SEC Filing | Glacier Bancorp, Inc.

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 June 30, 1999 [ ] 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 July 29, 1999 was 9,535,287. 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 Condensed Statements of Financial Condition - June 30, 1999, December 31, and June 30, 1998 (unaudited) ........... 3 Consolidated Condensed Statements of Operations - Three months and six months ended June 30, 1999 and 1998 (unaudited) 4 Consolidated Condensed Statements of Cash Flows - Six months ended June 30, 1999 and 1998 (unaudited) .............. 5 Notes to Consolidated Condensed Financial Statements ................ 6 Item 2 - Management's Discussion and Analysis Of Financial Condition and Results of Operations ................... 11 Item 3 - Quantitative and Qualitative Disclosure about Market Risk ......... 17 PART II. OTHER INFORMATION ......................................................... 18 Signatures ......................................................................... 19 2

3 GLACIER BANCORP, INC. CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL CONDITION (Unaudited - $ in thousands except per share data) JUNE 30, DECEMBER 31, JUNE 30, 1999 1998 1998 ----------- ----------- ----------- ASSETS: Cash on hand and in banks ............................ $ 30,910 33,806 35,014 Federal funds sold ................................... 3,042 5,883 1,845 Interest bearing cash deposits ....................... 218 2,494 8,348 ----------- ----------- ----------- Cash and cash equivalents ..................... 34,170 42,183 45,207 ----------- ----------- ----------- Investments: Investment securities, held-to-maturity ....... 0 8,272 3,498 Investment securities, available-for-sale ..... 56,397 50,618 55,836 Mortgage backed securities, available-for-sale 132,134 46,596 46,655 ----------- ----------- ----------- Total investments ........................ 188,531 105,486 105,989 ----------- ----------- ----------- Net loans receivable: Real estate loans ............................. 199,900 215,271 218,473 Commercial Loans .............................. 231,746 194,321 185,300 Installment and other loans ................... 126,680 113,749 117,025 Allowance for losses .......................... (5,652) (5,133) (4,782) ----------- ----------- ----------- Total loans, net ......................... 552,674 518,208 516,016 ----------- ----------- ----------- Premises and equipment, net .......................... 17,674 17,382 16,065 Real estate and other assets owned ................... 264 151 348 Federal Home Loan Bank of Seattle stock, at cost ..... 13,650 12,366 11,867 Federal Reserve stock, at cost ....................... 1,430 1,219 1,067 Accrued interest receivable .......................... 4,576 4,348 4,204 Goodwill, net ........................................ 2,489 2,601 1,352 Other assets ......................................... 3,812 2,083 1,444 ----------- ----------- ----------- $ 819,269 706,027 703,559 =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY: Deposits - non-interest bearing ...................... $ 103,665 100,177 95,006 Deposits - interest bearing .......................... 367,268 375,667 360,533 Advances from Federal Home Loan Bank of Seattle ...... 202,241 124,886 136,476 Securities sold under agreements to repurchase ....... 49,113 17,239 18,784 Other borrowed funds ................................. 9,939 1,468 11,032 Accrued interest payable ............................. 2,675 2,278 2,406 Current income taxes ................................. 121 0 417 Deferred income taxes ................................ 891 1,601 1,877 Other liabilities .................................... 4,317 4,588 3,832 Minority interest .................................... 310 313 1,140 ----------- ----------- ----------- Total liabilities ............................. 740,540 628,217 631,503 ----------- ----------- ----------- Common stock, $.01 par value per share (1) ........... 95 95 93 Paid-in capital ...................................... 80,686 60,104 37,871 Retained earnings (deficit) - substantially restricted (312) 16,415 32,998 Accumulated other comprehensive earnings (loss) ...... (1,740) 1,196 1,094 ----------- ----------- ----------- Total stockholders' equity .................... 78,729 77,810 72,056 ----------- ----------- ----------- $ 819,269 706,027 703,559 =========== =========== =========== Book value per share .......................... $ 8.27 8.22 7.75 =========== =========== =========== Total shares outstanding at end of period (1) ............................... 9,525,360 9,460,210 9,295,399 (1) Number of shares outstanding adjusted for 10% stock dividend in 1998 and 1999. See accompanying notes to consolidated financial statements. 3

4 GLACIER BANCORP, INC. CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (unaudited - $ in thousands except per share data) Three months ended June 30, Six months ended June 30 - -------------------------------------------------- --------------------------- ------------------------ 1999 1998 1999 1998 ---------- ---------- ---------- ---------- INTEREST INCOME: Real estate loans .......................... $ 3,889 4,593 8,045 9,153 Commercial loans ........................... 4,718 4,017 9,103 7,732 Consumer and other loans ................... 2,744 2,794 5,364 5,602 Investment securities ...................... 2,739 2,060 4,639 4,217 ---------- ---------- ---------- ---------- Total interest income ................ 14,090 13,464 27,151 26,704 ---------- ---------- ---------- ---------- INTEREST EXPENSE: Deposits ................................... 3,365 3,668 6,813 7,221 Advances ................................... 2,250 2,065 4,082 4,178 Repurchase agreements ...................... 222 203 407 413 Other borrowed funds ....................... 162 72 184 132 ---------- ---------- ---------- ---------- Total interest expense ............... 5,999 6,008 11,486 11,944 ---------- ---------- ---------- ---------- NET INTEREST INCOME ............................... 8,091 7,456 15,665 14,760 Provision for loan losses .................. 350 551 672 786 ---------- ---------- ---------- ---------- Net Interest Income after provision for loan losses 7,741 6,905 14,993 13,974 ---------- ---------- ---------- ---------- NON-INTEREST INCOME: Fees and service charges ................... 2,478 2,380 4,958 4,785 Gains on sale of investments ............... 1 1 3 13 Other income ............................... 220 1,032 543 1,288 ---------- ---------- ---------- ---------- Total fees and other income ........... 2,699 3,413 5,504 6,086 ---------- ---------- ---------- ---------- NON-INTEREST EXPENSE: Compensation, employee benefits and related expenses ................ 3,119 3,036 6,167 5,842 Occupancy and equipment expense ............ 783 690 1,563 1,322 Other expenses ............................. 1,922 2,192 3,705 4,187 Minority interest .......................... 12 50 23 99 ---------- ---------- ---------- ---------- Total non-interest expense ............ 5,836 5,968 11,458 11,450 ---------- ---------- ---------- ---------- EARNINGS BEFORE INCOME TAXES ...................... 4,604 4,350 9,039 8,610 Federal and state income tax expense .............. 1,601 1,635 3,142 3,201 ---------- ---------- ---------- ---------- NET EARNINGS ...................................... $ 3,003 2,715 5,897 5,409 ========== ========== ========== ========== Basic earnings per share (1) ...................... 0.32 0.29 0.61 0.58 Diluted earnings per share (1) .................... 0.31 0.29 0.60 0.57 Dividends declared per share (1) .................. 0.15 0.11 0.29 0.21 Return on average assets (annualized) ............. 1.63% 1.58% 1.60% 1.57% Return on beginning equity (annualized) ........... 15.03% 16.04% 15.16% 15.98% Average outstanding shares - basic (1) ............ 9,520,719 9,255,828 9,500,307 9,226,401 Average outstanding shares - diluted (1) .......... 9,629,251 9,447,043 9,606,321 9,429,455 (1) Adjusted for stock dividends See accompanying notes to consolidated financial statements. 4

5 GLACIER BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited - $ in thousands) Six months ended June 30, - ---------------------------- ------------------------- 1999 1998 --------- --------- OPERATING ACTIVITIES: Net earnings ......................................................... $ 5,897 5,409 Adjustments to reconcile net earnings to net cash provided by operating activities: Mortgage loans held for sale originated or acquired ................ (63,048) (71,198) Proceeds from sales of mortgage loans held for sale ................ 70,340 67,223 Provision for loan losses .......................................... 672 786 Depreciation of premises and equipment ............................. 723 763 Amortization of goodwill ........................................... 112 66 Amortization of investment securities premiums and discounts, net .. 405 (73) Net decrease in deferred income taxes .............................. 249 31 Net (increase) decrease in accrued interest receivable ............. (228) 271 Net increase in accrued interest payable ........................... 397 590 Net increase in current income taxes ............................... 121 111 Net (increase) decrease in other assets ............................ (787) 453 Net (decrease) increase in other liabilities and minority interest (274) 896 FHLB stock dividends ............................................... (476) (412) --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES ....................... 14,103 4,916 --------- --------- INVESTING ACTIVITIES: Proceeds from maturities and prepayments of investments available-for-sale ............................................... 14,590 14,460 Purchases of investments available-for-sale .......................... (102,878) (5,826) Proceeds from maturities and prepayments of investments held-to-maturity ................................................. 0 7,406 Principal collected on installment and commercial loans .............. 103,875 73,226 Installment and commercial loans originated or acquired .............. (156,633) (114,162) Proceeds from sales of commercial loans .............................. 2,249 4,185 Principal collections on mortgage loans .............................. 62,433 47,566 Mortgage loans originated or acquired ................................ (54,354) (37,423) Net proceeds from sales (acquisition) of real estate owned ........... (113) (227) Net purchase of FHLB and FRB stock ................................... (1,019) (745) Net addition of premises and equipment ............................... (1,015) (2,107) Acquisition of minority interest ..................................... 0 (283) --------- --------- NET CASH USED IN INVESTING ACTIVITIES ........................... (132,865) (13,930) --------- --------- FINANCING ACTIVITIES: Net (decrease) increase in deposits .................................. (4,911) 25,786 Net increase (decrease) in FHLB advances and other borrowed funds .... 85,826 (6,439) Net increase (decrease) in securities sold under repurchase agreements 31,874 (2,889) Cash dividends paid to stockholders .................................. (2,746) (2,120) Proceeds from exercise of stock options .............................. 706 1,188 --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES ........................ 110,749 15,526 --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............. (8,013) 6,512 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ..................... 42,183 38,695 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ........................... $ 34,170 45,207 ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for: Interest................ $ 11,089 11,354 Income taxes............ 3,021 3,268 See accompanying notes to consolidated financial statements. 5

6 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 1) Basis of Presentation: In the opinion of Management, the accompanying unaudited consolidated condensed financial statements contain all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of Glacier Bancorp Inc.'s (the "Company") financial condition as of June 30, 1999, and June 30, 1998 and the results of operations for the six months and three months ended June 30, 1999 and 1998 and cash flows for the six months ended June 30, 1999 and 1998. The accompanying consolidated condensed financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These consolidated condensed 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, 1998. Operating results for the six months and three months ended June 30, 1999 are not necessarily indicative of the results anticipated for the year ending December 31, 1999. 2) Organizational Structure: The Company is the parent company for seven subsidiaries: Glacier Bank ("Glacier"); Glacier Bank of Whitefish ("Whitefish"); Glacier Bank of Eureka ("Eureka"); First Security Bank of Missoula ("Missoula"); Valley Bank of Helena ("Helena"), Big Sky Western Bank ("Big Sky"), and Community First, Inc. ("CFI"). On February 1, 1998, Glacier was converted from a federal savings bank charter to a State of Montana commercial bank charter. On August 31, 1998, the acquisition of HUB Financial Corporation and Valley Bank of Helena was completed. Effective January 20, 1999, Big Sky Western Bank became a subsidiary of the Company. The pooling method of interests accounting method was used for both acquisitions. Under this method, financial information for each of the periods presented includes the combined companies as though the mergers had occurred prior to the earliest date presented. At June 30, 1999, the Company owned 100%, 94%, 98%, 100%, 100%, 100% and 100% of Glacier, Whitefish, Eureka, Missoula, Helena, Big Sky and CFI, respectively. CFI provides full service brokerage services through Raymond James Financial Services, Inc. On January 20, 1999, the Company completed the acquisition of Big Sky Western Bank. Under the terms of the acquisition agreement, Big Sky became a wholly owned subsidiary of the Company, whereby shareholders of Big Sky received shares of the Company in exchange for their shares of Big Sky. Big Sky operates three offices in Gallatin County, Montana. The following abbreviated organizational chart illustrates the various relationships : [FLOW CHART] 6

7 3) Stock Dividend: On August 27, 1998 and May 27, 1999, a 10% stock dividend was approved by the Board of Directors. As a result, all per share amounts from time periods proceeding these dates have been restated to illustrate the effect of the stock dividend. Any fractional shares were paid in cash. 4) Ratios: Return on average assets was calculated based on the average of the total assets for the period. Return on beginning equity was calculated based on the stockholders' equity at the beginning of each period presented. 5) Cash Dividend Declared: On June 30, 1999, the Board of Directors declared of $.15 per share quarterly cash dividend to stockholders of record on July 13, 1999, payable on July 22, 1999. 6) Computation of Earnings Per Share: Basic earnings per common share is computed by dividing net earnings by the weighted average number of shares of common stock outstanding during the period presented. Diluted earnings per share is computed by including the net increase in shares if dilutive outstanding stock options were exercised, using the treasury stock method. Previous period amounts are restated for the effect of the stock dividend. The following schedule contains the data used in the calculation of basic and diluted earnings per share. Three Three Six Six months ended months ended months ended months ended June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998 ------------- ------------- ------------- ------------- Net income available to common stockholders, basic and diluted .... $3,002,554 2,715,023 5,896,766 5,408,741 ========== ========= ========= ========= Average outstanding shares - basic . 9,520,719 9,255,828 9,500,307 9,226,401 Add: dilutive stock options ........ 108,532 191,215 106,014 203,054 --------- --------- --------- --------- Average outstanding shares - diluted 9,629,251 9,447,043 9,606,321 9,429,455 ========= ========= ========= ========= Basic earnings per share ........... $ .32 .29 .61 .58 ========== === === === Diluted earnings per share ......... $ .31 .29 .60 .57 ========== === === === 7) Investments: A comparison of the amortized cost and estimated fair value of the Company's investment securities is as follows: 7

8 INVESTMENT SECURITIES AS OF JUNE 30, 1999 Estimated Weighted Amortized Gross Unrealized Fair Dollars in thousands Yield Cost Gains Losses Value -------------------- ----- ---- ----- ------ ----- U.S. GOVERNMENT AND FEDERAL AGENCIES maturing within one year .................. 6.81% 4,256 28 0 4,284 maturing one year through five years ...... 6.43% 3,400 43 0 3,443 maturing after ten years .................. 4.87% 1,247 3 (3) 1,247 ---- ------- ----- ------ ------- 6.39% 8,903 74 (3) 8,974 ---- ------- ----- ------ ------- STATE AND LOCAL GOVERNMENTS AND OTHER ISSUES: maturing within one year .................. 6.14% 421 2 (12) 411 maturing one year through five years ...... 5.16% 2,304 58 (1) 2,361 maturing five years through ten years ..... 5.07% 1,026 20 0 1,046 maturing after ten years .................. 5.19% 43,892 734 (1,021) 43,605 ---- ------- ----- ------ ------- 5.19% 47,643 814 (1,034) 47,423 ---- ------- ----- ------ ------- MORTGAGE-BACKED SECURITIES .................. 7.20% 30,588 303 (493) 30,398 REAL ESTATE MORTGAGE INVESTMENT CONDUITS .... 6.83% 104,260 233 (2,757) 101,736 ---- ------- ----- ------ ------- Total Securities ..................... 6.46% 191,394 1,424 (4,287) 188,531 ==== ======= ===== ====== ======= Effective January 1, 1999, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). SFAS 133 establishes accounting and reporting standards that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivatives' fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The adoption of SFAS 133 had no impact on the financial statements of the Company except that it allowed for a one-time reclassification of the investment portfolio from held-to-maturity to either trading or available-for-sale. The net effect on the consolidated statement of financial condition of this reclassification was an increase in total assets of $288,000, deferred tax liabilities of $98,000 and unrealized gains on securities available-for-sale of $190,000. 8

9 INVESTMENT SECURITIES AS OF DECEMBER 31, 1998 Gross Unrealized Estimated Weighted Amortized -------------------- Fair (dollars in thousands) yield Cost Gains Losses Value ---------------------- -------- ---------- ----- ------ --------- HELD-TO-MATURITY U.S. GOVERNMENT AND FEDERAL AGENCIES: maturing within one year .............. 7.90% $ 3,010 63 0 3,073 maturing one year through five years .. 7.10% 1,237 66 0 1,303 ---- ------- ----- ---- ------ 7.67% 4,247 129 0 4,376 ---- ------- ----- ---- ------ STATE AND LOCAL GOVERNMENTS AND OTHER ISSUES: maturing within one year .............. 5.50% 552 5 0 557 maturing one year through five years .. 5.56% 811 24 0 835 maturing five years through ten years . 5.01% 1,222 44 0 1,266 maturing after ten years .............. 5.67% 1,440 86 0 1,526 ---- ------- ----- ---- ------ 5.42% 4,025 159 0 4,184 ---- ------- ----- ---- ------ TOTAL HELD-TO-MATURITY SECURITIES . 6.58% $ 8,272 288 0 8,560 ==== ======= ===== ==== ====== AVAILABLE-FOR-SALE U.S. GOVERNMENT AND FEDERAL AGENCIES: maturing within one year .............. 5.88% $ 2,676 9 (1) 2,684 maturing one year through five years .. 5.91% 5,993 79 6,072 maturing after ten years .............. 6.51% 1,816 10 (1) 1,825 ---- ------- ----- ---- ------ 6.01% 10,485 98 (2) 10,581 ---- ------- ----- ---- ------ STATE AND LOCAL GOVERNMENTS AND OTHER ISSUES: maturing within one year .............. 6.88% $ 250 0 0 250 maturing one year through five years .. 6.00% 100 7 107 maturing five years through ten years . 5.06% 1,167 69 0 1,236 maturing after ten years .............. 5.30% 37,173 1,590 (319) 38,444 ---- ------- ----- ---- ------ 5.30% 38,690 1,666 (319) 40,037 ---- ------- ----- ---- ------ MORTGAGE-BACKED SECURITIES .................. 7.56% 18,299 546 (63) 18,782 REAL ESTATE MORTGAGE INVESTMENT CONDUITS .... 6.33% 27,715 184 (85) 27,814 ---- ------- ----- ---- ------ TOTAL AVAILABLE-FOR-SALE SECURITIES 6.03% $95,189 2,494 (469) 97,214 ==== ======= ===== ==== ====== 9

10 8) Stockholders' Equity: The May, 1999 stock dividend decreased retained earnings and increased common stock and paid in capital by $19,885 and resulted in a $312 deficit in retained earnings as of June 30, 1999. The transaction had no effect on total capital or capital adequacy. 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 Board's capital adequacy guidelines and the company's compliance with those guidelines as of June 30, 1999: Tier 1 (Core) Tier 2 (Total) Leverage (dollars in thousands) Capital Capital Capital ---------------------- --------- --------- --------- GAAP Capital ....................................................... $ 78,729 $ 78,729 $ 78,729 Goodwill ........................................................... (2,489) (2,489) (2,489) Net unrealized gains on securities available-for-sale ............................................ 0 0 0 Minority Interest .................................................. 310 310 310 Allowance for loan losses .......................................... -- 5,652 -- --------- --------- --------- Regulatory capital computed ........................................ $ 76,550 $ 82,202 $ 76,550 ========= ========= ========= Risk weighted assets ............................................... $ 519,897 $ 519,897 ========= ========= Total average assets ............................................... $ 737,328 ========= Capital as % of defined assets ..................................... 14.72% 15.81% 10.38% Regulatory "well capitalized" requirement .......................... 6.00% 10.00% 5.00% --------- --------- --------- Excess over "well capitalized" requirement ......................... 8.72% 5.81% 5.38% ========= ========= ========= 9) Comprehensive Income: The Company's only component of comprehensive income is the unrealized gains and losses on available-for-sale securities. For the three months For the six months ended June 30, ended June 30, ----------------------- --------------------- Dollars in thousands 1999 1998 1999 1998 -------------------- ------- ----- ----- ----- Net earnings ...................................... $ 3,003 2,715 5,897 5,409 ------- ----- ----- ----- Unrealized holding losses arising during the period (4,749) (32) (5,179) (245) Transfer from held-to-maturity .................... 0 0 288 0 Tax expense ....................................... 1,904 11 1,953 83 ------- ----- ----- ----- Net after tax ......................... (2,845) (21) (2,938) (162) Less: reclassification adjustment for amounts included in net income ......................... 1 1 3 13 Tax expense ....................................... 0 0 (1) (4) ------- ----- ----- ----- Net after tax ......................... 1 1 2 9 Net unrealized loss on securities ..... (2,844) (20) (2,936) (153) ------- ----- ----- ----- Total comprehensive earnings ...... $ 159 2,695 2,961 5,256 ======= ===== ===== ===== 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, 1998 to June 30, 1999. From December 31, 1998 total assets have grown $113.242 million, or 16.04%, to $819.269 million, and have increased $115.710 million, or 16.45% since June 30, 1998. The 1999 increase was primarily in investment growth of $83.0 million, or 78.7%. Higher investment yields, a steeper yield curve, and the pending branch and deposit acquisition from Washington Mutual have provided an opportunity to increase the investment portfolio. Net loans have also increased $34.5 million from December 31, 1998. Real estate loans decreased $15.4 million during the period, while commercial loans increased $37.4, consistent with management's decision to restructure the loan portfolio and to not retain long-term, low-interest rate mortgage loans. Loans sold to the secondary market amounted to $70.3 million and $67.2 million during the first six months of 1999 and 1998, respectively. The amount of loans serviced for others on June 30, 1999 was $120.232 million. Total deposits decreased $4.9 million, which was the result of a $3.5 million increase in non-interest bearing deposits and an $8.4 million decrease in interest bearing deposits. Borrowed funds in the form of Federal Home Loan Bank advances, and repurchase agreements were used to fund the asset growth in excess of deposit growth. Upon completion of the Washington Mutual branch purchase, which is expected to occur in early October, additional deposits of approximately $80 million will be available for asset funding, replacing the borrowed funds. All six institutions 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. The following table demonstrates the available FHLB lines of credit and the extent of utilization as of June 30, 1999 (in thousands): Available line Amount Used Available -------------- ----------- --------- Glacier Bank $148,136 127,619 20,517 Whitefish 11,501 7.575 3,926 Eureka 8,220 5,723 2,497 Missoula 33,955 29,000 4,955 Helena 11,213 8,042 3,171 Big Sky 14,314 11,786 2,528 -------- -------- -------- Totals 227,339 189,745 37,594 ======== ======== ======== 11

12 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 $2.7 million or .34% of total assets at June 30, 1999, compared to $2.8 million, or .40% of total assets, as of December 31, 1998. June 30, 1999 December 31, 1998 ------------- ----------------- Total Allowance for Loan and Real Estate Owned Losses: $5.6 million $5.1 million Allowance as a percentage of Total Loans: 1.02% .98% Allowance as a percentage of Non-performing Assets: 206% 184% Impaired Loans As of June 30, 1999, there were no loans considered impaired. 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 based on the terms of the loan. Minority Interest The minority interest on the consolidated statements 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. As of June 30, 1999, the Company owns 47,280 shares of Whitefish and 49,084 shares of Eureka. The Company's ownership of Whitefish and Eureka is 94% and 98%, respectively. Results of Operations - The three months ended 6/30/99 compared to the three months ended 6/30/98. Glacier Bancorp, Inc. reported record net income of $3.003 million, or basic earnings per share of $.32, for the second quarter of 1999, compared with $2.715 million, or basic earnings per share of $.29, for the same quarter of 1998. Return on average assets and return on beginning equity in the first quarter of 1999 were 1.63 percent and 15.03 percent, respectively, which compares to returns of 1.58 percent and 16.04 percent for the same quarter of 1998. The return on equity is lower in 1999 because stockholders' equity has increased $6.7 million, or 9.2 percent over the June 30, 1998 level and is a very strong 9.6 percent of assets. Net Interest Income Net interest income for the quarter was $8.091 million, an increase of $635,000, or 8.5 percent, over the same period in 1998. Growth in earning assets while maintaining a net interest margin as a percentage of earning assets, on a tax equivalent basis, of 4.7 percent, were the reasons for this increase. Loan balances have increased $37.5 million from June 30, 1998, an increase of 7.2 percent. Consistent with management's decision to restructure the loan portfolio there has been a significant shift in the mix of loans, with higher yielding commercial loans up $46.4 million, or 25.1 percent, and consumer loans up $9.6 million, or 8.2 percent. Real estate loans are down $18.6 million, or 8.5 percent, the result of prepayments and management's decision not to retain long-term low-rate mortgage loans. Total investments, including mortgage-backed securities, increased $82.5 million, or 77.9 percent, with most of the increase occurring during the current quarter. Total deposits increased $15.4 million, or 3.4 percent, with $8.7 million of the increase occurring in non-interest bearing deposits, which increased 9.1 percent. 12

13 Loan Loss Provision and Non-Performing Assets The second quarter provision for loan losses was $350 thousand, down from $551 thousand during the same quarter in 1998. Non-performing assets as a percentage of loans at June 30, 1999 were .50 percent, well below the average of the Company's peer group which was .78 percent at March 31, 1999, the most recent information available. The reserve for loan losses was 206 percent of non-performing assets as of June 30, 1999. Non-interest Income Non-interest income declined $714 thousand, from the second quarter of 1998 which included gains of $559 thousand from the sale of the trust department of Glacier Bank, and the credit card portfolio. Income from insurance sales was lower in 1999 due to a change in the types of consumer loans made which are not as applicable to credit insurance. Service fees on deposit accounts were $98 thousand higher in 1999. Non-interest Expense Non-interest expense decreased by $132 thousand, or 2.2 percent, over the second quarter of 1998 which included merger and reorganization expense of $232 thousand. Compensation and employee benefits increased $83 thousand, or 2.7 percent. Occupancy and equipment expense was up $93 thousand, or 13.5 percent, the result of bringing more data processing functions in-house and additional expenses from the new branch/corporate office. Other expenses were down $270 thousand, or 12.3 percent. The rest of the expense reduction was the minority interest in subsidiaries which decreased by $38 thousand, resulting from the acquisition of minority shares. Results of Operations - The six months ended 6/30/99 compared to the six months ended 6/30/98 Net income of $5.897 million was an increase of $488 thousand, or 9.0 percent, over the first six months of 1998. Basic earnings per share were $.61 for 1999 and $.58 for 1998, with diluted earnings per share of $.60 and $.57, respectively. Included in 1998 were merger and reorganization expenses of $256 thousand after tax, or basic earning per share of $.03. Return on average assets was 1.60 and 1.57 percent, and return on beginning equity was 15.16 and 15.98 percent for the first six months of 1999 and 1998, respectively. The high capital level of 11.02 percent at the beginning of the year results in a lower return on equity. The capital ratio has been reduced, with the significant asset growth and a change in the net unrealized gain on investments, to 9.61 percent. Net Interest Income Net interest income for the six months was $15.665 million, an increase of $905 thousand, or 6.13 percent over the same 1998 period. More earning assets, the increase in higher yield commercial and consumer loans, and the sale of lower yield real estate loans on the secondary market, are the reasons for the net interest income increase. The net interest margin as a percentage of average earning assets on a tax equivalent basis, was 4.68 percent, about the same as the 4.69 percent in 1998. So far we have not experienced a decrease in net interest margin. The recent 25 basis point increase to the Wall Street Prime lending rate should also benefit the margin. Loan Loss Provision The provision for loan losses was $672 thousand, down slightly from $786 thousand in 1998. The level of non-performing loans remains at a relatively low level compared to the peer group of similar sized companies as reported in the Federal Reserve Bank's "Bank Performance Report". Non-interest Income Total non-interest income is down $582 thousand from last year due to a non-recurring $559 thousand gain in 1998 from the sale of Glacier Bank's trust department, and the sale of the credit card portfolio. 13

14 Non-interest Expense Non-interest expense increased by $8 thousand over 1998 which included merger and reorganization expense of $328 thousand. Compensation and employee benefits increased $325 thousand, or 5.6 percent. Occupancy and equipment expense was up $241 thousand, or 18.2 percent, the result of bringing more data processing functions in-house, and additional expenses from the new branch/corporate office. Other expenses were down $482 thousand, or 11.5 percent. The rest of the expense reduction was the minority interest in subsidiaries which decreased by $76 thousand, resulting from the acquisition of minority shares. The discussion above may include certain "forward looking statements" concerning the future operations of the Company. The Company is taking advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 as they apply to forward looking statements. This statement is for the express purpose of availing the Company of the protections of such safe harbor with respect to all "forward looking statements." Management's ability to predict results of the effect of future plans in inherently uncertain, and is subject to factors that may cause actual results to differ materially from those projected. Year 2000 Issues The century date change for the Year 2000 is a serious issue that may impact virtually every organization including the Company. Many software programs are not able to recognize the Year 2000, since most programs and systems were designed to store calendar years in the 1900s by assuming "19" and storing only the last two digits of the year. The problem is especially important to financial institutions since many transactions, such as interest accruals and payments, are date sensitive, and because the Company and its subsidiary banks interact with numerous customers, vendors and third party service providers who must also address the Year 2000 issue. The problem is not limited to computer systems. Year 2000 issues will also potentially affect every system that has an embedded microchip, such as automated teller machines, elevators and vaults. State of Readiness The Company and its subsidiary banks are committed to addressing these Year 2000 issues in a prompt and responsible manner, and they have dedicated the resources to do so. Management has completed an assessment of its automated systems and has implemented a program consistent with applicable regulatory guidelines, to complete all steps necessary to resolve identified issues. The Company's compliance program has several phases, including (1) project management; (2) assessment; (3) testing; and (4) remediation and implementation. Project Management. The Company has formed a Year 2000 compliance committee consisting of senior management and departmental representatives. The committee has met regularly since October 1997. A Year 2000 compliance plan was developed and regular meetings have been held to discuss the process, assign tasks, determine priorities and monitor progress. The committee regularly reports to the Company's Board. Assessment. All of the Company's and its subsidiary banks' computer equipment and mission-critical software programs have been identified. This phase is essentially complete. Primary software vendors were also assessed during this phase, and vendors who provide mission-critical software have been contacted. The Year 2000 committee is in the process of obtaining written certification from providers of material services that such providers are, or will be, Year 2000 compliant. Based upon its ongoing assessment of the readiness of its vendors, suppliers and service providers, the committee intends to develop contingency plans addressing the most reasonably likely worst case scenarios. The committee will continue to monitor and work with these vendors. The committee and other bank officers have also identified and began working with, the subsidiary banks' significant borrowers and funds providers to assess the extent to which they may be affected by Year 2000 issues. 14

15 Testing. Updating and testing of the Company's and its subsidiary banks' automated systems has been completed as of June 30, 1999. Estimated Costs to Address Year 2000 Issues The total financial effect that Year 2000 issues will have on the Company cannot be predicted with any certainty at this time. In fact, in spite of all efforts being made to rectify these problems, the success of the Company's efforts will not be known until the Year 2000 actually arrives. However, based on its assessment to date, the Company does not believe that expenses related to meeting Year 2000 challenges will have a material effect on its operations or consolidated financial condition. Year 2000 challenges facing vendors of mission-critical software and systems, and facing the Company's customers, could have a material effect on the operations or consolidated financial condition of the Company, to the extent such parties are materially affected by such challenges. Risks Related to Year 2000 Issues The year 2000 poses certain risks to the Company and its subsidiary banks and their operations. Some of these risks are present because the Company purchases technology and information systems applications from other parties who face Year 2000 challenges. Other risks are inherent in the business of banking or are risks faced by many companies. Although it is impossible to identify all possible risks that the Company may face moving into the millennium, management has identified the following significant potential risks. Commercial banks may experience a contraction in their deposit base, if a significant amount of deposited funds are withdrawn by customers prior to the Year 2000, and interest rates may increase as the millennium approaches. This potential deposit contraction could make it necessary for the Company to change its sources of funding and could impact future earnings. The Company established a contingency plan for addressing this situation, should it arise, into its asset and liability management policies. The plan includes maintaining the ability to borrow funds from the Federal Home Loan Bank of Seattle. Significant demand for funds from other banks could reduce the amount of funds available to borrow. If insufficient funds are available from these sources, the Company may also sell investment securities or other liquid assets to meet liquidity needs. The Company lends significant amounts to businesses in its marketing area. If these businesses are adversely affected by Year 2000 problems, their ability to repay loans could be impaired. This increased credit risk could adversely affect the Company's financial performance. During the assessment phase of the Company's Year 2000 program, each of the Company's subsidiary banks' substantial borrowers were identified, and the Company is working with such borrowers to ascertain their levels of exposure to Year 2000 problems. To the extent that the Company is unable to assure itself of the Year 2000 readiness of such borrowers, it intends to apply additional risk assessment criteria to the indebtedness of such borrowers and make any necessary related adjustments to the Company's provision for loan losses. The Company and its subsidiary banks, like those of many other companies, can be adversely affected by the Year 2000 triggered failures of other companies upon who the Company depends for the functioning of their automated systems. Accordingly, the Company's operations could be materially affected, if the operations of mission-critical third party service providers are adversely affected. As described above, the Company has identified its mission-critical vendors and is monitoring their Year 2000 compliance programs. Contingency Plans The Company has developed specific contingency plans related to year 2000 issues, other than those described above. As the Company and its subsidiary banks continue to monitor the readiness of vendors, service providers and substantial borrowers, appropriate contingency plans will be developed that address the most 15

16 reasonably likely "worst case" scenarios. Certain circumstances, as described above in "Risk," may occur for which there are no completely satisfactory contingency plans. FORWARD LOOKING STATEMENTS The discussion above regarding to the century date change for the Year 2000 includes certain "forward looking statements" concerning the future operations of the Company. The Company desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 as they apply to forward looking statements. This statement is for the express purpose of availing the Company of the protections of such safe harbor with respect to all "forward looking statements." Management's ability to predict results of the effect of future plans is inherently uncertain, and is subject to factors that may cause actual results to differ materially from those projected. Factors that could affect the actual results include the Company's success is identifying systems and programs that are not Year 2000 compliant; the possibility that systems modifications will not operate as intended; unexpected costs associated with remediation, including labor and consulting costs; the nature and amount of programming required to upgrade or replace the affected systems; the uncertainty associated with the impact of the century change on the Company's customers, vendors and third-party service providers; and the economy generally. 16

17 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, 1998, the most recent information available, as compared to the 10% Board approved policy limit. Estimated Rate Change NII Sensitivity ----------- --------------- +200 bp 1.44% -200 bp -1.99% The preceding sensitivity analysis does not represent a Company forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including: the nature and timing of interest rate levels including yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of assets and liability cashflows, and others. While assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurances as to the predictive nature of these assumptions including how customer preferences or competitor influences might change. Also, as market conditions vary from those assumed in the sensitivity analysis, actual results will also differ due to: prepayment/refinancing levels likely deviating from those assumed, the varying impact of interest rate change caps or floors on adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early withdrawals and product preference changes, and other internal/external variables. Furthermore, the sensitivity analysis does not reflect actions that ALCO might take in responding to or anticipating changes in interest rates. 17

18 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 None ITEM 3. DEFAULTS ON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS At the annual shareholders' meeting held April 28, 1999, directors Michael J. Blodnick, Fred J. Flanders, and Harold A. Tutvedt were elected to a three-year term. At the same meeting, amendments to the "1995 Employee Stock Option Plan" and the "1994 Directors' Stock Option Plan" increasing the number of shares available for issuance by 600,000 and 100,000, respectively, were approved. Votes were tabulated as follows: Proposal #1 - Election of Directors: Michael J. Blodnick Fred J. Flanders Harold A. Tutvedt ------------------- ---------------- ----------------- For 7,468,683 7,468,867 7,466,488 Against 240 56 2,925 Abstain 13,519 13,519 13,029 Proposal #2 - Amendment to the 1995 Employee Stock Option Plan For 5,543,123 Against 283,353 Abstain 69,199 Proposal #3 - Amendment to the 1994 Directors' Stock Option Plan For 5,475,277 Against 325,179 Abstain 95,220 ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 18

19 a. Exhibit 27 - Financial data schedule b. On May 19, 1999, a Form 8-K was filed disclosing that Glacier Bank had entered into a definitive agreement with Washington Mutual Bank fsb to purchase two branches of Washington Mutual located in Butte, Montana. Under the terms of the purchase and assumption agreement, Glacier would acquire approximately $80 million in deposits and the real estate of the two branches. The transaction is expected to close early in October, 1999. 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. August 10, 1999 By _____________________________ Michael J. Blodnick President/CEO August 10, 1999 By _____________________________ James H. Strosahl Executive Vice President/CFO 19

9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED STATEMENTS OF FINANCIAL JUNE 30, 1999, CONSOLIDATED STATEMENTS OF OPERATIONS JUNE 30, 1999, REFERENCE TO QUARTERLY REPORT FROM 10-Q JUNE 30, 1999. 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 30,910 218 3,042 0 188,531 0 0 558,326 5,652 819,269 470,933 101,516 8,314 159,777 0 0 95 78,634 819,269 22,512 4,639 0 27,151 6,813 11,486 15,665 672 3 11,458 9,039 0 0 0 5,897 0.61 0.60 4.68 1,715 746 0 0 5,133 291 138 5,652 5,652 0 0