SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20522
FORM 10-K/A
[ X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 COMMISSION FILE 000-18911
GLACIER BANCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 81-0519541
(State or other jurisdiction (IRS employer
of incorporation or organization) Identification No.)
49 Commons Loop, Kalispell, MT 59901
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 406-756-4200
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the registrant (i) 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 (ii) has been subject to such filing
requirements for the past 90 days. [X]
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 18, 1999, there were issued and outstanding 8,650,195 shares of the
Registrant's Common Stock. No preferred shares are issued or outstanding.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, computed by reference to the closing price of such stock as of the
close of trading on March 18, 1999, was $168,678,802.
Document Incorporated by Reference
Portions of the 1999 Annual Meeting Proxy Statement dated March 31, 1999 are
incorporated by reference into Part III of this form 10-K.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The Company is a Delaware corporation and at December 31, 1998 had five
commercial banks as subsidiaries, Glacier Bank, Glacier Bank of Whitefish,
Glacier Bank of Eureka, First Security Bank of Missoula, and Valley Bank of
Helena. The following discussion and analysis includes the effects of the
pooling-of-interests merger with HUB Financial Corporation, and the purchase
accounting treatment of the minority shares of Valley Bank of Helena. Prior
period information has been restated to include amounts from the HUB Financial
Corporation merger. The Company reported earnings of $10,744,000 for the year
ended December 31, 1998, or $1.30 basic earnings per share, and $1.28 diluted
earnings per share, compared to $10,054,000, or $1.24 basic earnings per share
and $1.22 diluted earnings per share, for the year ended December 31, 1997, and
$8,207.000, or $1.03 basic and $1.02 diluted earnings per share for the year
ended December 31, 1996. During 1996, the FDIC SAIF fund was recapitalized
through one-time payments from thrift institutions. Glacier Bank's after tax
cost of this payment was $583,000, or $.09 basic earnings per share, In
addition, after tax expenses related to the merger of First Security Bank were
$563,000, or $.08 basic earnings per share. Operating earnings without the SAIF
and merger expenses were $9,353,000, or $1.20 basic earnings per share. This
continued improvement in net income can be attributed to an increase in earning
assets, management of net interest margin, and strong non-interest income. The
following narrative and charts focus on the significant financial changes which
have taken place over the past years and include a discussion of the Company's
financial condition, results of operations, and capital resources.
Liquidity and Capital Resources
The objective of liquidity management is to maintain cash flows adequate to meet
current and future needs for credit demand, deposit withdrawals, maturing
liabilities and corporate operating expenses. This source of funds is generated
by deposits, principal and interest payments on loans, sale of loans and
securities, short and long term borrowings, and net income. In addition, all
five subsidiaries are members of the Federal Home Loan Bank of Seattle. This
membership provides for established lines of credit in the form of advances
which serve as a supplemental source of funds for lending and other general
business purposes. During 1998, all five financial institutions maintained
liquidity at a level deemed sufficient to meet operating cash needs. The
liquidity was in excess of regulatory requirements.
Retention of a portion of Glacier Bancorp, Inc.'s earnings results in
stockholders equity at December 31, 1998 of $74,937,000, or 11.2% of assets,
which compares with $64,775,000, or 10.0% of assets at December 31, 1997.
Earnings retention, and increases resulting from the exercise of stock options
and acquisitions, has outpaced the increase in assets of $17,984,000, or 2.8%,
during 1998. The stockholder's equity ratio remains well above required
regulatory levels, and above the average of the Company's peers, providing
flexibility in the management of assets.
Financial Condition
For the year ended December 31, 1998, consolidated assets increased $17,984,000,
or 2.8% over the prior year. The following table summarizes the Company's major
asset and liability components as a percentage of total assets at December 31,
1998, 1997, and 1996.
2
Major Balance Sheet Components as a
Percentage of Total Assets
December 31,
-----------------------
1998 1997 1996
------ ----- -----
Assets:
Cash, and Cash Equivalents,
Investment securities, FHLB and
Federal Reserve Stock ......................... 22.2% 24.8% 28.0%
Real Estate Loans ............................. 30.0% 32.7% 34.1%
Commercial Loans .............................. 27.4% 21.7% 19.4%
Installment and Other Loans ................... 16.7% 17.6% 17.1%
Other Assets .................................. 3.7% 3.2% 1.4%
------ ----- -----
100.0% 100.0% 100.0%
===== ===== =====
Liabilities and Stockholder's Equity:
Deposit Accounts .............................. 66.7% 62.3% 61.1%
FHLB Advances ................................. 18.1% 21.9% 24.2%
Other Borrowings and Repurchase Agreements .... 2.8% 4.6% 2.9%
Other Liabilities ............................. 1.2% 1.2% 2.6%
Stockholders' Equity .......................... 11.2% 10.0% 9.3%
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
Real estate loans continue to be the largest component of the Company's assets,
although the percentage is decreasing, and commercial loans are increasing as a
result of the Company's strategy. Deposit accounts, with comparatively short
terms to maturity, represent the majority of the liabilities.
Effect of inflation and changing prices
Generally accepted accounting principles require the measurement of financial
position and operating results in terms of historical dollars, without
consideration for change in relative purchasing over time due to inflation.
Virtually all assets of a financial institution are monetary in nature,
therefore interest rates generally have a more significant impact on a company's
performance than does the effect of inflation.
GAP analysis
The following table gives a description of our GAP position for various time
periods. As of December 31, 1998, we had a positive GAP position at six months,
and a negative GAP position at twelve months. The cumulative GAP as a percentage
of total assets for six months is a positive 2.5% which compares to a positive
.95% at December 31, 1997 and 1.7% at December 31, 1996.
The table also shows the GAP earnings sensitivity, and earnings sensitivity
ratio, along with a brief description as to how they are calculated. The
traditional one dimensional view of GAP is not sufficient to show a bank's
ability to withstand interest rate changes. Superior earnings power is also a
key factor in reducing exposure to higher interest rates. For example, our GAP
earnings sensitivity ratio shows that a 1% change in interest rates would only
change income by .48%. Because of our GAP position, the table illustrates how a
1% increase in rates would increase the Company's income by approximately
$51,000. Using this analysis to join GAP information with earnings data, it
produces a better picture of our strength and ability to handle interest rate
change. The methodology used to compile this GAP information is based on our mix
of assets and liabilities and the historical experience accumulated regarding
their rate sensitivity.
3
Interest Rate Sensitivity and Gap Analysis as of December 31, 1998
Projected maturity or repricing
----------------------------------------------------------------
0-6 6-12 1-5 More than Non-rate
Months Months years 5 years Sensitive Total
(dollars in thousands) -------- -------- -------- -------- --------- --------
Assets:
Interest bearing deposits $ 5,143 0 0 0 0 5,143
Investment securities .... 3,184 2,088 6,961 41,485 0 53,718
Mortgage-backed securities 4,611 4,770 31,302 3,661 0 44,344
Floating rate loans ...... 147,276 12,980 61,672 1,107 0 223,035
Fixed rate loans ......... 31,976 15,446 90,498 138,139 0 276,059
Other earning assets ..... 11,848 -- -- 1,219 -- 13,067
Non-earning assets ....... -- -- -- -- 51,285 51,285
-------- -------- -------- -------- -------- --------
Total Assets .............................. $204,038 35,284 190,433 185,611 51,285 666,651
======== ======== ======== ======== ======== ========
Liabilities and Equity:
Deposits ................. 154,326 31,893 83,980 174,260 0 444,459
FHLB advances ............ 14,632 11,745 75,098 19,110 0 120,586
Other purchased funds .... 18,357 0 0 0 0 18,357
Other liabilities ........ -- 0 0 0 8,312 8,312
Equity ................... -- -- -- -- 74,937 74,937
-------- -------- -------- -------- -------- --------
Total liabilities and equity .............. $187,316 43,638 159,078 193,370 83,249 666,651
======== ======== ======== ======== ======== ========
Gap Earnings Sensitivity (1) .............. $ 51
Gap Earnings Sensitivity Ratio (2) ........ $ 0.48%
(1) Gap Earnings Sensitivity is the estimated effect on income after taxes
of 39%, of a 1% increase or decrease in Interest rates (1% X ($8,368 less
tax of $3,264).
(2) Gap Earnings Sensitivity Ratio is Gap Earnings Sensitivity divided by
the estimated yearly earnings of $10,744. A 1% increase in interest rates
has this estimated percentage increase effect on annual income.
This table estimates the repricing maturities of the Company's assets and
liabilities, based upon the Company's assessment of the repricing
characteristics of the various instruments. Non-contractual deposit liabilities
are allocated among the various maturity categories as follows: non-interest
bearing checking and interest- bearing checking are included in the more than 5
years category. Regular savings are included in the 1 - 5 years category. Money
market balances are included in the less than 6 months category. Mortgage-backed
securities are at the anticipated principal payments based on the
weighted-average-life.
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 the net interest spread
decreased in 1998 from 3.93% to 3.89%, primarily the result of lower rates on
interest earning assets. The net interest margin increased slightly in 1998 from
4.76% to 4.79%, primarily the result of an increase in interest earning assets.
Although the interest spread is down from 1997 the increased asset levels, and
the increased interest-free funding resulted in significantly higher net
interest income.
4
December 31, [1]
----------------------
For the year ended: 1998 1997 1996
------ ------ ------
Combined weighted average yield on loans and investments [2] ......... 8.41% 8.58% 8.54%
Combined weighted average rate paid on savings deposits and borrowings 4.52% 4.65% 4.63%
Net interest spread ................................................. 3.89% 3.93% 3.91%
Net interest margin [3] ............................................ 4.79% 4.76% 4.76%
[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
and Federal Reserve Bank.
[3] The net interest margin (net yield on average interest earning assets) is
interest income from loans and investments (tax free income adjusted for tax
effect) less interest expense from deposits, FHLB advances, and other
borrowings, divided by the total amount of earning assets.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Financial Condition
Total assets increased $17,984,000, or 2.8% as compared to December 31, 1997.
Net loans outstanding increased 5.8%, or $27,332,000 with the largest increase
occurring in the commercial classification which increased $42,835,000, or 30%.
Real estate loans decreased $11,843,000 or 5.6% the result of management's
decision to not retain long-term mortgages in the portfolio in the current low
interest rate environment. Consumer loans decreased $2,842,000, or 2.5%, the
result of selling the credit card portfolio. Investment securities decreased
$17,463,000, or 15.1%. With the flat yield curve during 1998 there were limited
attractive investment opportunities.
Total liabilities increased $7,822,000, or 1.3%, with interest bearing deposits
up $32,387,000, or 10.1%, and non-interest bearing deposits up $7,723,000, or
9.1%. Federal Home Loan Bank advances decreased $21,274,000, or 15.0%.
Securities sold under repurchase agreements and other borrowed funds were down
$11,253,000, or 38.0%.
Total stockholders' equity increased $10,162,000, or 15.7%, the result of
earnings retention, the additional shares issued to minority stockholders of
Valley Bank of Helena, and the effect of stock options exercised.
Results of Operations
Interest Income - Interest income was $51,081,000 compared to $49,381,000 for
the years ended December 31, 1998 and 1997, respectively, a $1,700,000, or 3.4%
increase. The weighted average yield on the loan and investment portfolios
decreased from 8.58% to 8.41%. This decrease in yield was offset by increased
volumes in loans, and the change in loan mix from real estate loans to higher
yielding commercial loans, increasing interest income.
Interest Expense - Interest expense was $22,204,000 for the year ended December
31, 1998, up slightly from $22,134,000 in 1997, a $70,000 increase. The increase
is due to higher balances in interest bearing deposits, which was largely offset
by lower amounts outstanding in Federal Home Loan Bank advances, repurchase
agreements and other borrowed funds during 1998. The increased balances in
non-interest bearing deposits reduced the need for interest bearing funding
which also reduced interest expense.
5
Net Interest Income - Net interest income was $28,877,000 compared to
$27,247,000 in 1997, an increase of $1,630,000, or 6.0%, the net result of the
items discussed in the above paragraphs. Net interest income was up in 1998,
however, aggressive competition for loans and deposits may have an adverse
effect on net interest income in 1999.
Provision for Loan Losses - The provision for loan losses was $1,490,000 for
1998, up from $807,000 for 1997. Total loans charged off, net of recoveries,
were $672,000 in 1998, up from the $495,000 experienced in 1997. The allowance
for loan losses balance was $4,845,000 at December 31, 1998, up from $4,027,000
at December 31, 1997, an increase of $818,000. At December 31, 1998, the
non-performing assets (non-accrual loans, accruing loans 90 days or more
overdue, real estate acquired by foreclosure or deed-in-lieu thereof, and
repossessed personal property) totaled $2,795,000 or .42% of total assets;
compared to $1,620,000 or .25% of total assets at December 31, 1997. The reserve
for loan losses as a percentage of loans increased to .97% from .86% at December
31, 1998 and December 31, 1997, respectively. The allowance for loan losses was
increased primarily because of the changing mix of loans from residential real
estate to more commercial loans, which historically carry additional credit
risk.
Non-interest income - Total non-interest income of $11,259,000 was up
$1,644,000, or 17.1% from 1997. Loan fees and charges were $891,000 greater than
the prior year. Most of this increase came from the large volume of real estate
lending activity resulting from low mortgage rates. An increase in mortgage
rates in 1999 could slow down refinance activity which may result in reduced
non-interest income from mortgage originations.
Increased volumes in deposit accounts was the reason for the $115,000 increase
in service charges and other fees. Other income, which includes a gain on the
sale of the credit card portfolio of $457,000, and $102,000 from the sale of the
trust business, increased $802,000.
Non-interest expense - Total non-interest expense increased from $20,093,000 to
$21,606,000 an increase of $1,513,000, or 7.5%. Of this increase $749,000 was
from merger and reorganization expenses, leaving an increase of $764,000, or
3.8%. Compensation, employee benefits, and related expenses increased $325,000,
or 3.1% from 1997. Occupancy expense increased $322,000, or 14.2% from 1997. The
change to an in-house data center, a new branch of Valley Bank of Helena, and a
new branch and corporate office building in Kalispell were the main reasons for
the increase. Data processing expense decreased $95,000, the result of bringing
more data processing services in-house during 1998. The efficiency ratio
(non-interest expense)/(net interest income + non-interest income), excluding
the merger expenses, was 52% in 1998, down from 54% in 1997, as compared with
similar sized bank holding companies nationally which average about 62%.
Year Ended December 31, 1997 compared to Year Ended December 31, 1996
Financial condition
Total assets increased $40,200,000 or 6.6% as compared to December 31, 1996. Net
loans outstanding increased 8.7%, or $37,555,000 with the largest increase
occurring in the commercial classification which increased $23,227,000, or 19%,
followed by installment loans which increased $9,992,000, or 9.5%. Real estate
loans increased $4,648,000, or 2.2% a result of a significant portion of the
loan production being sold. Investment securities decreased $2,221,000, or 1.9%.
The flat yield curve provided little opportunity to achieve reasonable spreads
in the investment portfolio so funds were used to pay down the FHLB borrowings
rather than growing investments.
Total liabilities increased $31,803,000, or 5.8% with interest bearing deposits
up $21,720,000, or 7.3%, and non-interest bearing deposits up $10,071,000, or
13.4%. Federal Home Loan Bank advances decreased $5,356,000, or 3.6%. Securities
sold under repurchase agreements and other borrowed funds were up $12,089,000,
or 69.0%.
6
Funding sources are utilized based on the lowest cost available, which results
in changes from one accounting period to the next.
Total stockholder's equity increased $8,308,000, or 14.7%, primarily the result
of earnings retention, and by an increase in the net unrealized gains on
securities available-for-sale of $1,172,000.
Results of Operations
Interest Income - Interest income was $49,381,000 compared to $45,915,000 for
the years ended December 31, 1997 and 1996, respectively, a $3,466,000, or 7.5%
increase. The weighted average yield on the loan and investment portfolios
increased slightly from 8.54% to 8.58%. This increase in yield and increased
volumes in loans, resulted in the increased interest income. Interest rates were
lower at the end of 1997 than early in the year, with little slope in the yield
curve.
Interest Expense - Interest expense was $22,134,000 for the year ended December
31, 1997, up from $20,521,000 in 1996, a $1,613,000, or 7.9% increase. The
increase is due to higher balances in interest bearing deposits, increases in
amounts outstanding in repurchase agreements and other borrowed funds during
1997. This increase was partially offset by reduced Federal Home Loan Bank
borrowings.
Net Interest Income - Net interest income was $27,247,000 compared to
$25,394,000 in 1996, an increase of $1,853,000, or 7.3%, the net result of the
items discussed in the above paragraphs.
Provision for Loan Losses - The provision for loan losses was $807,000 for 1997,
down from $880,000 for 1996. Total loans charged off, net of recoveries, were
$495,000 in 1997, lower than the $696,000 experienced in 1996. The allowance for
loan losses balance was $4,027,000 at December 31, 1997, up from $3,715,000 at
December 31, 1996, an increase of $312,000. At December 31, 1997, the
non-performing assets (non-accrual loans, accruing loans 90 days or more
overdue, real estate acquired by foreclosure or deed-in-lieu thereof, and
repossessed personal property), totaled $1,620,000 , or .25% of total assets;
compared to $1,913,000, or .31% of total assets at December 31, 1996.
Non-interest income - Total non-interest income of $9,615,000 increased by
$75,000 from 1996. Increases in service charges and other fees which were
$356,000 greater than the prior year were mostly offset by a reduction in other
income of $354,000, primarily from a reduction in commissions on insurance
sales, and non-recurring recoveries of charged off interest in 1996.
Non-interest expense - Total non-interest expense decreased from $20,215,000 to
$20,093,000, a decrease of $122,000, or .6%. Of this decrease $947,000 was from
the FDIC SAIF insurance assessment expensed in 1996, and $531,000 was from
merger expenses, leaving an increase from operations of $1,356,000.
Compensation, employee benefits, and related expenses increased $730,000, or
7.4% from 1996 the result of staffing five new branches and other growth related
staffing additions, plus other normal cost increases. Occupancy expense
increased $243,000, or 12.0% from 1996 primarily the result of adding the new
branches. Data processing expense was up $116,000, or 13.2%, from volume
increases. Following the one-time FDIC assessment in 1996 the rates on FDIC
insurance were reduced in 1996 which resulted in a reduction in expense of
$226,000, or 64.4%. Other expenses increased $281,000, or 4.4% from 1996,
primarily from increased marketing costs, and other expenses related to the new
branches. The efficiency ratio (non-interest expense)/(net interest income +
non-interest income), excluding the merger and the FDIC assessment, was 54% in
1997, up from 53% in 1996, as compared with similar sized bank holding companies
nationally which average about 62%.
Future Accounting Pronouncements
Please see the notes to the consolidated financial statement for information on
accounting pronouncements.
7
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 and "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.
Testing.
Updating and testing of the Company's and its subsidiary banks' automated
systems is currently underway and it is anticipated that all testing will be
complete by January 31, 1999. Upon completion, the committee will be able to
identify any internal computer systems that remain non-compliant.
8
SIGNATURES
PURSUANT to the requirements of Section 13 or 15(d) 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, on March 26, 1999.
GLACIER BANCORP, INC.
PURSUANT to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on March 26, 1999, by the following persons in the
capacities indicated.
/s/ James H. Strosahl Executive Vice President and CFO
- --------------------------- (Principal Financial/Accounting Officer)
James H. Strosahl
9