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1 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, 1997 [ ] 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 G L A C I E R B A N C O R P , I N C. ------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 81-0468393 - ------------------------------- ------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) P.O. Box 27; 202 Main Street, Kalispell, Montana 59903-0027 - -------------------------------------------------------------------------------- (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 27, 1997, was 6,818,263. No preferred shares are issued or outstanding. 1
2 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, 1997, December 31, and September 30, 1996.......................3 Consolidated Statements of Operations - Three and nine months ended September 30, 1997 and 1996.......................4 Consolidated Statements of Cash Flows - Nine months ended September 30, 1997 and 1996.................................5 Notes to Consolidated Financial Statements....................................6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations ......................11 PART II. OTHER INFORMATION ............................................................15 SIGNATURES .............................................................................15 2
3 GLACIER BANCORP, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited - dollars in thousands except per share data) Sept 30, Dec 31, Sept 30, 1997 1996 1996 --------- --------- --------- Assets: Cash on hand and in banks....................................................... 26,972 24,666 21,546 Federal funds sold.............................................................. 325 1,483 5,023 Interest bearing cash deposits.................................................. 3,875 1,000 2,545 --------- --------- --------- Cash and cash equivalents................................................... 31,172 27,149 29,114 --------- --------- --------- Investments: Investment securities, held-to-maturity..................................... 13,060 16,410 16,955 Investment securities, available-for-sale................................... 36,644 42,989 34,613 Mortgaged backed securities, held-to-maturity............................... 3,191 4,045 3,623 Mortgaged backed securities, available-for-sale............................. 49,794 42,061 44,182 --------- --------- --------- Total Investments...................................................... 102,689 105,505 99,373 --------- --------- --------- Net loans receivable: Real estate loans........................................................... 204,644 198,607 200,774 Commercial Loans............................................................ 112,041 100,070 94,096 Installment and other loans................................................. 98,891 91,248 89,591 Allowance for losses........................................................ (3,481) (3,284) (3,030) --------- --------- --------- Total Loans, net....................................................... 412,095 386,641 381,431 --------- --------- --------- Premises and equipment, net..................................................... 11,524 11,292 10,771 Real estate and other assets owned.............................................. 120 410 394 Federal Home Loan Bank of Seattle stock, at cost................................ 10,118 8,586 8,211 Federal Reserve stock, at cost.................................................. 340 340 280 Accrued interest receivable..................................................... 3,643 3,473 3,259 Goodwill, net................................................................... 1,403 1,526 1,568 Other assets.................................................................... 865 1,070 1,019 --------- --------- --------- $573,968 545,992 535,420 ========= ========= ========= Liabilities and stockholders' equity: Deposits - interest bearing..................................................... $276,647 257,409 260,388 Deposits - non-interest bearing................................................. 70,433 64,330 61,968 Advances from Federal Home Loan Bank of Seattle................................. 126,712 143,289 126,326 Securities sold under agreements to repurchase.................................. 17,185 9,791 12,547 Other borrowed funds............................................................ 12,017 5,202 10,936 Accrued interest payable........................................................ 2,031 799 1,845 Advance payments by borrowers for taxes and insurance........................... 2,543 940 2,471 Current income taxes............................................................ 136 0 0 Deferred income taxes........................................................... 1,917 1,446 887 Other liabilities............................................................... 6,544 10,409 7,768 Minority Interest............................................................... 471 429 405 --------- --------- --------- Total liabilities........................................................... 516,636 494,044 485,541 --------- --------- --------- Common stock, $.01 par value per share, 12,500,000 shares authorized (1) 69 69 67 Paid-in capital................................................................. 34,716 34,548 33,766 Retained earnings - substantially restricted.................................... 22,700 18,392 17,808 Treasury stock at cost (2)...................................................... (1,066) (1,066) (1,066) Net unrealized gain (loss) on securities available-for-sale..................... 913 5 (696) --------- --------- --------- Total stockholders' equity.................................................. 57,332 51,948 49,879 --------- --------- --------- $573,968 545,992 535,420 ========= ========= ========= Book value per share........................................................ $8.41 7.65 7.40 ========= ========= ========= (1) Number of shares outstanding adjusted for three for two stock split in 1997. (1) Total shares outstanding at end of period 6,816,066 6,793,664 6,738,039 ========= ========= ========= (2) Treasury Shares 85,890 85,890 85,890 ========= ========= ========= 3
4 GLACIER BANCORP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited - $ in thousands except per share data) Three months ended Nine months ended -------------------------------- -------------------------------- Sept. 30, 1997 Sept. 30, 1996 Sept. 30, 1997 Sept. 30, 1996 -------------- -------------- -------------- -------------- INTEREST INCOME: Real estate loans ............................. $ 4,144 4,030 12,200 11,878 Commercial loans .............................. 2,735 2,311 7,730 6,623 Consumer and other loans ...................... 2,405 2,181 6,938 6,135 Mortgage backed securities .................... 917 857 2,681 2,407 Investments ................................... 1,006 1,125 3,154 3,425 --------- --------- --------- --------- Total interest income ................... 11,207 10,504 32,703 30,468 --------- --------- --------- --------- INTEREST EXPENSE: Deposits ...................................... 2,822 2,620 8,266 7,598 Advances ...................................... 1,885 1,836 5,731 5,366 Repurchase agreements ......................... 255 213 683 641 Other borrowed funds .......................... 83 54 189 111 --------- --------- --------- --------- Total interest expense .................. 5,045 4,723 14,869 13,716 --------- --------- --------- --------- NET INTEREST INCOME ............................... 6,162 5,781 17,834 16,752 Provision for loan losses...................... 189 249 561 464 --------- --------- --------- --------- Net Interest Income after provision for loan losses 5,973 5,532 17,273 16,288 --------- --------- --------- --------- NON-INTEREST INCOME: Loan fees and service charges ................. 1,970 1,898 5,492 5,330 Gains (Losses) on sale of investments ......... 20 37 20 37 Other income .................................. 150 210 515 745 --------- --------- --------- --------- Total fees and other income .............. 2,140 2,145 6,027 6,112 --------- --------- --------- --------- NON-INTEREST EXPENSE: Compensation, employee benefits and related expenses ................... 2,341 2,192 6,882 6,340 Occupancy expense ............................. 495 430 1,432 1,215 Data processing expense ....................... 194 154 579 432 Other expenses ................................ 1,395 2,455 3,931 4,948 Minority interest ............................. 19 13 49 49 --------- --------- --------- --------- Total non-interest expense ............... 4,444 5,244 12,873 12,984 --------- --------- --------- --------- EARNINGS BEFORE INCOME TAXES ...................... 3,669 2,433 10,427 9,416 Federal and state income tax expense .............. 1,351 934 3,829 3,688 --------- --------- --------- --------- NET EARNINGS ...................................... 2,318 1,499 6,598 5,728 ========= ========= ========= ========= Earnings per common share (1) ..................... $ 0.34 0.22 0.97 0.85 Dividends declared per common share (1) ........... 0.12 0.11 0.35 0.31 Return on average assets (annualized) ............. 1.62% 1.15% 1.57% 1.47% Return on beginning equity (annualized) ........... 16.77% 12.49% 16.93% 16.31% Weighted average shares outstanding (1) ........... 6,812,937 6,687,242 6,804,001 6,759,342 (1) Adjusted for three for two stock split in 1997 4
5 GLACIER BANCORP, INC. Consolidated Statements of Cash Flows Nine months ended Sept. 30 (dollars in thousands) 1997 1996 ---------- ------- OPERATING ACTIVITIES: Net Earnings ......................................................... $ 6,598 5,728 Adjustments to reconcile Net Earnings to Net Cash Provided by Operating Activities: Provision for loan losses .......................................... 561 464 Depreciation of premises and equipment ............................. 617 614 Amortization of goodwill ........................................... 123 126 Loss (gain) on sale of investments ................................. 20 37 Amortization of investment securities premiums and discounts, net .. 105 42 Net decrease in deferred income taxes .............................. (118) (134) Net (increase) decrease in interest receivable ..................... (170) 94 Net increase in interest payable ................................... 1,232 1,178 Net increase (decrease) in current income taxes .................... 136 (544) Net (increase) decrease in other assets ............................ 205 (215) Net increase (decrease) in other liabilities and minority interest . (3,823) 756 FHLB stock dividends ............................................... (521) (435) NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES ................ 4,965 7,711 ------- ------- INVESTING ACTIVITIES: Proceeds from maturities and prepayments of investment securities available-for-sale .................................... 18,812 16,913 Purchases of investment securities available-for-sale ................ (18,838) (28,529) Proceeds from maturities and prepayments of investment securities held-to-maturity ...................................... 4,214 1,654 Purchases of investment securities held-to-maturity .................. 0 (995) Principal collected on installment and commercial loans .............. 53,306 63,913 Installment and commercial loans originated or acquired .............. (75,075) (98,462) Proceeds from sales of commercial loans .............................. 1,794 13,831 Principal collections on mortgage loans .............................. 35,116 38,782 Mortgage loans originated or acquired ................................ (82,699) (95,735) Proceeds from sales of mortgage loans ................................ 41,546 49,039 Net proceeds from sales (acquisition) of real estate owned ........... 290 (342) Net purchase of FHLB and FRB stock ................................... (1,011) (421) Net addition of premises and equipment ............................... (849) (1,306) Acquisition of minority interest ..................................... (3) (109) ------- ------- NET CASH USED BY INVESTING ACTIVITIES ........................... (23,397) (41,767) ------- ------- FINANCING ACTIVITIES: Net increase in deposits ............................................. $ 25,341 30,771 Net increase (decrease) in FHLB advances and other borrowed funds .... (9,762) 15,048 Net increase in advance payments from borrowers for taxes and insurance ...................................................... 1,603 1,399 Net increase (decrease) in securities sold under repurchase agreements 7,394 (8,258) Cash dividends paid to stockholders .................................. (2,361) (1,567) Treasury stock purchased ............................................. 0 (192) Proceeds from exercise of stock options and additional shares issued . 239 640 ------- ------- NET CASH PROVIDED BY FINANCING ACTIVITIES ........................ 22,454 37,841 ------- ------- NET INCREASE IN CASH AND CASH EQUIVALENTS ........................ 4,022 3,785 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ..................... 27,149 25,329 ------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ........................... $ 31,172 29,114 ======== ====== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for: Interest ........................... $ 13,637 12,538 Income taxes ....................... $ 3,693 4,232 5
6 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS: 1) Basis of Presentation: In the opinion of Management, the accompanying unaudited consolidated statements contain all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of Glacier Bancorp Inc's (the "Company") Financial Condition as of September 30, 1997, December 31, and September 30, 1996 and the Results of Operations for the nine and three months ended September 30, 1997 and 1996 and the Statements of Cash Flows for the nine months ended September 30, 1997 and 1996. The First Security Bank of Missoula was acquired on December 31, 1996 through an exchange of stock with Missoula Bancshares, Inc. formerly the parent company of First Security Bank. The pooling of interest accounting method is being used for this merger transaction. Under this method, financial information for each of the periods presented include the combined companies as though the merger had occurred prior to the earliest date presented. 2) Organizational Structure: The Company is the parent company for five subsidiaries: Glacier Bank (the "Savings Bank"); Glacier National Bank (formerly the First National Bank of Whitefish) ("Whitefish"); First National Bank of Eureka ("Eureka"); First Security Bank of Missoula (Missoula) and Community First, Inc. (CFI). At September 30, 1997, the Company owned 100% of the Savings Bank, Missoula and CFI; 94% of Whitefish and 93% of Eureka. CFI provides full service brokerage services through Robert Thomas Securities, Inc. The following abbreviated organizational chart illustrates the various relationships: Glacier Bancorp, Inc. (Parent Holding Company) Glacier First Security Bank Bank of Missoula (Savings Bank) (Commercial bank) Community First Glacier National Bank Inc, (Brokerage services) (Commercial bank) First National Bank of Eureka (Commercial bank) 6
7 3) Stock Split: The company completed a three-for-two stock split May 23, 1997. As a result, all per share amounts from time periods preceding this date have been restated to illustrate the effect of the stock split. Any fractional shares were paid in cash. 4) Computation of Earnings Per Share: Earnings per common share were computed by dividing net income by the weighted average number of shares of common stock outstanding during the period presented. Stock options are considered common stock equivalents, but are excluded from earnings per share computations due to immateriality. 5) Ratios: Return on Average Assets (ROAA) was calculated based on the average of the total assets for the period. Return on Beginning Equity (ROBE) was calculated based on the Shareholders' Equity (Capital) at the beginning of each period presented. 6) Cash Dividend Declared: On September 26, 1997, the Board of Directors declared a $.12 per share quarterly cash dividend to stockholders of record on October 10, 1997, payable on October 24, 1997. 7) Investments: A comparison of the amortized cost and estimated fair value of the Company's investment securities is as follows: INVESTMENT SECURITIES AS OF SEPTEMBER 30, 1997 Gross Unrealized Amortized ---------------- Estimated (dollars in thousands) Cost Gains Losses Fair Value ---------- ----- ------ ---------- HELD TO MATURITY: U.S. Government and Federal Agencies $ 10,024 37 (10) 10,051 State, Local Government and other issues 3,036 97 (1) 3,132 Mortgage-backed securities 3,191 16 (6) 3,201 --------- ----- ---- ------ Total Held to Maturity Securities $ 16,251 150 (17) 16,384 ========= ===== ==== ====== AVAILABLE FOR SALE: U.S. Government and Federal Agencies $ 14,130 37 (53) 14,114 State, Local Government and other issues 21,712 818 0 22,530 Mortgage-backed securities 21,256 605 (48) 21,813 Real Estate Mortgage Investment Conduit 27,849 301 (169) 27,981 --------- ----- ---- ------ Total Available for Sale securities $ 84,947 1,761 (270) 86,438 ========= ===== ==== ====== 7
8 INVESTMENT SECURITIES AS OF DECEMBER 31, 1996 Gross Unrealized Amortized ---------------- Estimated (dollars in thousands) Cost Gains Losses Fair Value HELD TO MATURITY: U.S. Government and Federal Agencies $ 12,971 16 (81) 12,906 State, Local Government and other issues 3,439 77 (1) 3,515 Mortgage-backed securities 4,045 2 (32) 4,015 --------- --- ---- ------ Total Held to Maturity Securities $ 20,455 95 (114) 20,436 ========= === ==== ====== AVAILABLE FOR SALE: U.S. Government and Federal Agencies $ 27,480 50 (205) 27,325 State, Local Government and other issues 15,573 130 (39) 15,664 Mortgage-backed securities 24,319 534 (164) 24,689 Real Estate Mortgage Investment Conduit 17,684 0 (312) 17,372 --------- --- ---- ------ Total Available for Sale securities $ 85,056 714 (720) 85,050 ========= === ==== ====== 8) Consolidated Statements of Cash Flows: Cash equivalents include demand deposits at other financial institutions and short term certificates of deposit. 9) Regulatory Capital Requirements - The Federal Reserve Board has adopted capital adequacy guidelines pursuant to which it assesses the adequacy of capital in supervising a bank holding company. The following table illustrates the Federal Reserve Boards capital adequacy guidelines and the Company's compliance with those guidelines as of September 30, 1997. Tier I (Core) Capital Tier II (Total) Capital Leverage Capital ----------------------- (dollars in thousands) $ % $ % $ % GAAP Capital ........................................... $ 57,332 $ 57,332 $ 57,332 Goodwill ............................................... (1,403) (1,403) (1,403) Net unrealized gains on securities available-for-sale ................................ (913) (913) (913) Allowance for loan losses .............................. -- 3,481 -- ----------- --------- -------- Regulatory capital computed............................. $ 55,016 $ 58,497 $ 55,016 =========== ========= ======== Capital as % of assets............................................... 16.09% 16.93% 9.59% Regulatory "well capitalized" requirement ........................... 6.00% 10.00% 5.00% ----- ----- ---- Excess over "well capitalized" requirement........................... 10.09% 6.93% 4.59% ===== ===== ==== Interest-Rate-Risk ("IRR") Component FDICIA requires each federal banking agency to revise its risk-based capital standards to ensure that they take adequate account of IRR, concentration of credit risk and the risks of nontraditional activities, as well as reflect the actual performance and expected risk of loss on multi-family residential loans. Since January of 1994, the OTS has included an IRR component to its risk-based capital standards. An association's measured IRR is the change that occurs in its Net Portfolio Value ("NPV") as a result of a 200 basis point increase or decrease in interest rates (whichever leads to the lower NPV) divided by the estimated economic value (present value) of its assets; NPV equals the present value of expected cash inflows from existing assets less the present value of expected cash outflows from existing liabilities, plus the present value of net expected cash inflows from 8
9 existing off-balance sheet contracts. A normal level of IRR is less than 2%. Only institutions whose measured IRR exceeds 2% must maintain an IRR component. An association must maintain capital of at least 8% of risk- weighted assets after the IRR component is deducted. In August of 1995, the Agencies adopted a joint final rule to revise their risk-based capital standards to ensure that they take adequate account of interest rate risk. As of September 1, 1995, when evaluating the capital adequacy of a bank, examiners from the Agencies consider exposure to declines in the economic value of the bank's capital due to changes in interest rates. A bank may be required to hold additional capital for IRR if it has significant exposure or a weak interest rate risk management process. Concurrent with the publication of this final rule, the Agencies proposed for comment a joint policy statement describing the process they will use to measure and assess a bank's interest rate risk. This joint policy statement was superseded by an updated Joint Policy Statement in June of 1996. Any impact the joint final rule and Joint Policy Statement may have on the National Banks or the State Bank cannot be predicted at this time. In addition, the Agencies published a joint final rule on September 6, 1996, amending their respective risk- based capital standards to incorporate a measure for market risk to cover all positions located in an institution's trading account and foreign exchange and commodity positions wherever located. This final rule took effect on January 1, 1997 and implements an amendment to the BASLE Capital Accord that sets forth a supervisory framework for measuring market risk. The final rule effectively requires banks and bank holding companies with significant exposure to market risk to measure that risk using their own internal value-at-risk model, subject to the parameters of the final rule, and to hold a sufficient amount of capital to support the institution's risk exposure. Qualified Thrift Lender - In order to avoid certain restrictions on their operations, all savings associations are required to meet a Qualified Thrift Lender ("QTL") test. The regulations require that institutions maintain a percentage of qualifying lending activity of at least 65% as measured monthly. The Savings Bank reported on its September 30, 1997 Thrift Financial Report QTL ratios of 76%, 74%, and 75% for July, August and September 1997. Whitefish, Eureka and Missoula do not have a similar requirement. Accounting for Transfers of Assets and Extinguishments of Liabilities In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (the "Statement"). This Statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings, and provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. This Statement amends SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," to clarify that a debt security may not be classified as held-to-maturity if it can be prepaid or otherwise settled in such a way that the holder of the security would not recover substantially all of its recorded investment. 9
10 This Statement also rescinded all previous guidance regarding the accounting for mortgage servicing rights and provides guidance for the capitalization of originated as well as purchased mortgage servicing rights and the measurement of impairment of those rights. This Statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996, and is to be applied prospectively. Earlier or retroactive application is not permitted. The Company adopted the provisions of SFAS No. 125 as of January 1, 1997. During the quarter ended September 30, 1997, $59,479 in servicing assets were recognized and $21,740 amortized. Year-to-date assets of $175,881, and amortization of $45,006 was recorded. The estimated fair value of the servicing assets was $779,000 at September 30, 1997 with a book value of $552,391. There was no activity or balance in the valuation allowance for impairment of recognized servicing assets during 1997. The fair value of the servicing assets was determined by stratification of the associated loan balances by rate, applying prepayment assumptions to each stratified group, and calculating a present value of resulting expected cash flows. Earnings Per Share In March 1997, the FASB issued SFAS No. 128, "Earnings Per Share" (the "Statement"). The Statement applies to entities with publicly held common stock or potential common stock and is effective for financial statements issued for periods ending after December 15, 1997. SFAS No. 128 replaces APB Opinion 15, "Earnings Per Share." Opinion 15 required that entities with simple capital structures present a single "earnings per common share" on the face of the income statement, whereas those with complex capital structures had to present both "primary" and "fully diluted" earnings per share ("EPS"). Primary EPS shows the amount of income attributed to each share of common stock if every common stock equivalent were converted into common stock. Fully diluted EPS considers common stock equivalents and all other securities that could be converted into common stock. SFAS No. 128 simplifies the computation of EPS by replacing the presentation of primary EPS with a presentation of basic EPS. The Statement requires dual presentation of basic and diluted EPS by entities with complex capital structures. Basic EPS includes no dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of securities that could share in the earnings of an entity, similar to fully diluted EPS. The Company has a simple capital structure, therefore minimal impact from SFAS No. 128 is expected. Disclosure of Information About Capital Structure In March 1997, the FASB issued SFAS No. 129, "Disclosure of Information About Capital Structure" (the "Statement"). The Statement applies to all entities and is effective for financial statements issued for periods ending after December 15, 1997. Statement No. 129 consolidates existing disclosure requirements. 10
11 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 December 31, 1996 to September 30, 1997. At September 30, 1997, total consolidated assets increased by $27,976,000, or 5.12%, over the December 31, 1996 level. This increase was primarily in loan growth of $25,454,000, an increase of 6.58%. Real Estate loans increased $6.0 million during the period, while commercial loans increased $12.0 million and Consumer loans increased $7.6 million. Loans sold to the secondary market amounted to $43.3 million and $62.9 million during the first nine months of 1997 and 1996, respectively. The amount of loans serviced for others on September 30, 1997 was $116.3 million. Total deposits increased nearly $25.3 million, with $19.2 million of the increase occurring in interest bearing deposits. Non-interest bearing deposits increased $6.1 million or 9.5%. Advances from the Federal Home Loan Bank ("FHLB") decreased $16.6 million while securities sold under repurchase agreements and other borrowed funds increased $7.4 million, and $6.8 million respectively. The OTS' minimum average liquidity requirement for the Savings Bank is 5.0%. For the three months ended September 30, 1997, the Savings Bank's liquidity percent age averaged 6.8%. The Savings Bank's principal source of funds are generated by deposits, payments on loans and securities, short and long term borrowings and net income. If there should ever be insufficient funds derived from these areas, the Savings Bank may borrow additional amounts from the FHLB, subject to regulatory limits. All four institutions are members of the FHLB at September 30, 1997. 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. The following table demonstrates the available FHLB lines of credit and the extent of utilization as of September 30, 1997: Available line Amount used Available -------------- ----------- ---------- The Savings Bank 145,605,000 97,906,000 47,699,000 Whitefish 8,493,000 5,450,000 3,043,000 Eureka 6,509,000 2,797,000 3,712,000 Missoula 13,949,000 1,427,000 12,522,000 Classified Assets and Reserves Non-performing assets, consisting of non-accrual loans, accruing loans 90 days or more overdue, and real estate and other assets acquired by foreclosure or deed-in-lieu thereof, net of related reserves, amounted to $1.4 million or .25% of total assets at September 30, 1997, as compared to $1.6 million, or .29% of total assets, at December 31, 1996. 11
12 September 30, 1997 December 31, 1996 ------------------ ----------------- Total Reserves for Loan and Real Estate Owned losses: $3.5 million $3.3 million Reserves as a percentage of Total Loans: .84% .85% Reserves as a percentage of Non-performing Assets: 244% 204% Impaired Loans As of September 30, 1997, there were no loans considered impaired as measured under SFAS No. 114 criterion. Interest income on impaired loans and interest recoveries on loans that have been charged off, is recognized on a cash basis after principal has been fully paid, or at the time a loan becomes fully performing per the terms of the loan. Minority Interest The Minority Interest on the consolidated statement of financial condition represents the minority stockholders' share in the Retained Earnings of the Company. These are shares of Eureka and Whitefish that are still outstanding. The Company has extended an offer to each minority stockholder notifying them that the Company would buy their shares at the current book value. As of September 30, 1997, the Company owns 46,900 shares of Whitefish and 46,439 shares of Eureka. The Company's ownership of Whitefish and Eureka is 94% and 93%, respectively. Results of Operations - The nine months ended 9/30/97 compared to the nine months ended 9/30/96. The following discussion pertains to the consolidated income for the Company. Net income of $6.598 million for the first nine months of 1997 was an increase of $212,000, or 3.3% over the $6.386 million, adjusted for the SAIF and merger expenses, in the same period in 1996. Earnings per share were $.97 for 1997 and $.94 in 1996. Return on average assets was 1.57% and 1.63% for 1997 and 1996, respectively, while the return on beginning equity was 16.93% and 18.19% for the same periods. Increased earnings from the net interest margin were somewhat offset by an increased provision for possible loan losses, and increased expenses from new office locations. Loan Loss Provision The provision for loan losses was $561,000, up from $464,000 during the same period in 1996, reflecting the increase in the volume of loans, and losses experienced. As discussed above the level of non-performing assets remains at a relatively low level compared to the peer group. Net Interest Income Net interest income for the nine months was $17.834 million, an increase of $1.082 million, or 6.46%, over 1996. More net earning assets, as discussed above, was the primary reason for this increase. The Company's net interest income is determined by its interest rate spread (i.e., the difference between the yields earned on its earning assets, and the rates paid on its interest-bearing liabilities) and the relative amounts of earning assets and interest-bearing liabilities. The following table sets forth information concerning the Company's interest rate spread at September 30, 1997 and 1996: 12
13 INTEREST RATE SPREAD One way to protect against interest rate volatility is to maintain a comfortable interest spread between yields on assets and the rates paid on interest bearing liabilities. As shown below, our net interest margin was unchanged in 1997 at 4.63%. Higher interest cost on deposits and borrowings, were somewhat offset by increased yield loans and investments. An increase in non-interest bearing liabilities, and asset growth resulted in significantly higher net interest income. Sept 30, [1] ----------------- FOR THE NINE MONTHS ENDED: 1997 1996 ---- ---- Combined weighted average yield on loans and investments [2].................... 8.51% 8.47% Combined weighted average rate paid on deposits and borrowings.................. 4.66% 4.58% Net interest spread............................................................. 3.85% 3.89% Net interest margin [3]......................................................... 4.63% 4.63% [1] Weighted averages are computed without the effect of compounding daily interest. [2] Includes dividends received on capital stock of the Federal Home Loan Bank. [3] The net interest margin (net yield on average interest earning assets) is interest income from loans and investments less interest expense from deposits, FHLB advances, and other borrowings, divided by the total amount of earning assets. Non-Interest Income Non-interest income decreased $85,000, or 1.4% from 1996. Loan fees and service charges on deposit accounts were up $162,000 while other income decreased by $230,000, primarily from a reduction in commissions on insurance sales, and a non-recurring $70,000 recovery in 1996. Gain on sale of investments was $17,000 below the amount recorded in 1996. Non-Interest Expense Non-interest expense increased by $950,000, or 8.0%, with the largest portion of the increase in compensation and employee benefits, which increased $542,000, or 8.6%. Data processing expenses increased $147,000, the result of increased volumes of loan and deposit accounts. Occupancy expense was also up substantially, $217,000, or 17.9%. Opening of the new branches, volume related increases, plus other normal increases resulted in these higher expenses. Income Taxes The effective combined federal and state tax rate was reduced from 39.1% in 1996 to 36.7% in 1997. Increased investment in tax free bonds was the primary reason for the reduced expense. Results of Operations - The three months ended 9/30/97 compared to the three months ended 9/30/96. The following discussion pertains to the consolidated income for the Company: Net income was $2.318 million, or $.34 per share, for the third quarter of 1997, compared with $1.499 million, or $.22 per share, for the same quarter of 1996. 1996 earnings were impacted by a one-time assessment to recapitalize the Federal Deposit Insurance Corporation (FDIC) Savings Association Insurance Fund (SAIF), and merger related expenses which resulted in a net earnings reduction of $658 thousand, or $.10 per share, adjusted for the three-for-two stock split in 1997. Return on average assets and return on beginning equity in the third quarter of 1997 were 1.62% and 16.77%, respectively, compared with returns of 1.66% and 17.98% for the same quarter of 1996 after adjustments for the SAIF and merger expenses. The lower return, as a percentage of assets, was the result of the sizeable asset growth of $38.548 million, or 7.2%. Stockholder equity at the beginning of the quarter was $6.6 million, or 13.6% greater than the third quarter of 1996. The 13
14 higher equity amount resulted in the reduced return on equity ratio. The capital level remains very strong at 10% of assets. Net Interest Income Net interest income for the quarter was $6.162 million, an increase of $381,000, or 6.66%, over the same period in 1996. More net earning assets was the primary reason for this increase. Loan balances have increased $30.7 million from September 30, 1996, an increase of 8.0%. All loan classifications have increased, with commercial loans up $17.9 million, or 19.1%, consumer loans up $9.3 million, or 10.4%, and real estate loans up $3.9 million, or 1.9%. Total investments including mortgage backed securities, increased $3.3 million or 3.3%. Total deposits increased $24.7 million, or 7.7%, with $8.5 million of the increase in non-interest bearing deposits. Federal Home Loan Bank advances, and other borrowed funds provided the balance of the funding for the increase in earning assets. Loan Loss Provisions and Non-Performing Assets The third quarter provision for loan losses was $189,000, down from $249,000 during the same quarter in 1996. Non-performing assets are at .35% of loans at September 30, 1997, well below the average of the Company's peer group which was .83% at June 30, 1997, the most recent information available. The reserve for loan losses was 244% of non-performing assets as of September 30, 1997. Non-interest Income Non-interest income decreased $5,000, or .2% from the third quarter of 1996. Loan fees and service charges on deposit accounts were up $72,000 while other income decreased by $60,000, primarily from a reduction in commissions on insurance sales. Gain on sale of investments was $17,000 below the amount recorded in 1996. Non-interest Expense Non-interest expense increased by $261,000, or 6.2%, over the third quarter of 1996, excluding the SAIF and merger expenses. The largest portion of the increase was in compensation and employee benefits which increased $149,000, or 6.8%. Data processing expenses increased $40,000 the result of increased volumes of loan and deposit accounts. Occupancy expense was also up substantially, $65,000, or 15.1%. Opening of four new branches, volume related increases, plus other normal increases resulted in these higher expenses. Income Taxes The effective tax rate was reduced from 38.3% in 1996 to 36.8% in 1997. Increased investment in tax free bonds was the primary reason for the reduced expense. Robert Thomas Securities, Inc. An agreement was entered into with Robert Thomas Securities, Inc. to provide full service brokerage and investment services in Glacier Bancorp, Inc. locations throughout Montana. This change will enhance service to our customers with the expansion of the number of investment brokers from one to five. Small Business Administration Loan (SBA) During the SBA fiscal year ended September 30, 1997, Glacier Bancorp, Inc. subsidiaries originated 11.5% of the total number of SBA loans made in the State of Montana. First Security Bank of Missoula was the top lender in the state, originating more than twice as many loans as the number two lender. Glacier Bank was the sixth largest originator during the period. 14
15 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There are no pending material legal proceedings to which the registrant or it's subsidiaries are a party. ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS ON 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 The following exhibits are filed as part of this report. 27 Financial Data Schedule (B) REPORTS ON FORM 8-K None filed during the quarter ended SEPTEMBER 30, 1997. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GLACIER BANCORP, INC. November 12, 1997 By /s/ MICHAEL J. BLODNICK Date --------------------------------------- Michael J. Blodnick Executive Vice President/COO November 12, 1997 By /s/ JAMES H. STROSAHL Date --------------------------------------- James H. Strosahl Senior Vice President/Chief Financial Officer 15
9 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 26,972 3,875 325 0 86,438 16,251 16,384 415,677 3,481 573,868 347,080 68,378 13,642 87,538 0 0 69 57,283 573,968 26,868 5,835 0 32,703 8,266 14,869 17,834 561 20 12,873 10,427 6,598 0 0 6,598 .97 .97 4.63 596 710 0 0 3,284 479 115 3,481 3,481 0 0