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 March 31, 2002 [ ] 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 incorporation or organization) (IRS Employer 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 May 13, 2002 was 17,134,632. 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 -- March 31, 2002, December 31, and March 31, 2001 (unaudited)............... 3 Consolidated Statements of Operations -- Three months ended March 31, 2002 and 2001 (unaudited)................... 4 Consolidated Statements of Stockholders' Equity and Comprehensive Income -- Years ended December 31, 2000 2001 and Three months ended March 31, 2002 (unaudited).................... 5 Consolidated Statements of Cash Flows -- Three months ended March 31, 2002 and 2001 (unaudited).................... 6 Notes to Consolidated Financial Statements (unaudited).................... 7 Item 2 -- Management's Discussion and Analysis of Financial Condition and Results of Operations.......................... 18 Item 3 -- Quantitative and Qualitative Disclosure about Market Risk................. 22 PART II. OTHER INFORMATION......................................................... 23 Item 1 -- Legal Proceedings......................................................... 23 Item 2 -- Changes in Securities and Use of proceeds................................. 23 Item 3 -- Defaults Upon Senior Securities........................................... 23 Item 4 -- Submission of Matters to a Vote of Security Holders....................... 23 Item 5 -- Other Information......................................................... 23 Item 6 -- Exhibits and Reports on Form 8-K.......................................... 23 Signatures.......................................................................... 23
GLACIER BANCORP, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION MARCH 31, December 31, March 31, (Unaudited - dollars in thousands except per share data) 2002 2001 2001 - -------------------------------------------------------- ------------ ----------- ----------- ASSETS: Cash on hand and in banks ............................................ $ 62,677 73,456 59,715 Interest bearing cash deposits ....................................... 14,565 23,970 3,455 ------------ ----------- ----------- Cash and cash equivalents ................................. 77,242 97,426 63,170 ------------ ----------- ----------- Investments: Investment securities, available-for-sale ................. 187,031 158,036 164,135 Mortgage backed securities, available-for-sale ............ 378,841 350,542 354,168 ------------ ----------- ----------- Total investments .................................... 565,872 508,578 518,303 ------------ ----------- ----------- Net loans receivable: Real estate loans ......................................... 387,659 421,996 505,840 Commercial Loans .......................................... 625,287 620,134 563,269 Consumer and other loans .................................. 290,317 298,851 339,570 Allowance for loan losses ................................. (19,498) (18,654) (17,047) ------------ ----------- ----------- Total loans, net ..................................... 1,283,765 1,322,327 1,391,632 ------------ ----------- ----------- Premises and equipment, net .......................................... 48,898 50,566 58,286 Real estate and other assets owned, net .............................. 921 593 451 Federal Home Loan Bank of Seattle stock, at cost ..................... 33,836 32,822 30,625 Federal Reserve stock, at cost ....................................... 4,202 4,185 1,722 Accrued interest receivable .......................................... 12,489 12,409 12,973 Core deposit intangible, net ......................................... 7,900 8,261 10,343 Goodwill, net ........................................................ 33,487 33,510 37,647 Other assets ......................................................... 14,943 15,070 7,627 ------------ ----------- ----------- $ 2,083,555 2,085,747 2,132,779 ============ =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY: Deposits - non-interest bearing ...................................... $ 238,243 234,318 227,362 Deposits - interest bearing .......................................... 1,188,634 1,211,746 1,278,419 Advances from Federal Home Loan Bank of Seattle ...................... 373,985 367,295 355,457 Securities sold under agreements to repurchase ....................... 31,823 32,585 28,270 Other borrowed funds ................................................. 8,146 1,060 12,304 Accrued interest payable ............................................. 7,313 9,179 12,121 Current income taxes ................................................. 3,652 95 887 Deferred tax liability ............................................... 1,449 1,780 3,327 Trust preferred securities ........................................... 35,000 35,000 35,000 Minority interest .................................................... -- -- 351 Other liabilities .................................................... 12,804 15,706 20,568 ------------ ----------- ----------- Total liabilities ......................................... 1,901,049 1,908,764 1,974,066 ------------ ----------- ----------- Preferred shares, 1,000,000 shares authorized. None outstanding ...... -- -- -- Common stock, $.01 par value per share 50,000,000 shares authorized ....................................... 171 169 161 Paid-in capital ...................................................... 169,386 167,371 158,294 Retained earnings (deficit) - substantially restricted ............... 11,699 7,687 (2,586) Accumulated other comprehensive income ............................... 1,250 1,756 2,844 ------------ ----------- ----------- Total stockholders' equity ................................ 182,506 176,983 158,713 ------------ ----------- ----------- $ 2,083,555 2,085,747 2,132,779 ============ =========== =========== Number of shares outstanding ......................................... 17,074,413 16,874,422 16,061,254 Book value of equity per share ....................................... $ 10.69 10.49 9.88 Tangible book value per share ........................................ $ 8.26 8.01 6.89 See accompanying notes to consolidated financial statements 3
GLACIER BANCORP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, ---------------------------- (unaudited - dollars in thousands except per share data) 2002 2001 - -------------------------------------------------------- ----------- ---------- INTEREST INCOME: Real estate loans ...................................... $ 7,838 6,689 Commercial loans ....................................... 11,432 9,377 Consumer and other loans ............................... 5,813 5,052 Investments ............................................ 7,995 5,257 ----------- ---------- Total interest income ............................ 33,078 26,375 ----------- ---------- INTEREST EXPENSE: Deposits ............................................... 7,442 8,734 FHLB Advances .......................................... 4,185 3,611 Securities sold under agreements to repurchase ......... 156 263 Trust preferred securities ............................. 904 601 Other borrowed funds ................................... 24 64 ----------- ---------- Total interest expense ........................... 12,711 13,273 ----------- ---------- NET INTEREST INCOME ............................................. 20,367 13,102 Provision for loan losses .............................. 1,300 585 ----------- ---------- Net interest income after provision for loan losses ..................................... 19,067 12,517 ----------- ---------- NON-INTEREST INCOME: Service charges and other fees ......................... 3,163 2,443 Miscellaneous loan fees and charges .................... 843 693 Gains on sale of loans ................................. 1,097 467 Gains on sale of investments, net ...................... -- 64 Other income ........................................... 746 460 ----------- ---------- Total non-interest income ......................... 5,849 4,127 ----------- ---------- NON-INTEREST EXPENSE: Compensation, employee benefits and related expenses ................................. 7,782 5,257 Occupancy and equipment expense ........................ 2,301 1,459 Data processing expense ................................ 446 261 Core deposit intangibles amortization .................. 361 168 Goodwill amortization .................................. 249 224 Other expenses ......................................... 3,475 3,131 Minority interest ...................................... -- 15 ----------- ---------- Total non-interest expense ........................ 14,614 10,515 ----------- ---------- EARNINGS BEFORE INCOME TAXES .................................... 10,302 6,129 Federal and state income tax expense ................... 3,554 2,215 ----------- ---------- NET EARNINGS .................................................... $ 6,748 3,914 =========== ========== Basic earnings per share ........................................ $ 0.40 0.30 Diluted earnings per share ...................................... $ 0.39 0.29 Dividends declared per share .................................... $ 0.16 0.15 Return on average assets (annualized) ........................... 1.30% 1.14% Return on average equity (annualized) ........................... 14.76% 13.14% Return on tangible average equity (annualized) .................. 19.17% 14.64% Average outstanding shares - basic .............................. 17,014,148 13,020,217 Average outstanding shares - diluted ............................ 17,298,634 13,569,827 See accompanying notes to consolidated financial statements. 4
GLACIER BANCORP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME YEARS ENDED DECEMBER 31, 2001, 2000, AND THREE MONTHS ENDED MARCH 31, 2002 Retained earnings Accumulated (accumulated other com- Total Common Stock deficit) prehensive stock- ------------------- Paid-in substantially income holders' (Unaudited - dollars in thousands except per share data) Shares Amount capital restricted (loss) equity - -------------------------------------------------------- ---------- ------ ------- ------------- ----------- -------- Balance at December 31, 2000 ........................... 11,447,150 114 101,828 (4,087) 258 98,113 Comprehensive income: Net earnings ...................................... -- -- -- 21,689 -- 21,689 Unrealized gain on securities, net of reclassification adjustment ..................... -- -- -- -- 1,498 1,498 -------- Total comprehensive income ............................. 23,187 -------- Cash dividends declared ($.60 per share) ............... -- -- -- (9,915) -- (9,915) Stock options exercised ................................ 864,571 9 6,755 -- -- 6,764 Tax benefit from stock related compensation ............ -- -- 2,778 -- -- 2,778 Conversion of debentures ............................... 32,239 1 341 -- -- 342 Stock issued in connection with merger of WesterFed Financial Corporation ...................... 4,530,462 45 55,669 -- -- 55,714 ---------- ---- ------- ------- ------ -------- Balance at December 31, 2001 ........................... 16,874,422 169 167,371 7,687 1,756 176,983 Comprehensive income: Net earnings ...................................... -- -- -- 6,748 -- 6,748 Unrealized loss on securities, net of reclassification adjustment ..................... -- -- -- -- (506) (506) -------- Total comprehensive income ............................. 6,242 -------- Cash dividends declared ($.16 per share) ............... -- -- -- (2,736) -- (2,736) Stock options exercised ................................ 199,991 2 2,100 -- -- 2,102 ---------- ---- ------- ------- ------ -------- Balance at March 31, 2002 .............................. 17,074,413 $171 169,471 11,699 1,250 182,591 ========== ==== ======= ======= ====== ======== See accompanying notes to consolidated financial statements 5
GLACIER BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED MARCH 31, ---------------------------- (Unaudited - dollars in thousands except per share data) 2002 2001 - -------------------------------------------------------- ------------- ----------- OPERATING ACTIVITIES : Net cash provided by (used in) operating activities ....................... $ 35,128 (8,249) INVESTING ACTIVITIES: Proceeds from sales, maturities and prepayments of investments available-for-sale ........................................ 48,112 81,243 Purchases of investments available-for-sale ............................... (107,544) (197,529) Principal collected on installment and commercial loans ................... 139,176 74,874 Installment and commercial loans originated or acquired ................... (150,780) (83,012) Principal collections on mortgage loans ................................... 62,097 44,102 Mortgage loans originated or acquired ..................................... (39,642) (35,702) Net purchase of FHLB and FRB stock ........................................ (541) (845) Acquisition of WesterFed Financial Corporation and several branches ....... -- 109,905 Net decrease (increase) in premises and equipment ......................... 704 (1,990) --------- -------- NET CASH USED IN INVESTING ACTIVITIES ................................ (48,418) (8,954) --------- -------- FINANCING ACTIVITIES: Net decrease in deposits .................................................. (19,188) (2,312) Net increase in FHLB advances and other borrowed funds .................... 13,775 1,282 Net decrease in securities sold under repurchase agreements ............... (762) (4,459) Proceeds from issuance of trust preferred securities ...................... -- 35,000 Cash dividends paid to stockholders ....................................... (2,736) (1,723) Proceeds from exercise of stock options and other stock issued ............ 2,017 799 --------- -------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES ................... (6,894) 28,587 --------- -------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS .................. (20,184) 11,384 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .......................... 97,426 51,786 --------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................ $ 77,242 63,170 ========= ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for: Interest ................................. $ 14,577 5,743 Income taxes ............................. $ -- 85 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 March 31, 2002, December 31, 2001, and March 31, 2001 and the results of operations and cash flows for the three months ended March 31, 2002 and 2001. 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, 2001. Operating results for the three months ended March 31, 2002 are not necessarily indicative of the results anticipated for the year ending December 31, 2002. Certain reclassifications have been made to the 2001 financial statements to conform to the 2002 presentation. 2) Organizational Structure: The Company, headquartered in Kalispell, Montana, is 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 operating subsidiaries: Glacier Bank ("Glacier"), First Security Bank of Missoula ("First Security"), Western Security Bank ("Western"), Big Sky Western Bank ("Big Sky"), Valley Bank of Helena ("Valley"), Glacier Bank of Whitefish ("Whitefish"), Community First, Inc. ("CFI"), and Glacier Capital Trust I ("Glacier Trust"), all located in Montana, and Mountain West Bank ("Mountain West") which is located in Idaho and Utah. CFI provides full service brokerage services through Raymond James Financial Services, Inc. The following abbreviated organizational chart illustrates the various relationships:
3) Ratios: Returns on average assets and average equity were calculated based on daily averages. 4) Cash Dividend Declared: On March 27, 2002, the Board of Directors declared a $.16 per share quarterly cash dividend to stockholders of record on April 9, 2002, payable on April 18, 2002. 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. The following schedule contains the data used in the calculation of basic and diluted earnings per share. Three Three months ended months ended March 31, 2002 March 31, 2001 -------------- -------------- Net earnings available to common stockholders, basic ........................... $ 6,747,830 3,914,266 After tax effect of interest on convertible subordinated debentures ........ -- 4,000 ----------- ---------- Net earnings available to common stockholders, diluted ......................... $ 6,747,830 3,918,266 =========== ========== Average outstanding shares - basic ............... $17,014,148 13,020,217 Add: Dilutive stock options ..................... 284,486 516,585 Convertible subordinated debentures ........ -- 33,025 ----------- ---------- Average outstanding shares - diluted ............. $17,298,634 13,569,827 =========== ========== Basic earnings per share ......................... $ 0.40 0.30 =========== ========== Diluted earnings per share ....................... $ 0.39 0.29 =========== ========== 6) Investments: A comparison of the amortized cost and estimated fair value of the Company's investments is as follows: 8
INVESTMENTS AS OF MARCH 31, 2002 Gross Unrealized Estimated Weighted Amortized -------------------- Fair (Dollars in thousands) Yield Cost Gains Losses Value - ---------------------- -------- --------- ----- ------ --------- U.S. GOVERNMENT AND FEDERAL AGENCIES maturing after ten years .......................... 3.59% $ 1,313 14 (2) 1,325 -------- ------ -------- ------- 3.59% 1,313 14 (2) 1,325 -------- ------ -------- ------- STATE AND LOCAL GOVERNMENTS AND OTHER ISSUES: maturing within one year .......................... 5.71% 1,633 19 -- 1,652 maturing one year through five years .............. 5.45% 14,016 232 (102) 14,146 maturing five years through ten years ............. 5.66% 1,799 44 (3) 1,840 maturing after ten years .......................... 5.64% 168,259 1,758 (2,108) 167,909 -------- ------ -------- ------- 5.63% 185,707 2,053 (2,213) 185,547 -------- ------ -------- ------- MORTGAGE-BACKED SECURITIES .......................... 5.64% 111,696 1,639 (116) 113,219 REAL ESTATE MORTGAGE INVESTMENT CONDUITS ............ 6.04% 265,093 2,717 (2,029) 265,781 -------- ------ -------- ------- TOTAL AVAILABLE-FOR-SALE INVESTMENTS ......... 5.82% $563,809 6,423 (4,360) 565,872 ======== ====== ======== ======= INVESTMENTS AS OF DECEMBER 31, 2001 Gross Unrealized Estimated Weighted Amortized -------------------- Fair (Dollars in thousands) Yield Cost Gains Losses Value - ---------------------- -------- --------- ----- ------ --------- U.S. GOVERNMENT AND FEDERAL AGENCIES maturing after ten years .......................... 2.77% $ 1,330 12 (3) 1,339 -------- ------ -------- ------- 2.77% 1,330 12 (3) 1,339 -------- ------ -------- ------- STATE AND LOCAL GOVERNMENTS AND OTHER ISSUES: maturing within one year .......................... 3.25% 4,639 28 -- 4,667 maturing one year through five years .............. 5.36% 13,774 291 (65) 14,000 maturing five years through ten years ............. 5.50% 2,349 57 (6) 2,400 maturing after ten years .......................... 5.81% 135,789 1,563 (1,722) 135,630 -------- ------ -------- ------- 5.67% 156,551 1,939 (1,793) 156,697 -------- ------ -------- ------- MORTGAGE-BACKED SECURITIES .......................... 6.08% 129,322 1,868 (126) 131,064 REAL ESTATE MORTGAGE INVESTMENT CONDUITS ............ 6.11% 218,470 2,941 (1,933) 219,478 -------- ------ -------- ------- TOTAL AVAILABLE FOR SALE INVESTMENTS ........... 5.96% $505,673 6,760 (3,855) 508,578 ======== ====== ======== ======= 9
7) Loans The following table summarizes the Company's loan portfolio. The loans mature or are repriced at various times. At At 3/31/02 12/31/01 ------------------------- ------------------------- TYPE OF LOAN Amount Percent Amount Percent ----------- ------- ----------- ------- REAL ESTATE LOANS: Residential first mortgage loans $ 367,520 28.63% $ 395,417 29.90% Loans held for sale 20,888 1.63% 27,403 2.07% ----------- ----------- Total 388,408 30.26% 422,820 31.97% COMMERCIAL LOANS: Real estate 383,550 29.88% 379,346 28.69% Other commercial loans 242,851 18.92% 241,811 18.29% ----------- ----------- Total 626,401 48.80% 621,157 46.98% INSTALLMENT AND OTHER LOANS: Consumer loans 135,053 10.52% 142,875 10.80% Home equity loans 155,438 12.11% 156,140 11.81% ----------- ----------- Total 290,491 22.63% 299,015 22.61% Net deferred loan fees, premiums and discounts (2,037) -0.17% (2,011) -0.15% Allowance for Losses (19,498) -1.52% (18,654) -1.41% ----------- ----------- NET LOANS $ 1,283,765 100.00% 1,322,327 100.00% =========== =========== The following table sets forth information regarding the Company's non-performing assets at the dates indicated: NONPERFORMING ASSETS At At (Dollars in Thousands) 3/31/2002 12/31/2001 --------- ---------- NON-ACCRUAL LOANS: Mortgage loans $ 3,297 $ 4,044 Commercial loans 5,245 4,568 Consumer loans 665 620 ------- ------- TOTAL 9,207 9,232 ACCRUING LOANS 90 DAYS OR MORE OVERDUE: Mortgage loans 1,516 818 Commercial loans 1,061 376 Consumer loans 131 243 ------- ------- TOTAL 2,708 1,437 Troubled debt restructuring: -- -- Real estate and other assets owned, net 921 593 ------- ------- TOTAL NON-PERFORMING LOANS, TROUBLED DEBT RESTRUCTURINGS, AND REAL ESTATE AND OTHER ASSETS OWNED, NET $12,836 $11,262 ======= ======= AS A PERCENTAGE OF TOTAL ASSETS 0.61% 0.53% Interest Income(1) $ 175 $ 658 (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. 10
The following table illustrates the loan loss experience: Three months ended Year ended March 31, December 31, (Dollars in Thousands) 2002 2001 ------------------ ------------ BALANCE AT BEGINNING OF PERIOD $ 18,654 7,799 CHARGE OFFS: Residential real estate (63) (677) Commercial loans (312) (723) Consumer loans (447) (2,029) -------- -------- Total charge offs $ (822) (3,429) -------- -------- RECOVERIES: Residential real estate 5 33 Commercial loans 61 266 Consumer loans 300 567 -------- -------- Total recoveries $ 366 866 -------- -------- CHARGEOFFS, NET OF RECOVERIES (456) (2,563) PURCHASED RESERVE -- 8,893 PROVISION 1,300 4,525 -------- -------- BALANCE AT END OF PERIOD $ 19,498 18,654 ======== ======== RATIO OF NET CHARGE OFFS TO AVERAGE LOANS OUTSTANDING DURING THE PERIOD 0.03% 0.20% ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES March 31, 2002 December 31, 2001 --------------------------- -------------------------- Percent Percent of loans in of loans in (Dollars in thousands) Allowance category Allowance category - ---------------------- --------- ----------- --------- ----------- Residential first mortgage and loans held for sale $ 2,611 29.8% 2,722 31.5% Commercial real estate 6,163 29.4% 5,906 28.3% Other commercial 6,922 18.6% 6,225 18.0% Consumer 3,802 22.2% 3,801 22.2% ------- ----- ------- ----- Totals $19,498 100.0% 18,654 100.0% ======= ===== ======= ===== 8) Deposits The following table illustrates the amounts outstanding for deposits greater than $100,000 at March 31, 2002, according to the time remaining to maturity: Certificates Demand (Dollars in thousands) of Deposit Deposits Totals - ---------------------- ------------ -------- ------ Within three months .......... $33,280 311,467 344,747 Three to six months .......... 20,795 -- 20,795 Seven to twelve months ....... 22,872 -- 22,872 Over twelve months ........... 10,767 -- 10,767 ------- ------- ------- Totals .................... $87,714 311,467 399,181 ======= ======= ======= 11
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: March 31, December 31, (Dollars in thousands) 2002 2001 --------- ------------ FHLB Advances Amount outstanding at end of period ........ $373,985 367,295 Average balance ............................ $368,352 349,023 Maximum outstanding at any month-end ....... $373,985 416,222 Weighted average interest rate ............. 4.61% 5.24% Repurchase Agreements: Amount outstanding at end of period ........ $ 31,823 32,585 Average balance ............................ $ 35,124 27,375 Maximum outstanding at any month-end ....... $ 41,113 37,814 Weighted average interest rate ............. 1.80% 2.11% 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 March 31, 2002: CONSOLIDATED Tier 1 (Core) Tier 2 (Total) Leverage (Dollars in thousands) Capital Capital Capital - ---------------------- ------------- -------------- -------- GAAP Capital ...................................... $ 182,506 182,506 182,506 Less: Goodwill and intangibles .................... (41,387) (41,387) (41,387) Accumulated other comprehensive gain on AFS securities ........................ (1,250) (1,250) (1,250) Plus: Allowance for loan losses ................... -- 16,600 -- Trust preferred securities .................... 35,000 35,000 35,000 ----------- ----------- ----------- Regulatory capital computed ....................... $ 174,869 191,469 174,869 =========== =========== =========== Risk weighted assets .............................. $ 1,394,020 1,394,020 =========== Total average assets .............................. 2,036,631 =========== Capital as % of defined assets .................... 12.54% 13.74% 8.59% Regulatory "well capitalized" requirement ......... 6.00% 10.00% 5.00% ----------- ----------- ----------- Excess over "well capitalized" requirement ........ 6.54% 3.74% 3.59% =========== =========== =========== 12
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 ended March 31, ------------------------- Dollars in thousands 2002 2001 - -------------------- ------- ------- Net earnings .................................................... $ 6,748 3,914 Unrealized holding (loss) gain arising during the period ........ (834) 4,212 Transfer from held-to-maturity .................................. -- -- Tax expense ..................................................... 328 (1,665) ------- ------- Net after tax ....................................... (506) 2,547 Reclassification adjustment for gains included in net income ....................................... -- 64 Tax expense ..................................................... -- (25) ------- ------- Net after tax ....................................... -- 39 Net unrealized (loss) gain on securities ............ (506) 2,586 ------- ------- Total comprehensive earnings .................... $ 6,242 6,500 ======= ======= 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, nonbank units, and eliminations of transactions between segments. 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. Three months ended and as of March 31, 2002 --------------------------------------------------------------- First Mountain (Dollars in thousands) Glacier Security Western West Big Sky - ---------------------- ------- -------- ------- -------- ------- Revenues from external customers $ 9,157 8,482 6,852 5,950 3,219 Intersegment revenues 101 7 6 -- -- Expenses 6,988 6,620 5,662 5,331 2,608 Intercompany eliminations -- -- -- -- -- -------- -------- -------- -------- --------- Net income $ 2,270 1,869 1,196 619 611 ======== ======== ======== ======== ========= Total Assets $476,815 434,346 392,493 345,861 166,766 ======== ======== ======== ======== ========= Total Valley Whitefish Other Consolidated -------- -------- -------- ------------ Revenues from external customers 3,147 2,055 65 38,927 Intersegment revenues 19 -- 8,873 9,006 Expenses 2,616 1,594 760 32,179 Intercompany eliminations -- -- (9,006) (9,006) -------- -------- -------- --------- Net income 550 461 (828) 6,748 ======== ======== ======== ========= Total Assets 165,601 117,891 (16,218) 2,083,555 ======== ======== ======== ========= 13
Three months ended and as of March 31, 2001 ---------------------------------------------------------------- First Mountain (Dollars in thousands) Glacier Security Western West Big Sky - ---------------------- -------- -------- -------- -------- -------- Revenues from external customers $ 9,487 5,068 6,280 3,716 1,714 Intersegment revenues 311 10 -- 143 -- Expenses 8,173 4,098 5,480 3,694 1,548 Intercompany eliminations -- -- -- -- -- -------- -------- -------- -------- --------- Net income $ 1,625 980 800 165 166 ======== ======== ======== ======== ========= Total Assets $462,992 212,027 916,113 308,467 77,955 ======== ======== ======== ======== ========= Total Valley Whitefish Other Consolidated ------ --------- ----- ------------ Revenues from external customers 2,037 1,974 226 30,502 Intersegment revenues 31 3 5,244 5,742 Expenses 1,741 1,616 238 26,588 Intercompany eliminations -- -- (5,742) (5,742) -------- -------- -------- --------- Net income 327 361 (510) 3,914 ======== ======== ======== ========= Total Assets 86,992 91,224 (22,991) 2,132,779 ======== ======== ======== ========= 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. Three Months Ended March 31, 2002 vs. 2001 (Dollars in Thousands) Increase (Decrease) due to: ---------------------------------- INTEREST INCOME Volume Rate Net ------- ------- ------- Real Estate Loans $ 1,676 (527) 1,149 Commercial Loans 4,594 (2,539) 2,055 Consumer and Other Loans 1,711 (950) 761 Investment Securities 4,193 (1,455) 2,738 ------- ------- ------- Total Interest Income 12,174 (5,471) 6,703 NOW Accounts 192 (299) (107) Savings Accounts 258 (351) (93) Money Market Accounts 1,165 (1,823) (658) Certificates of Deposit 2,350 (2,784) (434) FHLB Advances 1,867 (1,293) 574 Other Borrowings and Repurchase Agreements 402 (246) 156 ------- ------- ------- Total Interest Expense 6,234 (6,796) (562) ------- ------- ------- NET INTEREST INCOME $ 5,940 1,325 7,265 ======= ======= ======= 14
14) Average Balance Sheet The following schedule 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. AVERAGE BALANCE SHEET For the Three months ended 3-31-02 For the year ended 12-31-01 ------------------------------------- ---------------------------------- (Dollars in Thousands) Interest Average Interest Average Average and Yield/ Average and Yield/ ASSETS Balance Dividends Rate Balance Dividends Rate ------------ --------- ------- ---------- --------- ------- Real Estate Loans $ 402,041 7,838 7.80% $ 428,999 34,012 7.93% Commercial Loans 619,317 11,432 7.49% 556,907 48,292 8.67% Consumer and Other Loans 292,149 5,813 8.07% 292,732 25,528 8.72% ------------ ------- ---------- ------- Total Loans 1,313,507 25,083 7.74% 1,278,638 107,832 8.43% Investment Securities 590,430 7,995 5.42% 501,927 30,088 5.99% ------------ ------- ---------- ------- Total Earning Assets 1,903,937 33,078 6.95% 1,780,565 137,920 7.75% ------- ------- Non-Earning Assets 165,708 165,687 ------------ ---------- TOTAL ASSETS $ 2,069,645 $1,946,252 ============ ========== LIABILITIES AND STOCKHOLDERS' EQUITY NOW Accounts $ 201,484 215 0.43% $ 183,399 1,758 0.96% Savings Accounts 123,398 242 0.79% 102,736 1,855 1.81% Money Market Accounts 332,262 1,713 2.09% 287,150 9,575 3.33% Certificates of Deposit 525,475 5,272 4.07% 552,469 29,504 5.34% FHLB Advances 368,352 4,185 4.61% 349,023 18,280 5.24% Repurchase Agreements and Other Borrowed Funds 76,621 1,084 5.73% 66,658 4,574 6.86% ------------ ------- ---------- ------- Total Interest Bearing Liabilities 1,627,592 12,711 3.17% 1,541,435 65,546 4.25% ------- ------- Non-interest Bearing Deposits 228,533 216,238 Other Liabilities 30,646 27,847 ------------ ---------- Total Liabilities 1,886,771 1,785,520 ------------ ---------- Common Stock 170 157 Paid-In Capital 167,750 152,420 Retained Earnings 11,461 5,929 Accumulated Other Comprehensive Earnings (Loss) 3,493 2,226 ------------ ---------- Total Stockholders' Equity 182,874 160,732 ------------ ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,069,645 $1,946,252 ============ ========== NET INTEREST INCOME $20,367 $72,374 ======= ======= NET INTEREST SPREAD 3.78% 3.49% NET INTEREST MARGIN ON AVERAGE EARNING ASSETS 4.28% 4.06% RETURN ON AVERAGE ASSETS 1.30% 1.11% RETURN ON AVERAGE EQUITY 14.76% 13.49% 15) Recently Issued Accounting Standards In July 2001, the Financial Accounting Standards Board (FASB) issued Statement 141, Business Combinations, and Statement 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 15
well as all purchase method 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. Statement 142 requires 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. However, goodwill recognized in connection with a branch acquisition will continue to be subject to provisions of Statement 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions. Statement 142 also requires 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 Statement 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Company adopted the provisions of Statement 141 immediately, and Statement 142 effective January 1, 2002. Statement 141 requires 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. The Company is 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 (March 31, 2002). In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company is required to test the intangible asset for impairment in accordance with the provisions of Statement 142 within the first interim period. Any impairment loss would 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. The Company evaluated its existing intangible assets and goodwill as required by Statement 142, and determined that no adjustments are required at this time. In connection with the transitional goodwill impairment evaluation, Statement 142 requires 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 (June 30, 2002) 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 (January 1, 2002). This second step is required to be completed as soon as possible, but no later than the end of the year of adoption (December 31, 2002). Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Company's consolidated statements of operations. 16
The following table sets forth information regarding the Company's core deposit intangibles, amortizable goodwill, and mortgage servicing rights: As of March 31, 2002 -------------------------------------------------------------- Core Deposit Amortizable Mortgage (Dollars in thousands) Intangible Goodwill Servicing Rights(1) Total - ---------------------- ------------ ----------- ------------------- ----- Gross carrying value $ 9,836 20,489 Accumulated Amortization (1,936) (1,242) ------- ------ Net carrying value $ 7,900 19,247 2,188 29,335 ======= ====== AGGREGATE AMORTIZATION EXPENSE For the three months ended March 31, 2002 $ 361 249 91 701 ESTIMATED AMORTIZATION EXPENSE For the year ended December 31, 2002 $ 1,439 995 294 2,728 For the year ended December 31, 2003 1,219 995 266 2,480 For the year ended December 31, 2004 1,011 995 260 2,266 For the year ended December 31, 2005 847 995 253 2,095 For the year ended December 31, 2006 779 995 246 2,020 (1) Gross carrying value and accumulated amortization are not readily available At March 31, 2002, the Company's goodwill totaled $33.487 million, of which $14.240 million represents goodwill that is no longer being amortized as of January 1, 2002 pursuant to Statement 142. The changes in the carrying amount of goodwill for the three months ended March 31, 2002 are as follows. Balance Goodwill Amortization Balance At Adjustments for three months At (Dollars in thousands) 12/31/2001 2002 ended 3/31/02 3/31/2002 - ---------------------- ---------- ----------- ---------------- --------- Parent $ 2,151 -- -- 2,151 Glacier Bank 4,074 9 (29) 4,054 First Security 3,796 -- -- 3,796 Western 4,193 217 -- 4,410 Mountain 16,818 -- (220) 16,598 Big Sky 1,752 -- -- 1,752 Valley 726 -- -- 726 Whitefish -- -- -- -- ------- ------- ------- ------- $33,510 226 (249) 33,487 ======= ======= ======= ======= 17
The impact of the adoption of Statement 142 on earnings is as follows: For the Three Months Ended March 31, --------------------------- (Dollars in thousands) 2002 2001 - ---------------------- ------ ----- Reported net income $6,748 3,914 Add back goodwill amortization, net of tax -- 80 ------ ----- Adjusted net income $6,748 3,994 ====== ===== For the Three Months Ended March 31, ---------------------------------------------------------------------- 2002 2001 ------------------------------ ------------------------------ Basic EPS Diluted EPS Basic EPS Diluted EPS --------- ----------- --------- ----------- Reported net income $0.40 0.39 0.30 0.29 Add back goodwill amortization, net of tax -- -- 0.01 -- ----- ----- ----- ----- Adjusted net income $0.40 0.39 0.31 0.29 ===== ===== ===== ===== As of March 31, 2002, the Company has identified its reporting units as its banking subsidiaries and has allocated goodwill accordingly. Because of the extensive effort needed to comply with adopting Statements 141 and 142, it is not practicable to reasonably estimate the full impact of adopting these Statements on the Company's consolidated financial statements at the date of this report, except that upon adoption the Company does not anticipate any significant adjustments to the useful lives or residual values of its intangible assets. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial Condition This section discusses the changes in Statement of Financial Condition items from March 31, 2002 to March 31, 2001. March 31, -------------------------- ASSETS ($ IN THOUSANDS) 2002 2001 $ change % change - ----------------------- ----------- --------- -------- -------- Cash on hand and in banks $ 62,677 59,715 2,962 5.0% Investment securities and interest bearing deposits 618,475 554,105 64,370 11.6% Loans: Real estate 387,659 505,840 (118,181) -23.4% Commercial and Agricultural 625,287 563,269 62,018 11.0% Consumer 290,317 339,570 (49,253) -14.5% ----------- --------- ------- Total loans 1,303,263 1,408,679 (105,416) -7.5% Allowance for loan losses (19,498) (17,047) (2,451) 14.4% ----------- --------- ------- Total loans net of allowance for loan losses 1,283,765 1,391,632 (107,867) -7.8% ----------- --------- ------- Other assets 118,638 127,327 (8,689) -6.8% ----------- --------- ------- Total Assets $ 2,083,555 2,132,779 (49,224) -2.3% =========== ========= ======= 18
Since March 31, 2001 total assets have decreased $49 million, or 2 percent, to $2.084 billion. The sale of six north central Montana branches in June of 2001 reduced assets by $82 million. After adjusting for the branch sale, assets have increased $33 million, or 2 percent. Total loans, net of the reserve for loan losses, have decreased $108 million of which $22 million was from the branch sale. With lower interest rates during the past year a large number of real estate loans have been refinanced, which coupled with our decision to sell the majority of the real estate loan production, has resulted in a reduction in real estate loans of $118 million. Commercial loans have increased $62 million and continue to be the lending focus. Consumer loans have declined $49 million with a significant portion of the decline attributed to the runoff in the WesterFed dealer originated consumer loans. We have discontinued the origination and purchase of these loan types and are focusing on home-equity loans for the consumer loan portfolio. Investment securities, including Federal Home Loan Bank and Federal Reserve Bank stock, have increased $64 million offsetting some of the reduction in loans. The amount of loans serviced for others on March 31, 2002 was approximately $278 million. March 31, ------------------------------ LIABILITY CHANGE ($ IN THOUSANDS) 2002 2001 $ change % change ---------- --------- -------- -------- Non-interest bearing deposits $ 238,243 227,362 10,881 4.8% Interest-bearing deposits 1,188,634 1,278,419 (89,785) -7.0% Advances from Federal Home Loan Bank 373,985 355,457 18,528 5.2% Other borrowed funds 39,969 40,574 (605) -1.5% Other liabilities 25,218 37,254 (12,036) -32.3% Trust preferred securities 35,000 35,000 -- 0.0% ---------- --------- ------- Total liabilities $1,901,049 1,974,066 (73,017) -3.7% ========== ========= ======= Total deposits have decreased $79 million from the March 31, 2001 balances, with $81 million attributed to the branch sales. Non-interest bearing deposits are up $11 million, or 5 percent, and interest-bearing deposits are down $90 million, or 7 percent. Approximately $75 million of the decline in interest-bearing deposits is the result of the branch sale, with the remainder due primarily to pricing strategies in the low interest rate environment. Federal home loan bank advances, other borrowed funds, and repurchase agreements, have increased $18 million. Other liabilities which include accrued interest, dividends, and income taxes payable have declined $12 million due to the decline in interest bearing deposits, lower interest rates, and the payment of accrued expenses during 2001 associated with the acquisitions. Liquidity The objective of liquidity management is to maintain cash flows adequate to meet current and future needs for credit demand, deposit withdrawals, maturing liabilities and corporate operating expenses. This source of funds is generated by deposits, principal and interest payments on loans, sale of loans and securities, short and long-term borrowings, and net income. In addition, all seven banking subsidiaries are members of the FHLB. Accordingly, management of the Company has a wide range of versatility in managing the liquidity and asset/liability mix for each individual institution as well as the Company as a whole. As of March 31, 2002, the Company had $700 million of available FHLB line of which $374 million was utilized. During 2002, all seven financial institutions maintained liquidity levels in excess of regulatory requirements and deemed sufficient to meet operation cash needs. 19
STOCKHOLDERS' EQUITY March 31, -------------------------------------- ($ IN THOUSANDS EXCEPT PER SHARE DATA) 2002 2001 ----------- ----------- Common equity $ 181,256 $ 155,869 Net unrealized gain on securities 1,250 2,844 ----------- ----------- Total stockholders' equity $ 182,506 $ 158,713 =========== =========== Stockholders' equity to total assets 8.76% 7.44% Tangible equity to total assets 6.91% 5.31% Book value per common share $ 10.69 $ 9.88 Tangible book value per common share $ 8.26 $ 6.89 Allowance for Loan Loss and Non-Performing Assets March 31, December 31, March 31, CREDIT QUALITY INFORMATION ($ IN THOUSANDS) 2002 2001 2001 ---------- ------------ --------- Allowance for loan losses $ 19,498 18,654 17,047 Non-performing assets $ 12,766 11,275 7,892 Allowance as a percentage of non-performing assets 152.73% 165.45% 216.00% Non-performing assets as a percentage of total assets 0.61% 0.53% 0.37% Allowance as a percentage of total loans 1.50% 1.39% 1.21% Non-performing assets as a percentage of total assets at March 31, 2002 were .61 percent versus .37 percent at the same time last year, which compares to the Peer Group average of .59 percent at December 31, 2001, the most recent information available. The reserve for loan losses was 153 percent of non-performing assets at March 31, 2002, down from 216 percent a year ago. Three credits are the primary reason for the increase in non-performing assets, and the Company will continue to work diligently to improve this area. With the continuing change in loan mix from residential real estate to commercial and consumer loans, which historically have greater credit risk, the Company has increased the balance in the reserve for loan losses account. The reserve balance has increased $2.451 million from March 31, 2001, or 14 percent, to $19.498 million, which is 1.50 percent of total loans outstanding, up from 1.21 percent a year ago and 1.39 percent at December 31, 2001. The first quarter provision expense for loan losses was $1.300 million, up from $585 thousand during the same quarter in 2001. 20
Results of Operations -- The three months ended March 31, 2002 compared to the three months ended March 31, 2001. REVENUE SUMMARY Three months ended March 31, ----------------------------------------------- ($ IN THOUSANDS) 2002 2001 $ change % change ------- ------ -------- -------- Net interest income $20,367 13,102 7,265 55.4% Fees and other revenue: Service charges and fees 4,006 3,136 870 27.7% Gain on sale of loans 1,097 467 630 134.9% Other income 746 524 222 42.4% ------- ------- ------ Total non-interest income 5,849 4,127 1,722 41.7% ------- ------- ------ Total revenue $26,216 17,229 8,987 52.2% ======= ======= ====== Net interest margin 4.39% 4.11% ======= ======= Net Interest Income Net interest income for the quarter increased $7.265 million, or 55 percent, over the same period in 2001. The WesterFed, and Idaho and Utah branch acquisitions were completed late in the first quarter of 2001 and had limited impact on net interest income in that quarter. The larger asset base in 2002 and an increase in the net interest margin as a percentage of earning assets, on a tax equivalent basis, from 4.1 percent in 2001 to 4.4 percent in 2002 contributed to this increase in net interest income. Non-interest Income Fee income increased $870 thousand, or 28 percent higher in the first quarter of 2002 than the same quarter in 2001. Gain on sale of loans increased $630 thousand, or 135 percent, and other income was up $222 thousand. Account volume increases and strong mortgage origination activity continued to drive revenue growth in the first quarter. NON-INTEREST EXPENSE SUMMARY Three months ended March 31, ------------------------------------------------- ($ IN THOUSANDS) 2002 2001 $ change % change ------- ----- -------- -------- Compensation and employee benefits $ 7,782 5,257 2,525 48.0% Occupancy and equipment expense 2,301 1,459 842 57.7% Outsourced data processing 446 261 185 70.9% Core deposit intangible amortization 361 168 193 114.9% Goodwill amortization (a) 249 224 25 11.2% Other expenses 3,475 3,146 329 10.5% ------- ------ ----- Total non-interest expense $14,614 10,515 4,099 39.0% ------- ------ ----- (a) 2001 amortization would have been $97 thousand if current accounting rules for goodwill amortization would have been in place. Non-interest Expense Non-interest expense increased by $4.099 million, or 39 percent, over the same quarter of 2001. The impact of the first quarter 2001 acquisitions along with normal cost increases are the reasons for the 2002 increase. Included in the 2001 total is $406 thousand in merger and conversion expense. Intangible asset amortization in the form of 21
core deposit and goodwill was $361 thousand and $249 thousand, respectively, which is an increase of $218 thousand over the prior year. 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 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 December 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 0.77% -3.20% Estimated increase (decrease) in net interest income $ 627 (2,607) 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 22
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 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. May 14, 2002 /s/Michael J. Blodnick President/CEO May 14, 2002 /s/James H. Strosahl Executive Vice President/CFO 23