1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20522
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
September 20, 2000
COMMISSION FILE 000-18911
GLACIER BANCORP, INC.
DELAWARE
IRS Employer Identification No. 81-0519541
49 Commons Loop, Kalispell, MT 59901
Registrant's telephone number, including area code: (406) 756-4200
ITEM 5. OTHER EVENTS
On September 20, 2000 the Boards of Directors of Glacier Bancorp, Inc. (the
"Company") and WesterFed Financial Corporation approved the terms of a merger
agreement whereby Glacier Bancorp, Inc. would acquire WesterFed Financial
Corporation with a combination of Company stock and cash as consideration. It is
desired by the Company to file the necessary registration statements with the
Securities Exchange Commission, and proxy documents to shareholders of both
companies, incorporating by reference the previously filed financial
information. Since the Company's acquisition of Mountain West Bank of Coeur
d'Alene, accounted for as a pooling of interests, was effective in February
2000, the financial information related to Mountain West Bank was not included
in the Company's 1999 annual report. Therefore this report of additional
information incorporating the Mountain West Bank's financial information is
being filed.
This item 5 includes the following:
A. Audited Consolidated Financial Statements as of December 31, 1999 and 1998,
and for each of the years in the three year period ended December 31, 1999;
B. Selected financial data for and as of the five years ended December 31,
1999;
C. Management's discussion and analysis of the financial condition and results
of operations as of and for the year ended December 31, 1999;
D. Management's discussion and analysis of the financial condition and results
of operations as of and for the year ended December 31, 1998;
E. Various schedules in connection with the management's discussion and
analysis.
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Independent Auditors' Report
The Board of Directors and Stockholders
Glacier Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of Glacier Bancorp,
Inc. and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity and comprehensive
income, and cash flows for each of the years in the three-year period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We did
not audit either the 1997 or 1998 financial statements of Mountain West Bank,
acquired by Glacier Bancorp, Inc. on February 4, 2000 in a pooling of interests,
which financial statements reflect net interest income and net income
constituting 7.5% and 4.7%, respectively, of the related 1997 consolidated
totals, and total assets constituting 10.3% and net interest income and net
income constituting 9.6% and 4.0%, respectively, of the related 1998
consolidated totals. Those statements were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to the
amounts included for Mountain West Bank, is based solely on the report of the
other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
The consolidated financial statements give retroactive effect to the merger of
Glacier Bancorp, Inc. and Mountain West Bank on February 4, 2000, which has been
accounted for as a pooling of interests as described in Notes 1 and 19 to the
consolidated financial statements.
In our opinion, based on our audits and the report of the other auditor, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Glacier Bancorp, Inc. and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States of America.
\s\ KPMG LLP
Billings, Montana
October 19, 2000
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Report of Independent Accountants
The Board of Directors and Stockholders
Mountain West Bank
In our opinion, the balance sheet as of March 31, 1999 and the related
statements of income, comprehensive income, changes in stockholders' equity and
of cash flows for each of the two years in the period ended March 31, 1999 of
Mountain West Bank (not presented separately herein) present fairly, in all
material respects, the financial position, results of operations and cash flows
of Mountain West Bank at March 31, 1999 and for each of the two years in the
period ended March 31, 1999, in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion. We have not
audited the financial statements of Mountain West Bank for any period subsequent
to March 31, 1999.
\s\ PricewaterhouseCoopers LLP
Spokane, Washington
May 19, 1999
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CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
- ------------------------------------------------------------------------------------- -----------------------
(dollars in thousands except share data) 1999 1998
- ------------------------------------------------------------------------------------- --------- ---------
ASSETS:
Cash on hand and in banks ..................................................... $ 50,590 39,027
Federal funds sold ............................................................ 64 5,883
Interest bearing cash deposits ................................................ 1,711 6,394
--------- ---------
Cash and cash equivalents ................................................ 52,365 51,304
Investment securities, available-for-sale ..................................... 208,561 110,035
Investment securities, held-to-maturity (market value of $740 and $9,340 at
December 31, 1999 and 1998, respectively) ................................. 751 9,052
Loans receivable, net ......................................................... 652,208 571,188
Premises and equipment, net ................................................... 24,670 20,789
Real estate and other assets owned, net ....................................... 550 151
Federal Home Loan Bank of Seattle stock, at cost .............................. 15,134 12,972
Federal Reserve Bank stock, at cost ........................................... 1,467 1,219
Accrued interest receivable ................................................... 5,611 4,803
Goodwill and other intangibles, net of accumulated amortization of $ 1,012
and $ 707 at December 31, 1999, and 1998, respectively .................... 7,035 2,601
Deferred tax asset ............................................................ 2,959 --
Other assets .................................................................. 2,690 2,688
--------- ---------
$ 974,001 786,802
========= =========
LIABILITIES:
Deposits - non-interest bearing ............................................... $ 126,927 115,954
Deposits - interest bearing ................................................... 517,179 430,549
Advances from Federal Home Loan Bank of Seattle ............................... 208,650 125,886
Securities sold under agreements to repurchase ................................ 19,766 17,239
Other borrowed funds .......................................................... 6,848 1,468
Accrued interest payable ...................................................... 2,717 2,361
Current income taxes .......................................................... 108 491
Deferred income taxes ......................................................... -- 1,509
Minority interest ............................................................. 308 313
Other liabilities ............................................................. 6,442 6,886
--------- ---------
Total liabilities ........................................................ 888,945 702,656
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value per share. Authorized 1,000,000
shares; none issued .......................................................... -- --
Common stock, $.01 par value per share. Shares outstanding at December 31,
1999; 10,394,041 and December 31, 1998; 9,344,093 ....................... 104 93
Paid-in capital ............................................................... 87,387 66,180
Retained earnings - substantially restricted .................................. 2,996 16,700
Accumulated other comprehensive income (loss), net ............................ (5,431) 1,173
--------- ---------
Total stockholders' equity ............................................... 85,056 84,146
--------- ---------
$ 974,001 786,802
========= =========
See accompanying notes to consolidated financial statements.
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GLACIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
- -------------------------------------------------------------- -----------------------------
(dollars in thousands except per share data) 1999 1998 1997
- -------------------------------------------------------------- ------- ------- -------
INTEREST INCOME:
Real estate loans ...................................... $17,875 19,404 20,212
Commercial loans ....................................... 21,499 18,250 13,876
Consumer and other loans ............................... 12,367 11,907 11,700
Investment securities and other ........................ 12,978 9,267 9,824
------- ------- -------
TOTAL INTEREST INCOME ................................ 64,719 58,828 55,612
------- ------- -------
INTEREST EXPENSE:
Deposits ............................................... 16,494 16,567 15,468
Advances ............................................... 9,460 7,939 8,100
Securities sold under agreements to repurchase ......... 1,318 772 1,072
Other borrowed funds ................................... 363 192 285
------- ------- -------
TOTAL INTEREST EXPENSE ............................... 27,635 25,470 24,925
------- ------- -------
NET INTEREST INCOME .................................. 37,084 33,358 30,687
Provision for loan losses .............................. 1,723 1,735 1,052
------- ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES ..................................... 35,361 31,623 29,635
NON-INTEREST INCOME:
Service charges and other fees ......................... 6,416 5,917 5,438
Miscellaneous loan fees and charges .................... 2,081 2,089 1,899
Gain on sale of loans .................................. 3,108 3,862 2,498
Gain on sale of investments, net ....................... 23 62 205
Other income ........................................... 1,181 1,666 1,017
------- ------- -------
TOTAL NON-INTEREST INCOME ............................ 12,809 13,596 11,057
------- ------- -------
NON-INTEREST EXPENSE:
Compensation, employee benefits and related expenses ... 14,557 13,391 12,248
Occupancy expense ...................................... 4,172 3,587 2,932
Data processing expense ................................ 1,215 1,347 1,313
Other expense .......................................... 9,101 8,700 7,008
Minority interest ...................................... 51 145 208
------- ------- -------
TOTAL NON-INTEREST EXPENSE ........................... 29,096 27,170 23,709
------- ------- -------
Earnings before income taxes ................................ 19,074 18,049 16,983
Federal and state income tax expense ..................... 6,722 6,674 6,246
------- ------- -------
NET EARNINGS ................................................ $12,352 11,375 10,737
======= ======= =======
BASIC EARNINGS PER SHARE ................................ $ 1.19 1.12 1.10
DILUTED EARNINGS PER SHARE .............................. $ 1.17 1.10 1.08
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1999, 1998, and 1997
Retained Accumulated
Common Stock earnings other Total
- ------------------------------------------ ----------------------- Paid-in substantially comprehensive stockholders'
($ in thousands except share data) Shares Amount capital restricted income (loss) equity
- ------------------------------------------ --------- ----------- -------- ------------- ------------- -------------
Balance at December 31, 1996 as previously
reported ............................ 4,974,211 $ 50 35,410 22,769 (4) 58,225
Adjustment for Mountain West Bank
pooling-of-interests ................ 292,797 3 3,618 (189) (36) 3,395
----------- ----------- ------ ------- ------ ------
Balance at December 31, 1996 as restated . 5,267,008 53 39,028 22,580 (40) 61,620
Comprehensive income:
Net earnings ........................ -- -- -- 10,737 -- 10,737
Unrealized gain on securities, net
of reclassification adjustment . -- -- -- -- 1,231 1,231
------
Total comprehensive income ............... -- -- -- -- -- 11,968
------
Cash dividends declared ($.40 per share) . -- -- -- (3,808) -- (3,808)
Stock options exercised .................. 52,160 1 557 -- -- 558
Tax benefit from stock related
compensation ....................... -- -- 257 -- -- 257
Increase in stock grant earned ........... -- -- 24 -- -- 24
Three for two stock split ................ 2,692,613 27 (24) (5) -- (2)
Additional shares issued ................. 247,961 2 2,918 -- -- 2,920
----------- ----------- ------ ------- ------ ------
Balance at December 31, 1997 ............. 8,259,742 $ 83 42,760 29,504 1,191 73,537
Comprehensive income:
Net earnings ........................ -- -- -- 11,375 -- 11,375
Unrealized loss on securities, net
of reclassification adjustment . -- -- -- -- (18) (18)
------
Total comprehensive income ............... -- -- -- -- -- 11,357
------
Transfer from retained earnings to
Additional paid-in capital .......... -- -- 100 (100) -- --
Cash dividends declared ($.46 per share) . -- -- -- (4,922) -- (4,922)
Stock options exercised .................. 153,459 1 1,572 -- -- 1,573
Tax benefit from stock related
compensation ....................... -- -- 386 -- -- 386
Increase in stock grant earned ........... -- -- 15 -- -- 15
10% stock dividend ....................... 847,131 8 19,149 (19,157) -- 1
Additional shares issued ................. 83,761 1 2,198 -- -- 2,199
----------- ----------- ------ ------- ------ ------
Balance at December 31, 1998 ............. 9,344,093 $ 93 66,180 16,700 1,173 84,146
Comprehensive income:
Net earnings ........................ -- -- -- 12,352 -- 12,352
Unrealized loss on securities, net
of reclassification adjustment . -- -- -- -- (6,604) (6,604)
------
Total comprehensive income ............... -- -- -- -- -- 5,748
------
Cash dividends declared ($.59 per share)
Stock options exercised .................. 113,049 1 -- (6,076) -- (6,076)
Tax benefit from stock related
compensation ....................... 1,091 -- -- 1,092
10% stock dividend ....................... 936,899 10 240 -- -- 240
Fiscal year conforming adjustment ........ 19,876 (19,905) -- (19)
Balance at December 31, 1999 ............. -- -- -- (75) -- (75)
----------- ----------- ------ ------- ------ ------
10,394,041 $ 104 87,387 2,996 (5,431) 85,056
========== =========== ====== ======= ====== ======
Disclosure of reclassification amount: 1999 1998 1997
-------- ----- -----
Holding gains (losses) arising during the period ... $(10,875) 41 2,073
Transfer from held to maturity ..................... 288 -- --
Tax benefit (expense) .............................. 3,999 (18) (707)
-------- --- -----
Net after tax ................................. (6,588) 23 1,366
-------- --- -----
Less reclassification adjustment for gains
included in net income ........................ 23 62 205
Tax expense ........................................ (7) (21) (70)
-------- --- -----
Net after tax ................................. 16 41 135
-------- --- -----
Net unrealized gain (loss) on securities .... $ (6,604) (18) 1,231
======== === =====
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
- ------------------------------------------------------------------------------ -----------------------------------
(dollars in thousands) 1999 1998 1997
- ------------------------------------------------------------------------------ --------- --------- ---------
OPERATING ACTIVITIES :
Net earnings ............................................................ $ 12,352 11,375 10,737
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Mortgage loans held for sale originated or acquired ................... (143,313) (207,622) (112,588)
Proceeds from sales of mortgage loans held for sale ................... 155,096 201,921 110,092
Proceeds from sales of commercial loans ............................... 10,796 8,756 16,193
Provision for loan losses ............................................. 1,723 1,735 1,052
Depreciation of premises and equipment ................................ 1,883 1,596 1,397
Amortization of goodwill .............................................. 305 165 155
Gain on sale of investments ........................................... (23) (62) (205)
Amortization of investment securities premiums and discounts, net ..... 196 (196) 55
Net decrease in deferred income taxes ................................. (207) (99) (230)
Net decrease (increase) in accrued interest receivable ................ (867) 15 (455)
Net increase in accrued interest payable .............................. 394 1,155 621
Net increase (decrease) in current income taxes ....................... 434 (632) 738
Net increase in other assets .......................................... (134) (180) (279)
Net increase (decrease) in other liabilities and minority interest .... (683) 1,439 (8,186)
FHLB stock dividends .................................................. (1,038) (973) (832)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES .......................... 36,914 18,393 18,265
--------- --------- ---------
INVESTING ACTIVITIES:
Proceeds from sales, maturities and prepayments of investment
securities available-for-sale ....................................... 38,279 38,142 33,661
Purchases of investment securities available-for-sale ................... (142,852) (36,916) (42,657)
Proceeds from maturities and prepayments of investment
securities held-to-maturity ......................................... 841 9,775 12,357
Purchases of investment securities held-to-maturity ..................... 12,057 (1,130) (3,448)
Principal collected on installment and commercial loans ................. 169,429 162,626 104,246
Installment and commercial loans originated or acquired ................. (290,174) (236,378) (157,491)
Principal collections on mortgage loans ................................. 98,211 95,945 62,692
Mortgage loans originated or acquired ................................... (94,838) (72,497) (71,687)
Net proceeds from sales of real estate owned ............................ -- 103 385
Net purchase of FHLB and FRB stock ...................................... (1,788) (879) (1,566)
Net addition of premises and equipment .................................. (5,799) (4,791) (2,297)
Acquisition of minority interest ........................................ -- (236) (14)
Acquisition of branch deposits .......................................... (4,739) -- --
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES .............................. (221,373) (46,236) (65,819)
--------- --------- ---------
FINANCING ACTIVITIES:
Net increase in deposits ................................................ 99,263 59,586 53,885
Net increase (decrease) in FHLB advances and other borrowed funds ....... 87,971 (28,593) (1,798)
Net increase (decrease) in securities sold under repurchase agreements .. 2,527 (4,434) 9,354
Cash dividends paid to stockholders ..................................... (5,923) (4,237) (3,369)
Proceeds from exercise of stock options and other stock issued .......... 1,114 1,573 3,476
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES ........................... 184,952 23,895 61,548
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .................... 493 (3,948) 13,994
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ........................ 51,872 55,252 41,258
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .............................. $ 52,365 51,304 55,252
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest ................................ $ 27,241 24,944 24,291
Cash paid during the period for income taxes ............................ $ 6,247 7,348 5,721
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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) GENERAL
Glacier Bancorp, Inc. (the "Company"), a Delaware corporation organized in 1990,
is a multi-bank holding company which provides a full range of banking services
to individual and corporate customers in Montana through its subsidiary banks.
The subsidiary banks are subject to competition from other financial service
providers. The subsidiary banks are also subject to the regulations of certain
government agencies and undergo periodic examinations by those regulatory
authorities.
The accounting and consolidated financial statement reporting policies of the
Company conform with generally accepted accounting principles and prevailing
practices within the banking industry. In preparing the consolidated financial
statements, management is required to make estimates and assumptions that affect
the reported and disclosed amounts of assets and liabilities as of the date of
the statement of financial condition and income and expenses for the period.
Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change in
the near term relate to the determination of the allowance for loan losses.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the subsidiary banks' allowance
for loan losses. Such agencies may require the subsidiary banks to recognize
additions to the allowance based on their judgements about information available
to them at the time of their examination.
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its eight subsidiaries, Glacier Bank ("Glacier"), First Security Bank of
Missoula ("First Security"), Glacier Bank of Whitefish ("Whitefish"), Glacier
Bank of Eureka ("Eureka"), Valley Bank of Helena ("Valley"), Big Sky Western
Bank, ("Big Sky"), Mountain West Bank in Idaho, ("Mountain West") and Community
First, Inc. ("CFI"). All significant inter-company transactions have been
eliminated in consolidation. The Company owns 94% of the outstanding stock of
Whitefish, 98% of Eureka, and 100% of Glacier, First Security, Valley, Big Sky,
Mountain West and CFI.
Valley was acquired on August 31, 1998 through an exchange of stock with HUB
Financial Corp. (HUB), formerly the parent company of Valley and the minority
shareholders of Valley. The transaction with the minority shareholders was
accounted for as a purchase. Financial information from August 31, 1998 forward
includes the results of operations previously attributable to the minority
interest. Big Sky was acquired on January 20, 1999 and Mountain West was
acquired on February 4, 2000. The pooling of interests method of accounting was
used for the merger transactions with HUB, Big Sky, and Mountain West. Under
this method, financial information for each of the periods presented includes
the combined companies as though the merger had occurred either as of or prior
to the earliest date presented.
(c) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, cash held as demand deposits at
various banks and regulatory agencies, interest bearing deposits and federal
funds sold with original maturities of three months or less.
(d) INVESTMENT SECURITIES
Debt securities for which the Company has the positive intent and ability to
hold to maturity are classified as held-to-maturity and are stated at amortized
cost. Debt and equity securities held primarily for the purpose of selling in
the near term are classified as trading securities and are
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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES...CONTINUED
reported at fair market value, with unrealized gains and losses included in
income. Debt and equity securities not classified as held-to-maturity or trading
are classified as available-for-sale and are reported at fair value with
unrealized gains and losses, net of income taxes, shown as a separate component
of stockholders' equity. Premiums and discounts on investment securities are
amortized or accreted into income using a method that approximates the
level-yield interest method. The cost of any investment, if sold, is determined
by specific identification. Declines in the fair value of securities below
carrying value that are other than temporary are charged to expense as realized
losses and the related carrying value is reduced to fair value.
Effective January 1, 1999, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS 133). SFAS 133 establishes accounting
and reporting standards that derivative instruments (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. SFAS 133
requires that changes in the derivatives' fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. The adoption of SFAS
133 had no impact on the financial statements of the Company except that it
allowed for a one-time reclassification of the investment portfolio from
held-to-maturity to either trading or available-for-sale. The net effect on the
consolidated statement of financial condition of this reclassification of all
the Company's held-to-maturity securities, with an amortized cost of
approximately $8,272,000, was an increase in total assets of $288,000, deferred
tax liabilities of $98,000 and unrealized gains on securities available-for-sale
of $190,000.
(e) LOANS RECEIVABLE
Loans that are intended to be held to maturity are reported at their unpaid
principal balance less chargeoffs, specific valuation accounts, and any deferred
fees or costs on originated loans. Purchased loans are reported net of
unamortized premiums or discounts. Discounts and premiums on purchased loans and
net loan fees on originated loans are amortized over the expected life of loans
using methods that approximate the interest method.
Loans on which the accrual of interest has been discontinued are designated as
nonaccrual loans. Accrual of interest on loans is discontinued either when
reasonable doubt exists as to the full, timely collection of interest or
principal or when a loan becomes contractually past due by ninety days or more
with respect to interest or principal unless such past due loan is well secured
and in the process of collection. When a loan is placed on nonaccrual status,
interest previously accrued but not collected is reversed against current period
interest income. Interest accruals are resumed on such loans only when they are
brought fully current with respect to interest and principal and when, in the
judgement of management, the loans are estimated to be fully collectible as to
both principal and interest.
(f) LOANS HELD FOR SALE
Mortgage and commercial loans originated and intended for sale in the secondary
market are carried at the lower of cost or estimated market value in the
aggregate. Net unrealized losses are recognized by charges to income. A sale is
recognized when the Company surrenders control of the loan and consideration,
other than beneficial interest in the loan, is received in exchange. A gain is
recognized to the extent the selling price exceeds the carrying value.
(g) ALLOWANCE FOR LOAN LOSSES
Management's periodic evaluation of the adequacy of the allowance is based on
factors such as the Company's past loan loss experience, known and inherent
risks in the portfolio, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral, current
economic conditions, and independent appraisals.
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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES...CONTINUED
The Company also provides an allowance for losses on impaired loans. Groups of
small balance homogeneous loans (generally consumer and residential real estate
loans) are evaluated for impairment collectively. A loan is considered impaired
when, based upon current information and events, it is probable that the Company
will be unable to collect, on a timely basis, all principal and interest
according to the contractual terms of the loan's original agreement. When a
specific loan is determined to be impaired, the allowance for loan losses is
increased through a charge to expense for the amount of the impairment. The
amount of the impairment is measured using cash flows discounted at the loan's
effective interest rate, except when it is determined that the sole source of
repayment for the loan is the operations or liquidation of the underlying
collateral. In such cases, impairment is measured by determining the current
value of the collateral, reduced by anticipated selling costs. The Company
recognizes interest income on impaired loans only to the extent the cash
payments are received. During 1999 and 1998 the amount of impaired loans was not
material.
(h) PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less depreciation. Depreciation is
computed on a straight-line method over the estimated useful lives or the term
of the related lease.
(i) REAL ESTATE OWNED
Property acquired by foreclosure or deed in lieu of foreclosure is carried at
the lower of cost or estimated fair value, less selling costs. Costs, excluding
interest, relating to the improvement of property are capitalized, whereas those
relating to holding the property are charged to expense. Fair value is
determined as the amount that could be reasonably expected in a current sale
(other than a forced or liquidation sale) between a willing buyer and a willing
seller. If the fair value of the asset minus the estimated cost to sell is less
than the cost of the property, a loss is recognized and the asset carrying value
is reduced.
(j) RESTRICTED STOCK INVESTMENTS
The Company holds stock in the Federal Home Loan Bank (FHLB) and the Federal
Reserve Bank (FRB). FHLB and FRB stocks are restricted because they may only be
sold to another member institution or the FHLB or FRB at their par values. Due
to restrictive terms, and the lack of a readily determinable market value, FHLB
and FRB stocks are carried at cost.
(k) GOODWILL AND OTHER INTANGIBLES
The excess of purchase price over the fair value of net assets from acquisitions
("Goodwill") is being amortized using the straight-line method over periods of
primarily 5 to 25 years. The Company assesses the recoverability of Goodwill by
determining whether the unamortized balance related to an acquisition can be
recovered through undiscounted future cash flows over the remaining amortization
period.
Core deposit intangibles represent the intangible value of depositor
relationships resulting from deposit liabilities assumed in acquisitions and are
amortized using an accelerated method based on an estimated runoff of the
related deposits, not exceeding 10 years.
(l) INCOME TAXES
Deferred tax assets and liabilities are recognized for estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of assets and liabilities and their respective tax bases. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
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11
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES...CONTINUED
(m) STOCK-BASED COMPENSATION
Compensation cost for stock-based compensation to employees is measured at the
grant date using the intrinsic value method. Under the intrinsic value method,
compensation cost is the excess of the market price of the stock at the grant
date over the amount an employee must pay to ultimately acquire the stock and is
recognized over any related service period.
(n) LONG-LIVED ASSETS
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. An asset is deemed impaired
if the sum of the expected future cash flows is less than the carrying amount of
the asset. If impaired, an impairment loss is recognized to reduce the carrying
value of the asset to fair value. At December 31, 1999 and 1998 there were no
assets that were considered impaired.
(o) MORTGAGE SERVICING RIGHTS
The Company recognizes mortgage servicing rights on loans originated and
subsequently sold as an asset regardless of whether the servicing rights are
acquired or retained on loans originated and subsequently sold. The mortgage
servicing rights are assessed for impairment based on the fair value of the
mortgage servicing rights. As of December 31, 1999 and 1998 the carrying value
of servicing rights was approximately $1,007,000 and $967,000, respectively.
There was no impairment of carrying value at December 31, 1999 or 1998.
(p) EARNINGS PER SHARE
Basic earnings per share is computed by dividing net earnings available to
common stockholders by the weighted average number of shares of common stock
outstanding during the year. Diluted earnings per share is computed by dividing
such net earnings by the weighted average number of common shares used to
compute basic EPS plus the incremental amount of potential common stock
determined by the treasury stock method. Previous period amounts are restated
for the effect of stock dividends and splits.
(q) COMPREHENSIVE INCOME
Comprehensive income includes net income, as well as other changes in
stockholders' equity that result from transactions and economic events other
than those with stockholders. The Company's only significant element of other
comprehensive income is unrealized gains and losses on available-for-sale
securities.
(r) RECLASSIFICATIONS
Certain reclassifications have been made to the 1998 and 1997 financial
statements to conform to the 1999 presentation.
2. CASH ON HAND AND IN BANKS
The subsidiary banks are required to maintain an average reserve balance with
either the Federal Reserve Bank or in the form of cash on hand. The amount of
this required reserve balance at December 31, 1999 was $6,993,000.
11
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3. INVESTMENT SECURITIES
A comparison of the amortized cost and estimated fair value of the Company's
investment securities is as follows at:
INVESTMENT SECURITIES AS OF DECEMBER 31, 1999
- ----------------------------------------------------
Dollars in thousands Estimated
- ---------------------------------------------------- Weighted Amortized Gross Unrealized Fair
HELD-TO-MATURITY Yield Cost Gains Losses Value
- ---------------------------------------------------- -------- --------- ------ ------- ---------
U.S. GOVERNMENT AND FEDERAL AGENCIES
maturing one year through five years ............. 6.26% 500 0 (5) 495
MORTGAGE-BACKED SECURITIES ......................... 6.50% 251 0 (6) 245
------- ------- ------- -------
TOTAL HELD-TO-MATURITY SECURITIES ........... 6.42% 751 0 (11) 740
======= ======= ======= =======
- ----------------------------------------------------
AVAILABLE FOR SALE
- ----------------------------------------------------
U.S. GOVERNMENT AND FEDERAL AGENCIES
maturing within one year ......................... 5.98% 1,998 3 (4) 1,997
maturing one year through five years ............. 6.37% 4,480 15 (105) 4,391
maturing five years though ten years ............. 6.76% 4,546 0 (221) 4,325
maturing after ten years ......................... 5.20% 1,322 2 (13) 1,310
------- ------- ------- -------
6.33% 12,346 20 (343) 12,023
------- ------- ------- -------
STATE AND LOCAL GOVERNMENTS AND OTHER ISSUES:
maturing within one year ......................... 6.50% 397 1 (49) 349
maturing one year through five years ............. 4.92% 1,302 14 (5) 1,311
maturing five years through ten years ............ 6.88% 4,120 25 (20) 4,125
maturing after ten years ......................... 5.21% 46,698 39 (2,985) 43,752
------- ------- ------- -------
5.34% 52,517 79 (3,059) 49,537
------- ------- ------- -------
MORTGAGE-BACKED SECURITIES ......................... 6.96% 44,277 164 (1,310) 43,131
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ........... 6.94% 108,374 126 (4,630) 103,870
------- ------- ------- -------
TOTAL AVAILABLE FOR SALE SECURITIES ................ 6.52% 217,514 389 (9,342) 208,561
======= ======= ======= =======
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INVESTMENT SECURITIES AS OF DECEMBER 31, 1998
- ------------------------------------------------
Dollars in thousands
- ------------------------------------------------ Gross Unrealized Estimated
HELD-TO-MATURITY Weighted Amortized -------------------- Fair
- ------------------------------------------------ Yield Cost Gains Losses Value
-------- --------- -------- -------- ---------
U.S. GOVERNMENT AND FEDERAL AGENCIES:
maturing within one year ................. 7.90% $ 3,010 63 -- 3,073
maturing one year through five years ..... 6.93% 1,737 66 -- 1,803
-------- -------- -------- --------
7.55% 4,747 129 -- 4,876
-------- -------- -------- --------
STATE AND LOCAL GOVERNMENTS AND OTHER ISSUES:
maturing within one year ................. 5.50% 552 5 -- 557
maturing one year through five years ..... 5.56% 811 24 -- 835
maturing five years through ten years .... 5.01% 1,222 44 -- 1,266
maturing after ten years ................. 5.67% 1,440 86 -- 1,526
-------- -------- -------- --------
5.42% 4,025 159 -- 4,184
-------- -------- -------- --------
MORTGAGE-BACKED SECURITIES ..................... 6.50% 280 -- -- 280
-------- -------- -------- --------
Total Held-to-Maturity Securities .... 6.37% $ 9,052 288 -- 9,340
======== ======== ======== ========
- ------------------------------------------------
AVAILABLE-FOR-SALE
- ------------------------------------------------
U.S. GOVERNMENT AND FEDERAL AGENCIES:
maturing within one year ................. 5.78% $ 4,176 9 (10) 4,175
maturing one year through five years ..... 6.09% 9,982 80 (9) 10,053
maturing after ten years ................. 6.45% 2,210 10 (1) 2,219
-------- -------- -------- --------
6.06% 16,368 99 (20) 16,447
-------- -------- -------- --------
STATE AND LOCAL GOVERNMENTS AND OTHER ISSUES:
maturing within one year ................. 6.88% $ 250 -- -- 250
maturing one year through five years ..... 6.00% 100 7 -- 107
maturing five years through ten years .... 5.30% 1,167 69 -- 1,236
maturing after ten years ................. 5.21% 37,173 1,590 (319) 38,444
-------- -------- -------- --------
5.23% 38,690 1,666 (319) 40,037
-------- -------- -------- --------
MORTGAGE-BACKED SECURITIES ..................... 7.12% 25,260 559 (81) 25,738
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ....... 6.58% 27,714 184 (85) 27,813
-------- -------- -------- --------
TOTAL AVAILABLE-FOR-SALE SECURITIES .. 6.18% $108,032 2,508 (505) 110,035
======== ======== ======== ========
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3. INVESTMENT SECURITIES...CONTINUED
The book value of investment securities is as follows at (in thousands):
INVESTMENT SECURITIES AS OF DECEMBER 31, 1997
------------------- ---------------------------------
Held-to-Maturity Available-for-Sale Totals
------------------- ------------------ ---------
U.S. Government and Federal Agencies ........... $ 10,779 28,111 38,890
State and Local Governments and Other Issues ... 4,382 26,941 31,323
Mortgage-Backed Securities ..................... 3,466 22,121 25,587
Real Estate Mortgage Investment Conduits ....... -- 32,838 32,838
-------- -------- --------
$ 18,627 110,011 128,638
======== ======== ========
Maturities of securities do not reflect repricing opportunities present in
adjustable rate securities, nor do they reflect expected shorter maturities
based upon early prepayment of principal.
The Company has not entered into any interest rate swaps, options or futures
contracts.
Gross proceeds from sales of investment securities for the years ended December
31, 1999, 1998, and 1997 were approximately $10,770,000, $10,476,000 and
$10,931,000 respectively; resulting in gross gains of approximately $72,000,
$65,000 and $213,000 and gross losses of approximately $49,000, $3,000 and
$8,000, respectively.
At December 31, 1999, the Company had investment securities with par values of
approximately $75,261,000 pledged as security for deposits of several local
government units, securities sold under agreements to repurchase, and as
collateral for treasury tax and loan borrowings.
The Real Estate Mortgage Investment Conduits are backed by the FNMA, GNMA, or
FHLMC. At December 31, 1999 and 1998, the minority interest share of the
unrealized loss was approximately $22,000 and $7,000, respectively.
4. LOANS RECEIVABLE
The following is a summary of loans receivable at:
December 31,
- ----------------------------------------- ---------------------------
(dollars in thousands) 1999 1998
- ----------------------------------------- --------- ---------
Residential first mortgage ......... $ 195,374 222,018
Loans held for sale ................ 30,004 16,474
Commercial real estate ............. 154,155 118,434
Commercial ......................... 125,462 97,463
Consumer ........................... 87,967 69,726
Home equity ........................ 66,566 53,325
Outstanding balances on credit cards -- 18
--------- ---------
659,528 577,458
Net deferred loan fees, premiums and (598) (602)
Allowance for losses ................ (6,722) (5,668)
--------- ---------
$ 652,208 571,188
========= =========
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15
4. LOANS RECEIVABLE...CONTINUED
The following is a summary of activity in allowance for losses on loans:
Years ended December 31,
- --------------------------------- ---------------------------------------
(dollars in thousands) 1999 1998 1997
- --------------------------------- ------- ------- -------
Balance, beginning of period .... $ 5,668 4,654 4,106
Chargeoffs, net of recoveries ... (669) (721) (504)
Provision ....................... 1,723 1,735 1,052
======= ======= =======
Balance, end of period .......... $ 6,722 5,668 4,654
======= ======= =======
The following is the allocation of allowance for loan losses at:
DECEMBER 31, 1999 December 31, 1998
---------------------------- ----------------------------
Percent of Percent of
Loans in loans in
Amount Category Amount category
- ----------------------------------- --------------- ----------- ------------ --------------
(dollars in thousands)
- -----------------------------------
Real estate loans and contracts ... $1,174 0.52% $1,221 0.51%
Commercial real estate ............ 1,526 0.99% 1,095 0.92%
Other commercial .................. 2,466 1.97% 1,992 2.04%
Consumer loans and credit cards ... 1,087 1.24% 988 1.42%
Home equity ....................... 469 0.71% 372 0.70%
------ ------
$6,722 1.02% $5,668 0.98%
====== ======
Substantially all of the Company's loans receivable are with customers within
the Company's market area. Although the Company has a diversified loan
portfolio, a substantial portion of its customers' ability to honor their
contracts is dependent upon the economic performance in the Company's market
areas.
The weighted average interest rate on loans was 8.53% and 8.77% at December 31,
1999 and 1998, respectively
At December 31, 1999 ,1998 and 1997 serviced loans sold to others were
$159,451,000, $169,378,000, and $156,288,000, respectively.
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extent credit and letters of
credit, and involve, to varying degrees, elements of credit risk. The Company's
exposure to credit loss in the event of nonperformance by the other party to the
financial instrument for commitments to extend credit is represented by the
contractual amount of those instruments. The Company uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
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4. LOANS RECEIVABLE...CONTINUED
The Company had outstanding commitments as follows (in thousands):
December 31,
----------------------
1999 1998
-------- --------
Letters of credit ................... $ 6,918 4,597
Loans and loans in process .......... 74,315 60,772
Unused consumer lines of credit ..... 26,464 17,519
-------- --------
$107,697 82,888
======== ========
The following is a summary of accrued interest receivable (in thousands):
December 31,
------------------
1999 1998
------ ------
Investment securities .......... $1,650 1,275
Mortgage-backed securities ..... 246 117
Loans receivable ............... 3,715 3,411
------ ------
$5,611 4,803
====== ======
The Company has entered into transactions with its executive officers,
directors, significant shareholders, and their affiliates. The aggregate amount
of loans to such related parties at December 31, 1999 was approximately
$11,438,000. During 1999, new loans to such related parties were approximately
$17,876,000 and repayments were approximately $14,081,000.
5. PREMISES AND EQUIPMENT
Premises and equipment consist of the following at:
December 31,
- ------------------------------------------------- -----------------------
(dollars in thousands) 1999 1998
- ------------------------------------------------- -------- --------
Land ............................................ $ 4,118 3,926
Office buildings and construction in progress ... 17,435 14,395
Furniture, fixtures and equipment ............... 12,291 10,067
Leasehold improvements .......................... 1,341 1,657
Accumulated depreciation ........................ (10,515) (9,256)
-------- --------
$ 24,670 20,789
======== ========
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6. DEPOSITS
Deposits consist of the following at:
December 31, 1999 December 31, 1998
----------------------------------------- --------------------------
- ---------------------------------------------- Weighted
(dollars in thousands) Average Rate Amount Percent Amount Percent
- ---------------------------------------------- -------------- --------- ----------- -------- ----------
Demand accounts ................................. 0.0% $126,927 19.7% $115,954 21.2%
-------- ---------- -------- ----------
NOW accounts .................................... 1.2% 102,917 16.0% 94,911 17.4%
Savings accounts ................................ 1.8% 47,312 7.3% 49,900 9.2%
Money market demand accounts .................... 4.0% 156,692 24.3% 120,050 22.0%
Certificate accounts:
4.00% and lower ............................ 1,715 0.3% 542 0.1%
4.01% to 5.00% ............................ 70,153 10.9% 41,104 7.5%
5.01% to 6.00% ............................. 110,490 17.2% 92,139 16.9%
6.01% to 7.00% ............................. 27,328 4.2% 24,836 4.5%
7.01% to 8.00% ............................. 412 0.1% 6,340 1.2%
8.01% and higher ........................... 160 0.0% 727 0.1%
-------- ---------- -------- ----------
Total certificate accounts .......... 5.4% 210,258 32.7% 165,688 30.3%
-------- ---------- -------- ----------
Total interest bearing deposits ................. 3.6% 517,179 80.3% 430,549 78.8%
-------- ---------- -------- ----------
Total deposits .................................. 2.9% $644,106 100.0% 546,503 100.0%
======== ========== ======== ==========
Deposits with a balance in excess of $100,000 ... $188,813 $157,740
======== ========
At December 31, 1999, scheduled maturities of certificates of deposit are as
follows:
Years ending December 31,
- ---------------------- -------------------------------------------------------------------------------
(dollars in thousands) TOTAL 2000 2001 2002 2003 Thereafter
- ---------------------- -------- -------- -------- -------- -------- ----------
4.00% and lower ...... $ 1,715 1,702 12 1 0 0
4.01% to 5.00% ....... 70,153 61,573 6,254 1,252 292 782
5.01% to 6.00% ....... 110,490 90,766 11,440 6,189 978 1,117
6.01% to 7.00% ....... 27,328 16,249 7,966 2,058 1,031 24
7.01% to 8.00% ....... 412 288 108 16 0 0
8.01% and higher ..... 160 100 54 6 0 0
-------- -------- -------- -------- -------- --------
$210,258 170,678 25,834 9,522 2,301 1,923
======== ======== ======== ======== ======== ========
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6. DEPOSITS...CONTINUED
Interest expense on deposits is summarized as follows:
Years ended December 31,
- -------------------------------- ---------------------------------
(dollars in thousands) 1999 1998 1997
- -------------------------------- ------- ------- -------
NOW accounts ................... $ 1,064 1,428 1,458
Money market demand accounts ... 5,304 4,458 3,317
Certificate accounts ........... 9,283 8,723 8,470
Savings accounts ............... 843 1,958 2,223
------- ------- -------
$16,494 16,567 15,468
======= ======= =======
7. ADVANCES FROM FEDERAL HOME LOAN BANK OF SEATTLE
Advances from the Federal Home Loan Bank of Seattle consist of the following:
Totals as of Totals as of Maturing in years ending December 31,
---------------------- December 31, December 31, --------------------------------------------------------------------
(dollars in thousands) 1998 1999 2000 2001 2002 2003 2004 2005-2010
---------------------- -------- -------- -------- -------- -------- -------- -------- ---------
4.00% to 5.00% ....... $ 590 84,018 83,870 148 -- -- -- --
5.01% to 6.00% ....... 112,105 112,726 91,358 4,361 742 15,552 152 561
6.01% to 7.00% ....... 10,841 9,996 6,856 296 354 237 189 2,064
7.01% to 8.00% ....... 2,150 1,710 40 140 40 240 140 1,110
8.01% to 9.00% ....... 200 200 -- -- -- 100 100 --
-------- -------- -------- -------- -------- -------- -------- --------
$125,886 208,650 182,124 4,945 1,136 16,129 581 3,735
======== ======== ======== ======== ======== ======== ======== ========
These advances were collateralized by the Federal Home Loan Bank of Seattle
stock held by the Company, and qualifying real estate loans and investments
totaling approximately $319,150,000 and $235,846,000 at December 31, 1999 and
1998, respectively.
The weighted average interest rate on these advances was 5.25% and 5.49% at
December 31, 1999 and 1998, respectively.
Included in the above amounts are advances in which the FHLB has a call option
which may be exercised after a predetermined time, and quarterly thereafter. The
following are the amounts (in thousands) of those advances:
Contractual Year Total Weighted
Maturity of Advance Average
Date Initial Call Amount Interest Rate
----------- ------------ --------- -------------
2003 2000 $ 16,000 5.23%
2008 2001 3,000 5.37%
2008 2003 15,000 5.52%
-----------
$ 34,000 5.37%
===========
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8. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWED FUNDS
Securities sold under agreements to repurchase consist of the following at:
Book Market
(dollars in thousands) Weighted Value of Value of
- ------------------------------------------------ Repurchase Average Underlying Underlying
December 31, 1999 Amount Rate Assets Assets
- ------------------------------------------------ ---------- ------- ---------- ----------
Securities sold under agreements
to repurchase within:
1-30 days ............... $13,765 4.38% $19,601 20,295
31-90 days ............... 6,001 4.81% 6,757 6,866
------- ------- -------
$19,766 4.51% $26,358 27,161
======= ======= =======
December 31, 1998:
- ------------------------------------------------
Securities sold under agreements
to repurchase within:
1-30 days ....................... $11,000 4.05% $14,706 15,099
31-90 days ....................... 6,126 5.18% 6,797 7,174
Greater than 90 days .............. 113 5.31% 120 120
------- ------- -------
$17,239 4.70% $21,623 22,393
======= ======= =======
The securities underlying agreements to repurchase entered into by the Company
are for the same securities originally sold, and are held in a custody account
by a third party. For the year ended December 31, 1999, securities sold under
agreements to repurchase averaged approximately $28,605,000 and the maximum
outstanding at any month end during the year was approximately $53,791,000.
In 1996 the Company entered into the treasury tax and loan account note option
program, which provides short term funding with no fixed maturity date up to
$12,000,000 at federal funds rate minus 25 basis points. At December 31, 1999
and 1998 the outstanding balance under this program was approximately $5,778,000
and $1,100,000. The borrowings are secured with investment securities with a par
value of approximately $8,620,000 and a market value of approximately
$8,382,000. For the year ended December 31, 1999, the maximum outstanding at any
month end was approximately $7,357,000 and the average balance was approximately
$3,047,000.
Other borrowed funds also includes federal funds purchased of $720,000 and
$18,000 at December 31, 1999 and 1998, respectively.
9. SUBORDINATED DEBENTURES
During 1999, the Company assumed Big Sky's subordinated convertible debentures
as part of the merger transaction. The outstanding balance at December 31, 1999
was $350,000, and is due December 31, 2001. The interest rate is 7.5 percent,
payable quarterly. The debentures may be prepaid at any time by the Company,
subject to approval by the FDIC and the Company's primary regulator, and are
convertible at the rate of one share of Company stock for each $12.83 of
principal value, or an equivalent of 27,293 shares.
19
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10. STOCKHOLDERS' EQUITY
The Federal Reserve Board has adopted capital adequacy guidelines pursuant to
which it assesses the adequacy of capital in supervising a bank holding company.
The following table illustrates the Federal Reserve Board's adequacy guidelines
and the Company's compliance with those guidelines as of December 31, 1999:
- ---------------------------------------------- Tier 1 (Core) Tier 2 (Total) Leverage
(dollars in thousands) Capital Capital Capital
- ---------------------------------------------- ------------ ------------- ----------
GAAP Capital ......................... $ 85,056 $ 85,056 $ 85,056
Less: Goodwill ....................... (7,035) (7,035) (7,035)
Plus: Net unrealized losses on
securities available for sale .. 5,431 5,431 5,431
Allowance for loan losses ..... -- 6,722 --
Minority Interest ............. 308 308 308
Other regulatory adjustments ......... (82) (82) (82)
--------- --------- ---------
Regulatory capital computed .......... $ 83,678 $ 90,400 $ 83,678
========= ========= =========
Risk weighted assets $ 632,257 $ 632,257
========= =========
Total average assets $ 872,322
=========
1999
----------------------------------
Capital as % of defined assets ............... 13.23% 14.30% 9.59%
Regulatory "well capitalized" requirement .... 6.00% 10.00% 5.00%
----- ----- -----
Excess over "well capitalized" requirement ... 7.23% 4.30% 4.59%
===== ===== =====
1998
----------------------------------
Capital as % of defined assets ............... 15.50% 16.59% 10.41%
Regulatory "well capitalized" requirement .... 6.00% 10.00% 5.00%
----- ----- -----
Excess over "well capitalized" requirement ... 9.50% 6.59% 5.41%
===== ===== =====
The Federal Deposit Insurance Corporation Improvement Act generally restricts a
depository institution from making any capital distribution (including payment
of a dividend) or paying any management fee to its holding Company if the
institution would thereafter be capitalized at less than 8% of total risk-based
capital, 4% of Tier I capital, or a 4% leverage ratio. At December 31, 1999, the
subsidiary banks' capital measures exceed the highest supervisory threshold,
which requires total Tier II capital of at least 10%, Tier I capital of at least
6%, and a leverage ratio of at least 5%. Each of the subsidiaries was considered
well capitalized by the respective regulator as of December 31, 1999.
During 1997, an additional 70,961 shares of stock were issued to increase the
capital of Big Sky.
20
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11. FEDERAL AND STATE INCOME TAXES
The following is a summary of consolidated income tax expense for:
Years ended December 31,
- ---------------------------------------------- -----------------------------------
(dollars in thousands) 1999 1998 1997
- ---------------------------------------------- ------- ------- -------
Current:
Federal ................................. $ 5,675 5,546 5,389
State ................................... 1,254 1,227 1,087
------- ------- -------
Total current tax expense 6,929 6,773 6,476
------- ------- -------
Deferred:
Federal ................................. (164) (127) (276)
State ................................... (43) 28 46
------- ------- -------
Total deferred tax benefit (207) (99) (230)
------- ------- -------
Total income tax expense $ 6,722 6,674 6,246
======= ======= =======
Tax exempt interest for the years ended December 31, 1999, 1998 and 1997 was
approximately $2,301,000, $1,604,000, and $1,227,000, respectively.
Federal and state income tax expense differs from that computed at the federal
statutory corporate tax rate as follows for:
Years ended December 31,
--------------------------------
1999 1998 1997
------ ------ ------
Federal statutory rate ............................. 35.0% 35.0% 35.0%
State taxes, net of federal income tax benefit ..... 4.1% 4.5% 4.3%
Non-deductible merger expenses ..................... 0.0% 0.1% 0.2%
Other, net ......................................... -3.9% -2.6% -2.7%
------ ------ ------
35.2% 37.0% 36.8%
====== ====== ======
The tax effects of temporary differences which give rise to a significant
portion of deferred tax assets and deferred tax liabilities are as follows at:
December 31,
- ------------------------------------------------------------ -----------------------
(dollars in thousands) 1999 1998
- ------------------------------------------------------------ -------- --------
Deferred tax assets:
Allowance for losses on loans ........................... $ 2,826 2,320
Available-for-sale securities fair value adjustment ..... 3,501 --
Other ................................................... 540 519
-------- --------
Total gross deferred tax assets .................. 6,867 2,839
-------- --------
Deferred tax liabilities:
Federal Home Loan Bank stock dividends .................. (2,247) (1,765)
Fixed assets, due to differences in depreciation ........ (665) (531)
Tax bad debt reserve in excess of base-year reserve ..... (418) (617)
Available-for-sale securities fair value adjustment ..... -- (822)
Basis difference from acquisitions ...................... (186) (192)
Other ................................................... (392) (421)
-------- --------
Total gross deferred tax liabilities ............ (3,908) (4,348)
-------- --------
Net deferred tax asset (liability) .............. $ 2,959 (1,509)
======== ========
21
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11. FEDERAL AND STATE INCOME TAXES...CONTINUED
There is no valuation allowance at December 31, 1999 and 1998 because management
believes that it is more likely than not that the Company's deferred tax assets
will be realized by offsetting future taxable income from reversing taxable
temporary differences and anticipated future taxable income.
The current portion of taxes payable was approximately $108,000 and $491,000 at
December 31, 1999 and 1998, respectively.
Retained earnings at December 31, 1999 includes approximately $3,600,000 for
which no provision for Federal income tax has been made. This amount represents
the base year bad debt reserve which is essentially an allocation of earnings to
pre-1988 bad debt deductions for income tax purposes only. This amount is
treated as a permanent difference and deferred taxes are not recognized unless
it appears that this reserve will be reduced and thereby result in taxable
income in the foreseeable future. The Company is not currently contemplating any
changes in its business or operations which would result in a recapture of this
federal bad debt reserve into taxable income.
12. EMPLOYEE BENEFIT PLANS
The Company has a noncontributory defined contribution retirement plan covering
substantially all employees. The Company follows the policy of funding
retirement plan contributions as accrued. The total retirement plan expense for
the years ended December 31, 1999, 1998, and 1997 was approximately $791,000,
$552,000 and $620,000 respectively.
The Company also has an employees' savings plan. The plan allows eligible
employees to contribute up to 10% of their monthly salaries. The Company matches
an amount equal to 50% of the employee's contribution, up to 6% of the
employee's total pay. Participants are at all times fully vested in all
contributions. The Company's contribution to the savings plan for the years
ended December 31, 1999, 1998 and 1997 was approximately $288,000, $256,000, and
$195,000, respectively
The Company has a Supplemental Executive Retirement Plan (SERP) which provides
retirement benefits at the savings and retirement plan levels, for amounts that
are limited by IRS regulations under those plans. The Company's contribution to
the SERP for the years ended December 31, 1999, 1998 and 1997 was approximately
$10,000, $26,000, and $46,000, respectively.
The Company has a non-funded deferred compensation plan for directors and senior
officers. The plan provides for the deferral of cash payments of up to 25% of a
participants' salary, and for 100% of bonuses and directors fees, at the
election of the participant. The total amount deferred was approximately
$43,000, $52,000, $156,000, for the years ending December 31, 1999, 1998, and
1997, respectively. The participant receives an earnings credit at a one year
certificate of deposit rate, or at the total return rate on Company stock, on
the amount deferred, as elected by the participant at the time of the deferral
election. The total earnings (losses) for the years ended 1999, 1998, and 1997
were approximately ($33,000), $12,000, and $66,000, respectively.
The Company has entered into employment contracts with fourteen senior officers
that provide benefits under certain conditions following a change in control of
the Company.
22
23
13. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
For the Years Ended December 31,
---------------------------------------------
1999 1998 1997
----------- ----------- -----------
Net earnings available to common
stockholders, basic ...................... $12,352,000 11,375,000 10,737,000
After tax effect of interest on
convertible subordinated debt ........ 16,000 16,000 16,000
----------- ----------- -----------
Net earnings available to common
stockholders, diluted .................... $12,368,000 11,391,000 10,753,000
=========== =========== ===========
Average outstanding shares - basic .......... 10,357,146 10,133,589 9,801,380
Add: dilutive stock options ................ 158,348 199,592 167,963
Convertible subordinated debt ......... 27,293 27,293 27,293
----------- ----------- -----------
Average outstanding shares - diluted ........ 10,542,787 10,360,474 9,996,636
=========== =========== ===========
Basic earnings per share .................... $ 1.19 1.12 1.10
=========== =========== ===========
Diluted earnings per share .................. $ 1.17 1.10 1.08
=========== =========== ===========
There were approximately 319,000 option shares in 1999 that were not included
because the option exercise price exceeded the market value. All option shares
were included as dilutive stock options in 1998 and 1997.
14. STOCK OPTION PLANS
During fiscal 1984, an Incentive Stock Option Plan was approved which provided
for the grant of options limited to 168,750 shares to certain full time
employees of the Company. In the year ended June 30, 1990, additional Stock
Option Plans were approved which provided for the grant of options limited to
29,445 shares to outside Directors and 166,860 shares to certain full time
employees of the Company. In the year ended December 31, 1994 a Stock Option
Plan was approved which provided for the grant of options to outside Directors
of the Company, limited to 50,000 shares. In the year ended December 31, 1995 a
Stock Option Plan was approved which provided for the grant of options limited
to 279,768 shares to certain full-time employees of the Company. In April 1999
the Directors 1994 Stock Option Plan, and the Employees 1995 Stock Option Plan,
were amended to provide 100,000 and 600,000 additional shares for the Directors
and Employees Plans, respectively. The option price at which the Company's
common stock may be purchased upon exercise of options granted under the plan
must be at least equal to the per share market value of such stock at the date
the option is granted. The 1984 plan also contains provisions permitting the
optionee, with the approval of the Company, to surrender his or her options for
cancellation and receive cash or common stock equal to the difference between
the exercise price and the then fair market value of the shares on the date of
surrender (cash-less exercise). The fiscal 1990 and 1995 plans also contain
provisions authorizing the grant of limited stock rights, which permit the
optionee, upon a change in control of the Company, to surrender his or her
options for cancellation and receive cash or common stock equal to the
difference between the exercise price and the fair market value of the shares on
the date of the grant. All option shares are adjusted for stock splits and stock
dividends. The term of the options may not
23
24
14. STOCK OPTION PLANS...CONTINUED
exceed five years from the date the options are granted. The employee options
vest over a period of two years and the director options vest over a period of
six months.
In 1994, Mountain West Bank adopted an Employee Stock Option Plan with 28,000
shares authorized, and a Directors' Stock Option plan with 12,000 shares
authorized. The option price at which the common stock may be purchased upon
exercise of options granted under the plan must be at least equal to the per
share market value at the date the option is granted. The options are fully
vested at the time of grant and must be exercised within ten years of the date
of the grant. All option shares are adjusted for stock splits and stock
dividends. In July 1994, both plans were amended to provide additional shares.
The Directors' plan received authorization for an additional 20,028 shares, and
the Employees' plan received an additional 46,732 shares. This plan was merged
with the Company's plan with all options converted at the exchange ratio of the
acquisition.
At December 31, 1999, total shares available for option grants to employees and
directors are 776,198. Changes in shares granted for stock options for the years
ended December 31, 1999, 1998, and 1997, are summarized as follows:
Options outstanding Options exercisable
-------------------------- --------------------------
Weighted Weighted
average average
Shares exercise price Shares exercise price
-------- -------------- -------- --------------
Balance, December 31, 1996 ..... 263,653 $ 15.08 160,957 $ 13.44
Canceled ....................... (10,305) (15.38) (590) (11.02)
Granted ........................ 172,634 19.31 57,216 10.95
Became exercisable ............. 11,338 17.15
Three for two stock split ...... 160,937 57,577
Exercised ...................... (52,160) (10.73) (52,160) (10.73)
-------- --------
Balance, December 31, 1997 ..... 534,759 $ 12.33 234,338 $ 10.32
Canceled ....................... (16,738) (13.51) (8,388) (10.97)
Granted ........................ 170,957 22.10 31,860 13.75
Became exercisable ............. 132,885 11.31
Stock dividend ................. 58,939 40,985
Exercised ...................... (153,459) (10.26) (153,459) (10.26)
-------- --------
Balance, December 31, 1998 ..... 594,458 $ 14.40 278,221 $ 10.36
Canceled ....................... (43,439) (18.57) (2,631) (11.74)
Granted ........................ 217,573 22.27 10,620 16.95
Became exercisable ............. 197,139 16.01
Stock dividend ................. 55,913 32,042
Exercised ...................... (113,049) (11.58) (113,049) (11.58)
-------- --------
Balance, December 31, 1999 ..... 711,456 $ 15.85 402,342 $ 12.41
======== ========
24
25
14. STOCK OPTION PLANS...CONTINUED
During the year ended December 31, 1999, there were 10,019 options exercised
through cash-less exercises at a weighted average market price of $21.77.
The range of exercise prices on options outstanding at December 31, 1999 is as
follows:
Total options outstanding Options exercisable
-------------------------------------------- ---------------------------
Weighted Weighted Weighted
average average average
Price range Shares exercise price life of options Shares exercise price
- -------------------- -------- -------------- --------------- -------- --------------
$ 6.22 - $10.52 174,964 $ 9.28 4.9 years 173,763 $ 9.30
$12.33 - $14.41 187,666 13.12 3.8 years 184,126 13.10
$16.95 - $21.00 312,993 20.32 3.2 years 10,620 17.14
$23.19 - $24.00 36,000 23.21 4.4 years 34,000 23.19
-------- --------
711,623 15.85 3.8 years 402,509 12.41
======== ========
The options exercised during the year ended December 31, 1999 were at prices
from $8.99 to $20.15.
The per share weighted-average fair value of stock options granted during 1999,
1998 and 1997 was $5.04, $4.76, and $4.18, respectively, on the date of grant
using the Black Scholes option-pricing model with the following assumptions:
1999 - expected dividend yield of 3.3%, risk-free interest rate of 6.2%,
volatility ratio of .23, and expected life of 4.9 years: 1998 - expected
dividend yield of 2.5%, risk-free interest rate of 4.6%, volatility ratio of
.22, and expected life of 5.2 years: 1997 - expected dividend yield of 2.9%,
risk-free interest rate 5.8%, volatility ratio of .22, and expected life of 5.5
years.
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 its 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 under SFAS No. 123,
the Company's net income would have been reduced to the pro forma amounts
indicated below:
(Dollars in thousands, except per share data)
Years ended December 31,
----------------------------------------
1999 1998 1997
-------- -------- --------
Net earnings As reported $ 12,352 11,375 10,737
Pro forma 11,463 10,724 10,178
Basic earnings per share As reported 1.19 1.12 1.10
Pro forma 1.11 1.06 1.04
Diluted earnings per share - As reported 1.17 1.10 1.08
Pro forma 1.09 1.04 1.02
25
26
15. PARENT COMPANY INFORMATION (CONDENSED)
The following condensed financial information is the unconsolidated (Parent
Company Only) information for Glacier Bancorp, Inc, combined with Mountain west
Bank:
STATEMENTS OF FINANCIAL CONDITION December 31,
- ---------------------------------------------------------------------- ----------------------
(dollars in thousands) 1999 1998
- ---------------------------------------------------------------------- -------- --------
Assets:
Cash .............................................................. $ 2,561 598
Interest bearing cash deposits .................................... 16 2,487
Cash and cash equivalents ................................... -------- --------
2,577 3,085
Investments securities, available-for-sale, at market value 1,755 1,691
Investments securities, held-to-maturity, at cost ................. -- 91
Other assets ...................................................... 2,640 1,332
Goodwill, net ..................................................... 2,376 2,601
Investment in subsidiaries ........................................ $ 78,220 77,731
-------- --------
Total assets ...................................................... 87,568 86,531
======== ========
Dividends payable ................................................. $ 1,910 1,757
Other liabilities ................................................. 602 628
-------- --------
Total liabilities ......................................... 2,512 2,385
Common stock ...................................................... 104 93
Paid-in capital ................................................... 87,387 66,180
Retained earnings ................................................. 2,996 16,700
Net unrealized gains (losses) on securities available-for-sale .... (5,431) 1,173
-------- --------
Total stockholders' equity ............................... $ 85,056 84,146
-------- --------
Liabilities and Stockholders' Equity: .................... 87,568 86,531
======== ========
STATEMENTS OF OPERATIONS Years ended December 31,
- ----------------------------------------------------------------------- ------------------------------------
(dollars in thousands) 1999 1998 1997
- ----------------------------------------------------------------------- -------- -------- --------
Revenues
Dividends from subsidiaries ........................................ $ 8,518 5,761 4,135
Other income ....................................................... 161 168 344
Intercompany charges for services .................................. 1,617 1,971 1,803
-------- -------- --------
Total revenues ................................................ 10,296 7,900 6,282
Expenses
Employee compensation and benefits ................................. 1,519 1,880 1,974
Goodwill amortization .............................................. 243 165 155
Other operating expenses ........................................... 1,027 1,239 323
-------- -------- --------
Total expenses ................................................ 2,789 3,284 2,452
Earnings before income tax benefit and equity in undistributed
earnings of subsidiaries ..................................... 7,507 4,616 3,830
Income tax benefit ................................................. (328) (198) (88)
-------- -------- --------
Income before equity in undistributed earnings of subsidiaries ..... 7,835 4,814 3,918
Equity in undistributed earnings of subsidiaries ................... 4,517 6,561 6,819
-------- -------- --------
Net earnings .......................................................... $ 12,352 11,375 10,737
======== ======== ========
26
27
15. PARENT COMPANY INFORMATION (CONDENSED)...CONTINUED
STATEMENTS OF CASH FLOWS Years ended December 31,
- ----------------------------------------------------------------- ------------------------------------
(dollars in thousands) 1999 1998 1997
- ----------------------------------------------------------------- -------- -------- --------
Operating Activities
Net earnings ................................................. $ 12,352 11,375 10,737
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Goodwill amortization ........................................ 242 165 155
Gain on sale of investments available-for-sale ............... -- (8) (184)
Equity in undistributed earnings of subsidiaries ............. (4,517) (6,561) (6,819)
Net increase (decrease) in other assets and other liabilities (1,176) (220) (4,010)
-------- -------- --------
Net cash provided (used in) by operating activities ............. 6,901 4,751 (121)
Investing activities
Purchases of investment securities available-for-sale ........ (103) (198) (176)
Proceeds from sales, maturities and prepayments of securities
available-for-sale ....................................... 3 59 484
Proceeds from maturities of securities held-to-maturity ...... -- 3 3
Payment for land purchase .................................... -- -- (160)
Equity contribution to subsidiary ............................ (2,500) -- --
Acquisition of minority interest ............................. -- (236) (14)
-------- -------- --------
Net cash provided (used) by investing activities ................ (2,600) (372) 137
Financing activities
Proceeds from exercise of stock options and other stock
issued.................................................... 1,114 1,573 3,476
Principal reductions on notes payable ........................ -- (216) (82)
Proceeds from new bank loan .................................. -- -- 222
Cash dividends paid to stockholders .......................... (5,923) (4,327) (3,369)
-------- -------- --------
Net cash provided by (used in) financing activities ............. (4,809) (2,970) 247
Net increase (decrease) in cash and cash equivalents ............ (508) 1,409 263
Cash and cash equivalents at beginning of period ................ 3,085 1,676 1,413
-------- -------- --------
Cash and cash equivalents at end of period ...................... $ 2,577 3,085 1,676
======== ======== ========
27
28
16. UNAUDITED QUARTERLY FINANCIAL DATA
Summarized unaudited quarterly financial data is as follows (in thousands except
per share amounts):
1999 Quarter 1 Quarter 2 Quarter 3 Quarter 4
- ------------------------------------ ------------- ------------- ------------- -------------
Interest income .................... $ 14,398 15,476 16,849 17,996
Interest expense ................... 5,973 6,470 7,260 7,932
Net interest income ................ 8,425 9,006 9,589 10,064
Provision for loan loss ............ 359 410 478 476
Net income before income taxes ..... 4,540 4,742 5,099 4,693
Net earnings ....................... 2,969 3,088 3,266 3,029
Basic earnings per share[1] ........ 0.29 0.30 0.31 0.29
Diluted earnings per share[1] ...... 0.28 0.29 0.31 0.29
Dividends per share[1] ............. $0.14 $0.15 $0.15 $0.20(2)
Market range high-low[1] ........... $21.82-$17.05 $24.38-$17.27 $23.88-$15.25 $18.75-$14.88
1998 Quarter 1 Quarter 2 Quarter 3 Quarter 4
- ------------------------------------ ------------- ------------- ------------- -------------
Interest income .................... $ 14,383 14,713 14,975 14,757
Interest expense ................... 6,383 6,499 6,433 6,155
Net interest income ................ 8,000 8,214 8,542 8,602
Provision for loan loss ............ 293 600 368 474
Net income before income taxes ..... 4,565 4,516 4,573 4,395
Net earnings ....................... 2,880 2,815 2,834 2,846
Basic earnings per share[1] ........ 0.28 0.28 0.28 0.28
Diluted earnings per share[1] ...... 0.28 0.27 0.27 0.28
Dividends per share[1] ............. $0.11 $0.12 $0.13 $0.21(3)
Market range high-low[1] ........... $24.38-$19.21 $23.55-$21.90 $23.97-$20.71 $20.57-$17.16
1997 Quarter 1 Quarter 2 Quarter 3 Quarter 4
- ------------------------------------ ------------- ------------- ------------- -------------
Interest income .................... $ 13,169 13,815 14,265 14,363
Interest expense ................... 6,011 6,201 6,379 6,334
Net interest income ................ 7,158 7,581 7,886 8,062
Provision for loan loss ............ 263 281 257 251
Net income before income taxes ..... 3,609 4,301 4,449 4,624
Net earnings ....................... 2,275 2,720 2,770 2,972
Basic earnings per share[1] ........ 0.23 0.28 0.28 0.30
Diluted earnings per share[1] ...... 0.23 0.27 0.28 0.30
Dividends per share[1] ............. $0.09 $0.10 $0.10 $0.14(2)
Market range high-low[1] ........... $13.64-$12.81 $17.36-$12.60 $16.12-$14.46 $20.66-$15.39
[1] Per share amounts adjusted to reflect effect of 10% stock dividend
[2] Special dividend was paid at $.05 per share.
[3] Special dividend was paid at $.07 per share.
28
29
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments have been defined to generally mean cash or a contract
that implies an obligation to deliver cash or another financial instrument to
another entity. For purposes of the Company's Consolidated Statement of
Financial Condition, this includes the following items:
1999 1998
- --------------------------------------------------- ----------------------- -----------------------
(dollars in thousands) Amount Fair Value Amount Fair Value
- --------------------------------------------------- -------- ---------- -------- ----------
Financial Assets:
Cash .............................................. $ 50,590 50,590 39,027 39,027
Federal funds sold ................................ 64 64 5,883 5,883
Interest bearing cash deposits .................... 1,711 1,711 6,394 6,394
Investment securities ............................. 62,060 62,055 65,256 65,544
Mortgage-backed securities ........................ 147,252 147,246 53,831 53,831
Loans ............................................. 652,208 641,499 571,188 578,176
FHLB and Federal Reserve Bank stock ............... 16,601 16,601 14,191 14,191
Financial Liabilities:
Deposits .......................................... $644,106 646,778 546,503 547,634
Advances from the FHLB of Seattle ................. 208,650 204,681 125,886 126,311
Repurchase agreements and other borrowed funds .... 26,614 26,614 18,707 18,707
Financial assets and financial liabilities other than securities are not traded
in active markets. The above estimates of fair value require subjective
judgments and are approximate. Changes in the following methodologies and
assumptions could significantly affect the estimates. These estimates may also
vary significantly from the amounts that could be realized in actual
transactions.
Financial Assets - The estimated fair value approximates the book value of cash,
federal funds sold and interest bearing cash deposits. For investment and
mortgage-backed securities, the fair value is based on quoted market prices. The
fair value of loans is estimated by discounting future cash flows using current
rates at which similar loans would be made. The fair value of FHLB and Federal
Reserve Bank stock approximates the book value.
Financial Liabilities - The estimated fair value of demand and savings deposits
approximates the book value since rates are periodically adjusted to market
rates. Certificates of deposit fair value is estimated by discounting the future
cash flows using current rates for similar deposits. Advances from the FHLB of
Seattle fair value is estimated by discounting future cash flows using current
rates for advances with similar weighted average maturities. Repurchase
agreements and other borrowed funds have variable interest rates, or are short
term, so fair value approximates book value.
Off-balance sheet financial instruments - Commitments to extend credit and
letters of credit represent the principal categories of off-balance sheet
financial instruments. Rates for these commitments are set at time of loan
closing, so no adjustment is necessary to reflect these commitments at market
value. See Note 4 to consolidated financial statements.
18. CONTINGENCIES AND COMMITMENTS
The Company is a defendant in legal proceedings arising in the normal course of
business. In the opinion of management, the disposition of pending litigation
will not have a material effect on the Company's consolidated financial position
or results of operations.
29
30
19. BUSINESS COMBINATIONS
On August 31, 1998, the Company issued 536,154 shares of common stock in
exchange for all of the outstanding stock of HUB Financial Corporation (HUB),
parent company of Valley Bank of Helena (Valley). As a result of this
transaction, the Company acquired the majority interest, 86.5%, of Valley. This
business combination has been accounted for as a pooling-of interests
combination, and, accordingly, the consolidated financial statements for periods
prior to the combination have been restated to include the accounts and results
of operations of HUB.
The results of operations previously reported by the separate companies and the
combined amounts presented in the accompanying consolidated financial statements
are summarized below (in thousands):
Six months
ended Year ended
June 30, 1998 December 31,
(unaudited) 1997
------------- ------------
Revenue of:
Glacier Bancorp, Inc ......................... $ 27,717 52,343
HUB Financial Corporation .................... 3,523 6,652
-------- --------
$ 31,240 58,995
======== ========
Net earnings of:
Glacier Bancorp, Inc. ........................ $ 4,892 9,180
HUB Financial Corporation .................... 408 874
-------- --------
$ 5,300 10,054
======== ========
On August 31, 1998 the Company issued additional shares of $2,199 to acquire the
shares held by minority shareholders of Valley Bank of Helena the subsidiary
bank of HUB Financial Corporation.
Also on August 31, 1998, the Company issued 83,761 shares of common stock in
exchange for the minority interest of 13.5% of Valley. This business combination
has been accounted for as a purchase and, accordingly, the consolidated
statement of operations for the year ended December 31, 1998 includes the
results of operations related to this minority interest commencing August 31,
1998 and the proportional interest of the net assets acquired have been restated
to estimated fair value.
On January 18, 1999, the Company issued 227,707 shares of common stock in
exchange for all of the outstanding stock of Big Sky Western Bank. This business
combination has been accounted for as a pooling-of-interests combination and,
accordingly, the consolidated financial statements for periods prior to the
combination have been restated to include the accounts and results of operations
of Big Sky Western Bank. The results of operations previously reported by the
separate companies and the combined amounts presented in the accompanying
consolidated financial statements are summarized below (in thousands):
30
31
19. BUSINESS COMBINATIONS...CONTINUED
Years ended
December 31,
1998 1997
-------- --------
Revenue of:
Glacier Bancorp, Inc. ........................ $ 62,340 58,995
Big Sky Western Bank ......................... 3,340 2,826
-------- --------
$ 65,680 61,821
======== ========
Net earnings of:
Glacier Bancorp, Inc. ........................ $ 10,746 10,054
Big Sky Western Bank ......................... 169 182
-------- --------
$ 10,915 10,236
======== ========
During 1997 Big Sky Western Bank issued additional shares of $1,001 to increase
the capital of the bank.
On February 4, 2000, the Company issued 844,257 shares of common stock in
exchange for all of the outstanding stock of Mountain West Bank. This business
combination has been accounted for as a pooling-of-interests combination and,
accordingly, the consolidated financial statements for periods prior to the
combination have been restated to include the accounts and results of operations
of Mountain West Bank.
Prior to the combination Mountain West Bank's fiscal year ended on March 31. In
recording the pooling-of-interests combination, Mountain West Bank's financial
statements for the twelve months ended December 31, 1999, were combined with the
Company's financial statements for the same period. For the December 31, 1998
financial statements Mountain West Bank's March 31, 1999 financial statements
were combined with the Company's December 31, 1998 financial statements. An
adjustment of $75,000 has been made to stockholders' equity as of December 31,
1999, to eliminate the effect of including Mountain West Bank's results of
operations for the three months ended March 31, 1999, in both the years ended
December 31, 1999 and 1998. The financial statements for the year ended December
31, 1997 includes the Mountain West Bank's March 31, 1998 financial statements.
The results of operations previously reported by the separate companies and the
combined amounts presented in the accompanying consolidated financial statements
are summarized below (in thousands):
Years ended December 31,
1999 1998 1997
-------- -------- --------
Revenue of:
Glacier Bancorp, Inc. .............. $ 69,985 65,680 61,821
Mountain West Bank ................. 7,543 6,744 4,848
-------- -------- --------
$ 77,528 72,424 66,669
======== ======== ========
Net earnings of:
Glacier Bancorp, Inc. .............. $ 12,179 10,915 10,236
Mountain West Bank ................. 173 460 501
-------- -------- --------
$ 12,352 11,375 10,737
======== ======== ========
During 1997 Mountain West Bank issued additional shares of $1,923 to increase
the capital of the bank.
31
32
20. BRANCH ACQUISITIONS
On October 8, 1999, the Company, through its largest subsidiary Glacier Bank,
acquired the two Butte, Montana offices of Washington Mutual Bank with
approximately $73,000,000 in deposits. This acquisition was accounted for as a
purchase. The premium paid of $4,767,000 included a core deposit intangible of
approximately $1,797,000 and goodwill of approximately $2,970,000.
22. OPERATING SEGMENT INFORMATION
As of December 31, 1998, the company adopted FASB Statement 131, Financial
Reporting for Segments of a Business Enterprise. This statement requires that a
public business enterprise report financial and descriptive information about
its reportable operating segments. According to the statement, operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance.
The Company evaluates segment performance internally based on individual bank
charter, and thus the operating segments are so defined. All segments, except
for the segment defined as "other," are based on commercial banking operations.
The operating segment defined as "other" includes the Parent company, smaller
nonbank operating units, and eliminations of transactions between segments.
The accounting policies of the individual operating segments are the same as
those of the Company described in note 1. Transactions between operating
segments are primarily conducted at fair value, resulting in profits that are
eliminated for reporting consolidated results of operations. Expenses for
centrally provided services are allocated based on the estimated usage of those
services.
32
33
22. OPERATING SEGMENT INFORMATION...CONTINUED
The following is a summary of selected operating segment information for the
years ended and as of December 31, 1999, 1998, and 1997 (in thousands):
Operating Segments information
(Dollars in thousands)
First Valley Big Sky Mountain
1999 Glacier Whitefish Eureka Security Helena Western West Other Consolidated
-------- -------- -------- -------- -------- -------- -------- -------- ------------
Net interest income ............ $ 15,266 2,044 1,290 8,804 3,614 2,077 3,755 234 37,084
Provision for loan losses ...... 470 66 24 600 155 191 217 -- 1,723
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net interest income after
provision for loan losses .... 14,796 1,978 1,266 8,204 3,459 1,886 3,538 234 35,361
Noninterest income ............. 5,539 675 313 2,260 1,494 881 1,745 (98) 12,809
Merger expense and amortization
of goodwill and core deposit
intangibles .................. 78 -- -- -- -- -- 78 361 517
Other noninterest expense ...... 10,750 1,502 986 4,567 2,977 2,096 4,941 709 28,528
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income before income taxes
and minority interest ........ 9,507 1,151 593 5,897 1,976 671 264 (934) 19,125
Minority interest .............. -- 51 51
Income taxes expense (benefit) . 3,303 348 191 2,132 731 231 91 (305) 6,722
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net income ..................... $ 6,204 803 402 3,765 1,245 440 173 (680) 12,352
======== ======== ======== ======== ======== ======== ======== ======== ========
Assets ......................... $460,257 52,203 28,879 193,548 82,587 66,255 89,884 388 974,001
Net loans ...................... 272,060 35,485 18,178 161,781 58,924 43,850 61,930 -- 652,208
Deposits ....................... 276,880 34,261 18,514 143,645 65,095 41,034 67,824 (3,147) 644,106
Stockholders' equity ........... 36,040 4,605 3,137 15,640 7,073 5,281 6,243 7,037 85,056
1998
Net interest income ............ $ 14,572 1,820 1,247 7,784 3,312 1,251 3,187 185 33,358
Provision for loan losses ...... 670 78 12 645 85 42 203 -- 1,735
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net interest income after
provision for loan losses .... 13,902 1,742 1,235 7,139 3,227 1,209 2,984 185 31,623
Noninterest income ............. 5,723 686 372 2,801 1,553 743 1,637 81 13,596
Merger expense and amortization
of goodwill and core deposit
intangibles .................. -- -- -- -- -- -- -- 931 931
Other noninterest expense ...... 10,523 1,347 971 4,151 3,010 1,680 3,885 527 26,094
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income before income taxes
and minority interest ........ 9,102 1,081 636 5,789 1,770 272 736 (1,192) 18,194
Minority interest .............. -- 145 145
Income taxes expense (benefit) . 3,238 343 217 2,138 659 103 276 (300) 6,674
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net income ..................... $ 5,864 738 419 3,651 1,111 169 460 (1,037) 11,375
======== ======== ======== ======== ======== ======== ======== ======== ========
Assets ......................... $370,686 42,643 24,471 164,546 69,924 39,376 80,867 (5,711) 786,802
Net loans ...................... 272,399 22,022 16,322 134,646 48,860 23,959 52,980 -- 571,188
Deposits ....................... 201,211 34,179 17,797 139,348 57,807 31,385 70,659 (5,883) 546,503
Stockholders' equity ........... 39,058 4,642 3,309 14,668 6,628 2,873 6,336 6,632 84,146
1997
Net interest income ............ $ 14,121 1,786 1,232 6,654 3,142 1,143 2,297 312 30,687
Provision for loan losses ...... 345 -- 42 360 60 82 163 -- 1,052
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net interest income after
provision for loan losses .... 13,776 1,786 1,190 6,294 3,082 1,061 2,134 312 29,635
Noninterest income ............. 4,540 570 350 2,818 1,275 520 922 62 11,057
Merger expense and amortization
of goodwill and core deposit
intangibles .................. -- -- -- -- -- -- -- 155 155
Other noninterest expense ...... 10,145 1,399 947 4,050 2,709 1,334 2,282 480 23,346
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income before income taxes
and minority interest ........ 8,171 957 593 5,062 1,648 247 774 (261) 17,191
Minority interest .............. 208 208
Income taxes expense (benefit) . 2,958 312 202 1,896 614 65 273 (74) 6,246
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net income ..................... $ 5,213 645 391 3,166 1,034 182 501 (395) 10,737
======== ======== ======== ======== ======== ======== ======== ======== ========
Assets ......................... $365,921 41,276 25,565 144,382 69,875 32,724 67,135 1,648 748,526
Net loans ...................... 266,670 22,746 16,290 111,867 49,344 19,303 40,014 -- 526,234
Deposits ....................... 173,371 30,918 16,385 127,801 57,687 25,449 57,741 (1,813) 487,539
Stockholders' equity ........... 35,572 4,247 3,188 12,586 6,647 2,927 5,836 2,534 73,537
33
34
23. Pending Acquisitions
On September 14, 2000 the Company announced the acquisition of seven branches of
Wells Fargo & Company and First Security Corporation subsidiary banks located in
Idaho and Utah. Included in the purchase are deposits of approximately $185
million, and certain loans and real estate of the branch offices. The locations
will become branch offices of Mountain West Bank of Coeur d'Alene.
On September 20, 2000 the Company and WesterFed Financial Corporation
("WesterFed") jointly announced the signing of a definitive agreement whereby
the Company will acquire WesterFed for a combination of cash and stock.
WesterFed operates twenty-seven offices in fourteen Montana communities with
total assets at June 30, 2000 of $946 million, total loans of $619 million, and
total deposits of $607 million and total equity of $89 million.
Both transactions are pending approval by banking regulators. The WesterFed
purchase also is subject to approval by shareholders of both companies.
34
35
MOUNTAIN WEST BANK
Mountain West Bank was acquired by the Company in February, 2000. Prior to the
acquisition Mountain West Bank's fiscal year ended on March 31, hence; some of
the following compares to those dates. Total assets at December 31, 1999
increased $9 million, or 11 percent, over the balances at March 31, 1999. Net
loans increased $9 million, or 14 percent, from March 31, 1999, with the
remaining asset growth in investment securities. Real estate loans increased $6
million, and consumer loans increased $3 million. Non-performing loans as a
percentage of loans was .23 percent and the allowance for loan losses was at 3.5
times non-performing loans at December 31, 1999. Total deposits decreased $3
million, with borrowed funds used to support the additional asset growth. Net
income decreased $287 thousand, or 62 percent, when comparing the year ended
December 31, 1999 to the year ended December 31, 1998, the result of investments
in new branches, a data system conversion, and increased marketing expense. Net
interest income increased $568 thousand, or 18 percent. Non-interest income
increased $108 thousand, and non-interest expense increased $1.1 million. The
efficiency ratio increased from 80.53 percent for the year ended March 31, 1999
to 90.87 percent for the year ended December 31, 1999 due to the increase in
expenses previously mentioned.
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
Average Balance Sheet
The following three-year 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.
-----------------------------------------------------------------------
AVERAGE BALANCE SHEET For the year ended 12-31-99 For the year ended 12-31-98
-----------------------------------------------------------------------
(Dollars in Thousands) Interest Average Interest Average
Average and Yield/ Average and Yield/
ASSETS Balance Dividends Rate Balance Dividends Rate
-----------------------------------------------------------------------
Real Estate Loans $ 226,246 17,875 7.90% $ 237,034 19,404 8.19%
Commercial Loans 246,811 21,499 8.71% 202,119 18,250 9.03%
Consumer and Other Loans 136,484 12,367 9.06% 124,525 11,907 9.56%
-------- ------- ----- -------- ------- -----
Total Loans 609,541 51,741 8.49% 563,678 49,561 8.79%
Investment Securities 202,016 12,978 6.42% 153,225 9,267 6.05%
-------- ------- ----- -------- ------ -----
Total Earning Assets 811,557 64,719 7.97% 716,903 58,828 8.21%
------- ----- ------- -----
Non-Earning Assets 60,766 54,945
------- -------
TOTAL ASSETS $ 872,322 $ 771,846
========== ==========
LIABILITIES
AND STOCKHOLDERS' EQUITY
NOW Accounts $ 91,380 1,064 1.16% $ 85,965 1,428 1.66%
Savings Accounts 47,272 843 1.78% 48,438 1,065 2.20%
Money Market Accounts 134,364 5,304 3.95% 118,215 5,175 4.38%
Certificates of Deposit 174,368 9,283 5.32% 155,760 8,899 5.71%
FHLB Advances 173,289 9,460 5.46% 140,877 7,939 5.64%
Repurchase Agreements
and Other Borrowed Funds 31,362 1,681 5.36% 20,023 964 4.81%
------- ------ ----- ------- ---- -----
Total Interest Bearing Liabilities 652,034 27,635 4.24% 569,278 25,470 4.47%
------- ----- ------- -----
Non-interest Bearing Deposits 118,318 112,343
Other Liabilities 17,102 11,335
------- -------
Total Liabilities 787,455 692,956
-------- --------
Common Stock 99 81
Paid-In Capital 76,696 54,524
Retained Earnings 10,212 23,102
Accumulated Other
Comprehensive Earnings (Loss) (2,140) 1,183
------- ------
Total Stockholders' Equity 84,867 78,890
------- ------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 872,322 $ 771,846
========== ==========
NET INTEREST INCOME $37,084 $33,358
======== ========
NET INTEREST SPREAD 3.74% 3.73%
NET INTEREST MARGIN
ON AVERAGE EARNING ASSETS (1) 4.57% 4.65%
RETURN ON AVERAGE ASSETS (2) 1.42% 1.47%
RETURN ON AVERAGE EQUITY (3) 14.55% 14.42%
DIVIDEND PAYOUT RATIO (4) 49.58% 41.07%
AVERAGE EQUITY TO
AVERAGE ASSETS RATIO (5) 9.73% 10.22%
-----------------------------------------------------------------------
-----------------------------------
AVERAGE BALANCE SHEET For the year ended 12-31-97
-----------------------------------
(Dollars in Thousands) Interest Average
Average and Yield/
ASSETS Balance Dividends Rate
-----------------------------------
Real Estate Loans $ 243,772 20,212 8.29%
Commercial Loans 145,938 13,876 9.51%
Consumer and Other Loans 119,694 11,700 9.77%
-------- ------- -----
Total Loans 509,403 45,788 8.99%
Investment Securities 150,582 9,824 6.52%
-------- ------ -----
Total Earning Assets 659,985 55,612 8.43%
------- -----
Non-Earning Assets 53,822
------
TOTAL ASSETS $ 713,807
=========
LIABILITIES
AND STOCKHOLDERS' EQUITY
NOW Accounts $ 78,729 1,457 1.85%
Savings Accounts 48,087 1,415 2.94%
Money Market Accounts 90,487 3,860 4.27%
Certificates of Deposit 150,856 8,736 5.79%
FHLB Advances 144,043 8,100 5.62%
Repurchase Agreements
and Other Borrowed Funds 29,294 1,357 4.63%
------- ------ -----
Total Interest Bearing Liabilities 541,496 24,925 4.60%
------- -----
Non-interest Bearing Deposits 90,117
Other Liabilities 15,344
------
Total Liabilities 646,957
-------
Common Stock 64
Paid-In Capital 39,914
Retained Earnings 26,238
Accumulated Other
Comprehensive Earnings (Loss) 634
---
Total Stockholders' Equity 66,850
------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 713,807
=========
NET INTEREST INCOME $30,687
=======
NET INTEREST SPREAD 3.82%
NET INTEREST MARGIN
ON AVERAGE EARNING ASSETS (1) 4.65%
RETURN ON AVERAGE ASSETS (2) 1.50%
RETURN ON AVERAGE EQUITY (3) 16.06%
DIVIDEND PAYOUT RATIO (4) 36.36%
AVERAGE EQUITY TO
AVERAGE ASSETS RATIO (5) 9.37%
-----------------------------------
35
36
(1) Without tax effect on non-taxable securities income
(2) Net income divided by average total assets
(3) Net income divided by average equity
(4) Dividends declared per share divided by income per share
(5) Average equity divided by average total assets
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.
------------------------------------------------------------------------
Years Ended December 31, Years Ended December 31,
(Dollars in Thousands) 1999 vs. 1998 1998 vs. 1997
------------------------------------------------------------------------
Increase (Decrease) due to: Increase (Decrease) due to:
------------------------------------------------------------------------
INTEREST INCOME Volume Rate Net Volume Rate Net
------------------------------------------------------------------------
Real Estate Loans $ (883) $ (646) $ (1,529) $ (559) $ (249) $ (808)
Commercial Loans 4,035 (786) 3,249 5,342 (968) 4,374
Consumer and Other Loans 1,143 (683) 460 472 (265) 207
Investment Securities 2,951 760 3,711 172 (729) (557)
------------------------------------------------------------------------
Total Interest Income 7,246 (1,355) 5,891 5,427 (2,211) 3,216
------------------------------------------------------------------------
NOW Accounts 90 (454) (364) 134 (164) (30)
Savings Accounts (26) (196) (222) 10 (360) (350)
Money Market Accounts 707 (578) 129 1,183 133 1,316
Certificates of Deposit 1,063 (680) 383 284 (120) 164
FHLB Advances 1,826 (305) 1,521 (178) 17 (161)
Other Borrowings and
Repurchase Agreements 547 171 718 (430) 36 (394)
------------------------------------------------------------------------
Total Interest Expense 4,207 (2,042) 2,165 1,003 (458) 545
------------------------------------------------------------------------
NET INTEREST INCOME $ 3,039 $ 687 $ 3,726 $ 4,424 $ (1,753) $ 2,671
========================================================================
Net interest income increased $4 million in 1999 over 1998. The increase was
primarily due to increases in volumes. Market interest rates increased during
1999. The two-year treasury note was at 6.1% at December 31, 1999 which is a 161
basis point increase from year-end 1998. The 30-year treasury bond was at 6.46%,
up 135 basis points from the prior year. The spread between the 2-year rates and
30-year rates has declined from 53 basis points to 27 basis points. The decrease
in spread may result in a smaller interest margin as short-term funding costs
may increase at a faster pace than the income on earning assets. For additional
information see section "Management's Discussion and Analysis".
LENDING ACTIVITY
GENERAL
The Banks focus their lending activity primarily on several types of loans: 1)
first-mortgage, conventional loans secured by residential properties,
particularly single-family, 2) installment lending for consumer purposes (e.g.,
auto, home equity, etc.), and 3) commercial lending that concentrates on
targeted businesses. Management's Discussion & Analysis and Note 4 to the
Consolidated Financial Statements, contain more information about the lending
portfolio.
36
37
LOAN PORTFOLIO COMPOSITION
The following table summarizes the Company's loan portfolio:
-----------------------------------------------------------------------------------------
(Dollars in Thousands) At At At At
12/31/99 12/31/98 12/31/97 12/31/96
TYPE OF LOAN
- ----------------------------------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent
-----------------------------------------------------------------------------------------
REAL ESTATE LOANS:
Residential first mortgage loans $195,374 29.96% $222,018 38.87% $237,906 45.23% $233,948 48.87%
Loans held for sale $30,004 4.60% $16,474 2.88% $9,716 1.85% $6,672 1.39%
-----------------------------------------------------------------------------------------
Total $225,378 34.56% $238,492 41.75% $247,622 47.08% $240,620 50.26%
- ----------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL LOANS:
Real estate $154,155 23.64% $118,434 20.73% $73,212 13.92% $62,479 13.05%
Other commercial loans $125,462 19.24% $97,463 17.06% $85,693 16.29% $67,795 14.16%
-----------------------------------------------------------------------------------------
` Total $279,617 42.88% $215,897 37.79% $158,905 30.21% $130,274 27.21%
- ----------------------------------------------------------------------------------------------------------------------------------
INSTALLMENT AND OTHER LOANS:
Consumer loans $87,967 13.49% $69,726 12.21% $120,158 22.84% $108,183 22.60%
Home equity loans (1) $66,566 10.21% $53,325 9.34% $0 0.00% $0 0.00%
Outstanding balances on credit cards $0 $18 $3,951 0.75% $3,725 0.78%
-----------------------------------------------------------------------------------------
Total $154,533 23.70% $123,069 21.55% $124,109 23.59% $111,908 23.38%
- ----------------------------------------------------------------------------------------------------------------------------------
Net deferred loan fees, premiums
and discounts (2) ($598) -0.11% ($602) -0.10% $0 0.00% $0 0.00%
Allowance for Losses ($6,722) -1.03% ($5,668) -0.99% ($4,654) -0.88% ($4,106) -0.85%
-----------------------------------------------------------------------------------------
NET LOANS $652,208 100.00% $571,188 100.00% $525,982 100.00% $478,696 100.00%
- -----------------------------------------=========================================================================================
---------------------
(Dollars in Thousands) At
12/31/95
TYPE OF LOAN
- --------------------------------------------------------------
Amount Percent
---------------------
REAL ESTATE LOANS:
Residential first mortgage loans $218,280 51.77%
Loans held for sale $8,438 2.00%
---------------------
Total $226,718 53.77%
- --------------------------------------------------------------
COMMERCIAL LOANS:
Real estate $51,850 12.30%
Other commercial loans $53,659 12.73%
---------------------
` Total $105,509 25.03%
- --------------------------------------------------------------
INSTALLMENT AND OTHER LOANS:
Consumer loans $90,099 21.37%
Home equity loans (1) $0 0.00%
Outstanding balances on credit cards $3,139 0.74%
---------------------
Total $93,238 22.11%
- --------------------------------------------------------------
Net deferred loan fees, premiums
and discounts (2) $0 0.00%
Allowance for Losses ($3,803) -0.91%
---------------------
NET LOANS $421,662 100.00%
- -----------------------------------------=====================
(1) For periods prior to 1998, included with consumer loans.
(2) For periods prior to 1998, included with other loans amounts.
37
38
LOAN PORTFOLIO MATURITIES OR REPRICING TERM
The stated maturities or first repricing term (if applicable) for the loan
portfolio at December 31, 1999 was as follows:
- ----------------------------------------
(Dollars in Thousands) Real Estate Commercial Consumer Totals
- ---------------------------------------- ----------- ---------- -------- -------
Variable Rate $ 77,666 155,996 34,999 268,661
Fixed Rate Maturing or Repricing in:
One year or less 14,250 39,861 41,099 95,210
One to five years 40,278 43,456 61,389 145,122
Thereafter 93,184 40,304 17,046 150,535
-------- -------- -------- --------
Totals $225,378 279,617 154,533 659,528
======== ======== ======== ========
LOAN PORTFOLIO SCHEDULED CONTRACTUAL PRINCIPAL REPAYMENTS
The following table sets forth certain information at December 31, 1999
regarding the dollar amount of scheduled loan contractual repayments (demand
loans, loans having no stated scheduled repayments and no stated maturity, and
overdrafts are reported as due in one year or less)
After One Year
- ---------------------------------------- One Year through After Five
(Dollars in Thousands) or Less Five Years Years Totals
- ---------------------------------------- --------- -------------- ---------- -------
Real estate loans $ 21,652 106,145 97,581 225,378
Commercial loans 63,247 122,625 93,745 279,617
Consumer loans 62,038 63,175 29,320 154,533
-------- -------- -------- --------
Totals $146,937 291,945 220,646 659,528
======== ======== ======== ========
Neither scheduled maturities nor scheduled contractual amortization of loans are
expected to reflect the actual term of the Banks' loan portfolio. Based on
historical information, the average life of loans is substantially less than
their contractual terms because of prepayments and, in the case of conventional
mortgage loans (i.e., those loans which are neither insured nor partially
guaranteed by the Federal Housing Administration or the Veterans
Administration), due-on-sale clauses, which give the Company the right to
declare a loan immediately due and payable in the event, among other things, the
borrower sells the real property subject to the mortgage and the loan is not
repaid.
38
39
The following table sets forth information regarding the Banks' non-performing
assets at the dates indicated:
------------------------------------------------------------
(Dollars in Thousands) At At At At At
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
------------------------------------------------------------
NON-ACCRUAL LOANS:
Mortgage loans $ 613 $ 438 $ 176 $ 157 $ 0
Commercial loans $ 776 $1,068 $ 288 $ 262 $ 474
Consumer loans $ 74 $ 64 $ 156 $ 45 $ 16
------------------------------------------------------------
TOTAL $1,463 $1,570 $ 620 $ 464 $ 490
------------------------------------------------------------
ACCRUING LOANS 90 DAYS OR MORE OVERDUE:
Mortgage loans $ 62 $ 632 $ 416 $ 290 $ 8
Commercial loans $ 99 $ 385 $ 268 $ 222 $ 364
Consumer loans $ 104 $ 124 $ 251 $ 431 $ 179
------------------------------------------------------------
TOTAL $ 265 $1,141 $ 935 $ 943 $ 551
------------------------------------------------------------
Troubled debt restructuring $ 0 $ 205 $ 249 $ 0 $ 0
Real estate and other assets owned, net $ 550 $ 151 $ 228 $ 506 $ 52
TOTAL NON-PERFORMING LOANS, TROUBLED DEBT
RESTRUCTURINGS, AND REAL ESTATE AND OTHER ------------------------------------------------------------
ASSETS OWNED, NET $2,278 $3,067 $2,032 $1,913 $1,093
------------------------------------------------------------
AS A PERCENTAGE OF TOTAL ASSETS 0.23% 0.39% 0.27% 0.28% 0.18%
------------------------------------------------------------
Interest Income (1) $ 132 $ 103 $ 84 $ 94 $ 55
------------------------------------------------------------
(1) This is the amount of interest that would have been recorded on loans
accounted for on a non-performing basis as of the end of each period if
such loans had been current for the entire period.
The following table illustrates the loan loss experience:
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES:
(Dollars in Thousands) Years ended December 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
BALANCE AT BEGINNING OF PERIOD $ 5,668 4,654 4,106 3,803 3,448
CHARGE OFFS:
Residential real estate (44) (50) 0 (122) 0
Commercial loans (409) (514) (162) (229) (238)
Consumer loans (433) (517) (617) (540) (221)
------- ------- ------- ------- -------
Total charge offs $ (886) (1,081) (779) (891) (459)
------- ------- ------- ------- -------
RECOVERIES:
Residential real estate 1 0 0 1 0
Commercial loans 110 250 155 69 56
Consumer loans 106 110 120 107 106
------- ------- ------- ------- -------
Total recoveries $ 217 360 275 177 162
------- ------- ------- ------- -------
CHARGEOFFS, NET OF RECOVERIES (669) (721) (504) (714) (297)
PROVISION 1,723 1,735 1,052 1,017 652
------- ------- ------- ------- -------
BALANCE AT END OF PERIOD $ 6,722 5,668 4,654 4,106 3,803
======= ======= ======= ======= =======
RATIO OF NET CHARGE OFFS TO AVERAGE
LOANS OUTSTANDING DURING THE PERIOD 0.11% 0.13% 0.10% 0.16% 0.08%
39
40
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
1999 1998 1997 1996
------------------------- ------------------------- ------------------------ ------------------------
Percent Percent Percent Percent
- ------------------------ of loans in of loans in of loans in of loans in
(Dollars in thousands) Allowance category Allowance category Allowance category Allowance category
- ------------------------ ------------- ---------- ------------- ---------- ------------- ---------- ------------- ---------
Residential real estate $1,174 0.52% 1,221 0.51% 1,263 0.51% 1,227 0.51%
Commercial real estate 1,526 0.99% 1,095 0.92% 549 0.75% 469 0.75%
Other commercial 2,466 1.97% 1,992 2.04% 1,345 1.57% 1,064 1.57%
Consumer 1,556 1.95% 1,360 2.12% 1,497 1.21% 1,346 1.24%
------------- ------------- ------------- -------------
Totals $6,722 5,668 4,654 4,106
============= ============= ============= =============
1995
------------------------
Percent
of loans in
(Dollars in thousands) Allowance category
- ------------------------ ------------- ---------
Residential real estate 1,137 0.51%
Commercial real estate 402 0.75%
Other commercial 826 1.57%
Consumer 1,438 1.59%
-------------
Totals 3,803
=============
SOURCES OF FUNDS
GENERAL
Deposits are the most important source of the Banks' funds for lending and other
business purposes. In addition, the Banks derive funds from loan repayments,
advances from the FHLB of Seattle, repurchase agreements, and loan sales. Loan
repayments are a relatively stable source of funds, while interest bearing
deposit inflows and outflows are significantly influenced by general interest
rate levels and money market conditions. Borrowings and advances may be used on
a short-term basis to compensate for reductions in normal sources of funds such
as deposit inflows at less than projected levels. They also may be used on a
long-term basis to support expanded activities and to match maturities of
longer-term assets. Deposits obtained through the Banks have traditionally been
the principal source of funds for use in lending and other business purposes.
Currently, the Banks have a number of different deposit programs designed to
attract both short-term and long-term deposits from the general public by
providing a wide selection of accounts and rates. These programs include regular
statement savings, interest-bearing checking, money market deposit accounts,
fixed rate certificates of deposit with maturities ranging from three months to
five years, negotiated-rate jumbo certificates, non-interest demand accounts,
and individual retirement accounts.
Management's Discussion and Analysis section contains information relating to
changes in the overall deposit portfolio.
Deposits are obtained primarily from individual and business residents of the
Banks' market area. The Banks issue negotiated-rate certificates of deposit with
balances of $100,000, or more, and have paid a limited amount of fees to brokers
to obtain deposits. The following table illustrates the amounts outstanding for
deposits greater than $100,000, according to the time remaining to maturity:
- --------------------------------- Certificates Non-maturity
(Dollars in thousands) of Deposit Deposits Totals
- --------------------------------- ------------ ------------ -------
Within three months ............. $32,394 130,068 162,462
Three months to six months ...... 6,264 -- 6,264
Seven months to twelve months ... 14,594 -- 14,594
Over twelve months .............. 5,493 -- 5,493
======= ======= =======
Totals ....................... $58,745 130,068 188,813
======= ======= =======
For additional information, see Note 6 to the Consolidated Financial Statements
for the year ended December 31, 1999.
ADVANCES AND OTHER BORROWINGS
As a member of the Federal Home Loan Bank, the Banks may borrow from the FHLB on
the security of stock which it is required to own in that bank and certain of
its home mortgages and other assets (principally, securities which are
obligations of, or guaranteed by the United States), provided certain standards
related to credit-worthiness have been met. Advances are made pursuant to
several different credit programs, each of which has its own interest rate and
range of maturities. Depending on the program, limitations on the amount of
advances are based either on a fixed percentage of an institution's capital or
on the FHLB's assessment of the institution's credit-worthiness. FHLB advances
have been used from time to time to meet seasonal and other withdrawals of
savings accounts and to expand lending by matching a portion of the estimated
amortization and prepayments of retained fixed rate mortgages. All of the Banks
are members in the FHLB
40
41
From time to time, primarily as a short-term financing arrangement for
investment or liquidity purposes, Glacier has made use of repurchase agreements
with various securities dealers. This process involves the "selling" of one or
more of the securities in the Glacier's portfolio and by entering into an
agreement to "repurchase" that same security at an agreed upon later date. A
rate of interest is paid to the dealer for the subject period of time. In
addition, although Glacier has offered retail repurchase agreements to its
retail customers, the Government Securities Act of 1986 imposed confirmation and
other requirements which generally made it impractical for financial
institutions to offer such investments on a broad basis. Through policies
adopted by the Board of Directors, Glacier and Valley enter into repurchase
agreements with local municipalities, and large balance customers, and have
adopted procedures designed to ensure proper transfer of title and safekeeping
of the underlying securities. The other banks have not utilized repurchase
agreements for liquidity purposes.
The following chart illustrates the average balances and the maximum outstanding
month-end balances for FHLB advances and repurchase agreements:
(Dollars in thousands) For the year ended December 31,
------------------------------------------
1999 1998 1997
-------- -------- --------
FHLB Advances
Amount outstanding at end of period ..... $208,650 125,886 147,660
Average balance ......................... $173,289 140,877 144,043
Maximum outstanding at any month-end .... $232,238 152,165 150,976
Weighted average interest rate .......... 5.45% 5.63% 5.62%
Repurchase Agreements:
Amount outstanding at end of period ..... $ 19,766 17,239 21,673
Average balance ......................... $ 28,605 16,652 20,107
Maximum outstanding at any month-end .... $ 53,791 19,300 25,292
Weighted average interest rate .......... 4.51% 4.70% 4.70%
For additional information concerning the Company's advances and repurchase
agreements, see Notes 7 and 8 to the Consolidated Financial Statements for the
year ended December 31, 1999.
41
42
ITEM 6. SELECTED FINANCIAL DATA
The following financial data of the Company are derived from the Company's
historical audited financial statements and related footnotes. The information
set forth below should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations and the financial
statements and related footnotes contained elsewhere in this Registration
Statement.
SUMMARY OF OPERATIONS AND SELECTED FINANCIAL DATA
At December 31,
- ------------------------------------------------------ ---------------------------------------------------------------------
(dollars in thousands, except per share data) 1999 1998 1997 1996 1995
- ------------------------------------------------------ --------- --------- --------- --------- ---------
SUMMARY OF FINANCIAL CONDITION:
Total assets .................................. $ 974,001 786,802 748,526 675,580 599,193
Investment securities ......................... 209,312 119,087 129,199 126,892 113,008
Loans receivable .............................. 658,930 576,856 530,888 482,974 425,615
Allowance for loan losses ..................... (6,722) (5,668) (4,654) (4,106) (3,803)
Deposits ...................................... 644,106 546,503 487,539 433,434 378,316
Advances ...................................... 208,650 125,886 147,660 152,116 127,265
Other borrowed funds
and repurchase agreements .................. 26,614 18,707 29,960 17,871 23,839
Stockholders' equity .......................... 85,056 84,146 73,538 61,620 55,763
Equity per common share* ...................... 8.18 8.64 7.55 6.32 5.72
Equity as a percentage of total assets ........ 8.73% 10.69% 9.82% 9.12% 9.31%
Years ended December 31,
- ------------------------------------------------------ ---------------------------------------------------------------------
(dollars in thousands, except per share data) 1999 1998 1997 1996 1995
- ------------------------------------------------------ --------- --------- --------- --------- ---------
SUMMARY OF OPERATIONS:
Interest income ............................... $ 64,719 58,828 55,612 50,481 44,407
Interest expense .............................. 27,635 25,470 24,925 22,639 19,285
--------- --------- --------- --------- ---------
Net interest income ......................... 37,084 33,358 30,687 27,842 25,122
Provision for loan losses ..................... 1,723 1,735 1,052 1,017 652
Non-interest income ........................... 12,809 13,596 11,057 10,421 9,068
Non-interest expense .......................... 29,096 27,170 23,709 23,027 18,954
--------- --------- --------- --------- ---------
Earnings before income taxes ................ 19,074 18,049 16,983 14,219 14,584
Income taxes .................................. 6,722 6,674 6,246 5,740 5,523
--------- --------- --------- --------- ---------
Net earnings ................................ 12,352 11,375 10,737 8,479 9,061
========= ========= ========= ========= =========
Basic earnings per common share* ............ 1.19 1.12 1.10 0.91 0.93
Diluted earnings per common share* .......... 1.17 1.10 1.08 0.90 0.92
Dividends declared per share* ............... 0.64 0.46 0.40 0.32 0.21
As of and for the years ended and as of December 31,
- ------------------------------------------------------ ---------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------ --------- --------- --------- --------- ---------
RATIOS:
Net earnings as a percent of
average assets ................................ 1.42% 1.47% 1.50% 1.36% 1.62%
average stockholders' equity .................. 14.55% 14.42% 16.06% 14.82% 17.40%
Net interest margin on average earning assets
(tax equivalent) ............................ 4.67% 4.80% 4.74% 4.75% 4.96%
Allowance for loan losses as a percent of loans ...... 1.02% 0.98% 0.88% 0.85% 0.89%
Allowance for loan losses as a percent of
nonperforming assets ......................... 295% 185% 229% 215% 348%
*revised for stock splits and dividends
All amounts have been restated to include mergers using the pooling of interests
accounting method and includes the impact of purchasing minority interest in
Valley Bank in 1998 and two Butte, Montana branches in 1999.
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43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company is a Delaware corporation and at December 31, 1999 had seven
commercial banks as subsidiaries: Glacier Bank, Glacier Bank of Whitefish,
Glacier Bank of Eureka, First Security Bank of Missoula, Valley Bank of Helena,
Big Sky Western Bank, and Mountain West Bank of Coeur d'Alene, Idaho. The
following discussion and analysis includes the effect of the
pooling-of-interests merger with HUB Financial Corporation (parent company of
Valley Bank of Helena), Big Sky Western Bank, Mountain West Bank, 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 Big Sky merger, and the Mountain West merger.
The Company reported earnings of $12,352,000 for the year ended December 31,
1999, or $1.19 basic earnings per share, and $1.17 diluted earnings per share,
compared to $11,375,000, or $1.12 basic earnings per share and $1.10 diluted
earnings per share, for the year ended December 31, 1998, and $10,737,000, or
$1.10 basic and $1.08 diluted earnings per share for the year ended December 31,
1997. The 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 tables 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
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 six
subsidiaries are members of the Federal Home Loan Bank of Seattle. This
membership provides for established lines of credit in the form of advances that
are a supplemental source of funds for lending and other general business
purposes. During 1999, all seven financial institutions maintained liquidity
levels in excess of regulatory requirements and deemed sufficient to meet
operating cash needs. The parent company is dependent on the payment of
principal and interest on its investments and dividends from its subsidiary
banks.
Retention of a portion of Glacier Bancorp, Inc.'s earnings resulted in
stockholders' equity at December 31, 1999 of $85,056,000, or 8.7% of assets,
which compares with $84,146,000, or 10.7% of assets at December 31, 1998. The
increase in assets of $187,199,000, or 23.8% during 1999 has outpaced earnings
retention and increases resulting from the exercise of stock options. The
stockholders' 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
The following table summarizes the Company's major asset and liability
components as a percentage of total assets at December 31, 1999, 1998 and 1997.
MAJOR BALANCE SHEET COMPONENTS AS A
PERCENTAGE OF TOTAL ASSETS
December 31,
----------------------------
1999 1998 1997
------ ------ ------
ASSETS:
Cash, and Cash Equivalents, Investment Securities, FHLB
and Federal Reserve Stock ........................... 28.6% 23.5% 26.1%
Real Estate Loans and loans Held for Sale ............. 23.1% 30.3% 32.9%
Commercial Loans ...................................... 28.7% 27.4% 21.2%
Consumer Loans ........................................ 15.9% 15.6% 16.6%
Other Assets .......................................... 3.7% 3.2% 3.2%
------ ------ ------
100.0% 100.0% 100.0%
====== ====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY:
Deposit Accounts ...................................... 66.1% 69.5% 65.1%
FHLB Advances ......................................... 21.4% 16.0% 19.7%
Other Borrowings and Repurchase Agreements ............ 2.7% 2.4% 4.0%
Other Liabilities ..................................... 1.1% 1.4% 1.3%
Stockholders' Equity .................................. 8.7% 10.7% 9.9%
------ ------ ------
100.0% 100.0% 100.0%
====== ====== ======
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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 the effect of inflation.
GAP ANALYSIS
The following table gives a description of our GAP position for various time
periods. As of December 31, 1999, we had a negative GAP position at six months
and twelve months. The cumulative GAP as a percentage of total assets for six
months is a negative 24.22% which compares to a positive 2.51% at December 31,
1998 and positive .95% at December 31, 1997. The December 31, 1998 and 1997
percentages exclude the Mountain West Bank amounts. 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. Using this analysis to join GAP information with earnings
data produces a better picture of our strength and ability to handle interest
rate changes. 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.
INTEREST RATE SENSITIVITY AND GAP ANALYSIS AS OF DECEMBER 31, 1999
Projected maturity or repricing
------------------------------------------------------------------
0-6 6-12 1 - 5 More than
(dollars in thousands) Months Months Years 5 Years Total
- --------------------------------------------- ---------- --------- --------- --------- ---------
ASSETS:
Interest bearing deposits ............. $ 1,775 0 0 0 1,775
Investment securities ................. 16,978 865 6,101 38,116 62,060
Mortgage-backed securities ............ 5,052 4,360 30,678 107,162 147,252
Floating rate loans ................... 165,309 7,490 87,615 8,247 268,661
Fixed rate loans ...................... 70,413 44,779 170,516 105,159 390,867
Other earning assets .................. 16,601 0 0 0 16,601
--------- --------- --------- --------- ---------
TOTAL INTEREST BEARING ASSETS ............... $ 276,128 57,494 294,910 258,684 887,216
========= ========= ========= ========= =========
LIABILITIES:
Interest bearing deposits ............. 269,492 61,199 142,511 43,977 517,179
FHLB advances ......................... 162,259 11,278 12,598 22,515 208,650
Other borrowed funds and repurchase
agreements .......................... 26,614 0 0 0 26,614
--------- --------- --------- --------- ---------
TOTAL INTEREST BEARING LIABILITIES .......... $ 458,365 72,477 155,109 66,492 752,443
========= ========= ========= ========= =========
Repricing gap ............................... $(182,237) (14,983) 139,801 192,192
Cumulative repricing gap .................... (182,237) (197,220) (57,419) 134,773
Cumulative gap as a % of total assets ....... -24.22% -26.21% -7.63% 17.91%
Gap Earnings Sensitivity(1) ................. $ (1,203)
Gap Earnings Sensitivity Ratio(2) ........... $ -9.74%
(1) Gap Earnings Sensitivity is the estimated effect on income after taxes of
39% of a 1% increase or decrease in interest rates .01(-$197,220+$76,916).
(2) Gap Earnings Sensitivity Ratio is Gap Earnings Sensitivity divided by the
estimated yearly earnings of $12,352. 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. Interest-bearing checking and
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.
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45
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. The interest spread for 1999 increased slightly from 3.73% to
3.74%. The net interest margin decreased slightly in 1999 from 4.65% to 4.57%,
primarily the result of an increase in interest earning assets at lower rates.
Increased asset levels, and increased interest-free funding resulted in
significantly higher net interest income.
December 31, (1)
-------------------------------
1999 1998 1997
------- ------- -------
Combined weighted average yield on loans and investments(2) ............. 7.97% 8.21% 8.43%
Combined weighted average rate paid on savings deposits and borrowings .. 4.24% 4.47% 4.60%
Net interest spread ..................................................... 3.74% 3.73% 3.82%
Net interest margin(3) .................................................. 4.57% 4.65% 4.65%
(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 net earning assets.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
FINANCIAL CONDITION
The Company acquired two Butte, Montana offices of Washington Mutual, with
approximately $73,000,000 in deposits, on October 8, 1999. Those branches have
been fully integrated into Glacier Bank, the largest subsidiary of the Company.
The following information includes the impact of that acquisition which was
accounted for as a purchase.
Total assets increased $187,199,000 or 23.8% over the December 31, 1998 asset
level. Total loans outstanding increased 14.2%, or $81,020,000 with the largest
increase occurring in the commercial classification which increased $63,720,000,
or 29.5%. Consumer loans increased $31,464,000 or 25.6%. Residential real estate
loans and loans held for sale declined $13,114,000 or 5.5%, in accordance with
management's plan to reduce the balances on real estate loans which generally
have lower interest rates than other loan types. Investment securities increased
$90,225,000, or 75.8%. Higher investment yields, a steeper yield curve, and the
Butte branch acquisition from Washington Mutual provided an opportunity to
increase the investment portfolio.
Total liabilities increased $186,289,000, or 26.5%, with non-interest bearing
deposits up $10,973,000, or 9.5%, and interest bearing deposits up $86,630,000
or 20.1%. Federal Home Loan Bank advances increased $82,764,000, or 65.7%.
Securities sold under repurchase agreements and other borrowed funds were up
$7,907,000, or 42.3%.
Total stockholders' equity increased $910,000 or 1.1%, the result of earnings
retention, offset by a $6,604,000 net change in accumulated other comprehensive
income (loss), the result of unrealized losses on securities available-for-sale.
RESULTS OF OPERATIONS
INTEREST INCOME - Interest income was $64,719,000 compared to $58,828,000 for
the years ended December 31, 1999 and 1998, respectively, a $5,891,000 or 10%
increase. The weighted average yield on the loan and investment portfolios
decreased from 8.2% to 8.0%. 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 and consumer loans, increasing interest income.
INTEREST EXPENSE - Interest expense was $27,635,000 for the year ended December
31, 1999, up from $25,470,000 in 1998, a $2,165,000, or 8.5%, increase. The
increase is due to higher balances in interest bearing deposits, Federal Home
Loan Bank advances, repurchase agreements and other borrowed funds during 1999.
The increased interest expense resulting from the higher balances in interest
bearing liabilities was partially offset by reduced rates and by the increase in
non-interest bearing deposits. The yield on interest bearing liabilities
declined from 4.5% in 1998 to 4.2% in 1999.
NET INTEREST INCOME - Net interest income was $37,084,000 compared to
$33,358,000 in 1998, an increase of $3,726,000, or 11.2%, the net result of the
items discussed in the above paragraphs.
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46
PROVISION FOR LOAN LOSSES - The provision for loan losses was $1,723,000 for
1999, down slightly from $1,735,000 for 1998. Total loans charged off, net of
recoveries, were $669,000 in 1999, down from the $721,000 experienced in 1998.
The allowance for loan losses balance was $6,722,000 at year end 1999, up from
$5,668,000 at year end 1998, an increase of $1,054,000. At December 31, 1999,
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 $2,278,000 or .23% of total assets;
compared to $3,067,000 or .39% of total assets at December 31, 1998. The
allowance for loan losses was 295% of non-performing assets at December 31,
1999, up from 185% the prior year end. The allowance for loan losses as a
percentage of loans increased to 1.02% from .98% at the 1999 and 1998 year ends.
The allowance for losses has increased primarily because of the changing mix of
loans from residential real estate to more commercial and consumer loans which
historically have greater credit risk along with higher loan rates.
NON-INTEREST INCOME - Total non-interest income of $12,809,000 was down
$787,000, or 5.8% from 1998 which included one time gains on the sale of the
credit card portfolio of $457,000, and $102,000 from the sale of the trust
business. Loan fees and charges were approximately the same as the prior year.
Increased volumes in deposit accounts resulted in an increase in fee income of
$499,000 from service charges and other fees. Other income was down $485,000
most of which was the gain on sale of credit card and trust business in 1998.
The gain on sale of investments was $23,000 in 1999, down from $62,000 in 1998.
Gain on sale of loans decreased $754,000, or 19.5%, from 1998. Real estate loans
sold totaled $155,096,000 in 1999 down from $201,921,000 in 1998. Commercial
loan sales totaled $10,796,000 and $8,756,000 for 1999 and 1998, respectively.
NON-INTEREST EXPENSE - Total non-interest expense increased from $27,170,000 to
$29,096,000 an increase of $1,926,000, or 7.1%. Compensation, employee benefits,
and related expenses increased $1,166,000, or 8.7% from 1998, with the new
branches and expanded data processing staff included. Occupancy and equipment
expense increased $585,000, or 16.3% from 1998, the result of bringing more data
processing functions in-house, the substantial investment in enhanced technology
for transaction imaging and internet banking, and additional expenses from the
new branch offices. Data processing and other expenses were up $269,000, or
2.7%, primarily the result of increased volumes and $78,000 in amortization of
the premium paid for the Butte acquisition. The other category of expense is the
minority interest in subsidiaries which decreased $94,000, resulting from the
acquisition of minority shares in 1998.
The efficiency ratio (non-interest expense)/(net interest income + non-interest
income), was 58.3% in 1999, up from 57.9% in 1998, as compared with similar
sized bank holding companies nationally which average approximately 63.5%.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO DECEMBER 31, 1997
FINANCIAL CONDITION
Total assets increased $38,276,000, or 5.1% over the December 31, 1997 asset
level. Total loans outstanding increased 8.6%, or $45,206,000 with the largest
increase occurring in the commercial classification which increased $56,992,000
or 35.9%. Real estate loans decreased $9,130,000 or 3.7% as a result of
management's decision to not retain long-term mortgages in the portfolio in the
low interest rate environment. Consumer loans decreased $1,040,000, or .8%, the
result of selling the credit card portfolio. Investment securities decreased
$10,112,000, or 7.8%. With the flat yield curve during 1998 there were limited
attractive investment opportunities.
Total liabilities increased $27,667,000, or 4.1%, with interest bearing deposits
up $45,811,000, or 11.9%, and non-interest bearing deposits up $13,153,000 or
12.8%. Federal Home Loan Bank advances decreased $21,774,000, or 14.7%.
Securities sold under repurchase agreements and other borrowed funds were down
$11,253,000, or 37.6%.
Total stockholders' equity increased $10,609,000 or 14.4%, primarily the result
of earnings retention.
RESULTS OF OPERATIONS
INTEREST INCOME - Interest income was $58,828,000 compared to $55,612,000 for
the years ended December 31, 1998 and 1997, respectively, a $3,216,000, or 5.8%
increase. The weighted average yield on the loan and investment portfolios
decreased from 8.4% to 8.2%. 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 which increased interest income.
INTEREST EXPENSE - Interest expense was $25,470,000 for the year ended December
31, 1998, up slightly from $24,925,000 in 1997, a $545,000 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. Increased balances
in non-interest bearing deposits also reduced the need for interest bearing
funding.
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47
NET INTEREST INCOME - Net interest income was $33,358,000 compared to
$30,687,000 in 1997, an increase of $2,671,000, or 8.7%, the net result of the
items discussed in the above paragraphs.
PROVISION FOR LOAN LOSSES - The provision for loan losses was $1,735,000 for
1998, up from $1,052,000 for 1997. Total loans charged off, net of recoveries,
were $721,000 in 1998, up from the $504,000 experienced in 1997. The allowance
for loan losses balance was $5,668,000 at year end 1998, up from $4,654,000 at
year end 1997, an increase of $1,014,000. 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 $3,067,000 or .39% of total assets;
compared to $2,032,000 or .27% of total assets at December 31, 1997. The reserve
for loan losses as a percentage of loans increased to .98% from .88% at the 1998
and 1997 year ends. The reserve for losses has increased primarily because of
the changing mix of loans from residential real estate to more commercial loans
which historically carry additional credit risk along with higher interest
rates.
NON-INTEREST INCOME - Total non-interest income of $13,596,000 was up
$2,539,000, or 23.0% from 1997. Loan fees and charges were $190,000, or 10%,
greater than the prior year. Gain on sale of loans of $3,862,000 was an increase
of $1,364,000, or 54.6% from the prior year. The volume of real estate loans
sold increased from $110,092,000 to $201,921,000 in 1998. Increased volumes in
deposit accounts was the reason for the $479,000 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, was up
$649,000.
NON-INTEREST EXPENSE - Total non-interest expense increased from $23,709,000 to
$27,170,000, an increase of $3,461,000, or 14.6%. Of this increase $852,000 was
from merger and reorganization expenses, leaving an increase from operations of
$2,609,000, or 11.0%. Compensation, employee benefits, and related expenses
increased $1,143,000 or 9.3% from 1997. Occupancy expense increased $655,000, or
22.3% 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 increased $34,000,
the result of Mountain West Bank, which incurred the added expense of a data
conversion during the year. The efficiency ratio was 57.8% in 1998, up from
56.8% in 1997, and compares favorably with similar sized bank holding companies
nationally which average about 62%.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
Market risk is the risk of loss in a financial instrument arising from adverse
changes in market rates/prices such as interest rates, foreign currency exchange
rates, commodity prices, and equity prices. The Company's primary market risk
exposure is interest rate risk. The ongoing monitoring and management of this
risk is an important component of the Company's asset/liability management
process which is governed by policies established by its Board of Directors that
are reviewed and approved annually. The Board of Directors delegates
responsibility for carrying out the asset/liability management policies to the
asset/liability committee (ALCO). In this capacity ALCO develops guidelines and
strategies impacting the Company's asset/liability management related activities
based upon estimated market risk sensitivity, policy limits and overall market
interest rate levels/trends.
INTEREST RATE RISK
Interest rate risk represents the sensitivity of earnings to changes in market
interest rates. As interest rates change, the interest income and expense
streams associated with the Company's financial instruments also change thereby
impacting net interest income (NII), the primary component of the Company's
earnings. ALCO utilizes the results of a detailed and dynamic simulation model
to quantify the estimated exposure of NII to sustained interest rate changes.
While ALCO routinely monitors simulated NII sensitivity over a rolling two-year
horizon, it also utilizes additional tools to monitor potential longer-term
interest rate risk. The simulation model captures the impact of changing
interest rates on the interest income received and interest expense paid on all
assets and liabilities reflected on the Company's statement of financial
condition. This sensitivity analysis is compared to ALCO policy limits which
specify a maximum tolerance level for NII exposure over a one year horizon,
assuming no balance sheet growth, given a 200 basis point (bp) upward and
downward shift in interest rates. A parallel and pro rata shift in rates over a
12-month period is assumed. The following reflects the Company's NII sensitivity
analysis as of December 31, 1999 and 1998 as compared to the 10% Board approved
policy limit.
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Interest Rate Sensitivity
+200 bp 1999 1998
------- ------- -------
Estimated sensitivity ......................... -3.66% -1.99%
Estimated decrease in net interest income ..... $(1,357) (664)
-200 bp
-------
Estimated sensitivity ......................... 2.68% 1.44%
Estimated increase in net interest income ..... $ 994 480
The preceding sensitivity analysis does not represent a forecast and should not
be relied upon as being indicative of expected operating results. These
hypothetical estimates are based upon numerous assumptions including: the nature
and timing of interest rate levels including yield curve shape, prepayments on
loans and securities, deposit decay rates, pricing decisions on loans and
deposits, reinvestment/replacement of assets and liability cash flows, and
others. While assumptions are developed based upon current economic and local
market conditions, the Company cannot make any assurances as to the predictive
nature of these assumptions including how customer preferences or competitor
influences might change. Also, as market conditions vary from those assumed in
the sensitivity analysis, actual results will also differ due to
prepayment/refinancing levels likely deviating from those assumed, the varying
impact of interest rate change caps or floors on adjustable rate assets, the
potential effect of changing debt service levels on customers with adjustable
rate loans, depositor early withdrawals and product preference changes, and
other internal/external variables. Furthermore, the sensitivity analysis does
not reflect actions that ALCO might take in responding to or anticipating
changes in interest rates.
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 December 14, 2000.
GLACIER BANCORP, INC.
By: /s/ Michael J. Blodnick
-----------------------------------------
Michael J. Blodnick
President/CEO
/s/ James H. Strosahl
-----------------------------------------
Executive Vice President and CFO
(Principal Financial/Accounting Officer)
48