreements: Amount outstanding at end of period ..... $ 29,392 24,877 Average balance ......................... $ 24,874 19,052 Maximum outstanding at any month-end .... $ 30,955 24,877 Weighted average interest rate .......... 4.24% 5.39% 12
10) 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 September 30, 2001: CONSOLIDATED Tier 1 (Core) Tier 2 (Total) Leverage (Dollars in thousands) Capital Capital Capital ----------- ------------- ----------- GAAP Capital ........................................... $ 171,595 171,595 171,595 Less: Goodwill and intangibles ........................ (44,011) (44,011) (44,011) Accumulated other comprehensive gain on AFS securities ............................. (4,283) (4,283) (4,283) Plus: Allowance for loan losses ....................... -- 16,450 -- Trust preferred secuirites ......................... 35,000 35,000 35,000 Other regulatory adjustments ........................... (29) (29) (29) ----------- ----------- ----------- Regulatory capital computed ............................ $ 158,272 174,722 158,272 =========== =========== =========== Risk weighted assets ................................... $ 1,447,481 1,447,481 =========== =========== Total average assets ................................... 2,126,230 =========== Capital as % of defined assets ......................... 10.93% 12.07% 7.44% Regulatory "well capitalized" requirement .............. 6.00% 10.00% 5.00% ----------- ----------- ----------- Excess over "well capitalized" requirement ............. 4.93% 2.07% 2.44% =========== =========== =========== 11) Comprehensive Earnings: The Company's only component of other comprehensive earnings is the unrealized gains and losses on available-for-sale securities. For the three months For the nine months ended Sept 30, ended Sept 30, ----------------------- ----------------------- Dollars in thousands 2001 2000 2001 2000 ------- ------- ------- ------- Net earnings .......................................... $ 5,707 3,853 15,229 10,273 Unrealized holding gains arising during the period .... 3,694 2,608 6,561 2,470 Transfer from held-to-maturity ........................ -- -- -- (11) Tax expense ........................................... (1,485) (1,024) (2,590) (1,000) ------- ------- ------- ------- Net after tax ............................. 2,209 1,584 3,971 1,459 Reclassification adjustment for gains (losses) included in net income ............................. 24 (5) 88 (5) Tax (expense) benefit ................................. (9) 2 (34) 2 ------- ------- ------- ------- Net after tax ............................. 15 (3) 54 (3) Net unrealized gains on securities ....... 2,224 1,581 4,025 1,456 ------- ------- ------- ------- Total comprehensive earnings .......... $ 7,931 5,434 19,254 11,729 ======= ======= ======= ======= 13
12) Segment Information The Company evaluates segment performance internally based on individual bank charter, 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, CFI, Glacier Trust, and intercompany eliminations. During the third quarter of 2001, certain branches of Western were transferred to other Company owned banks located in the same geographic area which accounted for the change in activity for certain segments. Nine months ended and as of Sept 30, 2001 --------------------------------------------------------------------------- (Dollars in thousands) Glacier Whitefish Missoula Helena Big Sky -------- --------- -------- -------- -------- Revenues from external customers $ 30,584 6,255 18,552 8,074 6,723 Intersegment revenues 937 14 14 125 2 Expenses 25,707 4,995 14,743 6,870 5,756 Intercompany eliminations -- -- -- -- -- -------- -------- -------- -------- -------- Net income $ 5,814 1,274 3,823 1,329 969 ======== ======== ======== ======== ======== Total Assets $528,848 122,991 422,687 165,859 166,879 ======== ======== ======== ======== ======== Mountain Total West Western Other Consolidated ---------- --------- ---------- ------------ Revenues from external customers 15,278 33,079 270 118,815 Intersegment revenues 192 169 20,216 21,669 Expenses 15,108 29,476 931 103,586 Intercompany eliminations -- -- (21,669) (21,669) ---------- --------- ---------- ---------- Net income 362 3,772 (2,114) 15,229 ========== ========= ========== ========== Total Assets 318,159 381,994 (12,452) 2,094,965 ========== ========= ========== ========== Nine months ended and as of Sept 30, 2000 ---------------------------------------------------------------------------- (Dollars in thousands) Glacier Whitefish Missoula Helena Big Sky ---------- ---------- ---------- ---------- ---------- Revenues from external customers $ 29,340 5,650 14,190 6,230 4,648 Intersegment revenues 866 8 -- 75 -- Expenses 25,244 4,585 11,326 5,458 4,259 Intercompany eliminations -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- Net income $ 4,962 1,073 2,864 847 389 ========== ========== ========== ========== ========== Total Assets $ 459,096 86,113 202,782 86,678 72,806 ========== ========== ========== ========== ========== Mountain Total West Other Consolidated ---------- ---------- ------------ Revenues from external customers 7,634 344 68,036 Intersegment revenues -- 12,513 13,462 Expenses 6,943 (52) 57,763 Intercompany eliminations -- (13,462) (13,462) ---------- ---------- ---------- Net income 691 (553) 10,273 ========== ========== ========== Total Assets 116,477 2,089 1,026,041 ========== ========== ========== 14
Three months ended and as of Sept 30, 2001 ----------------------------------------------------------------------------- (Dollars in thousands) Glacier Whitefish Missoula Helena Big Sky ---------- ---------- ---------- ---------- ---------- Revenues from external customers $ 10,792 2,249 8,230 3,386 3,130 Intersegment revenues 478 8 3 59 2 Expenses 9,025 1,791 6,530 2,889 2,567 Intercompany eliminations -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- Net income $ 2,245 466 1,703 556 565 ========== ========== ========== ========== ========== Total Assets $ 528,848 122,991 422,687 165,859 166,879 ========== ========== ========== ========== ========== Mountain Total West Western Other Consolidated ---------- ---------- ---------- ------------ Revenues from external customers 5,872 9,366 (130) 42,895 Intersegment revenues -- 161 7,557 8,268 Expenses 5,615 8,796 (25) 37,188 Intercompany eliminations -- -- (8,268) (8,268) ---------- ---------- ---------- ---------- Net income 257 731 (816) 5,707 ========== ========== ========== ========== Total Assets 318,159 381,994 (12,452) 2,094,965 ========== ========== ========== ========== Three months ended and as of Sept 30, 2000 ----------------------------------------------------------------------------- (Dollars in thousands) Glacier Whitefish Missoula Helena Big Sky ---------- ---------- ---------- ---------- ---------- Revenues from external customers $ 10,246 1,990 4,924 2,231 1,687 Intersegment revenues 236 1 -- 25 -- Expenses 8,722 1,624 3,880 1,885 1,528 Intercompany eliminations -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- Net income $ 1,760 367 1,044 371 159 ========== ========== ========== ========== ========== Total Assets $ 459,096 86,113 202,782 86,678 72,806 ========== ========== ========== ========== ========== Mountain Total West Other Consolidated ---------- ---------- ------------ Revenues from external customers 2,715 188 23,981 Intersegment revenues -- 4,524 4,786 Expenses 2,434 55 20,128 Intercompany eliminations -- (4,786) (4,786) ---------- --------- ---------- Net income 281 (129) 3,853 ========== ========= ========== Total Assets 116,477 2,089 1,026,041 ========== ========= ========== 15
13) 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. Nine Months Ended September 30, (Dollars in Thousands) 2001 vs. 2000 Increase (Decrease) due to: ----------------------------------- INTEREST INCOME Volume Rate Net --------- -------- --------- Real Estate Loans $12,929 (752) 12,177 Commercial Loans 15,496 (1,915) 13,581 Consumer and Other Loans 8,598 (636) 7,962 Investment Securities 11,547 (1,068) 10,479 ------- ------- ------- Total Interest Income 48,570 (4,371) 44,199 NOW Accounts 611 7 618 Savings Accounts 769 112 881 Money Market Accounts 3,599 (1,418) 2,181 Certificates of Deposit 13,519 (195) 13,324 FHLB Advances 6,181 (2,369) 3,812 Other Borrowings and Repurchase Agreements 2,631 (97) 2,534 ------- ------- ------- Total Interest Expense 27,310 (3,960) 23,350 ------- ------- ------- NET INTEREST INCOME $21,260 (411) 20,849 ======= ======= ======= 14) Average Balance Sheet The following schedule provides 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. 16
-------------------------------------------------------------------------------------- AVERAGE BALANCE SHEET For the Nine months ended 9/30/01 For the year ended 12-31-00 -------------------------------------------------------------------------------------- (Dollars in Thousands) Interest Average Interest Average Average and Yield/ Average and Yield/ ASSETS Balance Dividends Rate Balance Dividends Rate -------------------------------------------------------------------------------------- Real Estate Loans $ 427,425 26,313 8.21% $ 230,661 19,557 8.48% Commercial Loans 535,796 34,524 8.59% 312,434 28,784 9.21% Consumer and Other Loans 289,182 19,221 8.86% 164,262 14,856 9.04% ----------- ------- ----------- ----------- Total Loans 1,252,403 80,058 8.52% 707,357 63,197 8.93% Investment Securities 469,388 22,080 6.27% 236,287 15,640 6.62% ----------- ------ ----------- ----------- Total Earning Assets 1,721,791 102,138 7.91% 943,644 78,837 8.35% ------- ----------- Non-Earning Assets 171,378 64,151 ----------- ----------- TOTAL ASSETS $ 1,893,169 $ 1,007,795 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY NOW Accounts $ 177,366 1,407 1.06% $ 96,737 1,068 1.10% Savings Accounts 97,734 1,498 2.04% 44,996 806 1.79% Money Market Accounts 275,337 7,524 3.64% 167,533 7,447 4.45% Certificates of Deposit 545,374 22,821 5.58% 230,024 13,353 5.81% FHLB Advances 346,691 14,049 5.40% 211,217 13,454 6.37% Repurchase Agreements and Other Borrowed Funds 68,018 3,411 6.69% 31,799 1,229 3.86% ----------- ----------- ----------- ----------- Total Interest Bearing Liabilities 1,510,520 50,710 4.48% 782,306 37,357 4.78% ----------- ----------- Non-interest Bearing Deposits 208,619 135,840 Other Liabilities 24,313 1,181 ----------- ----------- Total Liabilities 1,743,452 919,327 ----------- ----------- Common Stock 154 110 Paid-In Capital 148,628 95,554 Retained Earnings (421) (2,250) Accumulated Other Comprehensive Earnings (Loss) 1,356 (4,946) ----------- ----------- Total Stockholders' Equity 149,717 88,468 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,893,169 $ 1,007,795 =========== =========== NET INTEREST INCOME $ 51,428 $ 41,480 =========== =========== NET INTEREST SPREAD 3.34% 3.57% NET INTEREST MARGIN ON AVERAGE EARNING ASSETS 3.98% 4.40% RETURN ON AVERAGE ASSETS 1.06% 1.39% RETURN ON AVERAGE EQUITY 13.41% 15.83% 17
15) Recent Acquisitions On February 28, 2001 the Company completed the acquisition of WesterFed Financial Corporation. The Company issued 4,530,462 shares and $37.274 million cash to shareholders as consideration for the merger. The acquisition was accounted for under the purchase method of accounting. Accordingly, the assets and liabilities of WesterFed were recorded by the Company at their respective fair values at the time of the completion of the merger and the results of WesterFed have been included with those of the Company since the date of the acquisition. The excess of the Company's purchase price over the net fair value of the assets acquired and liabilities assumed, including identifiable intangible assets, was recorded as goodwill and will be amortized over a useful life of 20 years during the current year. Subsequent to 2001, the goodwill will not be amortized due to a recently issued accounting standard. See footnote 17 for further discussion regarding FASB Statements No. 141 and 142. The estimated fair values of net assets acquired at the acquisition date are summarized as follows: (Dollars in thousands) ---------------------- Cash and due from banks ............ $ 24,891 Investments available-for-sale ..... 185,688 FHLB stock ......................... 13,062 Loans .............................. 613,825 Premises and equipment ............. 25,432 Goodwill ........................... 16,530 Core deposit intangible ............ 7,449 Other assets ....................... 10,965 -------- 897,842 -------- Deposits ........................... $603,555 FHLB advances ...................... 165,386 Repurchase agreements .............. 7,851 Other liabilities .................. 27,338 -------- 804,130 -------- Total consideration paid ......... $ 93,712 ======== On March 15, 2001, the Company completed the acquisition, subject to certain adjustments, of seven Wells Fargo & Company and First Security Corporation subsidiary banks located in Idaho and Utah. The acquisition was accounted for under the purchase method of accounting. Accordingly, the assets and liabilities of the acquired banks were recorded by the Company at their respective fair values at the date of the acquisition and the results of the banks operations have been included with those of the Company since the date of acquisition. The excess of the Company's purchase price over the net fair value of the assets acquired and liabilities assumed, including identifiable intangible assets, was recorded as goodwill and will be amortized over a useful life of 20 years. Subsequent to 2001, the goodwill will not be amortized due to a recently issued accounting standard. See footnote 17 for further discussion regarding FASB Statements No. 141 and 142. 18
The estimated fair values of the branches net assets acquired at the acquisition date are summarized as follows: (Dollars in thousands) ---------------------- Cash and due from banks .................. $122,149 Loans .................................... 36,573 Premises and equipment ................... 6,449 Core deposit intangible .................. 1,514 Other assets ............................. 196 -------- 166,881 -------- Deposits ................................. $183,968 Other liabilities ........................ 463 -------- 184,431 -------- Net liabilities assumed in excess of identifiable net assets acquired ..... $ 17,550 ======== The following pro forma information presents the consolidated results of operations as if the acquisitions had occurred at the beginning of January 1, 2000 and 2001. The table is for comparison purposes only. For the three months For the nine months ended Sept 30, ended Sept 30, ------------------------------ ------------------------------ (dollars in thousands except per share data) 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Total interest and non-interest income ..... $ 43,039 47,387 155,786 138,256 ========== ========== ========== ========== Net earnings ............................... $ 5,707 5,416 16,144 14,960 ========== ========== ========== ========== Net earnings per common share - basic ...... $ 0.34 0.34 0.99 0.94 Net earnings per common share - diluted .... $ 0.33 0.33 0.95 0.91 The pro forma information does not purport to be indicative of the results of operations that would have occurred had the transactions taken place at the beginning of the periods presented or of future results of operations. For example, these results do not take into affect any efficiencies or revenue enhancements that might have been realized had the acquisition occurred at the beginning of the periods. 16) Sale of Branches On June 23, 2001 the Company completed the sale of six branch locations in north central Montana with assets of $23.5 million to Stockman Bank. Stockman acquired five Western Security Bank offices and one Glacier Bank office. Included in the sale were loans of approximately $21.8 million, property and equipment with a book value of approximately $1.7 million, and deposits of $81.7 million. A gain of $511 thousand was recognized on the sale. 17) Impact of Recently Issued Accounting Standards On July 2001, the FASB issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method 19
business combinations completed after June 30, 2001. Statement 141 also specifies criteria that intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. Statement 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Company is required to adopt the provisions of Statement 141 immediately, and Statement 142 effective January 1, 2002. Furthermore, any goodwill and any intangible asset determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-Statement 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized prior to the adoption of Statement 142. Statement 141 will require upon adoption of Statement 142, that the Company evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in Statement 141 for recognition apart from goodwill. Upon adoption of Statement 142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of Statement 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. In connection with the transitional goodwill impairment evaluation, Statement 142 will require the Company to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. To accomplish this the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Company will then have up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit's carrying amount. To the extent a reporting unit's carrying amount exceeds its fair value, an indication exists that the reporting unit's goodwill may be impaired and the Company must perform the second step of the transitional impairment test. In the second step, the Company must compare the implied fair value of the reporting unit's goodwill, determined by allocating the reporting unit's fair value to all of it assets and liabilities in a manner similar to a purchase price allocation in accordance with Statement 141, to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Company's statement of earnings. As of the date of adoption, the Company expects to have unamortized goodwill in the amount of $34,800,000 and unamortized identifiable intangible assets in the amount of $8,200,000, all of which will be subject to the transition provisions of Statements 141 and 142. Amortization expense related to goodwill was $360,000 and $1,229,000 for the year ended December 31, 2000 and the nine months ended 20
September 30, 2001, respectively. Because of the extensive effort needed to comply with adopting Statements 141 and 142, it is not practicable to reasonably estimate the impact of adopting these Statements on the Company's financial statements at the date of this report, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle. In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities -- a replacement of FASB Statement No. 125. SFAS No. 140 revises accounting standards for securitizations and transfers of financial assets and collateral and requires certain disclosures, but carries forward most of SFAS No. 125's provisions without change. SFAS No. 140 is effective for recognition and reclassification of collateral and disclosures relating to securitization transactions and collateral for fiscal years ended after December 15, 2000. Adoption of these provisions did not have a material effect on the consolidation financial statements, results of operations or liquidity of the Company. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Recent Developments Recently Completed Acquisitions The acquisition of Missoula, Montana based WesterFed with December 31, 2000 assets of $929 million, loans of $623 million, and deposits of $606 million was completed on February 28, 2001. WesterFed shareholders received 4,530,462 shares of Glacier Bancorp stock and $37.274 million in cash as consideration for the acquisition. WesterFed was the holding company for Western Security Bank, Montana's largest savings bank with twenty-seven offices in fourteen Montana communities. Western Security Bank is a separate banking subsidiary of the Company. The acquisition of seven Wells Fargo & Company and First Security Corporation branches located in Boise, Nampa, Hailey, and Ketchum, Idaho and Brigham City and Park City, Utah by Mountain West Bank of Coeur d'Alene, Idaho was completed on March 15, 2001. The purchase included approximately $184 million in deposits, $37 million in loans, and real estate and equipment of the branches. Both acquisitions were accounted for using the purchase method of accounting. Accordingly, the assets and liabilities were recorded by the Company at their respective fair values at the time of the completion of the acquisitions and the results of operations include the results of the acquired operations since the dates of acquisitions. The sale of six branches located in North Central Montana to Stockman Bank was completed on June 23, 2001. The sale included loans of $21.8 million and deposits of $81.7 million. As a result of these transactions, the Company is now the largest publicly traded bank holding company headquartered in the inland northwest, with assets exceeding $2 billion. Western Security Bank converted to Company's system On July 21, 2001 Company employees, assisted by several representatives of our software vendor, successfully completed the conversion of the data systems from an outside servicer to the Company's in-house computer system. This conversion will now allow us to take advantage of the cost savings from this fully integrated system. 21
Western Security Bank, Billings, Montana Western Security Bank is now operated as a stand-alone community bank with offices in Billings, Laurel, and Lewistown. A new board of directors for the bank, comprised of local businesspeople, took office in September. Western Security Bank serves Montana's largest market with total assets of over $400 million. Geographic alignment of branches As part of the plan for the acquisition of WesterFed certain branches of subsidiary banks were transferred to other Company owned banks located in the same geographic area expanding the market share of those community banks. As of September 30, 2001 all branch transfers have been completed. Glacier Bank of Eureka merged into Glacier Bank of Whitefish The merger of the two banks, and redemption of the minority shares that were outstanding in these banks, was completed as of July 31, 2001. The banks had relatively small total assets, are in close proximity, have similar clients, and share management staff. It is anticipated that cost reductions will result without disturbing the community banking focus. Financial Condition This section discusses the changes in Statement of Financial Condition items from September 30, 2000 to September 30, 2001. September 30, ------------------------------- ASSET GROWTH ($ IN THOUSANDS) 2001 2000 $ change % change ----------- ----------- ----------- ------ Cash on hand and in banks $ 64,064 33,700 30,364 90.10% Interest bearing investments 546,606 225,889 320,717 141.98% Loans: Real estate 441,232 236,071 205,161 86.91% Commercial and Agricultural 627,110 325,974 301,136 92.38% Consumer 308,010 168,789 139,221 82.48% ----------- ----------- ----------- ------ Total loans 1,376,352 730,834 645,518 88.33% Allowance for loan losses (18,528) (7,808) (10,720) 137.30% ----------- ----------- ----------- ------ Total loans net of allowance for loan losses 1,357,824 723,026 634,798 87.80% ----------- ----------- ----------- ------ Other assets 126,471 43,426 83,045 191.23% ----------- ----------- ----------- ------ Total Assets $ 2,094,965 1,026,041 1,068,924 104.18% =========== =========== =========== ====== Since September 30, 2000 total assets have increased $1.069 billion, or 104 percent, to $2.095 billion, primarily the result of the completion of the WesterFed Financial Corporation acquisition, and branch purchases in Idaho and Utah from Wells Fargo and First Security Corporation, in the first quarter of 2001. Those acquisitions were accounted for as purchases and accordingly the financial information includes the assets and results of operations of those locations from the dates of purchase. Loans sold to the secondary market amounted to $203.058 million and $87.860 million during the first nine months of 2001 and 2000, respectively. The amount of loans serviced for others on September 30, 2001 was approximately $287 million. All seven banking subsidiaries are members of the FHLB. 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 22
as the Company as a whole. As of September 30, 2001, the Company had $707,514,000 of available FHLB line of which $360,654,000 was utilized. Total loans, net of the reserve for loan losses, have increased $635 million. We continue to sell the majority of the real estate loan production. Acquired with WesterFed were dealer originated consumer loans. We have discontinued the origination and purchase of these loan types. Commercial loans continue to increase. September 30, ----------------------------- LIABILITY GROWTH ($ IN THOUSANDS) 2001 2000 $ change % change ---------- ---------- ---------- -------- Non-interest bearing deposits $ 244,450 152,022 92,428 60.80% Interest-bearing deposits 1,209,469 564,965 644,504 114.08% Advances from Federal Home Loan Bank 360,654 177,909 182,745 102.72% Other borrowed funds 41,412 28,684 12,728 44.37% Other liabilities 32,385 10,623 21,762 204.86% Trust preferred securities 35,000 -- 35,000 100.00% ---------- ---------- ---------- ------ Total liabilities $1,923,370 934,203 989,167 105.88% ========== ========== ========== ====== Total deposits have increased $737 million over the September 30, 2000 balances. Total deposits acquired, net of branch sales, were $712 million, leaving an increase of $25 million from internal activity. Non-interest bearing deposits are up $92 million, or 61 percent, and interest-bearing deposits have increased $645 million, or 114 percent. Federal home loan bank advances, other borrowed funds, including the subordinated debentures issued with the trust preferred security, and repurchase agreements, have increased $230 million. Capital as a percentage of assets ratio is at 8.2 percent at September 30, 2001. The book value per share has increased from $8.57 at December 31, 2000 to $10.26 at September 30, 2001. September 30, June 30, March 31, CREDIT QUALITY INFORMATION ($ IN THOUSANDS) 2001 2001 2001 ---------- ---------- ---------- Allowance for loan losses $ 18,528 18,466 17,047 Non-performing assets $ 11,089 11,918 7,892 Allowance as a percentage of non performing assets 167.08% 154.94% 216.00% Non-performing assets as a percentage of total assets 0.53% 0.55% 0.37% Allowance as a percentage of total loans 1.35% 1.32% 1.21% Allowance for Loan Loss and Non-Performing Assets Non-performing assets as a percentage of total assets at September 30, 2001 were .53 percent versus .28 percent at the same time last year, which compares to the Peer Group average of .56 percent at June 30, 2001, the most recent information available. The reserve for loan losses was 167 percent of non-performing assets at September 30, 2001, down from 389 percent a year ago. With the growth in loan balances, and 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 $10.720 million, including $8.893 million of acquired reserves as a result of the acquisitions, or 137 percent, to $18.528 million, which is 1.35 percent of total 23
loans outstanding, up from 1.08 percent of loans at September 30, 2000. The third quarter provision expense for loan losses was $1.006 million, up from $491 thousand during the same quarter in 2000. Results of Operations -- The three months ended September 30, 2001 compared to the three months ended September 30, 2000. REVENUE SUMMARY ($ IN THOUSANDS) Three months ended September 30, ------------------------------------------------------------- 2001 2000 $ change % change ------- ------- -------- -------- Net interest income $19,199 10,519 8,680 82.52% Fees and other revenue: Service charges and fees 4,265 2,505 1,760 70.26% Gain on sale of loans 1,111 545 566 103.85% Other income 419 531 (112) -21.09% ------- ------- ------- ------ Total non-interest income 5,795 3,581 2,214 61.83% ------- ------- ------- ------ Total revenue $24,994 14,100 10,894 77.26% ======= ======= ======= ====== Net interest margin 4.08% 4.50% ======= ====== Net Interest Income Net interest income for the quarter increased $8.680 million, or 82 percent, over the same period in 2000. The growth in earning assets and the increase in non-interest bearing deposits resulted in a significant increase in net interest income. The net interest margin as a percentage of earning assets, on a tax equivalent basis, has declined from 4.5 percent at September 30, 2000 to 4.08 percent in 2001. The margin on assets acquired in the purchase transactions were lower than the margin on existing assets. Non-interest Income Fee income was $1.760 million, or 70 percent higher in the third quarter of 2001 than the same quarter in 2000. Gain on sale of loans increased $566 thousand, or 104 percent, and other income was down $112 thousand primarily because of gain on sale of a branch office in 2000. Account volume increases and strong mortgage origination activity continues to drive revenue growth. EXPENSE SUMMARY ($ IN THOUSANDS) Three months ended September 30, ---------------------------------------------------------- 2001 2000 $ change % change ------- ------ -------- -------- Compensation and employee benefits $ 7,392 $ 3,992 $ 3,400 85.17% Occupancy and equipment expense 2,187 1,221 966 79.12% Outsourced data processing 707 264 443 167.80% Core deposit intangible amortization 383 50 333 666.00% Goodwill amortization 492 91 401 440.66% Other expenses 3,948 1,855 2,093 112.83% ------- ------- ------- ------ Total non-interest expense $15,109 $ 7,473 $ 7,636 102.18% ------- ------- ------- ------ 24
Non-interest Expense Non-interest expense increased by $7.636 million, or 102 percent, over the same quarter of 2000. Included in the 2001 total is $325 thousand in merger and conversion expense. Intangible asset amortization in the form of core deposit and goodwill was $383 thousand and $492 thousand, respectively, which is an increase of $734 thousand over the prior year. Results of Operations -- The nine months ended September 30, 2001 compared to the nine months ended September 30, 2000. REVENUE SUMMARY ($ IN THOUSANDS) Nine months ended September 30, ----------------------------------------------------------- 2001 2000 $ change % change ------- ------- -------- -------- Net interest income $51,428 30,579 20,849 68.18% Fees and other revenue: Service charges and fees 11,737 7,255 4,482 61.78% Gain on sale of loans 2,766 1,512 1,254 82.94% Other income 2,173 1,330 843 63.38% ------- ------- ------- ----- Total non-interest income 16,676 10,097 6,579 65.16% ------- ------- ------- ----- Total revenue $68,104 40,676 27,428 67.43% ======= ======= ======= ===== Net interest margin 3.98% 4.40% ======= ====== Net Interest Income Net interest income for the nine months was $51.428 million, an increase of $20.849 million, or 68 percent, over the same period in 2000. The growth in earning assets and the increase in non-interest bearing deposits resulted in a significant increase in net interest income. The net interest margin continues to be a challenge as the spread on assets acquired is less than from the previous asset base. As a percentage of earning assets, the year-to-date margin has declined from 4.40 percent to 3.98 percent in 2001. Non-interest Income Fee income was $4.482 million, or 62 percent, higher in the first nine months of 2001 than the same period in 2000. Gain on sale of loans increased $1.254 million, or 83 percent, and other income was up $843 thousand, of which $511 thousand was from the gain on sale of the Glacier Bank Cut Bank branch. EXPENSE SUMMARY ($ IN THOUSANDS) Nine months ended September 30, ---------------------------------------------------------- 2001 2000 $ change % change ------- ------- -------- -------- Compensation and employee benefits $20,182 $12,078 $ 8,104 67.10% Occupancy and equipment expense 6,147 3,568 2,579 72.28% Outsourced data processing 2,007 1,143 864 75.59% Core deposit intangible amortization 957 150 807 538.00% Goodwill amortization 1,229 269 960 356.88% Other expenses 10,462 5,887 4,575 77.71% ------- ------- ------- ------ Total non-interest expense $40,984 $23,095 $17,889 77.46% ------- ------- ------- ------ 25
Non-interest Expense Non-interest expense increased by $17.889 million, or 77 percent, over the same nine months of 2000. Included in the 2001 total is $1.250 million in merger and conversion expense. Without those non-recurring expenses non-interest expense increased by $16.639 million, or 72 percent. Compensation and employee benefits increased $8.104 million or 67 percent. Occupancy and equipment expense was up $2.579 million, or 72 percent. Outsourced data processing expense increased $864 thousand, or 76 percent, and other expenses were up $4.575 million, or 78 percent. Intangible asset amortization in the form of core deposit and goodwill was $957 thousand and $1.229 million, respectively, which is an increase of $1.767 million over the prior year. Loan Loss Provision The year-to-date provision expense for loan losses was $3.429 million, up from $1.483 million during the same period in 2000, an increase of 131 percent. The reserve has increased because of the increased volume of loans, and the continuing shift in the mix of loans to commercial from residential. Commercial loans historically carry a higher risk profile than residential real estate loans. Net charged off loans as a percentage of loans outstanding were .12 for the first nine months of 2001 which is slightly higher than the full year 2000 percentage of .09. Forward-Looking Statements When used in this press release, the words or phrases `will likely result in', `are expected to', `will continue', `is anticipated', `estimate', or `project' or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected including general economic conditions, business conditions in the banking industry, the regulatory environment, new legislation, vendor quality and efficiency, employee retention factors, rapidly changing technology and evolving banking industry standards, competitive standards, competitive factors including increased competition among financial institutions and fluctuating interest rate environments. Readers are cautioned not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Readers should also care review the risk factors described in the company's most recent quarterly report on Form 10-Q for the periods ending March 31, 2001, and June 30, 2001, its Annual Report on Form 10-K for the period ending December 31, 2000 and other documents the company files from time to time with the Securities Exchange Commission. Headquartered in Kalispell, Montana, Glacier Bancorp, Inc. conducts business from Glacier Bank of Kalispell, First Security Bank of Missoula, Glacier Bank of Whitefish, Valley Bank of Helena, Big Sky Western Bank, Western Security Bank, all located in Montana, and Mountain West Bank located in Idaho with two branches in Utah. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT 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 26
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 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 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 July 31, 2001, the most recent information available, as compared to the 10% Board approved policy limit (dollars in thousands). Interest Rate Sensitivity +200 bp -200 bp ------- ------- Estimated sensitivity -2.74% 0.55% Estimated increase (decrease) in net interest income $ (2,439) 493 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. 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 None 27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits None (b) Current Report on Form 8-K None 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. GLACIER BANCORP, INC. November 9, 2001 /s/Michael J. Blodnick President/CEO November 9, 2001 /s/James H. Strosahl Executive Vice President/CFO 28