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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X]     Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

      For the quarterly period ended September 30, 2004

[  ]     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)
     
MONTANA   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


Not Applicable


(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 [  ]

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [  ]

The number of shares of Registrant’s common stock outstanding on October 20, 2004 was 24,510,568. No preferred shares are issued or outstanding.

 


GLACIER BANCORP, INC.
Quarterly Report on Form 10-Q

Index

         
    Page #
Part I. Financial Information
       
Item 1 – Financial Statements
       
    3  
    4  
    5  
    6  
    7  
    19  
    25  
    25  
    25  
    25  
    25  
    26  
    26  
    26  
    26  
    26  
 EXHIBIT 31.1
 EXHIBIT 31.2
 EXHIBIT 32

 


Table of Contents

Glacier Bancorp, Inc.

Condensed Consolidated Statements of Financial Condition
                         
    September 30,   December 31,   September 30,
(Unaudited - dollars in thousands, except per share data)
  2004
  2003
  2003
Assets:
                       
Cash on hand and in banks
  $ 69,625       77,093       67,538  
Interest bearing cash deposits
    9,001       9,047       27,517  
 
   
 
     
 
     
 
 
Cash and cash equivalents
    78,626       86,140       95,055  
Investment securities, available-for-sale
    1,086,862       1,050,311       973,098  
Federal Home Loan Bank stock, at cost
    44,004       41,235       40,581  
Federal Reserve Bank stock, at cost
    5,800       5,408       5,250  
Net loans receivable
    1,643,984       1,413,392       1,408,667  
Loans held for sale
    15,630       16,973       34,533  
Premises and equipment, net
    54,244       53,251       53,025  
Real estate and other assets owned
    493       587       577  
Accrued interest receivable
    15,494       14,941       14,204  
Core deposit intangible, net
    5,204       5,865       6,171  
Goodwill
    37,376       36,951       36,909  
Other assets
    14,982       14,579       15,004  
 
   
 
     
 
     
 
 
 
  $ 3,002,699       2,739,633       2,683,074  
 
   
 
     
 
     
 
 
Liabilities and stockholders’ equity:
                       
Non-interest bearing deposits
  $ 438,578       369,052       392,746  
Interest bearing deposits
    1,249,543       1,228,573       1,225,653  
Advances from Federal Home Loan Bank of Seattle
    854,056       777,294       714,837  
Securities sold under agreements to repurchase
    73,074       56,968       53,047  
Other borrowed funds
    9,612       8,018       5,740  
Accrued interest payable
    5,439       4,353       4,779  
Current income taxes
    4,175       826       1,731  
Deferred taxes
    8,375       7,369       4,916  
Subordinated debentures
    80,000       35,000       35,000  
Other liabilities
    16,869       14,341       16,520  
 
   
 
     
 
     
 
 
Total liabilities
    2,739,721       2,501,794       2,454,969  
 
   
 
     
 
     
 
 
Preferred shares, 1,000,000 shares authorized. None outstanding
                 
Common stock, $.01 par value per share, 62,500,000 shares authorized
    245       242       241  
Paid-in capital
    225,647       222,588       221,168  
Retained earnings - substantially restricted
    29,005       8,393       2,740  
Accumulated other comprehensive income
    8,081       6,616       3,956  
 
   
 
     
 
     
 
 
Total stockholders’ equity
    262,978       237,839       228,105  
 
   
 
     
 
     
 
 
 
  $ 3,002,699       2,739,633       2,683,074  
 
   
 
     
 
     
 
 
Number of shares outstanding
    24,507,345       24,203,338       24,167,481  
Book value per share
  $ 10.73       9.83       9.44  

See accompanying notes to condensed consolidated financial statements.

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Table of Contents

Glacier Bancorp, Inc.

Condensed Consolidated Statements of Operations
                                 
    Three months ended September 30,
  Nine months ended September 30,
(Unaudited - dollars in thousands, except per share data)
  2004
  2003
  2004
  2003
Interest income:
                               
Real estate loans
  $ 5,865       6,016       16,554       18,117  
Commercial loans
    14,744       13,137       41,682       37,116  
Consumer and other loans
    5,166       4,999       14,914       15,131  
Investment securities and other
    11,865       8,951       35,396       26,414  
 
   
 
     
 
     
 
     
 
 
Total interest income
    37,640       33,103       108,546       96,778  
 
   
 
     
 
     
 
     
 
 
Interest expense:
                               
Deposits
    3,510       4,102       10,406       13,480  
Federal Home Loan Bank of Seattle advances
    4,787       4,252       13,723       12,551  
Securities sold under agreements to repurchase
    231       157       565       490  
Subordinated debentures
    1,547       903       4,064       2,711  
Other borrowed funds
    180       25       235       81  
 
   
 
     
 
     
 
     
 
 
Total interest expense
    10,255       9,439       28,993       29,313  
 
   
 
     
 
     
 
     
 
 
Net interest income
    27,385       23,664       79,553       67,465  
Provision for loan losses
    1,200       1,221       2,995       3,113  
 
   
 
     
 
     
 
     
 
 
Net interest income after provision for loan losses
    26,185       22,443       76,558       64,352  
 
   
 
     
 
     
 
     
 
 
Non-interest income:
                               
Service charges and other fees
    5,331       4,088       14,386       11,523  
Miscellaneous loan fees and charges
    1,106       1,084       3,465       3,246  
Gains on sale of loans
    2,211       3,258       6,008       8,740  
Gains on sale of investments, net of impairment charge
          5             1,253  
Other income
    489       478       1,537       1,477  
 
   
 
     
 
     
 
     
 
 
Total non-interest income
    9,137       8,913       25,396       26,239  
 
   
 
     
 
     
 
     
 
 
Non-interest expense:
                               
Compensation, employee benefits and related expenses
    10,067       9,448       29,724       26,477  
Occupancy and equipment expense
    2,662       2,536       8,026       7,266  
Outsourced data processing expense
    346       393       1,127       1,221  
Core deposit intangibles amortization
    265       308       810       937  
Other expenses
    4,649       4,362       13,736       12,354  
 
   
 
     
 
     
 
     
 
 
Total non-interest expense
    17,989       17,047       53,423       48,255  
 
   
 
     
 
     
 
     
 
 
Earnings before income taxes
    17,333       14,309       48,531       42,336  
Federal and state income tax expense
    5,653       4,612       15,478       13,859  
 
   
 
     
 
     
 
     
 
 
Net earnings
  $ 11,680       9,697       33,053       28,477  
 
   
 
     
 
     
 
     
 
 
Basic earnings per share
  $ 0.48       0.40       1.35       1.18  
Diluted earnings per share
  $ 0.47       0.39       1.33       1.16  
Dividends declared per share
  $ 0.17       0.16       0.51       0.44  
Return on average assets (annualized)
    1.57 %     1.49 %     1.54 %     1.58 %
Return on average equity (annualized)
    18.12 %     17.10 %     17.74 %     17.00 %
Average outstanding shares – basic
    24,480,327       24,138,173       24,428,437       24,056,071  
Average outstanding shares - diluted
    24,931,616       24,584,529       24,858,965       24,448,030  

See accompanying notes to condensed consolidated financial statements.

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Glacier Bancorp, Inc.

Condensed Consolidated Statements of Stockholders’ Equity
and Comprehensive Income
Year ended December 31, 2003 and Nine months ended September 30, 2004
                                                 
                            Retained        
                            earnings        
                            (accumulated   Accumulated   Total
    Common Stock           deficit)   other comp-   stock-
   
  Paid-in   substantially   rehensive   holders’
(Unaudited - dollars in thousands, except per share data)
  Shares
  Amount
  capital
  restricted
  income
  equity
Balance at December 31, 2002
    23,768,000     $ 238       216,927       (15,027 )     10,111       212,249  
Comprehensive income:
                                               
Net earnings
                      38,008             38,008  
Unrealized loss on securities, net of reclassification adjustment and taxes
                            (3,495 )     (3,495 )
 
                                           
 
 
Total comprehensive income
                                            34,513  
 
                                           
 
 
Cash dividends declared ($.60 per share)
                      (14,573 )           (14,573 )
Stock options exercised
    435,338       4       4,670                   4,674  
Acquisition of fractional shares
                      (15 )           (15 )
Tax benefit from stock related compensation
                991                   991  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Balance at December 31, 2003
    24,203,338     $ 242       222,588       8,393       6,616       237,839  
Comprehensive income:
                                               
Net earnings
                      33,053             33,053  
Unrealized gain on securities, net of reclassification adjustment and taxes
                            1,465       1,465  
 
                                           
 
 
Total comprehensive income
                                            34,518  
 
                                           
 
 
Cash dividends declared ($.51 per share)
                      (12,441 )           (12,441 )
Stock options exercised
    375,257       4       4,872                   4,876  
Repurchase and retirement of stock
    (71,250 )     (1 )     (1,804 )                 (1,805 )
Acquisition of fractional shares
                (9 )                 (9 )
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Balance at September 30, 2004
    24,507,345     $ 245       225,647       29,005       8,081       262,978  
 
   
 
     
 
     
 
     
 
     
 
     
 
 

See accompanying notes to condensed consolidated financial statements.

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Glacier Bancorp, Inc.

Condensed Consolidated Statements of Cash Flows
                 
    Nine months ended Sept. 30,
(Unaudited - dollars in thousands)
  2004
  2003
OPERATING ACTIVITIES :
               
Net cash provided by operating activities
  $ 55,340       64,713  
 
   
 
     
 
 
INVESTING ACTIVITIES:
               
Proceeds from sales, maturities and prepayments of investments available-for-sale
    185,037       294,546  
Purchases of investments available-for-sale
    (227,988 )     (543,874 )
Principal collected on installment and commercial loans
    457,348       402,977  
Installment and commercial loans originated or acquired
    (632,755 )     (527,430 )
Principal collections on mortgage loans
    214,558       228,299  
Mortgage loans originated or acquired
    (272,699 )     (217,457 )
Net purchase of FHLB and FRB stock
    (1,943 )     (672 )
Acquisition of lone branch and Pend Oreille Bancorp
    14,524       (200 )
Net addition of premises and equipment
    (4,374 )     (6,146 )
 
   
 
     
 
 
NET CASH USED IN INVESTING ACTIVITIES
    (268,292 )     (369,957 )
 
   
 
     
 
 
FINANCING ACTIVITIES:
               
Net increase in deposits
    75,356       98,717  
Net increase in FHLB advances and other borrowed funds
    78,355       221,830  
Net increase in securities sold under repurchase agreements
    16,106       6,841  
Proceeds from issuance of subordinated debentures
    45,000        
Cash dividends paid to stockholders
    (12,441 )     (10,695 )
Proceeds from exercise of stock options
    4,876       4,244  
Repurchase and retirement of stock
    (1,805 )      
Cash paid for stock split and stock dividend
    (9 )     (15 )
 
   
 
     
 
 
NET CASH PROVIDED BY FINANCING ACTIVITIES
    205,438       320,922  
 
   
 
     
 
 
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    (7,514 )     15,678  
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    86,140       79,377  
 
   
 
     
 
 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 78,626       95,055  
 
   
 
     
 
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
               
Cash paid during the period for:   Interest
  $ 27,907       30,625  
                                                 Income taxes
  $ 12,129       11,236  

See accompanying notes to condensed consolidated financial statements.

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Table of Contents

Notes to Condensed Consolidated Financial Statements

1)   Basis of Presentation:
 
    In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of Glacier Bancorp Inc.’s (the “Company”) financial condition as of September 30, 2004, December 31, 2003, and September 30, 2003, stockholders’ equity for the nine months ended September 30, 2004 and the year ended December 31, 2003, the results of operations for the three and nine months ended September 30, 2004 and 2003, and cash flows for the nine months ended September 30, 2004 and 2003.
 
    The accompanying consolidated financial statements do not include all of the information and footnotes required by U. S. generally accepted accounting principles for complete financial statements. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003. Operating results for the three and nine months ended September 30, 2004 are not necessarily indicative of the results anticipated for the year ending December 31, 2004. Certain reclassifications have been made to the 2003 financial statements to conform to the 2004 presentation.
 
2)   Organizational Structure:
 
    The Company, headquartered in Kalispell, Montana, is a Montana corporation incorporated in 2004 as a successor corporation to the Delaware corporation incorporated in 1990. The Company is the parent company for seven wholly owned banking subsidiaries: Glacier Bank (“Glacier”), First Security Bank of Missoula (“First Security”), Western Security Bank (“Western”), Big Sky Western Bank (“Big Sky”), Valley Bank of Helena (“Valley”), and Glacier Bank of Whitefish (“Whitefish”), all located in Montana, and Mountain West Bank (“Mountain West”) which is located in Idaho, Utah, and Washington. In addition, the Company formed two subsidiaries, Glacier Capital Trust I (“Glacier Trust I”), and Glacier Capital Trust II (“Glacier Trust II”), for the purpose of issuing trust preferred securities. The Company does not have any off-balance sheet entities.
 
    On March 24, 2004, the Company formed Glacier Trust II and subordinated debentures in the form of trust preferred securities of $45 million, with an interest rate of 5.79 percent, were issued by the Company. The proceeds were used for general corporate purposes.
 
    The following abbreviated organizational chart illustrates the various relationships:

     (CHART)

3)   Ratios:
 
    Returns on average assets and average equity were calculated based on daily averages.

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4)   Dividends Declared:
 
    On April 28, 2004, the Board of Directors declared a five-for-four stock split payable May 20, 2004 to owners of record on May 11, 2004, and all share and per share amounts have been restated to reflect the effects of the stock split. On September 29, 2004, the Board of Directors declared a $.17 per share quarterly cash dividend to stockholders of record on October 12, 2004, payable on October 21, 2004.
 
5)   Computation of Earnings Per Share:
 
    Basic earnings per common share is computed by dividing net earnings by the weighted average number of shares of common stock outstanding during the period presented. Diluted earnings per share is computed by including the net increase in shares if dilutive outstanding stock options were exercised, using the treasury stock method.
 
    The following schedule contains the data used in the calculation of basic and diluted earnings per share.

                                 
    Three   Three   Nine   Nine
    months ended   months ended   months ended   months ended
    Sept. 30, 2004
  Sept. 30, 2003
  Sept. 30, 2004
  Sept. 30, 2003
Net earnings available to common stockholders
  $ 11,680,000       9,697,000       33,053,000       28,477,000  
Average outstanding shares - basic
    24,480,327       24,138,173       24,428,437       24,056,071  
Add: Dilutive stock options
    451,289       446,356       430,528       391,959  
 
   
 
     
 
     
 
     
 
 
Average outstanding shares - diluted
    24,931,616       24,584,529       24,858,965       24,448,030  
 
   
 
     
 
     
 
     
 
 
Basic earnings per share
  $ 0.48       0.40       1.35       1.18  
 
   
 
     
 
     
 
     
 
 
Diluted earnings per share
  $ 0.47       0.39       1.33       1.16  
 
   
 
     
 
     
 
     
 
 

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6)   Investments:
 
    A comparison of the amortized cost and estimated fair value of the Company’s investment securities, available for sale, is as follows.

INVESTMENTS AS OF SEPTEMBER 30, 2004

                                         
                    Gross Unrealized   Estimated
    Weighted   Amortized  
  Fair
(Dollars in thousands)
  Yield
  Cost
  Gains
  Losses
  Value
U.S. Government and Federal Agencies
                                       
maturing within one year
    1.29 %     253                   253  
maturing one year through five years
    3.54 %     50,219       619       (1 )     50,837  
maturing five years through ten years
    4.13 %     358       10             368  
maturing after ten years
    2.59 %     483       2       (1 )     484  
 
           
 
     
 
     
 
     
 
 
 
    3.53 %     51,313       631       (2 )     51,942  
 
           
 
     
 
     
 
     
 
 
State and Local Governments and other issues:
                                       
maturing within one year
    5.29 %     1,017       14             1,031  
maturing one year through five years
    4.79 %     4,857       83       (7 )     4,933  
maturing five years through ten years
    5.33 %     4,665       343             5,008  
maturing after ten years
    5.14 %     300,026       12,652       (1,320 )     311,358  
 
           
 
     
 
     
 
     
 
 
 
    5.14 %     310,565       13,092       (1,327 )     322,330  
 
           
 
     
 
     
 
     
 
 
Mortgage-Backed Securities
    4.96 %     62,961       1,094       (522 )     63,533  
Real Estate Mortgage Investment Conduits
    3.94 %     648,687       3,201       (2,831 )     649,057  
FHLB and FRB stock, at cost
    3.79 %     49,804                   49,804  
 
           
 
     
 
     
 
     
 
 
Total Investments
    4.30 %   $ 1,123,330       18,018       (4,682 )     1,136,666  
 
           
 
     
 
     
 
     
 
 

INVESTMENTS AS OF DECEMBER 31, 2003

                                         
                    Gross Unrealized   Estimated
    Weighted   Amortized  
  Fair
(Dollars in thousands)
  Yield
  Cost
  Gains
  Losses
  Value
U.S. Government and Federal Agencies
                                       
maturing within one year
    0.85 %   $ 352                   352  
maturing one year through five years
    1.29 %     259             (1 )     258  
maturing after ten years
    2.97 %     957       15       (1 )     971  
 
           
 
     
 
     
 
     
 
 
 
    2.22 %     1,568       15       (2 )     1,581  
 
           
 
     
 
     
 
     
 
 
State and Local Governments and other issues:
                                       
maturing within one year
    5.69 %     4,346       41             4,387  
maturing one year through five years
    4.30 %     5,485       84       (102 )     5,467  
maturing five years through ten years
    5.35 %     4,910       197             5,107  
maturing after ten years
    5.13 %     296,237       10,170       (1,683 )     304,724  
 
           
 
     
 
     
 
     
 
 
 
    5.13 %     310,978       10,492       (1,785 )     319,685  
 
           
 
     
 
     
 
     
 
 
Mortgage-Backed Securities
    4.30 %     64,123       1,465       (342 )     65,246  
Real Estate Mortgage Investment Conduits
    4.03 %     662,727       4,983       (3,911 )     663,799  
FHLB and FRB stock, at cost
    5.34 %     46,643                   46,643  
 
           
 
     
 
     
 
     
 
 
Total Investments
    4.41 %   $ 1,086,039       16,955       (6,040 )     1,096,954  
 
           
 
     
 
     
 
     
 
 

    Interest income includes tax-exempt interest for the nine months ended September 30, 2004 and 2003 of $10,432,000 and $8,138,000, respectively, and the three months ended September 30, 2004 and 2003 of $3,473,000 and $2,959,000, respectively.

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Table of Contents

    Gross proceeds from sales of investment securities for the nine months ended September 30, 2004 and 2003 were $0 and $19,603,000 respectively, resulting in gross gains of approximately $0 and $3,502,000, respectively. The cost of any investment sold is determined by specific identification.
 
    There was an impairment charge for the three and nine months ended September 30, 2003, of $0 and $2,249,000, respectively, for the impairment of value on collateralized mortgage obligations. The impairment charge is included in the net gain on sale of investments.

7) Loans

    The following table summarizes the Company’s loan portfolio.

TYPE OF LOAN

                                                 
    At   At   At
    9/30/2004
  12/31/2003
  9/30/2003
(Dollars in Thousands)   Amount   Percent   Amount   Percent   Amount   Percent
Real Estate Loans:
                                               
Residential first mortgage loans
  $ 359,025       21.6 %   $ 301,511       21.1 %   $ 311,284       21.6 %
Loans held for sale
    15,630       1.0 %     16,973       1.2 %     34,533       2.4 %
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Total
    374,655       22.6 %     318,484       22.3 %     345,817       24.0 %
Commercial Loans:
                                               
Real estate
    495,617       29.9 %     483,684       33.8 %     472,515       32.7 %
Other commercial loans
    480,068       28.9 %     359,030       25.1 %     358,304       24.8 %
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Total
    975,685       58.8 %     842,714       58.9 %     830,819       57.5 %
Consumer and Other Loans:
                                               
Consumer loans
    90,771       5.5 %     95,739       6.7 %     98,415       6.8 %
Home equity loans
    247,645       14.9 %     199,693       14.0 %     194,228       13.5 %
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Total
    338,416       20.4 %     295,432       20.7 %     292,643       20.3 %
Net deferred loan fees, premiums and discounts
    (3,067 )     -0.2 %     (2,275 )     -0.2 %     (2,159 )     -0.1 %
Allowance for Losses
    (26,075 )     -1.6 %     (23,990 )     -1.7 %     (23,920 )     -1.7 %
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Net Loans
  $ 1,659,614       100.0 %   $ 1,430,365       100.0 %   $ 1,443,200       100.0 %
 
   
 
     
 
     
 
     
 
     
 
     
 
 

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    The following table sets forth information regarding the Company’s non-performing assets at the dates indicated:

NONPERFORMING ASSETS

                         
             
    At   At   At
(Dollars in Thousands)
 
  9/30/2004
  12/31/2003
  9/30/2003
Non-accrual loans:
                       
Real estate loans
  $ 685       1,129       2,549  
Commercial loans
    7,571       8,246       5,513  
Consumer and other loans
    367       687       353  
 
   
 
     
 
     
 
 
Total
  $ 8,623       10,062       8,415  
Accruing Loans 90 days or more overdue:
                       
Real estate loans
    287       379       837  
Commercial loans
    2,485       1,798       587  
Consumer and other loans
    420       242       73  
 
   
 
     
 
     
 
 
Total
  $ 3,192       2,419       1,497  
Real estate and other assets owned
    493       587       577  
 
   
 
     
 
     
 
 
Total non-performing loans, and real estate and other assets owned
  $ 12,308       13,068       10,489  
 
   
 
     
 
     
 
 
As a percentage of total assets
    0.41 %     0.48 %     0.39 %
Interest Income (1)
  $ 398       665       428  

(1)   This is the amount of interest that would have been recorded on loans accounted for on a non-accrual basis for the nine months ended September 30, 2004 and 2003 and the year ended December 31, 2003, if such loans had been current for the entire period.
 
    The following table illustrates the loan loss experience:

ALLOWANCE FOR LOAN LOSS

                         
    Nine months ended   Year ended   Nine months ended
    September 30,   December 31,   September 30,
(Dollars in Thousands)
  2004
  2003
  2003
Balance at beginning of period
  $ 23,990       20,944       20,944  
Charge offs:
                       
Real estate loans
    (237 )     (416 )     (223 )
Commercial loans
    (497 )     (912 )     (792 )
Consumer and other loans
    (594 )     (1,078 )     (738 )
 
   
 
     
 
     
 
 
Total charge offs
  $ (1,328 )     (2,406 )     (1,753 )
 
   
 
     
 
     
 
 
Recoveries:
                       
Real estate loans
    53       126       149  
Commercial loans
    94       274       258  
Consumer and other loans
    271       284       250  
 
   
 
     
 
     
 
 
Total recoveries
  $ 418       684       657  
 
   
 
     
 
     
 
 
Chargeoffs, net of recoveries
    (910 )     (1,722 )     (1,096 )
Acquisition (1)
          959       959  
Provision
    2,995       3,809       3,113  
 
   
 
     
 
     
 
 
Balance at end of period
  $ 26,075       23,990       23,920  
 
   
 
     
 
     
 
 
Ratio of net charge offs to average loans outstanding during the period
    0.05 %     0.12 %     0.08 %

(1)   Acquisition of Pend Oreille Bancorp, Inc.

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    The following table summarizes the allocation of the allowance for loan losses:

                                                 
    September 30, 2004
  December 31, 2003
  September 30, 2003
            Percent           Percent           Percent
            of loans in           of loans in           of loans in
(Dollars in thousands)
  Allowance
  category
  Allowance
  category
  Allowance
  category
Real estate loans
  $ 2,570       22.2 %     2,147       21.8 %     2,214       23.5 %
Commercial real estate
    8,738       29.4 %     7,464       33.2 %     7,057       32.2 %
Other commercial
    10,136       28.4 %     9,951       24.7 %     10,275       24.4 %
Consumer and other loans
    4,631       20.0 %     4,428       20.3 %     4,374       19.9 %
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Totals
  $ 26,075       100.0 %     23,990       100.0 %     23,920       100.0 %
 
   
 
     
 
     
 
     
 
     
 
     
 
 

8) Intangible Assets

    The following table sets forth information regarding the Company’s core deposit intangibles and mortgage servicing rights as of September 30, 2004:

                         
    Core Deposit   Mortgage    
(Dollars in thousands)
  Intangible
  Servicing Rights (1)
  Total
Gross carrying value
  $ 10,270                  
Accumulated Amortization
    (5,066 )                
 
   
 
                 
Net carrying value
  $ 5,204       1,243       6,447  
 
   
 
                 
Weighted-Average amortization period
                       
(Period in years)
    10.0       9.6       9.9  
Aggregate Amortization Expense
                       
For the three months ended September 30, 2004
  $ 265       82       347  
For the nine months ended September 30, 2004
  $ 810       261       1,071  
Estimated Amortization Expense
                       
For the year ended December 31, 2004
  $ 1,074       282       1,356  
For the year ended December 31, 2005
    917       85       1,002  
For the year ended December 31, 2006
    841       83       924  
For the year ended December 31, 2007
    820       80       900  
For the year ended December 31, 2008
    807       78       885  

(1)   The mortgage servicing rights are included in other assets and the gross carrying value and accumulated amortization are not readily available.

    On June 4, 2004, the Company acquired the Ione, Washington branch, which resulted in additional core deposit intangible of $148,000 and goodwill of $425,000.

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9) Deposits

    The following table illustrates the amounts outstanding for deposits greater than $100,000 at September 30, 2004, according to the time remaining to maturity:

                         
    Certificates   Non-Maturity    
(Dollars in thousands)
  of Deposit
  Deposits
  Totals
Within three months
  $ 26,034       578,156       604,190  
Three to six months
    21,067             21,067  
Seven to twelve months
    15,842             15,842  
Over twelve months
    23,922             23,922  
 
   
 
     
 
     
 
 
Totals
  $ 86,865       578,156       665,021  
 
   
 
     
 
     
 
 

10) Advances and Other Borrowings

    The following chart illustrates the average balances and the maximum outstanding month-end balances for Federal Home Loan Bank of Seattle (FHLB) advances and repurchase agreements:

                         
    As of and   As of and   As of and
    for the nine   for the twelve   for the nine
    months ended   months ended   months ended
(Dollars in thousands)
  September 30, 2004
  December 31, 2003
  September 30, 2003
FHLB Advances
                       
Amount outstanding at end of period
  $ 854,056       777,294       714,837  
Average balance
  $ 818,003       601,679       556,664  
Maximum outstanding at any month-end
  $ 862,136       777,294       714,837  
Weighted average interest rate
    2.23 %     2.80 %     3.01 %
Repurchase Agreements:
                       
Amount outstanding at end of period
  $ 73,074       56,968       53,047  
Average balance
  $ 67,564       61,609       60,882  
Maximum outstanding at any month-end
  $ 73,074       74,808       74,808  
Weighted average interest rate
    1.11 %     1.09 %     1.08 %

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11) Stockholders’ Equity:

    The Federal Reserve Board has adopted capital adequacy guidelines that are used to assess the adequacy of capital in supervising a bank holding company. The following table illustrates the Federal Reserve Board’s capital adequacy guidelines and the Company’s compliance with those guidelines as of September 30, 2004.

CONSOLIDATED

                         
    Tier 1 (Core)   Tier 2 (Total)   Leverage
(Dollars in thousands)
  Capital
  Capital
  Capital
GAAP Capital
  $ 262,978       262,978       262,978  
Less: Goodwill and intangibles
    (42,580 )     (42,580 )     (42,580 )
Accumulated other comprehensive Unrealized gain on AFS securities
    (8,081 )     (8,081 )     (8,081 )
Plus: Allowance for loan losses
          24,471        
Other adjustments
          62        
Subordinated debentures
    80,000       80,000       80,000  
 
   
 
     
 
     
 
 
Regulatory capital computed
  $ 292,317       316,850       292,317  
 
   
 
     
 
     
 
 
Risk weighted assets
  $ 1,957,657       1,957,657          
 
   
 
     
 
         
Total average assets
                  $ 2,939,962  
 
                   
 
 
Capital as % of defined assets
    14.93 %     16.19 %     9.94 %
Regulatory “well capitalized” requirement
    6.00 %     10.00 %     5.00 %
 
   
 
     
 
     
 
 
Excess over “well capitalized” requirement
    8.93 %     6.19 %     4.94 %
 
   
 
     
 
     
 
 

12) Comprehensive Earnings:

    The Company’s only component of other comprehensive earnings is the unrealized gains and losses on available-for-sale securities.

                                 
    For the three months   For the nine months
    ended September 30,
  ended September 30,
Dollars in thousands
  2004
  2003
  2004
  2003
Net earnings
  $ 11,680       9,697       33,053       28,477  
Unrealized holding gain (loss) arising during the period
    20,932       (14,161 )     2,421       (13,617 )
Tax (expense) benefit
    (8,248 )     5,576       (956 )     5,325  
 
   
 
     
 
     
 
     
 
 
Net after tax
    12,684       (8,585 )     1,465       (8,292 )
Reclassification adjustment for gains included in net income
          5             3,502  
Tax expense
          (1 )           (1,365 )
 
   
 
     
 
     
 
     
 
 
Net after tax
          4             2,137  
Net unrealized gain (loss) on securities
    12,684       (8,581 )     1,465       (6,155 )
 
   
 
     
 
     
 
     
 
 
Total comprehensive earnings
  $ 24,364       1,116       34,518       22,322  
 
   
 
     
 
     
 
     
 
 

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13) Stock Based Compensation

    The exercise price of all options granted has been equal to the fair market value of the underlying stock at the date of grant and, accordingly, no compensation cost has been recognized for stock options in the financial statements. Had the company determined compensation cost based on the fair value of the option itself at the grant date for its stock options and earnings per share under FASB Statement 123, Accounting for Stock-Based Compensation, the Company’s net income would have been reduced to the pro forma amounts indicated below:

                                     
        Three months ended Sept. 30,
  Nine months ended Sept. 30,
        2004
  2003
  2004
  2003
Net earnings (in thousands):
  As reported   $ 11,680       9,697       33,053       28,477  
  Compensation cost     (129 )     (188 )     (374 )     (562 )
       
 
     
 
     
 
     
 
 
  Pro forma     11,551       9,509       32,679       27,915  
       
 
     
 
     
 
     
 
 
Basic earnings per share:
  As reported     0.48       0.40       1.35       1.18  
  Compensation cost     (0.01 )     (0.01 )     (0.01 )     (0.02 )
       
 
     
 
     
 
     
 
 
  Pro forma     0.47       0.39       1.34       1.16  
       
 
     
 
     
 
     
 
 
Diluted earnings per share:
  As reported     0.47       0.39       1.33       1.16  
  Compensation cost     (0.01 )       (0.02 )     (0.02 )
       
 
     
 
     
 
     
 
 
  Pro forma     0.46       0.39       1.31       1.14  
       
 
     
 
     
 
     
 
 

14) Segment Information

    The Company evaluates segment performance internally based on individual bank charters, and thus the operating segments are so defined. The following schedule provides selected financial data for the Company’s operating segments. Centrally provided services to the Banks are allocated based on estimated usage of those services. The operating segment identified as “Other” includes the Parent, non-bank units, and eliminations of transactions between segments.

                                         
    Nine months ended and as of September 30, 2004
            First           Mountain    
(Dollars in thousands)
  Glacier
  Security
  Western
  West
  Big Sky
Revenues from external customers
  $ 29,084       26,648       19,180       29,914       10,660  
Intersegment revenues
    238       20       2              
Expenses
    (21,032 )     (18,123 )     (13,950 )     (24,067 )     (7,970 )
Intercompany eliminations
                             
 
   
 
     
 
     
 
     
 
     
 
 
Net income
  $ 8,290       8,545       5,232       5,847       2,690  
 
   
 
     
 
     
 
     
 
     
 
 
Total Assets
  $ 673,084       611,465       458,333       612,608       235,058  
 
   
 
     
 
     
 
     
 
     
 
 
                                 
                            Total
    Valley
  Whitefish
  Other
  Consolidated
Revenues from external customers
    10,539       6,957       960       133,942  
Intersegment revenues
    104             40,986       41,350  
Expenses
    (7,865 )     (4,926 )     (2,956 )     (100,889 )
Intercompany eliminations
                (41,350 )     (41,350 )
 
   
 
     
 
     
 
     
 
 
Net income
    2,778       2,031       (2,360 )     33,053  
 
   
 
     
 
     
 
     
 
 
Total Assets
    233,223       164,851       14,077       3,002,699  
 
   
 
     
 
     
 
     
 
 

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Table of Contents

                                         
    Nine months ended and as of September 30, 2003
            First           Mountain    
(Dollars in thousands)
  Glacier
  Security
  Western
  West
  Big Sky
Revenues from external customers
  $ 27,417       25,862       19,358       24,214       9,155  
Intersegment revenues
    139       16       1       9       3  
Expenses
    (19,815 )     (18,497 )     (14,734 )     (19,792 )     (7,068 )
Intercompany eliminations
                             
 
   
 
     
 
     
 
     
 
     
 
 
Net income
  $ 7,741       7,381       4,625       4,431       2,090  
 
   
 
     
 
     
 
     
 
     
 
 
Total Assets
  $ 565,347       568,339       444,270       535,385       191,780  
 
   
 
     
 
     
 
     
 
     
 
 
                                 
                            Total
    Valley
  Whitefish
  Other
  Consolidated
Revenues from external customers
    10,788       6,011       212       123,017  
Intersegment revenues
    98       8       35,578       35,852  
Expenses
    (8,125 )     (4,460 )     (2,049 )     (94,540 )
Intercompany eliminations
                (35,852 )     (35,852 )
 
   
 
     
 
     
 
     
 
 
Net income
    2,761       1,559       (2,111 )     28,477  
 
   
 
     
 
     
 
     
 
 
Total Assets
    219,342       148,299       10,312       2,683,074  
 
   
 
     
 
     
 
     
 
 
                                         
    Three months ended and as of September 30, 2004
            First           Mountain    
(Dollars in thousands)
  Glacier
  Security
  Western
  West
  Big Sky
Revenues from external customers
  $ 10,122       9,036       6,573       10,690       3,786  
Intersegment revenues
    108       10                    
Expenses
    (7,404 )     (6,174 )     (4,743 )     (8,455 )     (2,785 )
Intercompany eliminations
                             
 
   
 
     
 
     
 
     
 
     
 
 
Net income
  $ 2,826       2,872       1,830       2,235       1,001  
 
   
 
     
 
     
 
     
 
     
 
 
Total Assets
  $ 673,084       611,465       458,333       612,608       235,058  
 
   
 
     
 
     
 
     
 
     
 
 
                                 
                            Total
    Valley
  Whitefish
  Other
  Consolidated
Revenues from external customers
    3,676       2,446       448       46,777  
Intersegment revenues
    35             14,320       14,473  
Expenses
    (2,763 )     (1,716 )     (1,057 )     (35,097 )
Intercompany eliminations
                (14,473 )     (14,473 )
 
   
 
     
 
     
 
     
 
 
Net income
    948       730       (762 )     11,680  
 
   
 
     
 
     
 
     
 
 
Total Assets
    233,223       164,851       14,077       3,002,699  
 
   
 
     
 
     
 
     
 
 

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Table of Contents

                                         
    Three months ended and as of September 30, 2003
            First           Mountain    
(Dollars in thousands)
  Glacier
  Security
  Western
  West
  Big Sky
Revenues from external customers
  $ 9,376       8,708       6,401       8,801       3,182  
Intersegment revenues
    37       4             6       3  
Expenses
    (6,762 )     (6,284 )     (4,820 )     (7,287 )     (2,397 )
Intercompany eliminations
                             
 
   
 
     
 
     
 
     
 
     
 
 
Net income
  $ 2,651       2,428       1,581       1,520       788  
 
   
 
     
 
     
 
     
 
     
 
 
Total Assets
  $ 565,347       568,339       444,270       535,385       191,780  
 
   
 
     
 
     
 
     
 
     
 
 
                                 
                            Total
    Valley
  Whitefish
  Other
  Consolidated
Revenues from external customers
    3,398       2,080       70       42,016  
Intersegment revenues
    33       7       12,136       12,226  
Expenses
    (2,587 )     (1,506 )     (676 )     (32,319 )
Intercompany eliminations
                (12,226 )     (12,226 )
 
   
 
     
 
     
 
     
 
 
Net income
    844       581       (696 )     9,697  
 
   
 
     
 
     
 
     
 
 
Total Assets
    219,342       148,299       10,312       2,683,074  
 
   
 
     
 
     
 
     
 
 

15) Rate/Volume Analysis

    Net interest income can be evaluated from the perspective of relative dollars of change in each period. Interest income and interest expense, which are the components of net interest income, are shown in the following table on the basis of the amount of any increases (or decreases) attributable to changes in the dollar levels of the Company’s interest-earning assets and interest-bearing liabilities (“Volume”) and the yields earned and rates paid on such assets and liabilities (“Rate”). The change in interest income and interest expense attributable to changes in both volume and rates has been allocated proportionately to the change due to volume and the change due to rate.

                         
    Nine Months Ended September 30,
            2004 vs. 2003        
    Increase (Decrease) due to:
(Dollars in Thousands)
  Volume
  Rate
  Net
Interest Income
                       
Real Estate Loans
  $ (282 )     (1,281 )     (1,563 )
Commercial Loans
    7,756       (3,190 )     4,566  
Consumer and Other Loans
    1,324       (1,541 )     (217 )
Investment Securities
    8,193       789       8,982  
 
   
 
     
 
     
 
 
Total Interest Income
    16,991       (5,223 )     11,768  
Interest Expense
                       
NOW Accounts
    59       (75 )     (16 )
Savings Accounts
    58       (109 )     (51 )
Money Market Accounts
    219       (522 )     (303 )
Certificates of Deposit
    (772 )     (1,932 )     (2,704 )
FHLB Advances
    5,892       (4,720 )     1,172  
Other Borrowings and Repurchase Agreements
    1,689       (107 )     1,582  
 
   
 
     
 
     
 
 
Total Interest Expense
    7,145       (7,465 )     (320 )
 
   
 
     
 
     
 
 
Net Interest Income
  $ 9,846       2,242       12,088  
 
   
 
     
 
     
 
 

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16) Average Balance Sheet

    The following schedule provides (i) the total dollar amount of interest and dividend income of the Company for earning assets and the resultant average yield; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rate; (iii) net interest and dividend income; (iv) interest rate spread; and (v) net interest margin. Non-accrual loans are included in the average balance of the loans.

AVERAGE BALANCE SHEET

                                                 
    For the Nine months ended 9-30-04
  For the Nine months ended 9-30-03
            Interest   Average           Interest   Average
    Average   and   Yield/   Average   and   Yield/
(Dollars in Thousands)
  Balance
  Dividends
  Rate
  Balance
  Dividends
  Rate
ASSETS
                                               
Real Estate Loans
  $ 332,261       16,554       6.64 %   $ 337,512       18,117       7.16 %
Commercial Loans
    907,310       41,682       6.14 %     750,477       37,116       6.61 %
Consumer and Other Loans
    312,015       14,914       6.38 %     286,911       15,131       7.05 %
 
   
 
     
 
             
 
     
 
         
Total Loans
    1,551,586       73,150       6.30 %     1,374,900       70,364       6.84 %
Tax -Exempt Investment Securities (1)
    281,614       10,432       4.94 %     215,784       8,138       5.03 %
Investment Securities
    852,969       24,964       3.90 %     650,208       18,276       3.75 %
 
   
 
     
 
             
 
     
 
         
Total Earning Assets
    2,686,169       108,546       5.39 %     2,240,892       96,778       5.76 %
 
           
 
                     
 
         
Non-Earning Assets
    177,248                       171,289                  
 
   
 
                     
 
                 
TOTAL ASSETS
  $ 2,863,417                     $ 2,412,181                  
 
   
 
                     
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                               
NOW Accounts
  $ 255,953       347       0.18 %   $ 220,183       363       0.22 %
Savings Accounts
    156,829       336       0.29 %     136,469       387       0.38 %
Money Market Accounts
    395,935       2,685       0.91 %     368,899       2,988       1.08 %
Certificates of Deposit
    425,446       7,038       2.21 %     462,067       9,742       2.82 %
FHLB Advances
    818,003       13,723       2.24 %     556,664       12,551       3.01 %
Repurchase Agreements and Other Borrowed Funds
    151,856       4,864       4.28 %     100,270       3,282       4.38 %
 
   
 
     
 
             
 
     
 
         
Total Interest Bearing Liabilities
    2,204,022       28,993       1.76 %     1,844,552       29,313       2.12 %
 
           
 
                     
 
         
Non-interest Bearing Deposits
    384,189                       315,233                  
Other Liabilities
    26,342                       28,459                  
 
   
 
                     
 
                 
Total Liabilities
    2,614,553                       2,188,244                  
 
   
 
                     
 
                 
Common Stock
    219                       183                  
Paid-In Capital
    224,792                       197,524                  
Retained Earnings
    19,063                       16,665                  
Accumulated Other Comprehensive Earnings
    4,790                       9,565                  
 
   
 
                     
 
                 
Total Stockholders’ Equity
    248,864                       223,937                  
 
   
 
                     
 
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 2,863,417                     $ 2,412,181                  
 
   
 
                     
 
                 
Net Interest Income
          $ 79,553                     $ 67,465          
 
           
 
                     
 
         
Net Interest Spread
                    3.63 %                     3.64 %
Net Interest Margin on average earning assets
                    3.96 %                     4.03 %
Return on Average Assets
                    1.54 %                     1.58 %
Return on Average Equity
                    17.74 %                     17.00 %

(1)   Excludes tax effect on non-taxable investment security income

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Recent acquisition

On June 4, 2004, Glacier Bancorp, Inc. completed its acquisition of the Ione branch in Ione, Washington. The branch had approximately $15 million in deposits, and became a branch of Mountain West Bank, the Company’s Idaho banking subsidiary. In consideration for the assumption of liabilities, the Company received $14.5 million in cash. A portion of the purchase price was allocated to core deposit intangible of $148,000 and goodwill of $425,000.

Financial Condition

This section discusses the changes in Statement of Financial Condition items from September 30, 2003 and December 31, 2003, to September 30, 2004.

                                         
                            $ change from   $ change from
    September 30,   December 31,   September 30,   December 31,   September 30,
Assets ($ in thousands)
  2004
  2003
  2003
  2003
  2003
Cash on hand and in banks
  $ 69,625       77,093       67,538       (7,468 )     2,087  
Investment securities, interest bearing deposits, FHLB stock, and FRB stock
    1,145,667       1,106,001       1,046,446       39,666       99,221  
Loans:
                                       
Real estate
    373,662       317,774       345,091       55,888       28,571  
Commercial
    973,869       841,306       829,513       132,563       144,356  
Consumer
    338,158       295,275       292,516       42,883       45,642  
 
   
 
     
 
     
 
     
 
     
 
 
Total loans
    1,685,689       1,454,355       1,467,120       231,334       218,569  
Allowance for loan losses
    (26,075 )     (23,990 )     (23,920 )     (2,085 )     (2,155 )
 
   
 
     
 
     
 
     
 
     
 
 
Total loans net of allowance for loan losses
    1,659,614       1,430,365       1,443,200       229,249       216,414  
 
   
 
     
 
     
 
     
 
     
 
 
Other assets
    127,793       126,174       125,890       1,619       1,903  
 
   
 
     
 
     
 
     
 
     
 
 
Total Assets
  $ 3,002,699       2,739,633       2,683,074       263,066       319,625  
 
   
 
     
 
     
 
     
 
     
 
 

At September 30, 2004 total assets were $3.003 billion which is $320 million greater than the September 30, 2003 assets of $2.683 billion, an increase of 12 percent, and $263 million greater than the December 31, 2003 assets of $2.740 billion, a 10 percent increase.

Total loans have increased $219 million from September 30, 2003 and $231 million from December 31, 2003, an increase of 16 percent. Since year end 2003, commercial loans have increased $133 million, or 16 percent, and real estate loans gained $56 million, or 18 percent. Consumer loans have increased $43 million, or 15 percent, primarily from increases in home equity loans which continue to be the primary source of our consumer loan originations. Our banks continue to generate impressive loan volume. For the past two quarters our loan growth has far exceeded our anticipated growth.

Investment securities, including interest bearing deposits in other financial institutions, have increased $99 million from September 30, 2003, and are $40 million more than at December 31, 2003. Additional investments were made to utilize excess funding liquidity, and to invest a portion of the proceeds from the trust preferred securities issued in March.

The Company typically sells a majority of mortgage loans originated, retaining servicing only on loans sold to certain lenders. The sale of loans in the secondary mortgage market reduces the Company’s risk of holding long-term, fixed rate loans in the loan portfolio. Mortgage loans sold for the nine months ended September 30, 2004 and 2003 were $216 million and $455 million, respectively, and for the three months ended September 30, 2004 and 2003 were $73 million and $163 million. The Company has also been active in generating commercial SBA loans. A portion of some of those loans is sold to other investors. The amount of loans sold and serviced for others at September 30, 2004 was approximately $175 million.

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                            $ change from   $ change from
    September 30,   December 31,   September 30,   December 31,   September 30,
Liabilities ($ in thousands)
  2004
  2003
  2003
  2003
  2003
Non-interest bearing deposits
  $ 438,578       369,052       392,746       69,526       45,832  
Interest bearing deposits
    1,249,543       1,228,573       1,225,653       20,970       23,890  
Advances from Federal Home Loan Bank
    854,056       777,294       714,837       76,762       139,219  
Securities sold under agreements to repurchase and other borrowed funds
    82,686       64,986       58,787       17,700       23,899  
Other liabilities
    34,858       26,889       27,946       7,969       6,912  
Subordinated debentures
    80,000       35,000       35,000       45,000       45,000  
 
   
 
     
 
     
 
     
 
     
 
 
Total liabilities
  $ 2,739,721       2,501,794       2,454,969       237,927       284,752  
 
   
 
     
 
     
 
     
 
     
 
 

Non-interest bearing deposits have increased $70 million, or 19 percent, since December 31, 2003 and are $46 million, or 12 percent, greater than the September 30, 2003 balance. This continues to be a primary focus of our banks and the programs we have initiated this past year continue to gain momentum. Total deposits have increased $70 million from the September 30, 2003 balances and $90 million from December 31, 2003. This growth in deposits, a low cost stable funding source, gives us increased flexibility in managing our asset mix. Federal Home Loan Bank advances have also increased, $77 million from December 31, 2003, and $139 million from September 30, 2003, as we continue to take advantage of the flexibility of that funding source in this current period of low interest rates. Repurchase agreements and other borrowed funds also have increased from the prior year and from year end 2003 as we continue to use these cost effective sources of funding. On March 24, 2004, subordinated debentures in the form of trust preferred securities of $45 million, with an interest rate of 5.79 percent, were issued. The proceeds were used for general corporate purposes.

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. The principal source of the Company’s cash revenues is the dividends received from the Company’s banking subsidiaries. The payment of dividends is subject to government regulation, in that regulatory authorities may prohibit banks and bank holding companies from paying dividends which would constitute an unsafe or unsound banking practice. The subsidiaries source of funds is generated by deposits, principal and interest payments on loans, sale of loans and securities, short and long-term borrowings, and net income. In addition, all seven banking subsidiaries are members of the FHLB. As of September 30, 2004, the Company had $1.103 billion of available FHLB line of which $854 million was utilized. 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. During 2004, all seven financial institutions maintained liquidity and regulatory capital levels in excess of regulatory requirements and operational needs.

Commitments

In the normal course of business, there are various outstanding commitments to extend credit, such as letters of credit and un-advanced loan commitments, which are not reflected in the accompanying consolidated financial statements. Management does not anticipate any material losses as a result of these transactions.

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Stockholders’ equity

                                         
                            $ change from   $ change from
    September 30,   December 31,   Setpember 30,   December 31,   September 30,
($ in thousands except per share data)
  2004
  2003
  2003
  2003
  2003
Common equity
  $ 254,897       231,223       224,149       23,674       30,748  
Net unrealized gain on securities
    8,081       6,616       3,956       1,465       4,125  
 
   
 
     
 
     
 
     
 
     
 
 
Total stockholders’ equity
  $ 262,978       237,839       228,105       25,139       34,873  
 
   
 
     
 
     
 
     
 
     
 
 
Stockholders’ equity to total assets
    8.76 %     8.68 %     8.50 %                
Book value per common share
  $ 10.73       9.83       9.44       0.90       1.29  
Market price per share at end of quarter
  $ 29.16       25.98       21.94       3.18       7.22  

Total equity and book value per share amounts have increased substantially from the prior year, primarily the result of earnings retention, and stock options exercised. Net unrealized gains on securities available for sale of $8 million at September 30, 2004 is greater than the $7 million at year end 2003 and the $4 million at September 30, 2003, and is primarily a function of interest rate changes.

                         
    September 30,
  December 31,
  September 30,
Credit quality information ($ in thousands)
  2004
  2003
  2003
Allowance for loan losses
  $ 26,075       23,990       23,920  
Non-performing assets
  $ 12,308       13,068       10,489  
Allowance as a percentage of non performing assets
    212 %     184 %     228 %
Non-performing assets as a percentage of total assets
    0.41 %     0.48 %     0.39 %
Allowance as a percentage of total loans
    1.55 %     1.65 %     1.63 %
Net charge-offs as a percentage of loans
    0.05 %     0.12 %     0.08 %

Allowance for Loan Loss and Non-Performing Assets

Non-performing assets as a percentage of total assets at September 30, 2004 were at .41 percent, a slight increase from .37 percent at June 30, 2004, a decrease from .48 percent at December 31, 2003, and an increase from .39 percent at September 30, 2003. This compares favorably to the Federal Reserve Bank Peer Group average of .59 percent at June 30, 2004, the most recent information available. The allowance for loan losses was 212 percent of non-performing assets at September 30, 2004, compared to 228 percent a year ago. The allowance has increased $2.155 million, or 9 percent, from a year ago to $26.075 million, which is 1.55 percent of September 30, 2004 total loans outstanding, down slightly from the 1.63 percent a year ago. The third quarter provision expense for loan losses was $1.200 million, a decrease of $21 thousand from the same quarter in 2003.

Results of Operations – The three months ended September 30, 2004 compared to the three months ended
September 30, 2003.

Operating results include amounts related to the operation of the three branches acquired with the Pend Oreille Bank as of July 15, 2003 and the Ione, Washington branch as of June 4, 2004.

The Company reported net quarterly earnings of $11.680 million, an increase of $1.983 million, or 20 percent, over the $9.697 million for the third quarter of 2003. Diluted earnings per share for the quarter of $.47, is an increase of 21 percent over the per share earnings of $.39 for the same quarter of 2003. Return on average assets and return on average equity for the quarter were 1.57 percent and 18.12 percent, respectively, which compares with prior year returns of 1.49 percent and 17.10 percent.

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Revenue summary

                                 
    Three months ended September 30,
($ in thousands)
  2004
  2003
  $ change
  % change
Net interest income
  $ 27,385       23,664       3,721       15.7 %
Non-interest income
                               
Service charges, loan fees, and other fees
    6,437       5,172       1,265       24.5 %
Gain on sale of loans
    2,211       3,258       (1,047 )     -32.1 %
Gain on sale of investments, net of impairment charge
          5       (5 )     -100.0 %
Other income
    489       478       11       2.3 %
 
   
 
     
 
     
 
         
Total non-interest income
    9,137       8,913       224       2.5 %
 
   
 
     
 
     
 
         
 
  $ 36,522       32,577       3,945       12.1 %
 
   
 
     
 
     
 
         
Tax equivalent net interest margin
    4.11 %     4.12 %                
 
   
 
     
 
                 

Net Interest Income

Net interest income for the quarter increased $3.721 million, or 16 percent, over the same period in 2003. Total interest income increased $4.537 million, or 14 percent, while total interest expense was $816 thousand higher. The investment portfolio generated approximately 64 percent of the increase in interest income with the remainder coming from the increase in loans outstanding. The increase in interest expense is primarily attributed to the issuance of $45 million in subordinated debentures and the increase in FHLB advances during the current year, which was partially offset by the increase in non-interest bearing deposits and a reduction in rates on maturing fixed term interest bearing deposits. The net interest margin as a percentage of earning assets, on a tax equivalent basis, was 4.11 percent which was near the 4.12 percent result for the third quarter of 2003. The margin for the third quarter increased from the 4.04 percent experienced for the second quarter of 2004. Premium amortization on mortgage related investments for the third quarter was $2.722 million, a decrease of $745 thousand from the second quarter and a decrease of $1.254 million from the third quarter of last year.

Non-interest Income

Fee income increased $1.265 million, or 24 percent, over the same period last year, driven primarily by an increased number of loan and deposit accounts and additional customer services offered. Gain on sale of loans decreased $1.047 million from the third quarter of last year, because of greatly reduced refinance activity, but increased $185 thousand from this years’ second quarter which was $255 thousand higher than the first quarter. Loan origination activity for housing purchases remains quite strong in our markets, with $176 million in residential loans originated in the third quarter and $488 million year to date.

Non-interest expense summary

                                 
    Three months ended September 30,
($ in thousands)
  2004
  2003
  $ change
  % change
Compensation and employee benefits
  $ 10,067       9,448       619       6.6 %
Occupancy and equipment expense
    2,662       2,536       126       5.0 %
Outsourced data processing expense
    346       393       (47 )     -12.0 %
Core deposit intangible amortization
    265       308       (43 )     -14.0 %
Other expenses
    4,649       4,362       287       6.6 %
 
   
 
     
 
     
 
         
Total non-interest expense
  $ 17,989       17,047       942       5.5 %
 
   
 
     
 
     
 
         

Non-interest Expense

Non-interest expense increased by $942 thousand, or 6 percent, from the same quarter of 2003 including expenses from the Ione branch acquisition, two additional branches in Boise, Idaho, and a new branch in downtown Bozeman, Montana. Compensation and benefit expense increased $619 thousand, or 7 percent from the third

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quarter of 2003, with the additional bank branches, normal compensation increases for job performance and increased cost for benefits tied to Company performance, accounting for the majority of the increase. Occupancy and equipment expense increased $126 thousand, or 5 percent, reflecting the cost of the additional locations. Outsourced data processing expense decreased by $47 thousand. Other expenses increased $287 thousand, or 7 percent, primarily from additional marketing expenses, and costs associated with new branch offices. The efficiency ratio (non-interest expense/net interest income + non-interest income) was 49 percent for the 2004 third quarter which is a significant improvement from the 52 percent for the 2003 third quarter.

Results of Operations – The nine months ended September 30, 2004 compared to the nine months ended
September 30, 2003.

Operating results include amounts related to the operation of the three branches acquired with the Pend Oreille Bank as of July 15, 2003 and the Ione, Washington branch as of June 4, 2004.

Net earnings for the nine months ended September 30, 2004 were $33.053 million, which is an increase of $4.576 million, or 16 percent over the same period of the prior year. Without the 2003 gain on sale of securities, net year-to-date earnings increased $5.419 million, or 20 percent. Diluted earnings per share of $1.33, is an increase of 14 percent over the $1.17 earned in the first nine months of 2003. The 2004 nine month return on average assets and return on average equity were 1.54 percent and 17.74 percent, respectively, which compares with the prior year nine month returns of 1.58 percent and 17.00 percent.

Revenue summary

                                 
            Nine months ended September 30,
($ in thousands)
  2004
  2003
  $ change
  % change
Net interest income
  $ 79,553       67,465       12,088       17.9 %
Non-interest income
                               
Service charges, loan fees, and other fees
    17,851       14,769       3,082       20.9 %
Gain on sale of loans
    6,008       8,740       (2,732 )     -31.3 %
Gain on sale of investments, net of impairment charge
          1,253       (1,253 )     -100.0 %
Other income
    1,537       1,477       60       4.1 %
 
   
 
     
 
     
 
         
Total non-interest income
    25,396       26,239       (843 )     -3.2 %
 
   
 
     
 
     
 
         
 
  $ 104,949       93,704       11,245       12.0 %
 
   
 
     
 
     
 
         
Tax equivalent net interest margin
    4.15 %     4.21 %                
 
   
 
     
 
                 

Net Interest Income

Net interest income for the first nine months increased $12.088 million, or 18 percent, over the same period in 2003. Total interest income was $11.768 million, or 12 percent higher than the same period in 2003, while total interest expense was $320 thousand lower. The investment portfolio generated approximately 76 percent of the increase in interest income. Additional interest income from the large increase in loans outstanding was partially offset by lower rates on the loan portfolio due to refinancing, and re-pricing of existing loans. The decrease in interest expense is primarily attributed to the increase in non-interest bearing deposits and a reduction in rates on maturing fixed term interest bearing deposits and Federal Home Loan Bank borrowings. The interest expense on the subordinated debentures issued in March 2004 partially offset the above described reductions. The net interest margin as a percentage of earning assets, on a tax equivalent basis, was 4.15 percent which was a decrease from 4.21 percent for the same period in 2003.

Non-interest Income

Fee income increased $3.082 million, or 21 percent, over the same period last year, driven primarily by an increased number of loan and deposit accounts and the fee income associated with this growth in accounts. Gain on sale of loans decreased $2.732 million, or 31 percent, from last year, because of greatly reduced refinance

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activity. Loan origination activity for housing purchases remains quite strong in our markets. In 2003 gains on sale of investments, net of impairment charge, of $1.253 million were recorded and zero gains were realized in 2004.

Non-interest expense summary

                                 
    Nine months ended September 30,
($ in thousands)
  2004
  2003
  $ change
  % change
Compensation and employee benefits
  $ 29,724       26,477       3,247       12.3 %
Occupancy and equipment expense
    8,026       7,266       760       10.5 %
Outsourced data processing expense
    1,127       1,221       (94 )     -7.7 %
Core deposit intangible amortization
    810       937       (127 )     -13.6 %
Other expenses
    13,736       12,354       1,382       11.2 %
 
   
 
     
 
     
 
         
Total non-interest expense
  $ 53,423       48,255       5,168       10.7 %
 
   
 
     
 
     
 
         

Non-interest Expense

Non-interest expense increased by $5.168 million, or 11 percent, from 2003 including expenses from the acquisitions, two additional branches in Boise, Idaho, and a new branch in downtown Bozeman, one of the fastest growing cities in Montana. Compensation and benefit expense increased $3.247 million, or 12 percent, with the additional bank branches, normal compensation increases for job performance and increased cost for benefits tied to Company performance, accounting for the majority of the increase. Occupancy and equipment expense increased $760 thousand, or 10 percent, reflecting the cost of the additional locations. Outsourced data processing expense decreased by $94 thousand, the result of bringing all core processing onto our in-house data systems, offset somewhat by increased item capture expenses for Mountain West Bank resulting from increased volumes. Other expenses increased $1.382 million, or 11 percent, primarily from start up expenses on implementing the High Performance Checking program at the four banks not previously on the program, additional advertising expense, and costs associated with new branch offices and the acquisitions. The efficiency ratio (non-interest expense/net interest income + non-interest income) was 51 percent, improving slightly from the 52 percent in 2003, excluding the gain on sale of securities.

Critical Accounting Policies

Companies may apply certain critical accounting policies requiring management to make subjective or complex judgments, often as a result of the need to estimate the effect of matters that are inherently uncertain. The Company considers its only critical accounting policy to be the allowance for loan losses. The allowance for loan losses is established through a provision for loan losses charged against earnings. The balance of allowance for loan loss is maintained at the amount management believes will be adequate to absorb known and inherent losses in the loan portfolio. The appropriate balance of allowance for loan losses is determined by applying estimated loss factors to the credit exposure from outstanding loans. Estimated loss factors are based on subjective measurements including management’s assessment of the internal risk classifications, changes in the nature of the loan portfolio, industry concentrations and the impact of current local, regional and national economic factors on the quality of the loan portfolio. Changes in these estimates and assumptions are reasonably possible and may have a material impact on the Company’s consolidated financial statements, results of operations and liquidity.

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 power 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.

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Forward Looking Statements

This Form 10-Q may be deemed to include forward looking statements, which management believes are a benefit to shareholders. These forward looking statements describe management’s expectations regarding future events and developments such as future operating results, growth in loans and deposits, continued success of the Company’s style of banking and the strength of the local economy. The words “will,” “believe,” “expect,” “should,” and “anticipate” and words of similar construction are intended in part to help identify forward looking statements. Future events are difficult to predict, and the expectations described above are subject to risk and uncertainty that may cause actual results to differ materially and adversely. In addition to discussions about risks and uncertainties set forth from time to time in the Company’s filings with the SEC, factors that may cause actual results to differ materially from those contemplated by such forward looking statements include, among others, the following possibilities: (1) local, national, and international economic conditions are less favorable than expected or have a more direct and pronounced effect on the Company than expected and adversely affect the Company’s ability to continue its internal growth at historical rates and maintain the quality of its earning assets; (2) changes in interest rates reduce interest margins more than expected and negatively affect funding sources; (3) projected business increases following strategic expansion or opening or acquiring new branches are lower than expected; (4) costs or difficulties related to the integration of acquisitions are greater than expected; (5) competitive pressure among financial institutions increases significantly; (6) legislation or regulatory requirements or changes adversely affect the businesses in which the Company is engaged; and (7) the Company’s ability to realize the efficiencies it expects to receive from its investments in personnel and infrastructure.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

The Company believes that there have not been any material changes in information about the Company’s market risk that was provided in the Form 10-K report for the year ended December 31, 2003.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of our disclosure controls and procedures (as required by Exchange Act Rules 240.13a-15(b) and 15d-14(c)) as of the date of this quarterly report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s current disclosure controls and procedures are effective and timely, providing them with material information relating to the Company required to be disclosed in the reports we file or submit under the Exchange Act.

Changes in Internal Controls

There have not been any significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. We are not aware of any significant deficiencies or material weaknesses, therefore no corrective actions were taken.

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. Unregistered Sales of Equity Securities and Use of Proceeds

     (a) Not Applicable

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     (b) Not Applicable

     (c) Not Applicable

Item 3. Defaults upon Senior Securities

     (a) Not Applicable

     (b) Not Applicable

Item 4. Submission of Matters to a Vote of Securities Holders

     (a) Not Applicable

     (b) Not Applicable

     (c) Not Applicable

     (d) Not Applicable

Item 5. Other Information

     (a) Not Applicable

     (b) Not Applicable

Item 6. Exhibits

         
  Exhibit 31.1 –    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes – Oxley Act of 2002
 
       
  Exhibit 31.2 –    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes – Oxley Act of 2002
 
       
  Exhibit 32 –    Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes – Oxley Act of 2002

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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 5, 2004
  /s/ Michael J. Blodnick
 
  Michael J. Blodnick
  President/CEO
 
   
November 5, 2004
  /s/ James H. Strosahl
 
  James H. Strosahl
  Executive Vice President/CFO

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