UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE 000-18911
GLACIER BANCORP, INC.
MONTANA 81-0519541
(State of Incorporation) (IRS Employer Identification Number)
49 Commons Loop, Kalispell, MT 59901
(Address of Principal Office)
Registrant's telephone number, including area code: (406) 756-4200
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the registrant (i) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (ii) has been subject to such filing
requirements for the past 90 days. [X]
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined by Exchange Act Rule 12b-2). Yes [X] No [ ]
The aggregate market value of the voting common equity held by non-affiliates of
the Registrant at June 30, 2004 (the last business day of the most recent second
quarter), was $644,782,651 (based on the average bid and ask price as quoted on
the NASDAQ National Market at the close of business on that date).
As of March 2, 2005, there were issued and outstanding 24,630,415 shares of the
Registrant's common stock. No preferred shares are issued or outstanding.
DOCUMENT INCORPORATED BY REFERENCE
Portions of the 2005 Annual Meeting Proxy Statement dated March 23, 2005 are
incorporated by reference into Part III of this Form 10-K.
GLACIER BANCORP, INC.
FORM 10-K ANNUAL REPORT
For the year ended December 31, 2004
TABLE OF CONTENTS
PART I. Page
Item 1. Business 3
Item 2. Properties 20
Item 3. Legal Proceedings 20
Item 4. Submission of Matter to a Vote of Security Holders 20
PART II.
Item 5. Market for the Registrant's Common Equity, Related Stockholder
Matters, and Issuer Purchase of Equity Securities 20
Item 6. Selected Financial Data 21
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 23
Item 7a. Quantitative and Qualitative Disclosure about Market Risk 33
Item 8. Financial Statements and Supplementary Data 33
Item 9. Changes in and Disagreements with Accountants in Accounting
and Financial Disclosures 66
Item 9a. Controls and Procedures 66
Item 9b. Other Information 66
PART III.
Item 10. Directors and Executive Officers of the Registrant 66
Item 11. Executive Compensation 67
Item 12. Security Ownership of Certain Beneficial Owners
and Management 67
Item 13. Certain Relationships and Related Transactions 67
Item 14 Principal Accountant Fees and Services 67
PART IV.
Item 15. Exhibits and Financial Statement Schedules 67
PART I.
This Annual Report and Form 10-K may be deemed to include forward looking
statements, which management believes are a benefit to shareholders. These
forward looking statements describe management's expectations regarding future
events and developments such as future operating results, growth in loans and
deposits, continued success of the Company's style of banking and the strength
of the local economy. The words "will," "believe," "expect," "should," and
"anticipate" and words of similar construction are intended in part to help
identify forward looking statements. Future events are difficult to predict, and
the expectations described above are subject to risk and uncertainty that may
cause actual results to differ materially and adversely. In addition to
discussions about risks and uncertainties set forth from time to time in the
Company's filings with the SEC, factors that may cause actual results to differ
materially from those contemplated by such forward looking statements include,
among others, the following possibilities: (1) local, national, and
international economic conditions are less favorable than expected or have a
more direct and pronounced effect on the Company than expected and adversely
affect the Company's ability to continue its internal growth at historical rates
and maintain the quality of its earning assets; (2) changes in interest rates
reduce interest margins more than expected and negatively affect funding
sources; (3) projected business increases following strategic expansion or
opening or acquiring new branches are lower than expected; (4) costs or
difficulties related to the integration of acquisitions are greater than
expected; (5) competitive pressure among financial institutions increases
significantly; (6) legislation or regulatory requirements or changes adversely
affect the businesses in which the Company is engaged; and (7) the Company's
ability to realize the efficiencies it expects to receive from its investments
in personnel and infrastructure.
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Glacier Bancorp, Inc. headquartered in Kalispell, Montana (the "Company"), is a
Montana corporation incorporated in 2004 as a successor corporation to the
Delaware corporation originally incorporated in 1990. The Company is a regional
multi-bank holding company providing commercial banking services from 55 banking
offices in Montana, Idaho, Utah and Washington. The Company offers a wide range
of banking products and services, including transaction and savings deposits,
commercial, consumer, and real estate loans, mortgage origination services, and
retail brokerage services. The Company serves individuals, small to medium-sized
businesses, community organizations and public entities.
SUBSIDIARIES
The Company is the parent holding company of its nine wholly owned subsidiaries,
Glacier Bank ("Glacier"), First Security Bank of Missoula ("First Security"),
Western Security Bank ("Western"), Mountain West Bank in Idaho ("Mountain
West"), Big Sky Western Bank ("Big Sky"), Valley Bank of Helena ("Valley"),
Glacier Bank of Whitefish ("Whitefish"), Glacier Capital Trust I ("Glacier Trust
I"), and Glacier Capital Trust II ("Glacier Trust II").
The Company formed Glacier Trust II as a financing subsidiary on March 24, 2004.
Glacier Trust II issued 45,000 preferred securities at $1,000 per preferred
security. The purchase of the securities entitles the shareholder to receive
cumulative cash distributions at an annual interest of 5.788% for the first five
years and then converts to a three month LIBOR plus 2.75% rate from payments on
the junior subordinated debentures of Glacier Bancorp, Inc. The subordinated
debentures will mature and the preferred securities must be redeemed by April 7,
2034. In exchange for the Company's capital contribution, the Company owns all
of the outstanding common securities of Glacier Trust II.
The Company formed Glacier Capital Trust I as a financing subsidiary on December
18, 2000. On January 25, 2001, Glacier Trust issued 1,400,000 preferred
securities at $25 per preferred security. The purchase of the securities
entitles the shareholder to receive cumulative cash distributions at an annual
interest rate of 9.40% from payments on the junior subordinated debentures of
Glacier Bancorp, Inc. The subordinated debentures will mature and the preferred
securities must be redeemed by February 1, 2031. In exchange for the Company's
capital contribution, the Company owns all of the outstanding common securities
of Glacier Trust I.
The Company provides full service brokerage services (selling products such as
stocks, bonds, mutual funds, limited partnerships, annuities and other insurance
products) through Raymond James Financial Services, a non-affiliated company.
The Company shares in the commissions generated, without devoting significant
management and staff time to this portion of the business.
RECENT AND PENDING ACQUISITIONS
The Company's strategy has been to profitably grow its business through internal
growth and selective acquisitions. We continue to look for profitable expansion
opportunities in existing and contiguous markets. On November 22, 2004, Glacier
entered into a Plan and Agreement of Merger with First National Banks - West Co.
and its wholly owned subsidiary First National Bank - West,
3
Evanston, Wyoming, whereby First National Banks - West Co. merged with and into
the Company. First National Bank - West operates as a separate wholly owned
subsidiary of the Company. First National Bank - West maintains seven branches,
its main and a second branch in Evanston, Wyoming, and five additional branches
in Afton, Alpine, Kemmerer, Pinedale, and Mountain View, Wyoming. This
transaction closed on February 28, 2005. On December 15, 2004, Glacier entered
into a Plan and Agreement of Merger with Citizens Bank Holding Company and its
wholly owned subsidiary Citizens Community Bank, Pocatello, Idaho, whereby
Citizens Bank Holding Company would merge with and into the Company, and
Citizens Community Bank will continue to operate as a wholly owned subsidiary of
the Company. Citizens Community Bank operates three branches, two in Pocatello,
and the other in Ammon, Idaho. This transaction is expected to close on March
31, 2005. On June 4, 2004, we acquired AmericanWest Bancorp.'s branch office in
Ione, Washington which became a branch of Mountain West Bank. On July 15, 2003,
we acquired Pend Oreille Bancorp and its branches also became additional
branches of Mountain West. On March 15, 2001, we acquired seven Wells Fargo &
Company and First Security Corporation branches located in Idaho and Utah. On
February 28, 2001, we acquired Western, through the purchase of WesterFed
Financial Corporation, its parent company. The acquisitions were accounted for
under the purchase method of accounting. Accordingly, the assets and liabilities
of the acquired banks were recorded by the Company at their respective fair
values at the date of the acquisition and the results of the banks operations
have been included with those of the Company since the date of acquisition. The
excess of the Company's purchase price over the net fair value of the assets
acquired and liabilities assumed, including identifiable intangible assets, was
recorded as goodwill.
Mountain West was acquired February 4, 2000. The acquisition was accounted for
using the pooling of interests method of accounting. Under this method,
financial information for each of the periods presented includes the combined
companies as though the merger had occurred prior to the earliest date
presented.
FDIC, FHLB AND FRB
The Federal Deposit Insurance Corporation ("FDIC") insures each subsidiary
bank's deposit accounts. Each subsidiary bank is a member of the Federal Home
Loan Bank of Seattle ("FHLB"), which is one of twelve banks which comprise the
Federal Home Loan Bank System and all subsidiaries, with the exception of
Mountain West, are members of the Federal Reserve Bank of Minneapolis ("FRB").
BANK LOCATIONS AT DECEMBER 31, 2004
Glacier Bancorp, Inc.'s office is located at 49 Commons Loop, Kalispell, MT
59901 and its telephone number is (406) 756-4200. Glacier's address is 202 Main
Street, Kalispell, MT 59901 (406) 756-4200, First Security's address is 1704
Dearborn, Missoula, MT 59801 (406) 728-3115, Western's address is 2929 3rd
Avenue North, Billings, MT 59101 (406) 252-3700, Mountain West's address is 125
Ironwood Drive, Coeur d'Alene, Idaho 83814 (208) 765-0284, Big Sky's address is
55 Lone Peak Drive, Big Sky, MT, 59716 (406) 995-2321, Valley's address is 3030
North Montana Avenue, Helena, MT 59601 (406) 495-2400, and Whitefish's address
is 319 East Second Street, Whitefish, MT 59937 (406) 863-6300. See "Item 2.
Properties."
The following abbreviated organizational chart illustrates the various existing
parent/subsidiary relationships at December 31, 2004:
<Table>
<Caption>
------------------------
Glacier Bancorp, Inc.
(Parent Holding Company)
------------------------
|
-----------------------------------------------|-------------------------------------------------------
Glacier Bank First Security Bank | Western Security Mountain West Bank
(Commercial bank) of Missoula | Bank of Coeur d'Alene
(Commercial bank) | (Commercial bank) (Commercial bank)
----------------- ------------------- | ----------------- ------------------------
|
-------------------------------------------------------------------------------------------------------
Big Sky Valley Bank Glacier Bank Glacier Capital Trust I
Western Bank of Helena of Whitefish and
(Commercial bank) (Commercial bank) (Commercial bank) Glacier Capital Trust II
----------------- ------------------- ----------------- ------------------------
</Table>
FINANCIAL INFORMATION ABOUT SEGMENTS
At December 31, 2004, the Company had seven wholly owned banking subsidiaries,
Glacier, First Security, Western, Mountain West, Big Sky, Valley, and Whitefish.
For information regarding the holding company, as separate from the
subsidiaries, see "Item 7 - Management's Discussion & Analysis" and footnote 16
to the Consolidated Financial Statements in "Item 8 - Financial Statements and
Supplementary Data".
4
The business of the Company's subsidiaries (collectively referred to hereafter
as "Banks") consists primarily of attracting deposit accounts from the general
public and originating commercial, residential, installment and other loans. The
Banks' principal sources of income are interest on loans, loan origination fees,
fees on deposit accounts and interest and dividends on investment securities.
The principal expenses are interest on deposits, FHLB advances, repurchase
agreements, and subordinated debentures, as well as general and administrative
expenses.
BUSINESS SEGMENT RESULTS
The Company evaluates segment performance internally based on individual banking
subsidiaries, and thus the operating segments are so defined. The following
schedule provides selected financial data for the Company's operating segments.
Centrally provided services to the Banks are allocated based on estimated usage
of those services. The operating segment identified as "Other" includes the
Parent company, nonbank unit, and eliminations of transactions between segments.
(Dollars in thousands) Glacier First Security Western
2004 2003 2002 2004 2003 2002 2004 2003 2002
------- ------- ------- ------- -------- ------- --------- --------- ---------
Condensed Income Statements
Net interest income 24,541 22,565 22,787 24,372 22,246 20,596 15,663 13,670 13,699
Noninterest income 8,652 8,184 7,554 3,684 4,392 3,880 3,583 4,043 2,782
------- ------- ------- ------- -------- ------- --------- --------- ---------
Total revenues 33,193 30,749 30,341 28,056 26,638 24,476 19,246 17,713 16,481
Provision for loan losses (1,075) (375) (1,080) (600) (1,250) (1,800) - - (325)
Core deposit intangible expense (276) (304) (332) (216) (270) (325) (279) (348) (419)
Other noninterest expense (14,980) (14,283) (12,913) (10,184) (9,766) (9,192) (9,016) (8,661) (7,832)
------- ------- ------- ------- -------- ------- --------- --------- ---------
Pretax earnings 16,862 15,787 16,016 17,056 15,352 13,159 9,951 8,704 7,905
Income tax expense (5,704) (5,437) (5,763) (5,572) (5,288) (4,761) (3,039) (2,604) (2,432)
------- ------- ------- ------- -------- ------- --------- --------- ---------
Net income 11,158 10,350 10,253 11,484 10,064 8,398 6,912 6,100 5,473
======= ======= ======= ======= ======== ======= ========= ========= =========
Average Balance Sheet Data
Total assets 631,213 534,774 477,195 602,407 528,791 455,039 453,151 427,786 397,277
Total loans 366,627 336,978 320,774 317,793 305,209 324,638 213,487 199,607 216,238
Total deposits 365,746 340,788 331,661 347,481 349,118 350,945 214,602 220,978 224,486
Stockholders' equity 62,230 56,866 51,014 53,247 47,822 41,457 48,731 47,782 45,065
End of Year Balance Sheet Data
Total assets 646,523 595,778 490,999 626,341 578,803 487,699 446,502 446,405 405,282
Net loans 398,187 330,012 319,906 326,826 295,195 300,481 210,181 196,732 188,793
Total deposits 393,655 358,600 327,018 359,918 340,650 352,805 207,711 219,950 226,482
Stockholders' equity 64,207 58,703 53,492 56,004 49,334 44,678 49,095 47,242 46,647
Performance Ratios
Return on average assets 1.77% 1.94% 2.15% 1.91% 1.90% 1.85% 1.53% 1.43% 1.38%
Return on average equity 17.93% 18.20% 20.10% 21.57% 21.04% 20.26% 14.18% 12.77% 12.14%
Efficiency ratio 45.96% 47.44% 43.65% 37.07% 37.68% 38.88% 48.30% 50.86% 50.06%
Regulatory Capital Ratios & Other
Tier I risk-based capital ratio 13.22% 13.75% 13.54% 12.47% 12.04% 11.06% 15.38% 15.04% 15.33%
Tier II risk-based capital ratio 14.35% 14.90% 14.79% 13.72% 13.29% 12.31% 16.63% 16.30% 16.61%
Leverage capital ratio 8.90% 8.97% 9.48% 8.27% 7.80% 7.82% 9.67% 9.23% 9.83%
Full time equivalent employees 187 176 170 119 119 120 110 105 105
Locations 11 11 11 9 9 9 7 7 8
------- ------- ------- ------- -------- ------- --------- --------- ---------
5
(Dollars in thousands) Mountain West Big Sky Valley
2004 2003 2002 2004 2003 2002 2004 2003 2002
------- ------- ------- ------- ------- ------- --------- --------- ---------
Condensed Income Statements
Net interest income 22,552 17,061 13,629 9,361 7,264 6,860 8,959 7,845 7,522
Noninterest income 12,315 10,206 6,392 2,249 1,729 1,591 2,940 3,730 2,641
------- ------- ------- ------- ------- ------- --------- --------- ---------
Total revenues 34,867 27,267 20,021 11,610 8,993 8,451 11,899 11,575 10,163
Provision for loan losses (1,320) (1,124) (695) (510) (250) (330) (440) (630) (1,335)
Core deposit intangible expense (210) (205) (224) (33) (41) (49) (60) (75) (90)
Other noninterest expense (21,290) (17,958) (13,439) (5,190) (4,141) (3,618) (6,020) (5,471) (5,371)
------- ------- ------- ------- ------- ------- --------- --------- ---------
Pretax earnings 12,047 7,980 5,663 5,877 4,561 4,454 5,379 5,399 3,367
Income tax expense (3,769) (2,216) (1,633) (2,157) (1,730) (1,705) (1,632) (1,754) (1,053)
------- ------- ------- ------- ------- ------- --------- --------- ---------
Net income 8,278 5,764 4,030 3,720 2,831 2,749 3,747 3,645 2,314
======= ======= ======= ======= ======= ======= ========= ========= =========
Average Balance Sheet Data
Total assets 582,923 464,464 366,254 224,968 190,745 170,000 229,243 201,702 173,785
Total loans 347,718 264,418 186,233 146,579 121,080 111,911 110,228 96,045 96,471
Total deposits 394,149 318,196 260,420 120,900 106,743 92,894 144,351 131,687 127,243
Stockholders' equity 63,710 53,071 42,045 19,287 17,387 15,021 19,188 17,837 15,047
End of Year Balance Sheet Data
Total assets 629,205 547,035 396,777 241,056 209,342 179,543 241,518 219,105 190,536
Net loans 382,819 313,021 214,453 161,761 125,664 111,378 119,626 97,292 97,937
Total deposits 431,662 372,936 275,809 132,853 115,496 95,897 146,660 134,405 126,418
Stockholders' equity 67,002 61,031 44,429 20,567 17,882 16,439 20,052 18,176 17,038
Performance Ratios
Return on average assets 1.42% 1.24% 1.10% 1.65% 1.48% 1.62% 1.63% 1.81% 1.33%
Return on average equity 12.99% 10.86% 9.58% 19.29% 16.28% 18.30% 19.53% 20.44% 15.38%
Efficiency ratio 61.66% 66.61% 68.24% 44.99% 46.50% 43.39% 51.10% 47.91% 53.73%
Regulatory Capital Ratios & Other
Tier I risk-based capital ratio 10.20% 10.48% 9.85% 9.22% 10.36% 10.77% 12.38% 13.25% 11.43%
Tier II risk-based capital ratio 11.39% 11.68% 10.85% 10.48% 11.61% 12.03% 13.62% 14.49% 12.45%
Leverage capital ratio 7.16% 7.34% 6.71% 7.88% 7.82% 8.04% 7.58% 7.35% 7.54%
Full time equivalent employees 220 204 152 59 54 43 65 62 61
Locations 16 15 11 4 4 3 6 6 6
------- ------- ------- ------- ------- ------- --------- --------- ---------
(Dollars in thousands) Whitefish Other Consolidated
2004 2003 2002 2004 2003 2002 2004 2003 2002
------- ------- ------- ------- ------- ------- --------- --------- ---------
Condensed Income Statements
Net interest income 6,393 5,194 4,901 (4,448) (3,493) (3,527) 107,393 92,352 86,467
Noninterest income 1,419 1,273 1,096 (277) 5 (19) 34,565 33,562 25,917
------- ------- ------- ------- ------- ------- --------- --------- ---------
Total revenues 7,812 6,467 5,997 (4,725) (3,488) (3,546) 141,958 125,914 112,384
Provision for loan losses (250) (180) (180) - - - (4,195) (3,809) (5,745)
Core deposit intangible expense - - - - - - (1,074) (1,243) (1,439)
Other noninterest expense (3,280) (3,071) (2,634) (1,099) (1,350) (1,375) (71,059) (64,701) (56,374)
------- ------- ------- ------- ------- ------- --------- --------- ---------
Pretax earnings 4,282 3,216 3,183 (5,824) (4,838) (4,921) 65,630 56,161 48,826
Income tax (expense) benefit (1,457) (1,054) (1,040) 2,316 1,930 1,963 (21,014) (18,153) (16,424)
------- ------- ------- ------- ------- ------- --------- --------- ---------
Net income 2,825 2,162 2,143 (3,508) (2,908) (2,958) 44,616 38,008 32,402
======= ======= ======= ======= ======= ======= ========= ========= =========
Average Balance Sheet Data
Total assets 161,364 139,516 121,757 11,847 (4,094) (7,242) 2,897,116 2,483,684 2,154,065
Total loans 88,614 72,206 63,676 (346) (356) (364) 1,590,700 1,395,187 1,319,577
Total deposits 77,681 70,857 64,107 (21,615) (11,056) (9,868) 1,643,295 1,527,311 1,441,888
Stockholders' equity 13,129 11,652 10,080 (26,154) (26,407) (24,152) 253,368 226,010 195,577
End of Year Balance Sheet Data
Total assets 169,411 149,531 129,255 10,181 (6,366) 1,253 3,010,737 2,739,633 2,281,344
Net loans 102,746 72,800 68,066 (341) (351) (361) 1,701,805 1,430,365 1,300,653
Total deposits 98,605 68,124 67,810 (41,356) (12,536) (12,316) 1,729,708 1,597,625 1,459,923
Stockholders' equity 13,839 12,126 11,078 (20,582) (26,655) (21,552) 270,184 237,839 212,249
Performance Ratios
Return on average assets 1.75% 1.55% 1.76% 1.54% 1.53% 1.50%
Return on average equity 21.52% 18.55% 21.26% 17.61% 16.82% 16.57%
Efficiency ratio 41.99% 47.49% 43.92% 50.81% 52.37% 51.44%
Regulatory Capital Ratios & Other
Tier I risk-based capital ratio 11.67% 12.32% 11.64% 15.06% 12.98% 12.99%
Tier II risk-based capital ratio 12.91% 13.57% 12.88% 16.31% 14.23% 14.24%
Leverage capital ratio 7.75% 7.60% 8.09% 10.16% 8.45% 8.95%
Full time equivalent employees 40 33 30 57 54 56 857 807 737
Locations 2 2 2 55 54 50
------- ------- ------- ------- ------- ------- --------- --------- ---------
6
INTERNET ACCESS
Copies of the Company's Annual Report on Form 10-K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934 are available free of charge through the Company's website
(www.glacierbancorp.com) as soon as reasonably practicable after the Company has
filed the material with, or furnished it to, the Securities and Exchange
Commission.
MARKET AREA
The Company's primary market area includes the three northwest Montana counties
of Flathead, Lake, and Lincoln; the west central Montana counties of Missoula,
Silver Bow, Lewis & Clark, Gallatin, and Yellowstone; in Idaho, the Company's
primary market area includes Ada, Kootenai, Bonner and Blaine counties.
Kalispell, the location of its home office, is the county seat of Flathead
County, and is the primary trade center of what is known as the Flathead Basin.
Glacier has its main office and a branch office in Kalispell, branches in
Columbia Falls, Evergreen, Bigfork, Polson (the county seat of Lake County),
Libby (the county seat of Lincoln County), Anaconda (the county seat of Deer
Lodge County), and three branches in Butte (the county seat of Silver Bow
County). First Security's main office and seven of the branch locations are in
Missoula (the county seat of Missoula County) and its ninth branch is in
Hamilton (the county seat of Ravailli County). Western Security's main office
and five of its branches are located in Billings (the county seat of Yellowstone
County) and two branches are located in Laurel and Lewistown (the county seat of
Fergus County). Mountain West has twelve offices in Idaho, Coeur d'Alene, Post
Falls, Hayden Lake, Meridian, Nampa, Hailey, Ketchum, two offices in Sandpoint
and three offices in Boise, two offices in Utah, Brigham City and Park City, and
two offices in Washington, Newport and Ione. Big Sky's main office is in Big
Sky, with three branches in Bozeman (the county seat of Gallatin County).
Valley's main office and five branch locations are in Helena (the state capital
and the county seat of Lewis & Clark County). Whitefish's main office is located
in Whitefish with its one branch in Eureka.
Northwest Montana has a diversified economic base, primarily comprised of wood
products, primary metal manufacturing, medical services, agriculture, high-tech
related manufacturing and tourism. Tourism is heavily influenced by the close
proximity of Glacier National Park, which has in excess of 1.5 million visitors
per year. The area also contains the Big Mountain Ski Area, and Flathead Lake,
the largest natural freshwater lake west of the Mississippi. Missoula, the home
of the University of Montana, has a large population base with a diverse economy
comprised of government services, transportation, medical services, forestry,
technology, tourism, trade and education. Missoula is located on Interstate
Highway 90, and has good air service. Helena, the county seat of Lewis and Clark
County and the state capital, is highly dependent on state and federal
government, but also has tourism, trade, transportation, and education
contributing to its economy. Bozeman, the home of Montana State University, is
the gateway to Yellowstone National Park, which has in excess of 2.5 million
visitors per year, and the Big Sky ski resort, both of which are very active
tourist areas. Bozeman also has a high-tech center and is located on Interstate
90, and has good air service. Billings, the largest city in Montana, is located
on Interstate 90 and is the western termination point of Interstate 94, and has
very good air service. Agriculture, medical services, transportation, oil
related industries and education are the primary economical activities. Coeur
d'Alene, located in northern Idaho on Interstate 90, is one of the fastest
growing areas in the United States. Boise, the state capital located on
Interstate 84, is also growing rapidly, with much of the growth related to
high-tech manufacturing.
COMPETITION
Glacier and Whitefish comprise the largest financial institution group in terms
of total deposits in the three county area of northwest Montana, and have
approximately 24% of the total deposits in this area. Glacier's three Butte,
Montana offices have approximately 21% of the deposits in Silver Bow County and
Glacier's Anaconda office has 20% of the deposits in Deer Lodge County. First
Security has approximately 26% of the total deposits in Missoula County. Western
has approximately 11% of the deposits in Yellowstone and Fergus counties
combined. Big Sky has approximately 10% of Gallatin County's deposits and Valley
has approximately 21% of Lewis and Clark County's total deposits. In Idaho,
Mountain West has approximately 11% of the deposits in Kootenai and Blaine
counties, 7% in Bonner County, and 1% in Ada and Canyon counties. In Utah,
Mountain West has 5% of the deposits in the Box Elder and Summit counties
combined. In Washington, Mountain West has 63% of the deposits in Pend Oreille
County.
There are a large number of depository institutions including savings banks,
commercial banks, and credit unions in the counties in which the Company has
offices. The Banks, like other depository institutions, are operating in a
rapidly changing environment. Non-depository financial service institutions,
primarily in the securities and insurance industries, have become competitors
for retail savings and investment funds. Mortgage banking/brokerage firms are
actively competing for residential mortgage business. In addition to offering
competitive interest rates, the principal methods used by banking institutions
to attract deposits include the offering of a variety of services and convenient
office locations and business hours. The primary factors in competing for loans
are interest rates and rate adjustment provisions, loan maturities, loan fees,
and the quality of service to borrowers and brokers.
7
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 12-31-04 For the year ended 12-31-03
-------------------------------- ---------------------------------
(Dollars in Thousands) Interest Average Interest Average
Average and Yield/ Average and Yield/
ASSETS Balance Dividends Rate Balance Dividends Rate
------------ --------- ------- ------------ ---------- --------
Residential First Mortgage $ 346,575 22,942 6.62% $ 336,494 23,883 7.10%
Commercial Loans 924,798 57,312 6.20% 770,352 50,203 6.52%
Consumer and Other Loans 319,327 20,331 6.37% 288,341 20,013 6.94%
------------ --------- ------- ------------ ----------
Total Loans 1,590,700 100,585 6.32% 1,395,187 94,099 6.74%
Tax-Exempt Investment Securities (1) 281,743 13,917 4.94% 226,971 11,410 5.03%
Taxable Investment Securities 844,051 32,783 3.88% 688,239 25,321 3.68%
------------ --------- ------- ------------ ----------
Total Earning Assets 2,716,494 147,285 5.42% 2,310,397 130,830 5.66%
--------- ----------
Non-Earning Assets 180,622 173,287
------------ ------------
TOTAL ASSETS $ 2,897,116 $ 2,483,684
============ ============
LIABILITIES
AND STOCKHOLDERS' EQUITY
NOW Accounts $ 259,279 474 0.18% $ 227,154 484 0.21%
Savings Accounts 159,237 471 0.30% 139,958 500 0.36%
Money Market Demand Accounts 402,157 3,776 0.94% 375,402 3,840 1.02%
Certificate Accounts 422,342 9,333 2.21% 456,790 12,397 2.71%
Advances from FHLB 791,245 18,540 2.34% 601,679 16,860 2.80%
Securities Sold Under agreements to
Reprchase and Other Borrowed Funds 181,461 7,298 4.02% 101,075 4,397 4.35%
------------ --------- ------- ------------ ----------
Total Interest Bearing Liabilities 2,215,721 39,892 1.80% 1,902,058 38,478 2.02%
--------- ----------
Non-interest Bearing Deposits 400,280 328,007
Other Liabilities 27,747 27,609
------------ ------------
Total Liabilities 2,643,748 2,257,674
------------ ------------
Common Stock 226 186
Paid-In Capital 225,065 203,543
Retained Earnings 22,804 14,217
Accumulated Other
Comprehensive Earnings 5,273 8,064
------------ ------------
Total Stockholders' Equity 253,368 226,010
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 2,897,116 $ 2,483,684
============ ============
NET INTEREST INCOME $ 107,393 $ 92,352
========= ==========
NET INTEREST SPREAD 3.62% 3.64%
NET INTEREST MARGIN
ON AVERAGE EARNING ASSETS (1) 3.95% 4.00%
RETURN ON AVERAGE ASSETS (2) 1.54% 1.53%
RETURN ON AVERAGE EQUITY (3) 17.61% 16.82%
------- -------
AVERAGE BALANCE SHEET For the year ended 12-31-02
-------------------------------
(Dollars in Thousands) Interest Average
Average and Yield/
ASSETS Balance Dividends Rate
----------- --------- -------
Residential First Mortgage $ 380,993 29,290 7.69%
Commercial Loans 649,665 47,013 7.24%
Consumer and Other Loans 288,919 22,559 7.81%
----------- ---------
Total Loans 1,319,577 98,862 7.49%
Tax-Exempt Investment Securities (1) 156,315 8,074 5.17%
Taxable Investment Securities 509,137 27,053 5.31%
----------- ---------
Total Earning Assets 1,985,029 133,989 6.75%
---------
Non-Earning Assets 169,036
-----------
TOTAL ASSETS $ 2,154,065
===========
LIABILITIES
AND STOCKHOLDERS' EQUITY
NOW Accounts $ 206,410 723 0.35%
Savings Accounts 127,245 857 0.67%
Money Market Demand Accounts 355,211 6,771 1.91%
Certificate Accounts 495,951 17,917 3.61%
Advances from FHLB 409,168 16,959 4.15%
Securities Sold Under agreements to
Reprchase and Other Borrowed Funds 76,087 4,295 5.64%
----------- ---------
Total Interest Bearing Liabilities 1,670,072 47,522 2.85%
---------
Non-interest Bearing Deposits 257,072
Other Liabilities 31,344
-----------
Total Liabilities 1,958,488
-----------
Common Stock 171
Paid-In Capital 170,291
Retained Earnings 19,195
Accumulated Other
Comprehensive Earnings 5,920
-----------
Total Stockholders' Equity 195,577
-----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 2,154,065
===========
NET INTEREST INCOME $ 86,467
=========
NET INTEREST SPREAD 3.90%
NET INTEREST MARGIN
ON AVERAGE EARNING ASSETS (1) 4.36%
RETURN ON AVERAGE ASSETS (2) 1.50%
RETURN ON AVERAGE EQUITY (3) 16.57%
-------
(1) Without tax effect on non-taxable securities income
(2) Net income divided by average total assets
(3) Net income divided by average equity
8
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) 2004 vs. 2003 2003 vs. 2002
----------------------------- ----------------------------
Increase (Decrease) due to: Increase (Decrease) due to:
----------------------------- ----------------------------
INTEREST INCOME Volume Rate Net Volume Rate Net
-------- -------- -------- -------- -------- --------
Real Estate Loans $ 716 $ (1,657) $ (941) $ (3,421) $ (1,986) $ (5,407)
Commercial Loans 10,064 (2,955) 7,109 8,733 (5,543) 3,190
Consumer and Other Loans 2,151 (1,833) 318 (45) (2,501) (2,546)
Investment Securities 8,092 1,877 9,969 13,185 (11,581) 1,604
-------- -------- -------- -------- -------- --------
Total Interest Income 21,023 (4,568) 16,455 18,452 (21,611) (3,159)
-------- -------- -------- -------- -------- --------
INTEREST EXPENSE
NOW Accounts 69 (79) (10) 73 (312) (239)
Savings Accounts 69 (98) (29) 86 (443) (357)
Money Market Accounts 274 (338) (64) 385 (3,316) (2,931)
Certificates of Deposit (935) (2,129) (3,064) (1,415) (4,105) (5,520)
FHLB Advances 5,312 (3,632) 1,680 7,979 (8,078) (99)
Other Borrowings and
Repurchase Agreements 3,496 (595) 2,901 1,411 (1,309) 102
-------- -------- -------- -------- -------- --------
Total Interest Expense 8,285 (6,871) 1,414 8,519 (17,563) (9,044)
-------- -------- -------- -------- -------- --------
NET INTEREST INCOME $ 12,738 $ 2,303 $ 15,041 $ 9,933 $ (4,048) $ 5,885
======== ======== ======== ======== ======== ========
Net interest income increased $15 million in 2004 over 2003. The increase was
primarily due to increases in volumes and the decrease in rates on deposits and
borrowings. For additional information see "Item 7 - Management's Discussion and
Analysis".
INVESTMENT ACTIVITIES
It has generally been the Company's policy to maintain a liquidity portfolio
only slightly above policy limits because higher yields can generally be
obtained from loan originations than from short-term deposits and investment
securities.
Liquidity levels may be increased or decreased depending upon yields on
investment alternatives and upon management's judgment as to the attractiveness
of the yields then available in relation to other opportunities and its
expectation of the level of yield that will be available in the future.
The Company's investment securities are generally classified as available for
sale and are carried at estimated fair value with unrealized gains or losses
reflected as an adjustment to stockholders' equity.
The Company uses an effective tax rate of 35% in calculating the tax equivalent
yield. Approximately $293 million of the investment portfolio is comprised of
tax exempt investments which is an increase of $14 million from the prior year.
The increase in tax exempt investments is the result of higher after tax yields
on tax exempt investment securities versus taxable investment securities.
For information about the Company's equity investment in the stock of the FHLB
of Seattle, see "Sources of Funds - Advances and Other Borrowings".
For additional information, see "Item 7 - Management's Discussion & Analysis"
and footnote 3 to the Consolidated Financial Statements in "Item 8 - Financial
Statements and Supplementary Data".
9
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. "Item 7 - Management's Discussion & Analysis" and footnote
4 to the Consolidated Financial Statements in "Item 8 - Financial Statements and
Supplementary Data" contain more information about the lending portfolio.
LOAN PORTFOLIO COMPOSITION
The following table summarizes the Company's loan portfolio:
LOAN PORTFOLIO COMPOSITION
(Dollars in Thousands) At At At
12/31/04 12/31/03 12/31/02
TYPE OF LOAN
------------
Amount Percent Amount Percent Amount Percent
---------- ------- ---------- ------- ---------- -------
REAL ESTATE LOANS:
Residential first mortgage $ 382,750 22.49% $ 305,372 21.35% $ 315,043 24.22%
Held for sale $ 14,476 0.85% $ 16,973 1.19% $ 51,987 4.00%
---------- ------- ---------- ------- ---------- -------
Total $ 397,226 23.34% $ 322,345 22.54% $ 367,030 28.22%
========== ======= ========== ======= ========== =======
COMMERCIAL LOANS:
Real estate $ 526,455 30.94% $ 483,684 33.82% $ 397,803 30.58%
Other commercial $ 466,582 27.42% $ 359,030 25.10% $ 276,675 21.27%
---------- ------- ---------- ------- ---------- -------
Total $ 993,037 58.36% $ 842,714 58.92% $ 674,478 51.85%
========== ======= ========== ======= ========== =======
INSTALLMENT AND OTHER LOANS:
Consumer $ 95,663 5.62% $ 95,739 6.69% $ 112,893 8.68%
Home equity $ 248,684 14.61% $ 199,693 13.96% $ 174,033 13.38%
---------- ------- ---------- ------- ---------- -------
Total $ 344,347 20.23% $ 295,432 20.65% $ 286,926 22.06%
========== ======= ========== ======= ========== =======
Net deferred loan fees, premiums
and discounts ($ 6,313) -0.37% ($ 6,136) -0.43% ($ 6,837) -0.52%
Allowance for loan losses ($ 26,492) -1.56% ($ 23,990) -1.68% ($ 20,944) -1.61%
LOANS RECEIVABLE, NET $1,701,805 100.00% $1,430,365 100.00% $1,300,653 100.00%
========== ======= ========== ======= =========== =======
(Dollars in Thousands) At At
12/31/01 12/31/00
TYPE OF LOAN
------------
Amount Percent Amount Percent
---------- ---------- ---------- -------
REAL ESTATE LOANS:
Residential first mortgage $ 401,133 30.33% $ 224,631 30.62%
Held for sale $ 27,403 2.07% $ 7,058 0.96%
---------- --------- ---------- -------
Total $ 428,536 32.40% $ 231,689 31.58%
========== ========= ========== =======
COMMERCIAL LOANS:
Real estate $ 379,346 28.69% $ 198,414 27.05%
Other commercial $ 241,811 18.29% $ 142,519 19.43%
---------- --------- ---------- -------
Total $ 621,157 46.98% $ 340,933 46.48%
---------- --------- ---------- -------
INSTALLMENT AND OTHER LOANS:
Consumer $ 142,875 10.80% $ 86,336 11.77%
Home equity $ 156,140 11.81% $ 83,539 11.39%
---------- --------- ---------- -------
Total $ 299,015 22.61% $ 169,875 23.16%
========== ========= ========== =======
Net deferred loan fees, premiums
and discounts ($ 7,727) -0.58% ($ 1,137) -0.16%
Allowance for loan losses ($ 18,654) -1.41% ($ 7,799) -1.06%
LOANS RECEIVABLE, NET $1,322,327 100.00% $ 733,561 100.00%
=========== ========= ========== =======
(Dollars in Thousands) Real Estate Commercial Consumer Totals
---------------------- ----------- ---------- -------- --------
Variable Rate Maturing or Repricing in:
One year or less $ 107,963 438,676 201,638 748,277
One to five years 89,651 307,172 7,676 404,499
Thereafter 6,454 13,551 - 20,005
Fixed Rate Maturing or Repricing in:
One year or less 87,436 88,683 35,754 211,873
One to five years 79,629 118,170 79,889 277,688
Thereafter 26,093 26,785 19,390 72,268
--------- ------- ------- ---------
Totals $ 397,226 993,037 344,347 1,734,610
========= ======= ======= =========
LOAN PORTFOLIO MATURITIES OR REPRICING TERM
The stated maturities or first repricing term (if applicable) for the loan
portfolio at December 31, 2004 was as follows:
REAL ESTATE LENDING
The Banks' lending activities consist of the origination of both construction
and permanent loans on residential and commercial real Estate. The Banks
actively solicit real estate loan applications from real estate brokers,
contractors, existing customers, customer
10
referrals, and walk-ins to their offices. The Banks' lending policies generally
limit the maximum loan-to-value ratio on residential mortgage loans to 80% of
the lesser of the appraised value or purchase price or above 80% of the loan if
insured by a private mortgage insurance company. The Banks also provide interim
construction financing for single-family dwellings, and makes land acquisition
and development loans on properties intended for residential use.
CONSUMER LENDING
The majority of all consumer loans are secured by real estate, automobiles, or
other assets. The Banks intend to continue lending for such loans because of
their short-term nature, generally between three months and five years, with an
average term of approximately two years. Moreover, interest rates on consumer
loans are generally higher than on mortgage loans. The Banks also originate
second mortgage and home equity loans, especially to its existing customers in
instances where the first and second mortgage loans are less than 80% of the
current appraised value of the property.
COMMERCIAL LENDING
The Banks make commercial loans of various types including operating loans,
equipment loans and a relatively small amount of unsecured loans. The Company's
credit risk management includes stringent credit policies, regular credit
examinations, management review of loans experiencing deterioration of credit
quality, individual loan approval limits, and committee approval of larger loan
requests. The Company has focused on increasing the mix of loans to include more
commercial loans. Commercial lenders at each of the banks are actively seeking
new and expanded lending relationships within their markets.
LOAN APPROVAL LIMITS
Individual loan approval limits have been established for each lender based on
the loan type and experience of the individual. Each subsidiary bank has an
Officer Loan Committee consisting of senior lenders and members of senior
management. The Officer Loan Committee has approval authority up to $500,000
($300,000 at Valley Bank of Helena, $1,000,000 at Western Security Bank and
$1,500,000 at Mountain West Bank). Loans between $500,000 and $2,000,000 (up to
$3,500,000 for Glacier Bank, First Security Bank of Missoula and Mountain West
Bank) go to the individual Bank's Board of Directors for approval. Loans over
these limits up to $5,000,000 are approved by the Executive Loan Committee of
the Company's Board of Directors. The membership of the Executive Loan Committee
consists of the bank's senior loan officers and the Company's Credit
Administrator. Loans greater than $5,000,000 are approved by the Company's Board
of Directors. Under banking laws loans to one borrower and related entities are
limited to a set percentage of the unimpaired capital and surplus of the bank.
LOAN PURCHASES AND SALES
Fixed-rate, long-term mortgage loans are generally sold in the secondary market.
The Banks have been active in the secondary market, primarily through the
origination of conventional FHA and VA residential mortgages for sale in whole,
or in part, to savings associations, banks and other purchasers in the secondary
market. The sale of loans in the secondary mortgage market reduces the Banks'
risk of increases in interest rates of holding long-term, fixed-rate loans in
the loan portfolio and allows the Banks to continue to make loans during periods
when deposit flows decline or funds are not otherwise available for lending
purposes. In connection with conventional loan sales, the Banks typically sell a
majority of mortgage loans originated, retaining servicing only on loans sold to
certain lenders. The Banks have also been very active in generating commercial
SBA loans, and other commercial loans, with a portion of those loans sold to
other investors. As of December 31, 2004, loans serviced for others aggregated
approximately $175 million.
LOAN ORIGINATION AND OTHER FEES
In addition to interest earned on loans, the Banks receive loan origination fees
for originating loans. Loan fees generally are a percentage of the principal
amount of the loan and are charged to the borrower, and are normally deducted
from the proceeds of the loan. Loan origination fees are generally 1.0% to 1.5%
on residential mortgages and .5% to 1.5% on commercial loans. Consumer loans
require a flat fee as well as a minimum interest amount. The Banks also receive
other fees and charges relating to existing loans, which include charges and
fees collected in connection with loan modifications and tax service fees.
NON-PERFORMING LOANS AND ASSET CLASSIFICATION
Loans are reviewed on a regular basis and are placed on a non-accrual status
when the collection of principal or interest is unlikely. The Banks typically
place loans on non-accrual when principal or interest is due and has remained
unpaid for 90 days or more unless the loan is secured by collateral having
realizable value sufficient to discharge the debt in full. Once a loan has been
classified as non-accrual previously accrued unpaid interest is reversed.
Interest accrued and unpaid at the time a loan is placed on non-accrual status
is charged against interest income. Subsequent payments are either applied to
the outstanding principal balance or recorded as interest income, depending on
the assessment of the ultimate repayment of the loan.
11
The following table sets forth information regarding the Banks' non-performing
assets at the dates indicated:
NONPERFORMING ASSETS
(Dollars in Thousands) At At At At At
12/31/04 12/31/03 12/31/02 12/31/01 12/31/00
-------- -------- -------- -------- --------
NON-ACCRUAL LOANS:
Mortgage loans $ 847 $ 1,129 $ 2,476 $ 4,044 $ 687
Commercial loans 4,792 8,246 5,157 4,568 442
Consumer loans 311 687 409 620 25
-------- -------- -------- -------- --------
Total 5,950 10,062 8,042 9,232 1,154
-------- -------- -------- -------- --------
ACCRUING LOANS 90 DAYS OR MORE OVERDUE:
Mortgage loans 179 379 846 818 576
Commercial loans 1,067 1,798 968 376 91
Consumer loans 396 242 184 243 83
-------- -------- -------- -------- --------
Total 1,642 2,419 1,998 1,437 750
-------- -------- -------- -------- --------
Real estate and other assets owned, net 2,016 587 1,542 593 291
-------- -------- -------- -------- --------
TOTAL NON-PERFORMING LOANS AND REAL
ESTATE AND OTHER ASSETS OWNED, NET 9,608 13,068 11,582 $ 11,262 $ 2,195
-------- -------- -------- -------- --------
AS A PERCENTAGE OF TOTAL ASSETS 0.32% 0.48% 0.51% 0.53% 0.21%
-------- -------- -------- -------- --------
Interest Income (1) $ 372 $ 665 $ 596 $ 658 $ 101
-------- -------- -------- -------- --------
(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.
Non-performing assets as a percentage of total assets at December 31, 2004 were
..32 percent versus .48 percent at the same time last year, which compares
favorably to the Peer Group average of .49 percent at September 30, 2004, the
most recent information available. The reserve for loan losses was 276 percent
of non-performing assets at December 31, 2004, up from 184 percent a year ago.
With the continuing change in loan mix from residential real estate to
commercial and consumer loans, which historically have greater credit risk, the
Company has increased the balance in the reserve for loan losses account. The
reserve balance has increased $2,502,000, or 10 percent, to $26,492,000, which
is 1.53 percent of total loans outstanding, down from 1.65 percent of loans at
December 31, 2003.
ALLOWANCE FOR LOAN LOSSES
The Allowance for Loan Losses ("ALL") is maintained at a level that allows for
the absorption of loan losses inherent within the bank's loan portfolios. The
Company is committed to the early recognition of problem loans and to a strong
conservative allowance.
Determining the adequacy of the ALL involves a high degree of judgment and is
inevitably imprecise. Accordingly, the ALL is maintained within a range based
upon a best estimate. The adequacy of the ALL is based on management's current
judgment about the credit quality of the loan portfolio and considers all known
relevant internal and external factors that affect loan losses. An evaluation of
the adequacy of the ALL is conducted at a minimum on a quarterly basis and is
documented and approved by the subsidiary Banks' Boards of Directors.
The primary responsibility for credit risk assessment and identification of
problem loans rests with the loan officer of account. This continuous process,
utilizing the bank's credit risk rating process, is necessary to support
management's evaluation of adequacy of the ALL. An independent loan review
function verifying loan risk ratings validates the loan officer and management's
evaluation about the credit quality of the loan portfolio. The loan review
function also assesses the evaluation process and provides an independent
analysis of the adequacy of the ALL.
The ALL methodology is designed to reasonably estimate the probable loan and
lease loss within the Bank's loan portfolios. The methodology is based upon a
process of estimating general, specific, and other allowance allocations.
- General allocations are estimated by applying loan loss rates to
groups of loans as defined by Financial Accounting Standards Board
(FASB) Statement No. 5 Accounting for Contingencies.
12
- Specific allocations are estimated for loans that are impaired or
have been selected for individual review as defined by FASB
Statement No. 114 Accounting by Creditors for Impairment of a
Loan--an amendment of FASB Statements No. 5 and 15.
- Allocations that include other factors that warrant an increase or
decrease in the ALL balance.
At a minimum, the process includes the following elements:
- Is well documented with clear explanations of the supporting
analyses
- Includes an analysis of the loan portfolio whether on an individual
or group basis
- Considers all known relevant internal and external factors that may
affect loan losses
- Applies procedures consistently but, when appropriate, is modified
for new factors
- Ensures the ALL balance is recorded in accordance with U.S.
generally accepted accounting principals
The Banks' charge-off policy is generally consistent with bank regulatory
standards. Consumer loans generally are charged off when the loan becomes over
120 days delinquent. Real estate acquired as a result of foreclosure or by
deed-in-lieu of foreclosure is classified as real estate owned until such time
as it is sold. When such property is acquired, it is recorded at the lower of
the unpaid principal balance or estimated fair value, not to exceed estimated
net realizable value. Any write-down at the time of recording real estate owned
is charged to the allowance for loan losses. Any subsequent write-downs are a
charge to current expenses.
LOAN LOSS EXPERIENCE
Years ended December 31,
-----------------------------------------------
(Dollars in Thousands) 2004 2003 2002 2001 2000
-------- ------ ------ ------ -----
BALANCE AT BEGINNING OF PERIOD $ 23,990 20,944 18,654 7,799 6,722
CHARGE OFFS:
Residential real estate (419) (416) (887) (677) (98)
Commercial loans (1,150) (912) (2,522) (723) (450)
Consumer loans (776) (1,078) (1,328) (2,029) (424)
-------- ------ ------ ------ -----
Total charge offs $ (2,345) (2,406) (4,737) (3,429) (972)
-------- ------ ------ ------ -----
RECOVERIES:
Residential real estate 171 126 276 33 5
Commercial loans 120 274 326 266 43
Consumer loans 361 284 680 567 137
-------- ------ ------ ------ -----
Total recoveries $ 652 684 1,282 866 185
-------- ------ ------ ------ -----
CHARGEOFFS, NET OF RECOVERIES (1,693) (1,722) (3,455) (2,563) (787)
Acquisitions (1) - 959 - 8,893 -
PROVISION 4,195 3,809 5,745 4,525 1,864
-------- ------ ------ ------ -----
BALANCE AT END OF PERIOD $ 26,492 23,990 20,944 18,654 7,799
======== ====== ====== ====== =====
Ratio of net charge offs to average
loans outstanding during the period 0.10% 0.12% 0.26% 0.20% 0.11%
(1) Acquisition of Pend Oreille Bank, WesterFed Financial Corporation and
several branches
13
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSS
2004 2003 2002
--------------------- ---------------------- ----------------------
Percent Percent Percent
of loans in of loans in of loans in
(Dollars in thousands) Allowance category Allowance category Allowance category
- ---------------------- --------- ----------- --------- ----------- --------- -----------
Residential first mortgage
and loans held for sale $ 2,693 22.9% 2,147 21.8% 2,334 27.4%
Commercial real estate 9,222 30.3% 7,464 33.2% 7,088 30.1%
Other commercial 9,836 26.9% 9,951 24.7% 7,670 20.9%
Consumer 4,741 19.9% 4,428 20.3% 3,852 21.6%
------- ----- ------ ----- ------ -----
Totals $26,492 100.0% 23,990 100.0% 20,944 100.0%
======= ===== ====== ===== ====== =====
2001 2000
---------------------- ---------------------
Percent Percent
of loans in of loans in
(Dollars in thousands) Allowance category Allowance category
- ---------------------- --------- ----------- --------- -----------
Residential first mortgage
and loans held for sale 2,722 31.5% 1,227 31.2%
Commercial real estate 5,906 28.3% 2,300 26.7%
Other commercial 6,225 18.0% 2,586 19.2%
Consumer 3,801 22.2% 1,686 22.9%
------ ----- ----- -----
Totals 18,654 100.0% 7,799 100.0%
====== ===== ===== =====
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 form three months to
five years, negotiated-rate jumbo certificates, non-interest demand accounts,
and individual retirement accounts.
"Item 7 - Management's Discussion and Analysis" 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 certificate accounts 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:
Certificate Demand
(Dollars in thousands) Accounts Deposits Totals
- ----------------------------- -------- -------- -------
Within three months............. $ 32,013 612,673 644,686
Three months to six months...... 11,096 -- 11,096
Seven months to twelve months... 19,026 -- 19,026
Over twelve months.............. 24,258 -- 24,258
-------- ------- -------
Totals $ 86,393 612,673 699,066
======== ======= =======
For additional information, see "Item 7 - Management's Discussion & Analysis"
and footnote 7 to the Consolidated Financial Statements in "Item 8 - Financial
Statements and Supplementary Data".
In addition to funds obtained in the ordinary course of business, the Company
formed Glacier Trust I and Glacier trust II as financing subsidiaries. Glacier
Trust II issued 45,000 preferred securities at $1,000 per preferred security.
The purchase of the securities entitles the shareholder to receive cumulative
cash distributions at an annual interest of 5.788% for the first five years and
then converts to a three month LIBOR plus 2.75% rate from payments on the junior
subordinated debentures of Glacier Bancorp, Inc. The subordinated debentures
will mature and the preferred securities must be redeemed by April 7, 2034. In
exchange for the Company's capital contribution, the Company owns all of the
outstanding common securities of Glacier Trust II. The proceeds were used for
general corporate purposes. Glacier Trust I issued 1,400,000 preferred
securities at $25 per preferred security. The purchase of the securities
entitles the shareholder to receive cumulative cash distributions at an annual
interest rate of 9.40% from payments on the junior subordinated debentures of
Glacier Bancorp, Inc. The subordinated debentures will mature and the preferred
securities must be redeemed by February 1, 2031. In exchange for the Company's
capital contribution, the Company owns all of the outstanding common securities
of the trust. The purpose of the issuance of the securities was to finance the
acquisition of WesterFed Financial
14
Corporation and seven Wells Fargo & Company and First Security Corporation
branches in 2001. For additional information regarding the subordinated
debentures, see Note 10 to the Consolidated Financial Statements "Item 8 -
Financial Statements and Supplementary Data".
ADVANCES AND OTHER BORROWINGS
As a member of the Federal Home Loan Bank of Seattle ("FHLB"), 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.
From time to time, primarily as a short-term financing arrangement for
investment or liquidity purposes, the Banks have made use of repurchase
agreements with various securities dealers. This process involves the "selling"
of one or more of the securities in the Banks' 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 the Banks have 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, the Banks 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 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,
-------------------------------
2004 2003 2002
-------- ------- -------
FHLB Advances
Amount outstanding at end of period....... $818,933 777,294 483,660
Average balance........................... $791,245 601,679 409,168
Maximum outstanding at any month-end...... $862,136 777,294 483,660
Weighted average interest rate............ 2.34% 2.80% 4.15%
Repurchase Agreements:
Amount outstanding at end of period....... $ 76,158 56,968 46,206
Average balance........................... $ 69,480 61,609 35,479
Maximum outstanding at any month-end...... $ 80,265 74,808 46,206
Weighted average interest rate............ 1.25% 1.09% 1.46%
For additional information concerning the Company's advances and repurchase
agreements, see footnotes 8 and 9 to the Consolidated Financial Statements in
"Item 8 - Financial Statements and Supplementary Data".
EMPLOYEES
As of December 31, 2004, the Company employed 935 persons, 776 of who were full
time, none of whom were represented by a collective bargaining group. The
Company provides its with a comprehensive benefit program, including medical
insurance, dental plan, life and accident insurance, long-term disability
coverage, sick leave, profit sharing plan and employee stock options. Prior to
2002, the Company had a noncontributory defined contribution retirement plan and
an employee savings plan; however as of January 1, 2002, both plans were merged
into the new profit sharing plan. The Company considers its employee relations
to be excellent. See Note 13 in the Consolidated Financial Statements in "Item 8
- - Financial Statements and Supplementary Data" for detailed information
regarding profit sharing plan costs and eligibility.
15
SUPERVISION AND REGULATION
INTRODUCTION
Banking is a highly regulated industry. Banking laws and regulations are
primarily intended to protect depositors, not shareholders. The following
discussion identifies some of the more significant state and federal laws and
regulations affecting the banking industry. It is intended to provide a brief
summary of these laws and regulations and, therefore, is not complete and is
qualified by the statutes and regulations referenced in the discussion.
BANK HOLDING COMPANY REGULATION
General. The Company is a bank holding company as defined in the Bank Holding
Company Act of 1956, as amended, because of its ownership of Glacier Bank,
Glacier Bank of Whitefish, Valley Bank of Helena, First Security Bank of
Missoula, Big Sky Western Bank, Western Security Bank and Mountain West Bank,
all of which are Montana-state chartered commercial banks (with the exception of
Mountain West Bank, an Idaho state-chartered bank), and all of which are members
of the Federal Reserve (with the exception of Mountain West Bank, a non-Fed
member FDIC-insured bank). As a bank holding company, the Company is subject to
regulation, supervision and examination by the Federal Reserve. In general, the
Bank Holding Company Act limits the business of bank holding companies to owning
or controlling banks and engaging in other activities closely related to
banking. The Company must also file reports and provide additional information
with the Federal Reserve. Under the Financial Services Modernization Act of
1999, a bank holding company may apply to the Federal Reserve to become a
financial holding company, and thereby engage (directly or through a subsidiary)
in certain expanded activities deemed financial in nature, such as securities
brokerage and insurance underwriting.
Holding Company Bank Ownership. The Bank Holding Company Act requires every bank
holding company to obtain the prior approval of the Federal Reserve before (1)
acquiring, directly or indirectly, ownership or control of any voting shares of
another bank or bank holding company if, after such acquisition, it would own or
control more than 5% of such shares, (2) acquiring all or substantially all of
the assets of another bank or bank holding company, or (3) merging or
consolidating with another bank holding company.
Holding Company Control of Nonbanks. With some exceptions, the Bank Holding
Company Act also prohibits a bank holding company from acquiring or retaining
direct or indirect ownership or control of more than 5% of the voting shares of
any company which is not a bank or bank holding company, or from engaging
directly or indirectly in activities other than those of banking, managing or
controlling banks or providing services for its subsidiaries. The principal
exceptions to these prohibitions involve certain non-bank activities which, by
statute or by Federal Reserve regulation or order, have been identified as
activities closely related to the business of banking or of managing or
controlling banks.
Transactions with Affiliates. Subsidiary banks of a bank holding company are
subject to restrictions imposed by the Federal Reserve Act on extensions of
credit to the holding company or its subsidiaries, on investments in their
securities, and on the use of their securities as collateral for loans to any
borrower. These regulations and restrictions may limit the Company's ability to
obtain funds from the Bank for its cash needs, including funds for payment of
dividends, interest and operational expenses.
Tying Arrangements. We are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit, sale or lease of
property or furnishing of services. For example, with certain exceptions,
neither the Company nor its subsidiaries may condition an extension of credit to
a customer on either (1) a requirement that the customer obtain additional
services provided by us or (2) an agreement by the customer to refrain from
obtaining other services from a competitor.
Support of Subsidiary Banks. Under Federal Reserve policy, the Company is
expected to act as a source of financial and managerial strength to the Bank.
This means that the Company is required to commit, as necessary, resources to
support the Bank. Any capital loans a bank holding company makes to its
subsidiary banks are subordinate to deposits and to certain other indebtedness
of those subsidiary banks.
State Law Restrictions. As a Montana corporation, the Company is subject to
certain limitations and restrictions under applicable Montana corporate law. For
example, state law restrictions in Montana include limitations and restrictions
relating to indemnification of directors, distributions to shareholders,
transactions involving directors, officers or interested shareholders,
maintenance of books, records, and minutes, and observance of certain corporate
formalities.
THE SUBSIDIARIES
With the exception of Mountain West Bank, the Company's subsidiaries are subject
to extensive regulation and supervision by the Montana Department of Commerce's
Banking and Financial Institutions Division and the FRB as a result of their
membership in the Federal Reserve System. Mountain West Bank is subject to
regulation the Idaho Department of Finance and by the FDIC as a state non-member
commercial
16
bank. In addition, Mountain West's Utah and Washington branches are primarily
regulated by the Utah Department of Financial Institutions and the Washington
Department of Financial Institutions, respectively.
The federal laws that apply to the Banks regulate, among other things, the scope
of their business, their investments, their reserves against deposits, the
timing of the availability of deposited funds and the nature and amount of and
collateral for loans. Federal laws also regulate community reinvestment and
insider credit transactions and impose safety and soundness standards.
Community Reinvestment. The Community Reinvestment Act requires that, in
connection with examinations of financial institutions within their
jurisdiction, federal bank regulators must evaluate the record of financial
institutions in meeting the credit needs of their local communities, including
low and moderate income neighborhoods, consistent with the safe and sound
operation of those banks. These factors are also considered in evaluating
mergers, acquisitions, and applications to open a branch or facility.
Insider Credit Transactions. Banks are also subject to certain restrictions on
extensions of credit to insiders--executive officers, directors, principal
shareholders, and their related interests. Extensions of credit to insiders must
be made on substantially the same terms, including interest rates and
collateral, and follow credit underwriting procedures that are not less
stringent than those prevailing at the time for comparable transactions with
non-insiders. Also, extensions of credit to insiders must not involve more than
the normal risk of repayment or present other unfavorable features.
Safety and Soundness Standards. Federal law imposes upon banks certain
non-capital safety and soundness standards. These standards cover, among other
things, internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth,
compensation and benefits. Additional standards apply to asset quality, earnings
and stock valuation. An institution that fails to meet these standards must
develop a plan acceptable to its regulators, specifying the steps that the
institution will take to meet the standards. Failure to submit or implement such
a plan may subject the institution to regulatory sanctions.
INTERSTATE BANKING AND BRANCHING
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Act") permits nationwide interstate banking and branching under
certain circumstances. This legislation generally authorizes interstate
branching and relaxes federal law restrictions on interstate banking. Currently,
bank holding companies may purchase banks in any state, and states may not
prohibit such purchases. Additionally, banks are permitted to merge with banks
in other states as long as the home state of neither merging bank has opted out.
The Interstate Act requires regulators to consult with community organizations
before permitting an interstate institution to close a branch in a low-income
area.
Federal bank regulations prohibit banks from using their interstate branches
primarily for deposit production and have implemented a loan-to-deposit ratio
screen to ensure compliance with this prohibition.
With regard to interstate bank mergers, Montana "opted-out" of the Interstate
Act. Subject to certain conditions, an in-state bank that has been in existence
for at least 5 years may merge with an out-of-state bank. Banks, bank holding
companies, and their respective subsidiaries cannot acquire control of a bank
located in Montana if, after the acquisition, the acquiring institution,
together with its affiliates, would directly or indirectly control more than 22%
of the total deposits of insured depository institutions and credit unions
located in Montana. Montana law does not authorize the establishment of a branch
bank in Montana by an out-of-state bank.
Idaho has enacted "opting in" legislation in accordance with the Interstate Act
provisions allowing banks to engage in interstate merger transactions subject to
certain "aging" requirements. Branches may not be acquired or opened separately
in Idaho by an out-of-state bank, but once an out-of-state bank has acquired a
bank within Idaho, either through merger or acquisition of all or substantially
all of the bank's assets, the out-of-state bank may open additional branches
within Idaho.
Utah and Washington have each enacted "opting in" legislation similar in certain
respects to that enacted by Idaho, allowing banks to engage in interstate merger
transactions subject to certain aging requirements. De novo branching by an out
of state bank is generally prohibited; however, once an out of state bank has
acquired a Utah or Washington branch, that bank may establish additional
branches within that state.
DEPOSIT INSURANCE
The deposits of the Banks are currently insured to a maximum of $100,000 per
depositor through the Bank Insurance Fund ("BIF") administered by the FDIC. All
insured banks are subject to semi-annual deposit insurance premium assessments
by the FDIC. The FDIC has implemented a risk-based insurance premium system
under which banks are assessed insurance premiums based on how much risk they
present to the Bank Insurance Fund. Banks with higher levels of capital and a
low degree of supervisory concern are assessed lower premiums than banks with
lower levels of capital or a higher degree of supervisory concern.
17
DIVIDENDS
The principal source of the Company's cash revenues is dividends received from
the Company's subsidiary Banks. The payment of dividends is subject to
government regulation, in that regulatory authorities may prohibit banks and
bank holding companies from paying dividends which would constitute an unsafe or
unsound banking practice. In addition, a bank may not pay cash dividends if that
payment could reduce the amount of its capital below that necessary to meet
minimum applicable regulatory capital requirements. State laws also limit a
bank's ability to pay dividends.
CAPITAL ADEQUACY
Regulatory Capital Guidelines. Federal bank regulatory agencies use capital
adequacy guidelines in the examination and regulation of bank holding companies
and banks. The guidelines are "risk-based," meaning that they are designed to
make capital requirements more sensitive to differences in risk profiles among
banks and bank holding companies.
Tier I and Tier II Capital. Under the guidelines, an institution's capital is
divided into two broad categories, Tier I capital and Tier II capital. Tier I
capital generally consists of common shareholders' equity, surplus and undivided
profits. Tier II capital generally consists of the allowance for loan losses,
hybrid capital instruments, and subordinated debt. The sum of Tier I capital and
Tier II capital represents an institution's total capital. The guidelines
require that at least 50% of an institution's total capital consist of Tier I
capital.
Risk-based Capital Ratios. The adequacy of an institution's capital is gauged
primarily with reference to the institution's risk-weighted assets. The
guidelines assign risk weightings to an institution's assets in an effort to
quantify the relative risk of each asset and to determine the minimum capital
required to support that risk. An institution's risk-weighted assets are then
compared with its Tier I capital and total capital to arrive at a Tier I
risk-based ratio and a total risk-based ratio, respectively. The guidelines
provide that an institution must have a minimum Tier I risk-based ratio of 4%
and a minimum total risk-based ratio of 8%.
Leverage Ratio. The guidelines also employ a leverage ratio, which is Tier I
capital as a percentage of total assets, less intangibles. The principal
objective of the leverage ratio is to constrain the maximum degree to which a
bank holding company may leverage its equity capital base. The minimum leverage
ratio is 3%; however, for all but the most highly rated bank holding companies
and for bank holding companies seeking to expand, regulators expect an
additional cushion of at least 1% to 2%.
Prompt Corrective Action. Under the guidelines, an institution is assigned to
one of five capital categories depending on its total risk-based capital ratio,
Tier I risk-based capital ratio, and leverage ratio, together with certain
subjective factors. The categories range from "well capitalized" to "critically
undercapitalized." Institutions that are "undercapitalized" or lower are subject
to certain mandatory supervisory corrective actions.
CORPORATE GOVERNANCE AND ACCOUNTING LEGISLATION
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 (the "Act") addresses
corporate and accounting fraud. The Act establishes a new accounting oversight
board to enforce auditing standards and restricts the scope of services that
accounting firms may provide to their public company audit clients. Among other
things, the Act also (i) requires chief executive officers and chief financial
officers to certify to the accuracy of periodic reports filed with the
Securities and Exchange Commission (the "SEC"); (ii) imposes new disclosure
requirements regarding internal controls, off-balance-sheet transactions, and
pro forma (non-GAAP) disclosures; (iii) accelerates the time frame for reporting
of insider transactions and periodic disclosures by public companies; and (iv)
requires companies to disclose whether or not they have adopted a code of ethics
for senior financial officers and whether the audit committee includes at least
one "audit committee financial expert."
The Act also requires the SEC, based on certain enumerated factors, to regularly
and systematically review corporate filings. To deter wrongdoing, the Act: (i)
subjects bonuses issued to top executives to disgorgement if a restatement of a
company's financial statements was due to corporate misconduct; (ii) prohibits
an officer or director from misleading or coercing an auditor; (iii) prohibits
insider trades during pension fund "blackout periods"; (iv) imposes new criminal
penalties for fraud and other wrongful acts; and (v) extends the period during
which certain securities fraud lawsuits can be brought against a company or its
officers.
As a publicly reporting company, we are subject to the requirements of the Act
and related rules and regulations issued by the SEC and NASDAQ. We anticipate
that we will incur additional expense, including ongoing compliance with Section
404, as a result of the Act, but we do not expect that such compliance will have
a material impact on our business.
ANTI-TERRORISM LEGISLATION
The Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001 ("USA Patriot Act") is intended to
combat terrorism. Among other things, the USA Patriot Act (1) prohibits banks
from providing
18
correspondent accounts directly to foreign shell banks; (2) imposes due
diligence requirements on banks opening or holding accounts for foreign
financial institutions or wealthy foreign individuals (3) requires financial
institutions to establish an anti-money-laundering compliance program, and (4)
generally eliminates civil liability for persons who file suspicious activity
reports. The Act also increases governmental powers to investigate terrorism,
including expanded government access to account records. The Department of the
Treasury is empowered to administer and make rules to implement the Act. While
the USA Patriot Act may, to some degree, affect the Company's record-keeping and
reporting expenses, the Company does not believe that the Act will have a
material adverse effect on its business and operations.
FINANCIAL SERVICES MODERNIZATION
Gramm-Leach-Bliley Act of 1999. The Financial Services Modernization Act of
1999, also known as the Gramm-Leach-Bliley Act, brought about significant
changes to the laws affecting banks and bank holding companies. Generally, the
Act (i) repealed the historical restrictions on preventing banks from
affiliating with securities firms, (ii) provided a uniform framework for the
activities of banks, savings institutions and their holding companies, (iii)
broadened the activities that may be conducted by national banks and banking
subsidiaries of bank holding companies, (iv) provided an enhanced framework for
protecting the privacy of consumer information and (v) addressed a variety of
other legal and regulatory issues affecting both day-to-day operations and
long-term activities of financial institutions.
Bank holding companies that qualify and elect to become financial holding
companies can engage in a wider variety of financial activities than permitted
under previous law, particularly with respect to insurance and securities
underwriting activities. In addition, in a change from previous law, bank
holding companies will be in a position to be owned, controlled or acquired by
any company engaged in financially related activities, so long as the company
meets certain regulatory requirements. The act also permits national banks (and,
in states with wildcard statutes, certain state banks), either directly or
through operating subsidiaries, to engage in certain non-banking financial
activities.
We do not believe that the act will negatively affect our operations in the
short term. However, to the extent the legislation permits banks, securities
firms and insurance companies to affiliate, the financial services industry may
experience further consolidation. This consolidation could result in a growing
number of larger financial institutions that offer a wider variety of financial
services than we currently offer, and these companies may be able to
aggressively compete in the markets we currently serve.
EFFECTS OF GOVERNMENT MONETARY POLICY
The Company's earnings and growth are affected by general economic conditions,
and by the fiscal and monetary policies of the federal government, particularly
the Federal Reserve. The Federal Reserve implements a national monetary policy
for such purposes as curbing inflation and combating recession, but its open
market operations in U.S. government securities, control of the discount rate
applicable to borrowings from the Federal Reserve, and establishment of reserve
requirements against certain deposits, influence the growth of bank loans,
investments and deposits, and also affect interest rates charged on loans or
paid on deposits. The Company cannot predict with certainty the nature and
impact of future changes in monetary policies and their impact on the Company or
its subsidiary Banks.
TAXATION
FEDERAL TAXATION
The Company files consolidated federal, Montana, Idaho, and Utah income tax
returns, using the accrual method of accounting. All required tax returns have
been filed.
Financial institutions are subject to the provisions of the Internal Revenue
Code of 1986, as amended in the same general manner as other corporations. See
note 12 to the Consolidated Financial Statements in "Item 8 - Financial
Statements and Supplementary Data" for additional information.
19
STATE TAXATION
Under Montana, Idaho and Utah law, financial institutions are subject to a
corporation license tax, which incorporates or is substantially similar to
applicable provisions of the Internal Revenue Code. The corporation license tax
is imposed on federal taxable income, subject to certain adjustments. State
taxes are incurred at the rate of 6.75% in Montana, 7.6% in Idaho, and 5% in
Utah.
ITEM 2. PROPERTIES
At December 31, 2004, the Company owned 42 of its 55 offices, including its
headquarters and other property having an aggregate book value of approximately
$43 million, and leased the remaining branches. 8 offices are leased in Montana,
3 offices are leased in Idaho, 1 office is leased in Utah, and 1 office is
leased in Washington. The following schedule provides property information for
the Company's operating segments as of December 31, 2004.
Properties Properties Net Book
(dollars in thousands) Leased Owned Value
- --------------------- ---------- ---------- --------
Glacier 2 9 $ 7,806
First Security 3 6 6,493
Western 1 6 4,835
Mountain West 5 11 12,308
Big Sky 1 3 6,452
Valley 1 5 3,201
Whitefish - 2 1,485
---------- ---------- --------
13 42 $ 42,580
========== ========== ========
The Company believes that all of its facilities are well maintained, adequate
and suitable for the current operations of its business, as well as fully
utilized.
For additional information concerning the Company's premises and equipment and
lease obligations, see Note 5 and 19 to the Consolidated Financial Statements in
"Item 8 - Financial Statements and Supplementary Data".
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to various claims, legal actions
and complaints in the ordinary course of their businesses. In the Company's
opinion, all such matters are adequately covered by insurance, are without merit
or are of such kind, or involve such amounts, that unfavorable disposition would
not have a material adverse effect on the consolidated financial position or
results of operations of the Company.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the fourth quarter of
2004.
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON REGISTRANT'S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASE OF EQUITY SECURITIES
The Company's stock trades on the NASDAQ National Market under the symbol: GBCI.
The primary market makers are: D.A. Davidson & Company, Goldman, Sachs & Co.,
Keefe, Bruyette & Woods, Inc., Knight Equity Markets, L.P., Morgan Stanley &
Co., Inc., and Piper Jaffray Companies.
The market range of high and low bid prices for the Company's common stock for
the periods indicated are shown below. The sale price information has been
adjusted retroactively for all stock dividends and splits previously issued. As
of December 31, 2004, there were approximately 9,570 shareholders of Company
common stock. Following is a schedule of quarterly common stock price ranges:
2004 2003
------------------ ------------------
Quarter High Low High Low
- --------------- ------- ------- ------- -------
First.......... $ 27.04 $ 23.60 $ 21.59 $ 17.00
Second......... $ 28.25 $ 24.49 $ 20.96 $ 18.36
Third.......... $ 30.35 $ 25.75 $ 23.72 $ 19.56
Fourth......... $ 35.89 $ 28.90 $ 26.40 $ 21.54
The Company paid cash dividends on its common stock of $.68 and $.60 per share
for the years ended December 31, 2004 and 2003, respectively.
UNREGISTERED SECURITIES
There have been no securities of the Company sold within the last three years
which were not registered under the Securities Act.
ISSUER STOCK PURCHASES
The Company made no stock repurchases during the fourth quarter of 2004.
EQUITY COMPENSATION PLAN INFORMATION
We currently maintain two compensation plans that provide for the issuance of
the Company's common stock to officers and other employees, directors and
consultants. These consist of the 1994 Director Stock Option Plan, amended, and
the 1995 Employee Stock Option Plan, as amended, each of which have been
approved by the shareholders. The following table sets forth information
regarding outstanding options and shares reserved for future issuance under the
foregoing plans as of December 31, 2004:
Number of shares remaining
Number of shares to be available for future
issued upon exercise of Weighted-average issuance under equity
outstanding options, exercise price of compensation plans
warrants, and rights outstanding options, (excluding shares
(a) warrants, and rights reflected in column (a))
Plan Category (1) (2) (b) (c) (1)
- ----------------------------- ----------------------- -------------------- --------------------------
Equity compensation plans
approved by the shareholders 1,208,505 $ 18.315 1,792,215
Equity compensation plans not
approved by shareholders - $ 0 -
(1) Includes shares to be issued upon exercise of options under plans of
Mountain West Bank and WesterFed, which were assumed as a result of their
acquisitions.
(2) Consists of shares that are outstanding, and shares available for
future issuance, under the respective plans. The material features of the
plans are described above.
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 report.
21
SUMMARY OF OPERATIONS AND SELECTED FINANCIAL DATA
At December 31,
---------------
(dollars in thousands, except per share data) 2004 2003 2002 2001 2000
--------------------------------------------- ----------- --------- --------- --------- ---------
SUMMARY OF FINANCIAL CONDITION:
Total assets .............................. $ 3,010,737 2,739,633 2,281,344 2,085,747 1,056,712
Investment securities, available for sale.. 1,085,626 1,096,954 782,825 545,585 229,986
Loans receivable, net ..................... 1,701,805 1,430,365 1,300,653 1,322,327 733,561
Allowance for loan losses ................. (26,492) (23,990) (20,944) (18,654) (7,799)
Intangibles ............................... 42,315 42,816 40,011 41,771 6,493
Deposits .................................. 1,729,708 1,597,625 1,459,923 1,446,064 720,570
Advances from Federal Home Loan Bank ...... 818,933 777,294 483,660 367,295 196,791
Securities sold under agreements to
repurchase and other borrowed funds .... 81,215 64,986 61,293 32,585 29,529
Stockholders' equity ...................... 270,184 237,839 212,249 176,983 98,113
Equity per common share* .................. 11.01 9.83 8.93 7.63 6.23
Equity as a percentage of total assets .... 8.97% 8.68% 9.30% 8.49% 9.28%
Years ended December 31,
------------------------
(dollars in thousands, except per share data) 2004 2003 2002 2001 2000
- ------------------------------------------------ ----------- ------- ------- ------- ------
SUMMARY OF OPERATIONS:
Interest income ......................... $ 147,285 130,830 133,989 137,920 78,837
Interest expense ........................ 39,892 38,478 47,522 65,546 37,357
----------- ------- ------- ------- ------
Net interest income ................... 107,393 92,352 86,467 72,374 41,480
Provision for loan losses ............... 4,195 3,809 5,745 4,525 1,864
Non-interest income ..................... 34,565 33,562 25,917 23,251 13,294
Non-interest expense .................... 72,133 65,944 57,813 57,385 31,327
----------- ------- ------- ------- ------
Earnings before income taxes .......... 65,630 56,161 48,826 33,715 21,583
Income taxes ............................ 21,014 18,153 16,424 12,026 7,580
----------- ------- ------- ------- ------
Net earnings .......................... 44,616 38,008 32,402 21,689 14,003
=========== ======= ======= ======= ======
Basic earnings per common share* ...... 1.82 1.58 1.37 1.00 0.89
Diluted earnings per common share* .... 1.79 1.55 1.35 0.97 0.88
Dividends declared per share* ......... 0.68 0.60 0.49 0.44 0.43
At or for the years ended December 31,
--------------------------------------
2004 2003 2002 2001 2000
----- ----- ----- ----- -----
RATIOS:
Net earnings as a percent of
average assets ............................ 1.54% 1.53% 1.50% 1.10% 1.39%
average stockholders' equity .............. 17.61% 16.82% 16.57% 13.49% 15.83%
Dividend payout ratio ............................ 37.36% 38.07% 35.45% 43.48% 48.36%
Average equity to average asset ratio ............ 8.75% 9.10% 9.08% 8.26% 8.78%
Net interest margin on average earning assets.....
(tax equivalent) ........................ 4.15% 4.20% 4.51% 4.08% 4.48%
Allowance for loan losses as a percent of loans... 1.53% 1.65% 1.58% 1.39% 1.05%
Allowance for loan losses as a percent of
nonperforming assets ..................... 276% 184% 181% 165% 372%
At or for the years ended December 31,
--------------------------------------
(dollars in thousands) 2004 2003 2002 2001 2000
---------------------- ----------- --------- --------- ------- -------
OTHER DATA:
Loans originated and purchased ........... $ 1,543,595 1,509,850 1,204,852 994,527 570,652
Loans serviced for others ................ $ 174,805 189,601 253,063 286,996 146,534
Number of full time equivalent employees.. 857 807 737 728 423
Number of offices ........................ 55 54 50 51 30
Number of shareholders of record ......... 1,784 1,763 1,586 1,645 1,228
*revised for stock splits and dividends
All amounts have been restated to include mergers using the poolinf interests
accounting method. Acquisitions using the purchase method of accounting include
the operations since the acquisition date.
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS YEAR ENDED DECEMBER 31, 2004 COMPARED TO DECEMBER 31, 2003
The following discussion is intended to provide a more comprehensive review of
the Company's operating results and financial condition than can be obtained
from reading the Consolidated Financial Statements alone. The discussion should
be read in conjunction with the audited financial statements and the notes
thereto included later in this report. All numbers, except per share data, are
expressed in thousands of dollars.
HIGHLIGHTS AND OVERVIEW
This past year the Company experienced strong loan growth with total loans
outstanding increasing by $274 million, or 19 percent from the prior year. All
loan classifications experienced increases with commercial loan growth leading
the way with an increase of $150 million, or 18 percent. The low interest rates
for real estate loans continued through 2004 however the pace of home loan
refinancing slowed substantially from the 2003 level. The slowing of refinance
activity combined with a renewed focus on shorter term, and variable rate loans
resulted in an increase in real estate loans of $75 million, or 24 percent,
during the year. Consumer loans, primarily home equity loans, increased by $49
million, or 17 percent. The average interest rate on loans continued to decline
as repayments on higher rate loans continued to occur and new loans were booked
at reduced rates. Increases in targeted interest rates by the Federal Reserve
Board during 2004 and into 2005 should help reverse this trend. The increased
volume of loans more than offset the lower rates so that loan interest income
increased from 2003. Because of the increased loan balances which used available
funding, and reduced spreads on funding costs versus investment returns, total
investments declined from the prior year. With the reduction in refinancing of
home loans, prepayments on mortgage backed securities were substantially reduced
resulting in a lower level of premium amortization which increased the earnings
on investments. Maturing higher rate certificates of deposit and borrowed funds
reduced average interest rates paid from the prior year, however, increased
borrowed funds by the subsidiary banks and the issuance of $45 million in
subordinated debentures by the parent company, resulted in increased interest
expense.
Non-interest bearing deposits increased 25% during the year providing a stable
low-cost funding source for a portion of the asset growth. Interest bearing
deposits also ended the year with increased totals. Asset growth that exceeded
the increase in deposits was funded with Federal Home Loan Bank advances and
other borrowed funds.
With the reduction in mortgage loan refinance activity, the origination of
residential loans decreased by 17 percent from 2003; however the gain-on-sale of
loans declined 25 percent, the result of retaining more of the loans originated.
Service charges and fee income increased nicely in 2004, primarily the result of
increased account volumes. The net gain on the sale of securities of $1 million
during 2003 was not repeated in 2004 with a net of zero for the year.
Total revenue from net interest income and non-interest income increased $16
million, or 13%, over the prior year, the cumulative effect of the above
described items.
Non-interest expense increased $6 million, or 9%, from last year with the
largest increase occurring in compensation and benefits. Additional locations
and related staffing and merit increases were the primary reasons for this
increase. Other operating expenses also increased reflecting the increased
volume of activities in loan and deposit operations.
Looking forward, our future performance will depend on many factors including
economic conditions, interest rate changes, increasing competition for deposits
and quality loans, and regulatory burden. Increasing interest rates slow the
volume of real estate loan originations which reduces the fee income from that
activity while at the same time reducing commission expense for loan
originators. Increasing rates result in increased earnings on assets, however,
the cost of interest bearing funds also increases. The Company goal of asset and
liability management practices is to maintain or increase the level of net
interest income within an acceptable level of interest rate risk.
Regulatory burden seems to be never-ending as additional regulations continue to
add cost. The Sarbanes-Oxley Act (SOX) resulted in substantial increases in
audit and consulting fees during 2004, and a major diversion of internal staff
time from normal duties, primarily to satisfy the internal control requirements
of Section 404 of SOX. Costs to assure compliance in future years, including
ongoing compliance with SOX, are projected to remain high.
23
FINANCIAL CONDITION
ASSETS
The following table summarizes the asset balances as of December 31, 2004 and
2003, the amount of change, and percentage change during 2004:
December 31,
--------------------------
ASSETS ($ IN THOUSANDS) 2004 2003 $ change % change
----------- ----------- ----------- --------
Cash on hand and in banks $ 79,300 $ 77,093 $ 2,207 3%
Investment securities, FHLB and FRB stock,
and interest bearing deposits 1,098,633 1,106,001 (7,368) -1%
Loans:
Real estate 393,141 317,774 75,367 24%
Commercial 991,081 841,305 149,776 18%
Consumer 344,075 295,276 48,799 17%
----------- ----------- ----------- --
Total loans 1,728,297 1,454,355 273,942 19%
Allowance for loan losses (26,492) (23,990) (2,502) 10%
----------- ----------- ----------- --
Total loans net of allowance for loan losses 1,701,805 1,430,365 271,440 19%
----------- ----------- ----------- --
Other assets 130,999 126,174 4,825 4%
----------- ----------- ----------- --
Total Assets $ 3,010,737 $ 2,739,633 $ 271,104 10%
=========== =========== =========== ==
At December 31, 2004 total assets were $3.011 billion which is $271 million
greater than the December 31, 2003 assets of $2.740 billion, an increase of 10
percent.
Total loans have increased $274 million from December 31, 2003, an increase of
19 percent, with the growth occurring in all loan categories. Commercial loans
increased $150 million, or 18 percent, real estate loans gained $75 million, or
24 percent, and consumer loans grew by $49 million, or 17 percent. Loan volume
continues to be very strong with loans increasing $43 million during the fourth
quarter which has historically been a slow quarter for loan growth.
Investment securities, including interest bearing deposits in other financial
institutions, have decreased $7 million from December 31, 2003. Without the
approximately $18 million of proceeds of the March 2004 issuance of Trust
Preferred Securities that are invested in investment securities, total
investments would have declined $25 million from last year. Some of the cash
flow from investment maturities is now being used to fund the significant growth
in loans.
The following table summarizes the major asset components as a percentage of
total assets as of December 31, 2004, 2003, and 2002:
December 31,
----------------------------------
2004 2003 2002
----- ----- -----
ASSETS:
Cash, and cash equivalents, investment securities, FHLB
and Federal Reserve stock................................. 39.1% 43.2% 37.8%
Real estate loans and loans held for sale................... 13.0% 11.5% 15.7%
Commercial loans............................................ 32.3% 30.1% 28.9%
Consumer loans.............................................. 11.3% 10.6% 12.4%
Other assets................................................ 4.3% 4.6% 5.2%
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
The percentage of assets held as cash, and cash equivalents, investment
securities, FHLB and Federal Reserve stock has decreased from 43.2 percent at
December 31, 2003 to 39.1 percent at December 31, 2004. The decrease is
attributed to a $14 million reduction in investment securities during 2004 and
the increase in total assets resulting from the large increase in loans
outstanding. Strong economic activity in the markets served by the Company,
combined with excellent customer service, made the loan growth possible. The
Company continues to focus on quality loan growth of all types.
24
LIABILITIES
The following table summarizes the liability balances as of December 31, 2004
and 2003, the amount of change, and percentage change during 2004:
December 31,
-----------------------
LIABILITIES ($ IN THOUSANDS) 2004 2003 $ change % change
---------- ---------- ---------- --------
Non-interest bearing deposits $ 460,059 $ 369,052 $ 91,007 25%
Interest-bearing deposits 1,269,649 1,228,573 41,076 3%
Advances from Federal Home Loan Bank 818,933 777,294 41,639 5%
Securities sold under agreements to
repurchase and other borrowed funds 81,215 64,986 16,229 25%
Other liabilities 30,697 26,889 3,808 14%
Subordinated debentures 80,000 35,000 45,000 129%
---------- ---------- ---------- ---
Total liabilities $2,740,553 $2,501,794 $ 238,759 10%
========== ========== ========== ===
Non-interest bearing deposits have increased $91 million, or 25 percent, since
December 31, 2003. This continues to be a primary focus of our banks and the
programs we have initiated this past year continue to gain momentum. Total
deposits have increased $132 million from December 31, 2003. This growth in
deposits, a low cost stable funding source, gives us increased flexibility in
managing our asset mix. Federal Home Loan Bank advances have also increased, $42
million from December 31, 2003, as we continue to take advantage of the
flexibility of that funding source. In addition, repurchase agreements and other
borrowed funds have increased from the prior year as we continue to use these
cost effective sources of funding. On March 24, 2004, subordinated debentures in
the form of trust preferred securities of $45 million, with an interest rate of
5.79 percent, were issued. The proceeds will be used to fund the pending
acquisitions.
December 31,
---------------------------
2004 2003 2002
----- ----- -----
LIABILITIES AND STOCKHOLDER'S EQUITY:
Deposit accounts ............................ 57.4% 58.3% 64.0%
FHLB advances ............................... 27.2% 28.4% 21.2%
Other borrowings and repurchase agreements... 2.7% 2.4% 2.7%
Other liabilities ........................... 3.7% 2.2% 2.8%
Stockholders' equity ........................ 9.0% 8.7% 9.3%
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
With a $32 million increase in stockholders' equity and the $45 million increase
in subordinated debentures included in the other liabilities line above, the
percentage of assets funded by deposits decreased even with the substantial
increase in deposit balances.
December 31,
STOCKHOLDERS' EQUITY ------------------------
($ IN THOUSANDS EXCEPT PER SHARE DATA) 2004 2003 $ change % change
--------- --------- -------- --------
Common equity $ 264,250 $ 231,223 $ 33,027 14%
Accumulated other comprehensive income 5,934 6,616 (682) -10%
--------- --------- --------
Total stockholders' equity $ 270,184 $ 237,839 $ 32,345 14%
========= ========= ========
Stockholders' equity to total assets 8.97% 8.68%
Book value per common share $ 11.01 $ 9.83 $ 1.18 12%
Market price per share at end of quarter $ 34.04 $ 25.98 $ 8.06 31%
STOCKHOLDERS' EQUITY
Total equity and book value per share amounts have increased substantially from
the prior year, primarily the result of earnings retention, and stock options
exercised. Accumulated other comprehensive income, representing net unrealized
gains on securities available for sale of $6 million at December 31, 2004 is
slightly less than the $7 million at year end 2003, with the decline primarily a
function of interest rate changes.
25
RESULTS OF OPERATIONS
Operating results include amounts related to the operation of the three branches
acquired with the Pend Oreille Bank as of July 15, 2003 and the Ione, Washington
branch as of June 4, 2004.
Years ended December 31,
REVENUE SUMMARY ---------------------------------------------
($ IN THOUSANDS) 2004 2003 $ change % change
-------- -------- -------- --------
Net interest income $107,393 $ 92,352 $ 15,041 16%
Fees and other revenue:
Service charges, loan fees, and other fees 24,260 19,756 4,504 23%
Gain on sale of loans 8,015 10,674 (2,659) -25%
Gain on sale of investments,
net of impairment charge - 1,253 (1,253) -100%
Other income 2,290 1,879 411 22%
-------- -------- -------- ----
Total non-interest income 34,565 33,562 1,003 3%
-------- -------- -------- ----
$141,958 $125,914 $ 16,044 13%
======== ======== ======== ====
Tax equivalent net interest margin 4.15% 4.20%
======== ========
NET INTEREST INCOME
Net interest income increased $15.041 million, or 16 percent, over 2003. Total
interest income was $16.455 million, or 13 percent higher than 2003, while total
interest expense was $1.414 million, or 4 percent higher. The investment
portfolio generated approximately 61 percent of the increase in interest income.
Additional interest income from the large increase in loans outstanding was
partially offset by lower rates on the loan portfolio due to refinancing, and
re-pricing of existing loans. The increase in interest expense is attributed to
the increase in the subordinated debentures which increased interest expense by
$2.004 million. Interest expense on deposits declined $3.167 million, or 18
percent, from reductions in rates on maturing fixed term interest bearing
deposits. Interest on Federal Home Loan Bank borrowings and other borrowed funds
increased $2.577 million, or 15 percent, from increased volumes and increasing
interest rates. The net interest margin as a percentage of earning assets, on a
tax equivalent basis, was 4.15 percent which was a decrease from 4.20 percent
for 2003.
NON-INTEREST INCOME
Fee income increased $4.504 million, or 23 percent, over last year, driven
primarily by an increased number of loan and deposit accounts and the fee income
associated with this growth in accounts. Gain on sale of loans decreased $2.659
million, or 25 percent, from last year, because of greatly reduced refinance
activity. Loan origination activity for housing, especially new construction,
remains quite strong in our markets. In 2003 gains on sale of investments, net
of impairment charge, of $1.253 million were recorded and zero gains were
realized in 2004.
Years ended December 31,
NON-INTEREST EXPENSE SUMMARY --------------------------------------
($ IN THOUSANDS) 2004 2003 $ change % change
------- ------- -------- --------
Compensation and employee
benefits and related expense $39,955 $36,173 $ 3,782 10%
Occupancy and equipment expense 10,797 9,931 866 9%
Outsourced data processing 1,551 1,650 (99) -6%
Core deposit intangibles amortization 1,074 1,243 (169) -14%
Other expenses 18,756 16,947 1,809 11%
------- ------- ------- ---
Total non-interest expense $72,133 $65,944 $ 6,189 9%
======= ======= ======= ===
26
NON-INTEREST EXPENSE
Non-interest expense increased by $6.189 million, or 9 percent, from 2003
including expenses from the acquisitions, two additional branches in Boise,
Idaho, and a new branch in downtown Bozeman, Montana. Compensation and benefit
expense increased $3.782 million, or 10 percent, with the additional bank
branches, normal compensation increases for job performance and increased cost
for benefits tied to Company performance, accounting for the majority of the
increase. Occupancy and equipment expense increased $866 thousand, or 9 percent,
reflecting the cost of the additional locations and facility upgrades. Other
expenses increased $1.809 million, or 11 percent, primarily from start up
expenses on implementing the High Performance Checking program at the four banks
not previously on the program, additional advertising expense, $700 thousand
increase in audit and consulting expenses, and costs associated with new branch
offices and the acquisitions. The efficiency ratio (non-interest expense/net
interest income + non-interest income) was 51 percent, improving slightly from
the 53 percent in 2003, excluding the gain on sale of securities.
December 31, December 31,
CREDIT QUALITY INFORMATION ------------ ------------
($ IN THOUSANDS) 2004 2003
------------ ------------
Allowance for loan losses $ 26,492 $ 23,990
Non-performing assets 9,608 13,068
Allowance as a percentage of non performing assets 276% 184%
Non-performing assets as a percentage of total assets 0.32% 0.48%
Allowance as a percentage of total loans 1.53% 1.65%
Net charge-offs as a percentage of loans 0.098% 0.118%
PROVISION FOR LOAN LOSSES - Non-performing assets as a percentage of total
assets at December 31, 2004 were at .32 percent, a decrease from .48 percent at
December 31, 2003. This compares favorably to the Federal Reserve Bank Peer
Group average of .49 percent at September 30, 2004, the most recent information
available. The allowance for loan losses was 276 percent of non-performing
assets at December 31, 2004, compared to 184 percent a year ago. The allowance
has increased $2.502 million, or 10 percent, from a year ago to $26.492 million,
which is 1.53 percent of December 31, 2004 total loans outstanding, down
slightly from the 1.65 percent a year ago. The fourth quarter provision for loan
losses expense was $1.200 million, an increase of $504 thousand from the same
quarter in 2003.
EFFECT OF INFLATION AND CHANGING PRICES
Generally accepted accounting principles require the measurement of financial
position and operating results in terms of historical dollars, without
consideration for change in relative purchasing power over time due to
inflation. Virtually all assets of a financial institution are monetary in
nature; therefore, interest rates generally have a more significant impact on a
company's performance than does the effect of inflation.
COMMITMENTS
In the normal course of business, there are various outstanding commitments to
extend credit, such as letter of credit and un-advanced loan commitments, which
are not reflected in the accompanying consolidated financial statements.
Management does not anticipate any material losses as a result of these
transactions. The Company has outstanding debt maturities, the largest of which
are the advances from the Federal Home Loan Bank. See footnote 8 for the
maturity schedule of the advances. The following table represents our
contractual obligations as of December 31, 2004:
Payments Due by Period
------------------------------------------------------------------------------------------------
Indeterminate
(dollars in thousands) Total Maturity (1) 2005 2006 2007 2008 2009 Thereafter
- --------------------------- ---------- ------------- ------- ------- ------- ------ ----- ----------
Deposits................... $1,729,708 1,322,681 287,641 59,368 43,768 7,298 8,875 77
Advances from the FHLB..... 818,933 - 480,222 110,419 124,919 21,302 48 82,023
Repurchase agreements...... 76,158 - 76,158 - - - - -
Subordinated debentures.... 80,000 - - - - - - 80,000
Capital lease obligations.. 1,682 - 81 83 84 87 89 1,258
Operating lease
obligations.............. 7,487 - 1,171 1,050 861 770 685 2,950
---------- --------- ------- ------- ------- ------ ----- -------
$2,713,968 1,322,681 845,273 170,920 169,632 29,457 9,697 166,308
========== ========= ======= ======= ======= ====== ===== =======
(1) Represents interest and non-interest bearing checking, money market, and
savings accounts
27
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
The objective of interest rate risk management is to contain the risks
associated with interest rate fluctuations. The process involves identification
and management of the sensitivity of net interest income to changing interest
rates. Managing interest rate risk is not an exact science. The interval between
repricing of interest rates of assets and liabilities changes from day to day as
the assets and liabilities change. For some assets and liabilities contractual
maturity and the actual cash flows experienced are not the same. A good example
is residential mortgages that have long term contractual maturities but may be
repaid well in advance of the maturity when current prevailing interest rates
become lower than the contractual rate. Interest-bearing deposits without a
stated maturity could be withdrawn after seven days, however, the Bank's
experience indicates that these funding pools have a much longer duration and
are not as sensitive to interest rate changes as other financial instruments.
Prime based loans generally have rate changes when the Federal Reserve Bank
changes short term interest rates, however, depending on the magnitude of the
rate change and the relationship of the current rates to rate floors and rate
ceilings that may be in place on the loans, the loan rate may not change.
GAP ANALYSIS
The following table gives a description of our GAP position for various time
periods. As of December 31, 2004, we had a negative GAP position at six months
and a positive GAP position at twelve months. The cumulative GAP as a percentage
of total assets for six months is a negative 5.55% which compares to a negative
4.00% at December 31, 2003 and a negative 2.77% at December 31, 2002. The table
also shows the GAP earnings sensitivity, and earnings sensitivity ratio, along
with a brief description as to how they are calculated. 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.
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................. $ 12,722 285 - - 13,007
Investment securities..................... 3,786 2,233 83,524 231,691 321,234
Mortgage-backed securities................ 153,565 123,199 402,362 35,463 714,589
FHLB stock and FRB stock.................. 44,004 - - 5,799 49,803
Floating rate loans....................... 661,054 87,222 404,500 20,005 1,172,781
Fixed rate loans.......................... 126,667 85,207 277,687 72,268 561,829
----------- ---------- --------- ------- ---------
TOTAL INTEREST BEARING ASSETS.................. $ 1,001,798 298,146 1,168,073 365,226 2,833,243
=========== ========== ========= ======= =========
LIABILITIES:
Interest-bearing deposits................. 646,057 87,230 112,518 423,844 1,269,649
FHLB advances............................. 431,695 41,040 262,476 83,722 818,933
Repurchase agreements and other
borrowed funds.......................... 81,215 - - - 81,215
----------- ---------- --------- ------- ---------
TOTAL INTEREST BEARING LIABILITIES............. $ 1,158,967 128,270 374,994 507,566 2,169,797
=========== ========== ========= ======= =========
Repricing gap.................................. $ (157,169) 169,876 793,079 (142,340) 663,446
Cumulative repricing gap....................... $ (157,169) 12,707 805,786 663,446
Cumulative gap as a % of total assets.......... -5.55% 0.45% 28.44% 23.42%
Gap Earnings Sensitivity (1)................... $ 78
Gap Earnings Sensitivity Ratio (2)............. 0.17%
(1) Gap Earnings Sensitivity is the estimated effect on income, after taxes of
39%, of a 1% increase or decrease in interest rates (1%
28
of ($12,707 - $4,956))
(2) Gap Earnings Sensitivity Ratio is Gap Earnings Sensitivity divided by the
estimated yearly earnings of $44,616. 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 more than 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.
NET INTEREST INCOME SIMULATION
The traditional one-dimensional view of GAP is not sufficient to show a bank's
ability to withstand interest rate changes. Because of limitations in GAP
modeling the Asset/Liability Management Committee (ALCO) of the Company uses a
detailed and dynamic simulation model to quantify the estimated exposure of net
interest income (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 or 100 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 as a benchmark. Other non-parallel rate movement scenarios are also
modeled to determine the potential impact on net interest income. The following
reflects the Company's NII sensitivity analysis as of December 31, 2004 and 2003
as compared to the 10% Board approved policy limit.
2004 2003
---- ----
+200 bp
Estimated sensitivity.......................... -3.47% -4.57%
Estimated decrease in net interest income $(3,727) (4,220)
-100 bp
Estimated sensitivity.......................... 0.38% 1.28%
Estimated increase in net interest income $ 408 1,182
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.
LIQUIDITY RISK
Liquidity risk is the possibility that the Company will not be able to fund
present and future obligations. 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. Core
deposits, FHLB credit lines, available-for-sale investment securities, and net
income are the key elements in meeting these objectives. All seven subsidiaries
are members of the FHLB. 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. As of year ended December 31, 2004,
the Company had $1,139 million of available FHLB line of which $819 million was
utilized. Accordingly, management of the Company has a wide range of versatility
in managing the liquidity and asset/liability mix for each individual
institution as well as the Company as a whole. During 2004, all seven financial
institutions maintained liquidity levels in excess of regulatory requirements
and deemed sufficient to meet operating cash needs.
CAPITAL RESOURCES AND ADEQUACY
Maintaining capital strength has been a long term objective. Ample capital is
necessary to sustain growth, provide protection against
29
unanticipated declines in asset values, and to safeguard the funds of
depositors. Capital also is a source of funds for loan demand and enables the
Company to effectively manage its assets and liabilities. Shareholders' equity
increased $32.345 million during 2004, or 14 percent the net result of earnings
of $44.616 million, less cash dividend payments and a decline of $682 thousand
in the net unrealized gains on available-for-sale investment securities. For
additional information see footnote 11 in the Consolidated Financial Statements.
Dividend payments were increased by $.08 per share, or 13 percent in 2004. The
payment of dividends is subject to government regulation, in that regulatory
authorities may prohibit banks and bank holding companies from paying dividends
which would constitute an unsafe or unsound banking practice.
CRITICAL ACCOUNTING POLICIES
Companies may apply certain critical accounting policies requiring management to
make subjective or complex judgments, often as a result of the need to estimate
the effect of matters that are inherently uncertain. The Company considers its
only material critical accounting policy to be the allowance for loan losses.
The allowance for loan losses is established through a provision for loan losses
charged against earnings. The balance of allowance for loan losses is maintained
at the amount management believes will be adequate to absorb known and inherent
losses in the loan portfolio. The appropriate balance of allowance for loan
losses is determined by applying estimated loss factors to the credit exposure
from outstanding loans. Estimated loss factors are based on subjective
measurements including management's assessment of the internal risk
classifications, changes in the nature of the loan portfolio, industry
concentrations and the impact of current local, regional and national economic
factors on the quality of the loan portfolio. Changes in these estimates and
assumptions are reasonably possible and may have a material impact on the
Company's consolidated financial statements, results of operations or liquidity.
For additional information regarding the allowance for loan losses, its relation
to the provision for loans losses and risk related to asset quality, see Note 4
to the Consolidated Financial Statements in "Item 8 - Financial Statements and
Supplementary Data".
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2003, the AICPA issued Statement of Position 03-3, Accounting for
Certain Loans or Debt Securities Acquired in a Transfer (SOP 03-3) which
addresses the accounting for certain acquired loans or debt securities that have
experienced a deterioration of credit quality between the loan origination date
and the date the loan is acquired by an investor, and for which it is probable,
at acquisition, that the investor will be unable to collect all contractually
required payments on the loan. When loans within the scope of this SOP are
acquired by the completion of a transfer, it is not appropriate at acquisition
to establish an allowance for loan losses related to those acquired loans. The
purchase price represents the fair value of the loans on the date of acquisition
and an allowance for loan losses should be recorded by the investor only to the
extent there is a change in the estimate of credit losses subsequent to
acquisition of the loan (and only to the extent of losses incurred subsequent to
acquisition). Likewise, loans within the scope of this SOP that are acquired in
a purchase business combination should be recognized initially at the present
value of amounts expected to be received and no allowance for loan losses should
be carried over related to these loans at acquisition. SOP 03-3 requires initial
application for loans acquired in fiscal years beginning after December 15,
2004.
In December 2004, the Financial Accounting Standards Board issued a revised
version of SFAS No. 123 Share-Based Payment, mandating that companies measure
the cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award (with limited
exceptions). The intrinsic value method of accounting for such awards, as
previously elected by the company and provided for in APB Opinion No. 25,
Accounting for Stock Issued to Employees will no longer acceptable under GAAP
for public companies effective for accounting periods ending after June 15,
2005. If no comparable market values are available, the grant-date fair value of
employee share options and similar instruments is to be estimated using
option-pricing models adjusted for the unique characteristics of those
instruments.
Under the previous provisions of SFAS No. 123, Accounting for Stock Based
Compensation companies using the intrinsic value method were required to
disclose in a footnote to their financial statements the effect on net income of
using the intrinsic value rather than the grant-date fair value method. The
company has continued to use the intrinsic value method, with appropriate
disclosures, in its financial statements through December 31, 2004 (See Stock
Based Compensation under Note 1 to the company's consolidated financial
statements). The company expects to adopt SFAS No. 123 (Revised) effective with
its reporting for the third quarter of 2005.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003 COMPARED TO DECEMBER 31, 2002
RESULTS OF OPERATIONS
Operating results include amounts related to the operation of the three branches
acquired in the Pend Oreille acquisition as of July 15, 2003.
REVENUE SUMMARY
($ IN THOUSANDS) Years ended December 31,
-----------------------------------------
2003 2002 $ change % change
--------- --------- --------- --------
Net interest income $ 92,352 $ 86,467 $ 5,885 7%
Fees and other revenue:
Service charges, loan fees, and other fees 19,756 17,954 1,802 10%
Gain on sale of loans 10,674 5,709 4,965 87%
Gain on sale of investments,
net of impairment charge 1,253 238 1,015 426%
Other income 1,879 2,016 (137) -7%
-------- -------- -------- ---
Total non-interest income 33,562 25,917 7,645 29%
-------- -------- -------- ---
Total revenue $125,914 $112,384 $ 13,530 12%
======== ======== ======== ===
Tax equivalent net interest margin 4.20% 4.51%
======== ========
Net income of $38.008 million was a $5.606 million increase over the $32.402
million for the year ended December 31, 2002, an increase of 17 percent. The
following narrative provides additional information on those results.
INTEREST INCOME -Historical low interest rates during most of the year resulted
in a $3 million reduction in interest income even though the earning assets of
the Company increased significantly. With the sustained low rates throughout the
year many loans of all types were refinanced with the rate on the new loans
substantially lower than the prepaid loans. New loans also were at much lower
rates than the average rates earned on the existing loans. Mortgage related
investment securities experienced much of the same results as the loan
portfolio. Investments were prepaid which negatively impacted interest income in
two ways: 1) securities that were purchased at a premium that experienced
prepayments had an acceleration of the amortization of the premium which reduced
the income; 2) reinvestment of the proceeds was at a lower rate than previously
enjoyed on the amounts invested. The weighted average yield on earning assets
(tax free income adjusted for tax effects) decreased from 6.91 percent for the
year 2002 to 5.86 percent in 2003. Increased balances in earning assets offset
much of the rate impact.
INTEREST EXPENSE - Interest expense decreased even more with total interest
expense $9 million, or 19 percent, lower in 2003. Most of the expense reduction
came from deposits as rates continued to decline during the year. In addition
higher rate certificates of deposits matured which further reduced interest
expense. These rate reductions coupled with increasing balances in non-interest
bearing deposits resulted in the deposit expense reduction. The balance in FHLB
advances increased $294 million during the year, however, with a combination of
maturing higher cost advances and lower rates on new advances the interest
expense on total advances decreased by $99,000 from the prior year. The weighted
average rate on advances decreased from 4.15 percent for 2002 to 2.80 for 2003.
The weighted rate on total advances outstanding at December 31, 2003 was 2.19
percent.
The prolonged low interest rates have resulted in a reduction in the net
interest margin (ratio of net interest income divided by average earning assets)
from 4.51 percent in 2002 to 4.20 percent in 2003 with the third quarter of 2003
being the lowest level at 4.12 percent. The ratio increased to 4.17 percent in
the fourth quarter of 2003 primarily due to increased earnings on investments.
With the low interest rates many real estate loans have either been refinanced
which lowers the future earnings rate on the loans that are retained, or the
loan is paid off which also lowers future earnings. To remain competitive it has
become necessary to reduce rates to market levels on all loan types which
reduces interest income on those loans. Investment income also is lower on
securities purchased during this low rate period than on securities previously
held in the portfolio. Prepayment of mortgage-backed securities also has
occurred as underlying mortgage loans have been prepaid. This prepayment not
only reduced the level of assets with higher rates but also resulted in much
faster amortization of premiums associated with the securities further reducing
interest income. To offset the reduction in interest income, rates on interest
bearing deposits have been reduced and matured borrowings have been renewed at
lower rates. The
31
increased level of non-interest bearing deposits has reduced the need for
additional borrowings which also has resulted in lower interest expense.
NON-INTEREST INCOME - Total non-interest income increased $8 million, or 29
percent over the prior year. $2 million of the increase was from increased
volumes in loan and deposit activity and the resulting fees. $1 million of the
increase was contributed by net gains on sale of investment securities. The
largest portion of the increase was from a $5 million increase in the gain on
sale of loans, the majority of which was from residential real estate loans. The
low interest rates during 2003 resulted in a very large increase in the number
of loans being refinanced to obtain low long term financing, and an increase in
new home loans because of affordable monthly payments.
Increasing rates affect the level of fee income created from the origination and
sale of mortgage loans as the refinance of loans is substantially reduced or
eliminated. Purchases of homes can also be affected because of reduced
affordability due to higher monthly payments with higher interest rates. The
subsidiary banks are located in areas of robust population growth which somewhat
mitigates the risk of significant reduction in home purchases. Reduction in
refinance activity also reduces the variable expenses such as commissions for
loan origination and could result in additional reductions in expense.
NON-INTEREST EXPENSE SUMMARY
($ IN THOUSANDS) Years ended December 31,
---------------------------------------
2003 2002 $ change % change
-------- -------- -------- --------
Compensation and employee benefits $36,173 $30,448 $ 5,725 19%
Occupancy and equipment expense 9,931 9,591 340 4%
Outsourced data processing 1,650 2,048 (398) -19%
Core deposit intangibles amortization 1,243 1,439 (196) -14%
Other expenses 16,947 14,287 2,660 19%
------- ------- ------- --
Total non-interest expense $65,944 $57,813 $ 8,131 14%
======= ======= ======= ==
NON-INTEREST EXPENSE - Non-interest expense also increased $8 million, a 14
percent increase, with $6 million of the increase in the compensation and
benefits classification. The Pend Oreille acquisition, additional branches in
the Boise and Bozeman markets, commissions paid to mortgage loan originators,
normal increases for job performance, and some benefits that are tied to the
Company stock price performance account for the majority of the increase.
Advertising and marketing, start up expenses for the High Performance Checking
program, and other volume related expenses made up most of the remainder of the
increased expense.
The efficiency ratio, which measures the cost per dollar of revenue generated,
increased from 51 percent in 2002 to 52 percent in 2003. Although this increased
from the prior year it is still significantly less than the 61 percent average
of similar sized banking companies.
CREDIT QUALITY INFORMATION December 31, December 31,
------------ ------------
($ IN THOUSANDS) 2003 2002
------------ ------------
Allowance for loan losses $ 23,990 $ 20,944
Non-performing assets 13,068 11,582
Allowance as a percentage of non performing assets 184% 181%
Non-performing assets as a percentage of total assets 0.48% 0.51%
Allowance as a percentage of total loans 1.65% 1.58%
Net charge-offs as a percentage of loans 0.118% 0.261%
PROVISION FOR LOAN LOSSES - The provision for loan losses was $3.809 million in
2003 which was a reduction of $1.936 million from 2002. Charged off loans, net
of recoveries of loans previously charged off, were $1.733 million lower in 2003
than the prior year. The balance in the allowance for loan losses increased
$3.046 million from the prior year end. At December 31, 2003 non-performing
assets (non-accrual loans, accruing loans 90 days or more overdue, real estate
acquired by foreclosure, and repossessed personal property) totaled $13.068
million, or .48 percent of total assets; compared to $11.582 million, or .51
percent at December 31,
32
2002. The peer group average according to the Federal Reserve Bank Performance
Report as of September 30, 2003, the most recent information available, for
banking companies similar to our size was .65 percent of total assets. The
allowance for loan losses was 184 percent of non-performing assets, and 1.65
percent of total loans as of December 31, 2003 which compares to 181 percent and
1.58 percent, respectively, at December 31, 2002.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information regarding "Quantitative and Qualitative Disclosures about Market
Risk" is set fourth under "Item 7 - Management's Discussion and Analysis".
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Glacier Bancorp, Inc.:
We have audited management's assessment, included in the accompanying Report of
Management, that Glacier Bancorp, Inc. and subsidiaries (the Company) maintained
effective internal control over financial reporting as of December 31, 2004
based on criteria established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Glacier Bancorp, Inc. and subsidiaries' management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Glacier Bancorp, Inc. and
subsidiaries maintained effective internal control
34
over financial reporting as of December 31, 2004 is fairly stated, in all
material respects, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Also, in our opinion, Glacier Bancorp, Inc. and
subsidiaries maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2004 based on criteria established
in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated statements of
financial condition of Glacier Bancorp, Inc. and subsidiaries as of December 31,
2004 and 2003, 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, 2004, and our report dated
March 15, 2005 expressed an unqualified opinion on those consolidated financial
statements.
/s/ KPMG
March 15, 2005
35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Glacier Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial condition
of Glacier Bancorp, Inc. and subsidiaries as of December 31, 2004 and 2003 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, 2004. 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 conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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.
In our opinion, 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, 2004 and 2003, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2004, in conformity with U.S. generally accepted accounting
principles.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Glacier
Bancorp, Inc.'s internal control over financial reporting as of December 31,
2004, based on criteria established in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organization of the Treadway Commission
(COSO), and our report dated March 15, 2005 expressed an unqualified opinion on
management's assessment of, and the effective operation of, internal control
over financial reporting.
/s/ KPMG
Billings, Montana
March 15, 2005
36
GLACIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
-----------------------
(dollars in thousands, except per share data) 2004 2003
- ----------------------------------------------------------------------------- ---------- ----------
ASSETS:
Cash on hand and in banks .............................................. $ 79,300 77,093
Interest bearing cash deposits ......................................... 13,007 9,047
---------- ----------
Cash and cash equivalents ......................................... 92,307 86,140
Investment securities, available-for-sale .............................. 1,085,626 1,096,954
Loans receivable, net of allowance for loan losses of $26,492
and $23,990 at December 31, 2004, and 2003, respectively ............ 1,687,329 1,413,392
Loans held for sale .................................................... 14,476 16,973
Premises and equipment, net ............................................ 55,732 53,251
Real estate and other assets owned, net ................................ 2,016 587
Accrued interest receivable ............................................ 15,637 14,941
Core deposit intangible, net of accumulated amortization of $5,331
and $4,257 at December 31, 2004, and 2003, respectively ............. 4,939 5,865
Goodwill ............................................................... 37,376 36,951
Other assets ........................................................... 15,299 14,579
---------- ----------
$3,010,737 2,739,633
========== ==========
LIABILITIES:
Non-interest bearing deposits .......................................... $ 460,059 369,052
Interest bearing deposits .............................................. 1,269,649 1,228,573
Advances from Federal Home Loan Bank of Seattle ........................ 818,933 777,294
Securities sold under agreements to repurchase ......................... 76,158 56,968
Other borrowed funds ................................................... 5,057 8,018
Accrued interest payable ............................................... 4,864 4,353
Deferred tax liability ................................................. 8,392 7,369
Subordinated debentures ................................................ 80,000 35,000
Other liabilities ...................................................... 17,441 15,167
---------- ----------
Total liabilities ...................................................... 2,740,553 2,501,794
STOCKHOLDERS' EQUITY:
Preferred shares, 1,000,000 shares authorized. None outstanding
at December 31, 2004 and 2003 ....................................... -- --
Common stock, $.01 par value per share. 62,500,000 shares authorized,
24,549,410 and 24,203,338 issued and outstanding at December 31,
2004 and 2003,
respectively ........................................................... 245 242
Paid-in capital ........................................................ 227,614 222,588
Retained earnings - substantially restricted ........................... 36,391 8,393
Accumulated other comprehensive income ................................. 5,934 6,616
---------- ----------
Total stockholders' equity ........................................ 270,184 237,839
---------- ----------
$3,010,737 2,739,633
========== ==========
See accompanying notes to consolidated financial statements.
37
GLACIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
----------------------------
(dollars in thousands, except per share data) 2004 2003 2002
- ---------------------------------------------------------- -------- ------- -------
INTEREST INCOME:
Real estate loans ................................... $ 22,942 23,883 29,290
Commercial loans .................................... 57,312 50,203 47,013
Consumer and other loans ............................ 20,331 20,013 22,559
Investment securities and other ..................... 46,700 36,731 35,127
-------- ------- -------
Total Interest Income ............................. 147,285 130,830 133,989
-------- ------- -------
INTEREST EXPENSE:
Deposits ............................................ 14,054 17,221 26,268
Federal Home Loan Bank of Seattle advances .......... 18,540 16,860 16,959
Securities sold under agreements to repurchase ...... 873 673 591
Subordinated debentures ............................. 5,619 3,615 3,616
Other borrowed funds ................................ 806 109 88
-------- ------- -------
Total Interest Expense ............................ 39,892 38,478 47,522
-------- ------- -------
NET INTEREST INCOME ............................... 107,393 92,352 86,467
Provision for loan losses ........................... 4,195 3,809 5,745
-------- ------- -------
Net interest income after provision
for loan losses .................................. 103,198 88,543 80,722
NON-INTEREST INCOME:
Service charges and other fees ...................... 19,550 15,458 14,011
Miscellaneous loan fees and charges ................. 4,710 4,298 3,943
Gain on sale of loans ............................... 8,015 10,674 5,709
Gain on sale of investments, net of impairment charge -- 1,253 238
Other income ........................................ 2,290 1,879 2,016
-------- ------- -------
Total Non-Interest Income ......................... 34,565 33,562 25,917
-------- ------- -------
NON-INTEREST EXPENSE:
Compensation, employee benefits and related expense.. 39,955 36,173 30,448
Occupancy and equipment expense ..................... 10,797 9,931 9,591
Outsourced data processing expense .................. 1,551 1,650 2,048
Core deposit intangibles amortization ............... 1,074 1,243 1,439
Other expense ....................................... 18,756 16,947 14,287
-------- ------- -------
Total Non-Interest Expense ........................ 72,133 65,944 57,813
-------- ------- -------
EARNINGS BEFORE INCOME TAXES ............................. 65,630 56,161 48,826
Federal and state income tax expense .................. 21,014 18,153 16,424
-------- ------- -------
NET EARNINGS ............................................. $ 44,616 38,008 32,402
======== ======= =======
BASIC EARNINGS PER SHARE ............................ $ 1.82 1.58 1.37
DILUTED EARNINGS PER SHARE .......................... $ 1.79 1.55 1.35
See accompanying notes to consolidated financial statements.
38
GLACIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
Retained
earnings
(accumulated Accumulated Total
deficit) other comp- stock-
Common Stock Paid-in substantially rehensive holders'
(Dollars in thousands, except per share data) Shares Amount capital restricted income equity
- --------------------------------------------------- ------------ ------- --------- ------------- ----------- ---------
Balance at December 31, 2001 23,202,330 $ 232 210,892 (35,897) 1,756 176,983
Comprehensive income: -- -- -- 32,402 -- 32,402
Net earnings -- -- -- -- 8,355 8,355
-------
Unrealized gain on securities, net of
reclassification adjustment -- -- -- -- -- 40,757
Total comprehensive income -------
Cash dividends declared ($.49 per share) -- -- -- (11,532) -- (11,532)
Stock options exercised 565,670 6 4,955 -- -- 4,961
Tax benefit from stock related compensation -- -- 1,080 -- -- 1,080
---------- ----- ------- ------- ------ -------
Balance at December 31, 2002 23,768,000 $ 238 216,927 (15,027) 10,111 212,249
Comprehensive income:
Net earnings -- -- -- 38,008 -- 38,008
Unrealized loss on securities, net of
reclassification adjustment -- -- -- -- (3,495) (3,495)
-------
Total comprehensive income -- -- -- -- -- 34,513
-------
Cash dividends declared ($.60 per share) -- -- -- (14,573) -- (14,573)
Stock options exercised 435,338 4 4,670 -- -- 4,674
Acquisition of fractional shares -- -- -- (15) -- (15)
Tax benefit from stock related compensation -- -- 991 -- -- 991
Balance at December 31, 2003 24,203,338 $ 242 222,588 8,393 6,616 237,839
---------- ----- ------- ------- ------ -------
Comprehensive income:
Net earnings -- -- -- 44,616 -- 44,616
Unrealized loss on securities, net
of reclassification adjustment -- -- -- -- (682) (682)
-------
Total comprehensive income -- -- -- -- -- 43,934
-------
Cash dividends declared ($.68 per share) -- -- -- (16,618) -- (16,618)
Stock options exercised 417,322 4 5,435 -- -- 5,439
Repurchase and retirement of stock (71,250) (1) (1,804) -- -- (1,805)
Acquisition of fractional shares -- -- (9) -- -- (9)
Tax benefit from stock related compensation -- -- 1,404 -- -- 1,404
---------- ----- ------- ------- ------ -------
Balance at December 31, 2004 24,549,410 $ 245 227,614 36,391 5,934 270,184
========== ===== ======= ======= ====== =======
Year ended December 31,
-----------------------------
Disclosure of reclassification amount: 2004 2003 2002
-------- -------- ---------
Unrealized and realized holding (loss) gain arising during the year ... $(1,124) (2,225) 13,980
Tax benefit (expense) ................................................. 442 866 (5,480)
------- ------- --------
Net after tax ........................................................ (682) (1,359) 8,500
------- ------- --------
Reclassification adjustment for net gains included in net income ....... -- (3,502) (238)
Tax expense ........................................................... -- 1,366 93
------- ------- --------
Net after tax ........................................................ -- (2,136) (145)
------- ------- --------
Net change in unrealized (loss) gain on available-for-sale
securities ................................................................ $ (682) (3,495) 8,355
======= ======= ========
See accompanying notes to consolidated financial statements.
39
GLACIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
----------------------------------
(dollars in thousands) 2004 2003 2002
- --------------------------------------------------------------------------- ---------- ---------- ----------
OPERATING ACTIVITIES :
Net earnings .......................................................... $ 44,616 38,008 32,402
Adjustments to reconcile net earnings to net cash provided by (used in)
operating activities:
Mortgage loans held for sale originated or acquired ................. (292,017) (521,323) (409,481)
Proceeds from sales of mortgage loans held for sale ................. 302,529 567,010 390,353
Provision for loan losses ........................................... 4,195 3,809 5,745
Depreciation of premises and equipment .............................. 4,567 4,283 4,178
Amortization of core deposit intangible ............................. 1,074 1,243 1,439
Gain on sale of investments, net of impairment charge ............... -- (1,253) (238)
Gain on sale of loans ............................................... (8,015) (10,674) (5,709)
Amortization of investment securities premiums and discounts, net ... 11,263 14,360 5,640
Federal Home Loan Bank of Seattle stock dividends ................... (1,218) (2,179) (2,170)
Deferred tax expense ................................................ 284 722 1,466
Tax benefit from stock related compensation ......................... 1,404 991 1,080
Net increase in accrued interest receivable ......................... (696) (1,270) (1,012)
Net increase (decrease) in accrued interest payable ................. 495 (1,795) (3,089)
Net increase (decrease) in current income taxes ..................... 1,201 1,645 (915)
Net (increase) decrease in other assets ............................. (2,145) 1,808 (1,041)
Net increase (decrease) in other liabilities ........................ 2,253 (99) (1,205)
--------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ........................ 69,790 95,286 17,443
--------- -------- --------
INVESTING ACTIVITIES:
Proceeds from sales, maturities and prepayments of investment
securities available-for-sale ..................................... 317,273 389,400 206,554
Purchases of investment securities available-for-sale ............... (315,172) (715,454) (429,596)
Principal collected on installment and commercial loans ............. 677,004 566,245 576,109
Installment and commercial loans originated or acquired ............. (875,539) (705,249) (617,200)
Principal collections on mortgage loans ............................. 296,482 303,251 260,027
Mortgage loans originated or acquired ............................... (376,039) (283,278) (178,171)
Net purchase of FHLB and FRB stock .................................. (1,942) (973) (3,687)
Acquisition of Ione branch and Pend Oreille Bank .................... 14,524 (243) --
Net addition of premises and equipment .............................. (7,032) (7,579) (828)
--------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES ............................ (270,441) (453,880) (186,792)
--------- -------- --------
FINANCING ACTIVITIES:
Net increase in deposits ............................................ 116,943 77,943 13,859
Net increase in FHLB advances ....................................... 41,639 293,634 116,364
Net increase in securities sold under repurchase agreements ......... 19,190 10,762 13,621
Net (decrease) increase in other borrowed funds ..................... (2,961) (7,069) 14,027
Proceeds from issuance of subordinated debentures ................... 45,000 -- --
Cash dividends paid ................................................. (16,618) (14,572) (11,532)
Proceeds from exercise of stock options and other stock issued ...... 5,439 4,674 4,961
Repurchase and retirement of stock .................................. (1,805) -- --
Cash paid for stock dividends ....................................... (9) (15) --
--------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES ........................ 206,818 365,357 151,300
--------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................ 6,167 6,763 (18,049)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ...................... 86,140 79,377 97,426
--------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR ............................ $ 92,307 86,140 79,377
========= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest .............................. $ 39,382 40,219 62,762
Cash paid during the year for income taxes .......................... $ 18,424 14,721 14,793
See accompanying notes to consolidated financial statements.
40
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) GENERAL
Glacier Bancorp, Inc. (the "Company"), is a Montana corporation incorporated in
2004 as a successor corporation to the Delaware corporation incorporated in
1990. The Company is a multi-bank holding company that provides a full range of
banking services to individual and corporate customers in Montana, Idaho, Utah
and Washington 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 accounting principles generally accepted in the United
States of America. 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 judgments 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 nine wholly owned operating subsidiaries, Glacier Bank ("Glacier"), First
Security Bank of Missoula ("First Security"), Western Security Bank ("Western"),
Mountain West Bank in Idaho, ("Mountain West"), Big Sky Western Bank, ("Big
Sky"), Valley Bank of Helena ("Valley"), Glacier Bank of Whitefish
("Whitefish"), Glacier Capital Trust I ("Glacier Trust I"), and Glacier Capital
Trust II ("Glacier Trust II"). All significant inter-company transactions have
been eliminated in consolidation.
On June 4, 2004, AmericanWest Bancorp.'s branch office in Ione, Washington was
acquired and became a branch of Mountain West Bank. Pend Oreille Bancorp was
acquired July 15, 2003 and its branches became additional branches of Mountain
West. The acquisitions were accounted for using the purchase method of
accounting. Accordingly, the financial information presented includes the
operations since the date of the acquisitions. See footnote 20 for additional
information related to these transactions.
(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 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. Currently, the Company only holds available-for-sale securities.
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.
The Company holds stock in the Federal Home Loan Bank of Seattle (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.
41
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES . . . CONTINUED
(e) LOANS RECEIVABLE
Loans that are intended to be held to maturity are reported at their unpaid
principal balance less charge-offs, 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 effective 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
judgment 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 interests 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.
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.
(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. The estimated useful life for office building is 15-40
years and the estimated useful life for furniture, fixtures, and equipment is
3-10 years.
(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) GOODWILL
On an annual basis, as required by Financial Accounting Standards Board (FASB)
Statement 142, Goodwill and Other Intangible Assets, the Company tests goodwill
for impairment at the subsidiary level during the third quarter. In addition,
goodwill is tested for impairment on an interim basis if an event or
circumstance indicates that it is more likely than not that an impairment loss
has occurred.
42
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ... CONTINUED
(k) CORE DEPOSIT INTANGIBLES
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. The useful life of the core deposit
intangible is reevaluated on an annual basis, with any changes in estimated
useful life being accounted for prospectively over the revised remaining life.
(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.
(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.
The per share weighted-average fair value of stock options granted during 2004,
2003 and 2002 was $1.59, $2.12, and $3.26, respectively, on the date of grant
using the Black Scholes option-pricing model with the following assumptions:
2004 - expected dividend yield of 2.44%, risk-free interest rate of 2.82%,
volatility ratio of 19%, and expected life of 4.8 years: 2003 - expected
dividend yield of 3.01%, risk-free interest rate of 2.78%, volatility ratio of
21%, and expected life of 4.8 years: 2002 - expected dividend yield of 3.02%,
risk-free interest rate of 2.73%, volatility ratio of 23%, and expected life of
4.8 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 123,
Accounting for Stock-Based Compensation, the Company's net income would have
been reduced to the pro forma amounts indicated below:
Years ended December 31,
-----------------------------------
2004 2003 2002
---------- --------- ---------
Net earnings (in thousands): As reported $ 44,616 38,008 32,402
Compensation cost (685) (752) (577)
---------- --------- ---------
Pro forma 43,931 37,256 31,825
========== ========= =========
Basic earnings per share: As reported 1.82 1.58 1.37
Compensation cost (0.02) (0.03) (0.02)
---------- --------- ---------
Pro forma 1.80 1.55 1.35
========== ========= =========
Diluted earnings per share: As reported 1.79 1.55 1.35
Compensation cost (0.03) (0.03) (0.02)
---------- --------- ---------
Pro forma 1.76 1.52 1.33
========== ========= =========
In December 2004, the Financial Accounting Standards Board issued a revised
version of SFAS No. 123 Share-Based Payment (SFAS 123R), which replaces SFAS 123
and supersedes APB 25. The Company is required to apply SFAS 123R as of the
first interim or annual reporting period that begins after June 15, 2005. SFAS
123R requires the recognition of compensation cost related to share-based
payment plans to be recognized in the financial statements based on the fair
value of the equity or liability instruments issued. The company expects to
adopt SFAS No. 123 (Revised) effective with its reporting for the third quarter
of 2005.
(n) LONG-LIVED ASSETS
Long-lived assets, including core deposit 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, 2004 and 2003 there were no
assets that were considered impaired.
43
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ... CONTINUED
(o) MORTGAGE SERVICING RIGHTS
The Company recognizes the rights to service mortgage loans for others, whether
acquired or internally originated. Loan servicing rights are initially recorded
at fair value based on comparable market quotes and are amortized as other
expense in proportion to and over the period of estimated net servicing income.
Loan servicing rights are evaluated quarterly for impairment by discounting the
expected future cash flows, taking into consideration the estimated level of
prepayments based on current industry expectations and the predominant risk
characteristics of the underlying loans including loan type, note rate and loan
term. Impairment adjustments, if any, are recorded through a valuation
allowance.
As of December 31, 2004 and 2003 the carrying value of servicing rights was
approximately $1,241,000 and $1,388,000, respectively. Amortization expense of
$328,000, $729,000, and $480,000 was recognized in the years ended December 31,
2004, 2003, and 2002, respectively. The servicing rights are included in other
assets on the balance sheet and are amortized over the period of estimated net
servicing income. There was no impairment of carrying value at December 31, 2004
or 2003. At December 31, 2004, the fair value of mortgage servicing rights was
approximately $1,621,000.
(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) STOCK SPLIT AND STOCK DIVIDEND
On April 28, 2004 the Board of Directors declared a five-for-four stock split,
payable to shareholders of record on May 11, 2004, payable May 20, 2004. On
April 30, 2003, the Board of Directors declared a 10 percent stock dividend,
payable in common stock of the Company to shareholders of record on May 13,
2003, payable on May 22, 2003. All prior period amounts have been restated to
reflect the stock split and dividend.
(r) 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.
(s) RECLASSIFICATIONS
Certain reclassifications have been made to the 2003 and 2002 financial
statements to conform to the 2004 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, 2004 was $8,290,000.
44
3. INVESTMENT SECURITIES, AVAILABLE FOR SALE
A comparison of the amortized cost and estimated fair value of the Company's
investment securities, available for sale, is as follows.
INVESTMENTS AS OF DECEMBER 31, 2004
Estimated
Weighted Amortized Gross Unrealized Fair
(Dollars in thousands) Yield Cost Gains Losses Value
---------------------- ----- ---- ----- ------ -------
U.S. GOVERNMENT AND FEDERAL AGENCIES
maturing within one year............................... 1.29% $ 251 - - 251
maturing five years through ten years.................. 4.62% 350 6 - 356
maturing after ten years............................... 3.08% 481 2 (1) 482
---------- -------- ------ ---------
3.16% 1,082 8 (1) 1,089
---------- -------- ------ ---------
STATE AND LOCAL GOVERNMENTS AND OTHER ISSUES:
maturing within one year............................... 5.30% 518 8 - 526
maturing one year through five years................... 5.37% 1,205 64 - 1,269
maturing five years through ten years.................. 4.69% 6,514 324 - 6,838
maturing after ten years............................... 5.13% 292,102 12,971 (1,098) 303,975
---------- -------- ------ ---------
5.12% 300,339 13,367 (1,098) 312,608
---------- -------- ------ ---------
MORTGAGE-BACKED SECURITIES............................... 4.99% 56,629 919 (503) 57,045
REAL ESTATE MORTGAGE INVESTMENT CONDUITS................. 3.77% 660,389 1,624 (4,469) 657,544
FHLMC AND FNMA STOCK..................................... 5.74% 7,593 - (56) 7,537
FHLB AND FRB STOCK, AT COST.............................. 3.22% 49,803 - - 49,803
---------- -------- ------ ---------
TOTAL INVESTMENTS 4.20% $1,075,835 15,918 (6,127) 1,085,626
========== ======== ====== =========
INVESTMENTS AS OF DECEMBER 31, 2003
Estimated
Weighted Amortized Gross Unrealized Fair
(Dollars in thousands) Yield Cost Gains Losses Value
---------------------- ----- ---- ----- ------ -------
U.S. GOVERNMENT AND FEDERAL AGENCIES
maturing within one year............................... 0.85%. $ 352 - - 352
maturing one year through five years................... 1.29% 259 - (1) 258
maturing after ten years............................... 2.97% 957 15 (1) 971
---------- -------- ------- ---------
2.22% 1,568 15 (2) 1,581
---------- -------- ------- ---------
STATE AND LOCAL GOVERNMENTS AND OTHER ISSUES:
maturing within one year............................... 5.69% 4,346 41 - 4,387
maturing one year through five years................... 4.30% 5,485 84 (102) 5,467
maturing five years through ten years.................. 5.35% 4,910 197 - 5,107
maturing after ten years............................... 5.11% 288,644 10,106 (1,683) 297,067
---------- -------- ------- ---------
5.11% 303,385 10,428 (1,785) 312,028
---------- -------- ------- ---------
MORTGAGE-BACKED SECURITIES............................... 4.30% 64,123 1,465 (342) 65,246
REAL ESTATE MORTGAGE INVESTMENT CONDUITS................. 4.03% 662,727 4,983 (3,911) 663,799
FHLMC AND FNMA STOCK..................................... 5.74% 7,593 64 - 7,657
FHLB AND FRB STOCK, AT COST.............................. 5.34% 46,643 - - 46,643
---------- -------- ------- ---------
TOTAL INVESTMENTS 4.41% $1,086,039 16,955 (6,040) 1,096,954
========== ======== ======= =========
45
3. INVESTMENT SECURITIES, AVAILABLE FOR SALE...CONTINUED
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. Weighted yields on tax-exempt
investment securities exclude the tax effect. The Real Estate Mortgage
Investment Conduits are backed by the FNMA, GNMA, or FHLMC.
The book value of securities was as follows at:
December 31,
(dollars in thousands) 2002
---------------------- --------
U.S. Government and Federal Agencies.................. $ 1,086
State and Local Governments and Other Issues.......... 244,665
Mortgage-Backed Securities............................ 81,043
Real Estate Mortgage Investment Conduits.............. 388,927
FHLMC and FNMA stock.................................. 7,593
FHLB and FRB stock.................................... 42,864
--------
$766,178
========
Investments with an unrealized loss position at December 31, 2004:
Less than 12 months 12 months or more Total
-------------------- -------------------- --------------------
Fair Unrealized Fair Unrealized Fair Unrealized
(dollars in thousands) Value Loss Value Loss Value Loss
---------------------- ------- ---------- ------- ---------- ------- ----------
U.S. Government and Federal Agencies..................... 136 1 314 1 450 2
State and Local Governments and other issues............. 18,767 260 18,409 838 37,176 1,098
FHLMC stock.............................................. 7,444 56 - - 7,444 56
Mortgage-Backed Securities............................... 18,867 193 13,256 310 32,123 503
Real Estate Mortgage Investment Conduits................. 381,196 2,994 73,086 1,474 454,282 4,468
------- -------- ------- -------- ------- -------
Total temporarily impaired securities 426,410 3,504 105,065 2,623 531,475 6,127
======= ======== ======= ======== ======= =======
Most of the unrealized loss is the result of changing market values due to
changes in intermediate and long term (10 year) interest rates. The value of
real estate mortgage investment conduits and mortgage-backed securities is also
affected by the level of mortgage refinancing activity and resulting prepayment
of the underlying mortgages. During periods of rapid prepayments, values decline
because of shortening of the expected maturity and reduced earning potential.
During periods of increasing rates, values decline due to the opportunity to
invest at current rates which are higher than the rates on the investments held.
The ten year U.S. Treasury rates have seen significant volatility during 2004
with rates ranging from a low of 3.76% in March to a high of 4.84% in June and
ending the year at 4.24%. The Company anticipates the unrealized losses to be
temporary and therefore an impairment charge is not required as of December 31,
2004.
Interest Income includes tax-exempt interest for the years ended December 31,
2004, 2003, and 2002 of $13,917,000, $11,410,000, and $8,074,000, respectively.
Gross proceeds from sales of investment securities for the years ended December
31, 2004, 2003, and 2002 were approximately $66,910,000, $19,603,000 and
$31,695,000 respectively, resulting in gross gains of approximately $304,000,
$3,502,000 and $451,000 and gross losses of approximately $304,000, $0 and
$213,000, respectively. The cost of any investment sold is determined by
specific identification.
At December 31, 2004, the Company had investment securities with carrying values
of approximately $194,795,000 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.
46
4. LOANS RECEIVABLE, NET AND LOANS HELD FOR SALE
The following is a summary of loans receivable, net and loans held for sale at:
December 31,
-----------------------
(dollars in thousands) 2004 2003
---------------------- ----------- ---------
Residential first mortgage ......................... $ 382,750 305,372
Loans held for sale ................................ 14,476 16,973
Commercial real estate.............................. 526,455 483,684
Other commercial.................................... 466,582 359,030
Consumer .......................................... 95,663 95,739
Home equity ....................................... 248,684 199,693
--------- ---------
1,734,610 1,460,491
Net deferred loan fees, premiums and discounts...... (6,313) (6,136)
Allowance for loan losses........................... (26,492) (23,990)
--------- --------
$ 1,701,805 1,430,365
=========== =========
The following is a summary of activity in allowance for losses on loans:
Years ended December 31,
-------------------------
(dollars in thousands) 2004 2003 2002
---------------------- ------- ------ ------
Balance, beginning of period ....................... $23,990 20,944 18,654
Acquisitions........................................ -- 959 --
Net charge offs..................................... (1,693) (1,722) (3,455)
Provision .......................................... 4,195 3,809 5,745
------- ------ ------
Balance, end of period ............................. $26,492 23,990 20,944
======= ====== ======
The following is the allocation of allowance for loan losses and percent of
loans in each category at:
DECEMBER 31, 2004 December 31, 2003
--------------------- ----------------------
PERCENT OF Percent of
OF LOANS IN of loans in
(dollars in thousands) AMOUNT CATEGORY Amount category
---------------------- -------- ----------- ---------- -----------
Residential first mortgage and loans held for sale...... $ 2,693 22.9% $ 2,147 21.8%
Commercial real estate.................................. 9,222 30.4% 7,464 33.2%
Other commercial ....................................... 9,836 26.9% 9,951 24.7%
Consumer................................................ 2,083 5.5% 2,220 6.6%
Home equity ............................................ 2,658 14.3% $ 2,208 13.7%
-------- ------- --------- -----
$ 26,492 100.0% 23,990 100.0%
======== ======= ========= =====
Substantially all of the Company's loan receivables 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. At December 31, 2004, no individual borrower had outstanding loans or
commitments exceeding 10% of the Company's consolidated stockholders' equity.
47
4. LOANS RECEIVABLE, NET AND LOANS HELD FOR SALE ... CONTINUED
Impaired loans, which consists of those reported as non-accrual, for the years
ended December 31, 2004, 2003, and 2002 were approximately $5,950,000,
$10,062,000, and $8,042,000, respectively, of which no impairment allowance was
deemed necessary. The average recorded investment in impaired loans for the
years ended December 31, 2004, 2003, and 2002 was approximately $8,733,000,
$8,620,000, and $8,275,000, respectively. Interest income that would have been
recorded on impaired loans if such loans had been current for the entire period
would have been approximately $372,000, $665,000, and $596,000 for the years
ended December 31, 2004, 2003, and 2002, respectively. Interest income
recognized on impaired loans for the years ended December 31, 2004, 2003, and
2002 was not significant. Loans ninety days overdue and still accruing interest
for the years ended December 31, 2004, 2003, and 2002 were approximately
$1,642,000, $2,419,000, and $1,998,000, respectively.
The weighted average interest rate on loans was 6.32% and 6.74% at December 31,
2004 and 2003, respectively.
At December 31, 2004, 2003 and 2002 loans sold and serviced for others were
$174,805,000, $189,601,000, and $253,063,000, respectively.
At December 31, 2004 the Company had $1,172,781,000 in variable rate loans and
$561,829,000 in fixed rate loans.
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 extend 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. The Company did not have any outstanding
commitments on impaired loans as of December 31, 2004.
The Company had outstanding commitments as follows:
December 31,
-----------------------
(dollars in thousands) 2004 2003
---------------------- ------------ -------
Loans and loans in process.................................. $ 367,388 258,350
Unused consumer lines of credit............................. 169,286 118,691
Letters of credit........................................... 18,842 13,636
---------- -------
$ 555,516 390,677
========== =======
Substantially all of the loans held for sale at December 31, 2004 and 2003 were
committed to be sold.
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, 2004 and 2003 was approximately
$33,180,000 and $27,313,000. During 2004 and 2003, new loans to such related
parties were approximately $22,847,000 and $24,652,000, respectively, and
repayments were approximately $16,980,000 and $18,525,000, respectively.
48
5. PREMISES AND EQUIPMENT, NET
Premises and equipment, net consist of the following at:
December 31,
----------------------
(dollars in thousands) 2004 2003
---------------------- ------------ -------
Land ................................................ $ 12,053 11,487
Office buildings and construction in progress........ 45,079 41,279
Furniture, fixtures and equipment.................... 25,656 24,533
Leasehold improvements............................... 2,827 2,590
Accumulated depreciation ............................ (29,883) (26,638)
------------ -------
$ 55,732 53,251
============ =======
6. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table sets forth information regarding the Company's core deposit
intangibles and mortgage servicing rights:
Core Deposit Mortgage
(Dollars in thousands) Intangible Servicing Rights (1) Total
---------------------- ------------ -------------------- -----
AS OF DECEMBER 31, 2004
Gross carrying value $ 10,270
Accumulated Amortization (5,331)
-----------
Net carrying value $ 4,939 1,241 6,180
===========
AS OF DECEMBER 31, 2003
Gross carrying value $ 10,122
Accumulated Amortization (4,257)
-----------
Net carrying value $ 5,865 1,388 7,253
===========
WEIGHTED-AVERAGE AMORTIZATION PERIOD
(Period in years) 10.0 9.6 9.9
AGGREGATE AMORTIZATION EXPENSE
For the year ended December 31, 2004 $ 1,074 328 1,402
For the year ended December 31, 2003 1,243 729 1,972
ESTIMATED AMORTIZATION EXPENSE
For the year ended December 31, 2005 917 85 1,002
For the year ended December 31, 2006 841 83 924
For the year ended December 31, 2007 820 81 901
For the year ended December 31, 2008 807 78 885
For the year ended December 31, 2009 756 75 831
(1) Gross carrying value and accumulated amortization are not readily available
49
6. GOODWILL AND OTHER INTANGIBLE ASSETS ... CONTINUED
On June 4, 2004, the Company completed the acquisition of American West Bancorp,
Inc.'s branch office in Ione, Washington. A portion of the purchase was
allocated to core deposit intangible of $148 thousand and goodwill of $425
thousand. The following is a summary of activity in goodwill.
(Dollars in thousands) Goodwill
---------------------- --------
Balance as of December 31, 2003 36,951
Acquisition of Ione branch 425
------
Balance as of December 31, 2004 37,376
======
7. DEPOSITS
Deposits consist of the following at:
DECEMBER 31, 2004 December 31, 2003
------------------------------------ ------------------------
Weighted
(dollars in thousands) Average Rate AMOUNT PERCENT Amount Percent
---------------------- ------------ ----------- ------- -------------- -------
Demand accounts............................... 0.0% $ 460,059 26.6% $ 369,052 23.1%
NOW accounts.................................. 0.2% 280,455 16.2% 249,838 15.6%
Savings accounts.............................. 0.3% 166,350 9.6% 150,367 9.4%
Money market demand accounts.................. 0.9% 415,817 24.0% 390,344 24.4%
Certificate accounts:
1.00% and lower.......................... 52,056 3.0% 75,908 4.8%
1.01% to 2.00%........................... 177,172 10.2% 176,839 11.1%
2.01% to 3.00%........................... 100,566 5.8% 85,289 5.3%
3.01% to 4.00%........................... 33,934 2.0% 39,536 2.5%
4.01% to 5.00%. ......................... 21,216 1.2% 27,351 1.7%
5.01% to 6.00%........................... 11,936 0.8% 19,897 1.3%
6.01% to 7.00%........................... 9,643 0.6% 12,691 0.8%
7.01% and higher......................... 504 0.0% 513 0.0%
----------- ------ -------------- -----
Total certificate accounts........ 2.2% 407,027 23.6% 438,024 27.5%
----------- ------ -------------- -----
Total interest bearing deposits............... 1.1% 1,269,649 73.4% 1,228,573 76.9%
----------- ------ -------------- -----
Total deposits................................ 0.9% $ 1,729,708 100.0% 1,597,625 100.0%
----------- ------ -------------- -----
Deposits with a balance in excess of $100,000 $ 699,066 $ 577,423
=========== ==============
50
7. DEPOSITS ... CONTINUED
At December 31, 2004, scheduled maturities of certificate accounts are as
follows:
Years ending December 31,
----------------------------------------------------------------
(dollars in thousands) Total 2005 2006 2007 2008 Thereafter
- ---------------------------- ------------ ------- ------ ------ ----- ----------
1.00% and lower............. $ 52,056 51,913 143 - - -
1.01% to 2.00%.............. 177,172 158,363 16,785 1,970 54 -
2.01% to 3.00%.............. 100,566 54,368 29,772 12,784 2,639 1,003
3.01% to 4.00%.............. 33,934 8,367 3,316 10,379 4,529 7,343
4.01% to 5.00%.............. 21,216 4,599 4,398 11,613 - 606
5.01% to 6.00%..............
11,936 2,241 2,687 7,008 - -
6.01% to 7.00% 9,643 7,286 2,267 14 76 -
7.01% and higher............ $ 504 504 - - - -
------------ ------- ------ ------ ----- -----
407,027 287,641 59,368 43,768 7,298 8,952
============ ======= ====== ====== ===== =====
Interest expense on deposits is summarized as follows:
Years ended December 31,
---------------------------
(dollars in thousands) 2004 2003 2002
- ---------------------- ------- ------ ------
NOW accounts ....... $ 474 484 723
Savings accounts ... 471 500 857
Money market demand
accounts ........... 3,776 3,840 6,771
Certificate accounts 9,333 12,397 17,917
------- ------ ------
$14,054 17,221 26,268
======= ====== ======
8. ADVANCES FROM FEDERAL HOME LOAN BANK OF SEATTLE
Advances from the Federal Home Loan Bank of Seattle (FHLB) consist of the
following:
Totals as of
Maturing in years ending December 31, December 31,
-------------------------------------------------------------- ------------------
(dollars in thousands) 2005 2006 2007 2008 2009 2010-2012 2004 2003
- -------------------------------- -------- ------- ------- ------ ---- --------- ------- -------
1.00% to 2.00%.................. - 40,000 - - - - 40,000 445,870
2.01% to 3.00%.................. 437,942 69,500 110,500 - - - 617,942 132,500
3.01% to 4.00%.................. 41,350 - 13,000 3,000 - 40,000 97,350 116,600
4.01% to 5.00%.................. - - - - - 42,000 42,000 47,500
5.01% to 6.00%.................. 145 145 145 18,128 1 - 18,564 31,217
6.01% to 7.00%.................. 574 274 974 74 47 23 1,966 2,256
7.01% to 8.00%.................. 211 500 300 100 - - 1,111 1,251
8.01% to 9.00%.................. - -- - - - - - 100
-------- ------- ------- ------ ---- --------- ------- -------
$480,222 110,419 124,919 21,302 48 82,023 818,933 777,294
======== ======= ======= ====== ==== ========= ======= =======
These advances are collateralized by the FHLB stock held by the Company and a
blanket assignment of the Bank's unpledged qualifying real estate loans and
investments. The total amount of advances available, subject to collateral
availability, as of December 31, 2004 was approximately $320,062,000.
The weighted average interest rate on these advances was 2.72% and 2.80% at
December 31, 2004 and 2003, respectively.
51
8. ADVANCES FROM FEDERAL HOME LOAN BANK OF SEATTLE . . . CONTINUED
The Federal Home Loan Bank of Seattle holds callable options, which may be
exercised after a predetermined time as shown below as of December 31, 2004:
Interest Earliest
(dollars in thousands) Amount Rate Maturity Call
- -------------------------------------------------- -------- ------------ -------- --------
Call Terms
Quarterly at FHLB option ......................... 13,000 2.88% 2007 2005
Quarterly at FHLB option ......................... 10,000 2.97% 2007 2005
Quarterly at FHLB option ......................... 3,000 5.37% 2008 2005
Quarterly at FHLB option ......................... 15,000 5.52% 2008 2005
If three month LIBOR is greater than 8% on
quarterly measurement date after initial
term ........................................... 82,000 3.49% - 4.83% 2012 2005
--------
$123,000
========
9. 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, 2004 AMOUNT RATE ASSETS ASSETS
- ------------------------------------ ----------------- -------- ---------- ----------
SECURITIES SOLD UNDER AGREEMENTS
TO REPURCHASE WITHIN:
1-30 DAYS.......................... 76,158 1.87% 126,671 129,340
----------------- ---- ---------- -------
$ 76,158 1.87% $ 126,671 129,340
================= ==== ========== =======
December 31, 2003:
Securities sold under agreements to
repurchase within:
1-30 days.......................... 56,968 1.06% 98,120 101,280
----------------- ------ ---------- -------
$ 56,968 1.06% $ 98,120 101,280
================= ====== ========== =======
The securities, consisting of agency issued or guaranteed mortgage backed
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, 2004 and 2003 securities sold under
agreements to repurchase averaged approximately $69,480,000 and $61,609,000,
respectively, and the maximum outstanding at any month end during the year was
approximately $80,265,000 and $74,808,000, respectively.
The Company also has a treasury tax and loan account note option program which
provides short term funding with no fixed maturity date up to $19,500,000 at
federal funds rates minus 25 basis points. At December 31, 2004 and 2003 the
outstanding balance under this program was approximately $4,354,000 and
$7,309,000. The borrowings are secured with investment securities with a par
value of approximately $26,635,000 and a market value of approximately
$28,568,000. For the year ended December 31, 2004, the maximum outstanding at
any month end was approximately $13,345,000 and the average balance was
approximately $3,954,000.
52
10. SUBORDINATED DEBENTURES
On March 24, 2004, 45,000 shares of trust preferred shares were issued by
Glacier Trust II whose common equity is wholly owned by the Company. The Trust
Preferred Securities bear a cumulative fixed interest rate of 5.788% for the
first five years and then converts to a three month LIBOR plus 2.75% rate for
the remaining term until maturity on April 7, 2034. Interest distributions are
payable quarterly. The Trust Preferred Securities are subject to mandatory
redemption upon repayment of the Subordinated Debentures of $45,000,000 at their
stated maturity date or their earlier redemption in an amount equal to their
liquidation amount plus accumulated and unpaid distributions to the date of
redemption.
On January 25, 2001, 1,400,000 shares of trust preferred shares were issued by
Glacier Trust I whose common equity is wholly owned by the Company. The Trust
Preferred Securities bear a cumulative fixed interest rate of 9.40% and mature
on February 1, 2031. Interest distributions are payable quarterly. The Trust
Preferred Securities are subject to mandatory redemption upon repayment of the
Subordinated Debentures of $35,000,000 at their stated maturity date or their
earlier redemption in an amount equal to their liquidation amount plus
accumulated and unpaid distributions to the date of redemption.
The Company guaranteed the payment of distributions and payments for redemption
or liquidation of the Trust Preferred Securities to the extent of funds held by
Glacier Trust I and Glacier Trust II. The obligations of the Company under the
Subordinated Debentures together with the guarantee and other back-up
obligations, in the aggregate, constitute a full and unconditional guarantee by
the Company of the obligations of both trusts under the Trust Preferred
Securities.
As a result of the adoption of FIN 46R on December 31, 2003, the Company
deconsolidated Glacier Trust I. The $35,000,000 of subordinated debentures
issued by the Company to Glacier Trust I are reflected in the consolidated
balance sheets as of December 31, 2004 and 2003. The $45,000,000 of subordinated
debentures issued by the Company to Glacier Trust II are reflected in the
consolidated balance sheet as of December 31, 2004.
The Subordinated Debentures with Glacier Trust I are unsecured, bear interest at
a rate of 9.40% per annum and mature on February 1, 2031. The Subordinated
Debentures with Glacier Trust II are unsecured, bear interest at a rate of
5.788% per annum for the first five years and then converts to a three month
LIBOR plus 2.75% rate for the remaining term until maturity on April 7, 2034.
Interest is payable quarterly for all Subordinated Debentures. The Company may
defer the payment of interest at any time from time to time for a period not
exceeding 20 consecutive quarters provided that the deferral period does not
extend past the stated maturity. During any such deferral period, distributions
on the Trust Preferred Securities will also be deferred and the Company's
ability to pay dividends on its common shares will be restricted.
Subject to approval by the Federal Reserve Bank, the Trust Preferred Securities
may be redeemed at par prior to maturity at the Company's option on or after
February 1, 2006 for Glacier Trust I and April 7, 2009 for Glacier Trust II. The
Trust Preferred Securities may also be redeemed at any time in whole (but not in
part) for either Trust in the event of unfavorable changes in laws or
regulations that result in (1) Glacier Trust I or Glacier Trust II becoming
subject to federal income tax on income received on the Subordinated Debentures,
(2) interest payable by Parent Company on the Subordinated Debentures becoming
non-deductible for federal tax purposes, (3) the requirement for either trust to
register under the Investment Company Act of 1940, as amended, or (4) loss of
the ability to treat the Trust Preferred Securities as "Tier 1 Capital" under
the Federal Reserve capital adequacy guidelines.
53
11. REGULATORY CAPITAL
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, 2004:
Minimum capital Well capitalized
Actual requirement requirement
--------------------- ------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------ ----- ------- -----
Tier 1 (core) capital to risk weighted assets
Consolidated .............................. 300,475 15.06% 79,800 4.00% 119,700 6.00%
Glacier ................................... 57,244 13.22% 17,318 4.00% 25,977 6.00%
First Security............................. 49,798 12.47% 15,978 4.00% 23,967 6.00%
Western ................................... 43,151 15.38% 11,224 4.00% 16,835 6.00%
Mountain West ............................. 42,992 10.20% 16,861 4.00% 25,292 6.00%
Big Sky.................................... 18,547 9.22% 8,043 4.00% 12,065 6.00%
Valley..................................... 17,674 12.38% 5,711 4.00% 8,567 6.00%
Whitefish ................................. 12,945 11.67% 4,439 4.00% 6,658 6.00%
Tier 2 (total) capital to risk weighted assets
Consolidated ............................... 325,432 16.31% 159,601 8.00% 199,501 10.00%
Glacier .................................... 62,128 14.35% 34,636 8.00% 43,295 10.00%
First Security 54,800 13.72% 31,956 8.00% 39,945 10.00%
Western .................................... 46,675 16.63% 22,447 8.00% 28,059 10.00%
Mountain West .............................. 48,005 11.39% 33,722 8.00% 42,153 10.00%
Big Sky .................................... 21,064 10.48% 16,087 8.00% 20,108 10.00%
Valley ..................................... 19,453 13.62% 11,423 8.00% 14,279 10.00%
Whitefish .................................. 14,325 12.91% 8,877 8.00% 11,097 10.00%
Leverage capital to total average assets
Consolidated ............................... 300,475 10.16% 118,271 4.00% 147,839 5.00%
Glacier .................................... 57,244 8.90% 25,723 4.00% 32,154 5.00%
First Security ............................. 49,798 8.27% 24,093 4.00% 30,117 5.00%
Western .................................... 43,151 9.67% 17,854 4.00% 22,317 5.00%
Mountain West .............................. 42,992 7.16% 24,027 4.00% 30,033 5.00%
Big Sky .................................... 18,547 7.88% 9,413 4.00% 11,767 5.00%
Valley ..................................... 17,674 7.58% 9,325 4.00% 11,656 5.00%
Whitefish................................... 12,945 7.75% 6,684 4.00% 8,355 5.00%
54
11. REGULATORY CAPITAL. . . CONTINUED
The following table illustrates the Federal Reserve Board's adequacy guidelines
and the Company's compliance with those guidelines as of December 31, 2003:
Minimum capital Well capitalized
Actual requirement requirement
------------------------- -------------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
----------- ------ -------- ------- -------- -----
Tier 1 (core) capital to risk weighted assets
Consolidated ............................... 223,423 12.98% 68,864 4.00% 103,296 6.00%
Glacier .................................... 51,010 13.75% 14,838 4.00% 22,256 6.00%
First Security.............................. 42,897 12.04% 14,252 4.00% 21,378 6.00%
Western .................................... 40,796 15.04% 10,850 4.00% 16,275 6.00%
Mountain West .............................. 37,695 10.48% 14,382 4.00% 21,573 6.00%
Big Sky..................................... 15,695 10.36% 6,062 4.00% 9,094 6.00%
Valley...................................... 15,866 13.25% 4,789 4.00% 7,184 6.00%
Whitefish .................................. 11,119 12.32% 3,609 4.00% 5,414 6.00%
Tier 2 (total) capital to risk weighted assets
Consolidated ............................... 245,006 14.23% 137,729 8.00% 172,161 10.00%
Glacier .................................... 55,281 14.90% 29,675 8.00% 37,094 10.00%
First Security.............................. 47,363 13.29% 28,504 8.00% 35,630 10.00%
Western .................................... 44,225 16.30% 21,700 8.00% 27,125 10.00%
Mountain West .............................. 41,995 11.68% 28,764 8.00% 35,955 10.00%
Big Sky..................................... 17,595 11.61% 12,125 8.00% 15,156 10.00%
Valley...................................... 17,350 14.49% 9,578 8.00% 11,973 10.00%
Whitefish .................................. 12,248 13.57% 7,218 8.00% 9,023 10.00%
Leverage capital to total average assets
Consolidated ............................... 223,423 8.45% 105,707 4.00% 132,134 5.00%
Glacier .................................... 51,010 8.97% 22,734 4.00% 28,418 5.00%
First Security.............................. 42,897 7.80% 22,007 4.00% 27,509 5.00%
Western .................................... 40,796 9.23% 17,676 4.00% 22,095 5.00%
Mountain West .............................. 37,695 7.34% 20,531 4.00% 25,664 5.00%
Big Sky .................................... 15,695 7.82% 8,032 4.00% 10,040 5.00%
Valley ..................................... 15,866 7.35% 8,637 4.00% 10,796 5.00%
Whitefish .................................. 11,119 7.60% 5,855 4.00% 7,319 5.00%
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, 2004 and
2003, 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,
2004 and 2003.
55
12. FEDERAL AND STATE INCOME TAXES
The following is a summary of consolidated income tax expense for:
(dollars in thousands) 2004 2003 2002
- ----------------------------------------- ------------- --------- ------
Current:
Federal............................. $ 16,361 13,741 11,925
State............................... 4,369 3,690 3,033
------------- ------ ------
Total current tax expense 20,730 17,431 14,958
------------- ------ ------
Deferred:
Federal............................. 238 554 1,139
State............................... 46 168 327
------------- ------ ------
Total deferred tax expense 284 722 1,466
------------- ------ ------
Total income tax expense $ 21,014 18,153 16,424
============= ====== ======
Federal and state income tax expense differs from that computed at the federal
statutory corporate tax rate as follows for:
Years ended December 31,
----------------------------------
2004 2003 2002
----- ---- ----
Federal statutory rate.................................. 35.0% 35.0% 35.0%
State taxes, net of federal income tax benefit.......... 4.4% 4.4% 4.4%
Tax-exempt interest income.............................. -7.2% -6.8% -5.4%
Other, net.............................................. -0.2% -0.3% -0.4%
---- ---- ----
32.0% 32.3% 33.6%
==== ==== ====
The tax effect of temporary differences which give rise to a significant portion
of deferred tax assets and deferred tax liabilities are as follows:
December 31,
- -------------------------------------------------------- -----------------------
(dollars in thousands) 2004 2003
- -------------------------------------------------------- ---------- -------
Deferred tax assets:
Allowance for losses on loans......................... $ 10,879 9,484
Deferred compensation................................. 1,795 1,390
Other................................................. 650 730
---------- -------
Total gross deferred tax assets 13,324 11,604
---------- -------
Deferred tax liabilities:
Federal Home Loan Bank stock dividends............... (10,270) (9,223)
Fixed assets, due to differences in depreciation..... (2,676) (2,585)
Deferred loan costs.................................. (1,602) (72)
Available-for-sale securities fair value adjustment.. (3,858) (4,300)
Other................................................ (3,310) (2,793)
---------- -------
Total gross deferred tax liabilities (21,716) (18,973)
---------- -------
Net deferred tax liability $ (8,392) (7,369)
---------- -------
There is no valuation allowance at December 31, 2004 and 2003 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.
12. FEDERAL AND STATE INCOME TAXES...CONTINUED
56
Retained earnings at December 31, 2004 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.
13. EMPLOYEE BENEFIT PLANS
The Company has a profit sharing plan that has a 3% "safe harbor" provision
which is a non-elective contribution by the Company. In addition, elective
contributions, depending on the Company's profitability, are made to the plan.
Participants are at all times fully vested in all contributions. The total plan
expense for the years ended December 31, 2004, 2003, and 2002 was approximately
$3,181,000, $3,072,000 and $2,691,000 respectively.
The Company also has an employees' savings plan. The plan allows eligible
employees to contribute up to 60%, 25% prior to October 1, 2004, 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, 2004, 2003 and 2002 was
approximately $750,000, $693,000, and $577,000, 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, 2004, 2003 and 2002 was approximately
$63,000, $53,000, and $28,000, 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
$402,000, $236,000, and $67,000, for the years ending December 31, 2004, 2003,
and 2002, 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 for the years ended 2004, 2003, and 2002
were approximately $437,000, $364,000, and $72,000, respectively. In connection
with an acquisition in 2001, the Company assumed the obligations of a deferred
compensation plan for certain key employees. The plan provides predetermined
periodic payments over 10 to 15 years upon retirement or death. As of December
31, 2004, the liability related to the obligation was approximately $1,780,000
and was included in other liabilities of the Consolidated Statements of
Financial Condition. The amount expensed related to the obligation during 2004
was insignificant.
The Company has entered into employment contracts with ten senior officers that
provide benefits under certain conditions following a change in control of the
Company.
57
14. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
For the Years Ended December 31,
-----------------------------------------------
2004 2003 2002
-------------- ---------- ----------
Net earnings available to common
stockholders, basic and diluted...................... $ 44,616,000 38,008,000 32,402,000
Average outstanding shares - basic...................... 24,452,573 24,088,290 23,583,669
Add: Dilutive stock options............................ 462,682 437,283 402,498
-------------- ---------- ----------
Average outstanding shares - diluted.................... 24,915,255 24,525,573 23,986,167
============== ========== ==========
Basic earnings per share................................ $ 1.82 1.58 1.37
============== ========== ==========
Diluted earnings per share.............................. $ 1.79 1.55 1.35
============== ========== ==========
There were approximately 1,400 options excluded from the diluted share
calculation for December 31, 2004, due the option exercise price exceeding the
market price. There were no options excluded from the diluted share calculation
for December 31, 2003 and 2002 because the market price exceeded the option
exercise price as of the end of the year.
15. STOCK OPTION PLANS
In the year ended June 30, 1990, Incentive 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. In April, 2002, the Directors 1994 Stock Option Plan and the
Employees 1995 Stock Option Plan were amended to provide 500,000 and 1,000,000
additional shares to the director's and employee's plans, respectively. The
option price at which the Company's common stock may be purchased upon exercise
of options granted under the plans must be at least equal to the per share
market value of such stock at the date the option is granted.
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
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.
58
15. STOCK OPTION PLANS...CONTINUED
At December 31, 2004, total shares available for option grants to employees and
directors are 1,792,215. Changes in shares granted for stock options for the
years ended December 31, 2004, 2003, and 2002, are summarized as follows:
Options outstanding Options exercisable
--------------------------- ----------------------------
Weighted Weighted
average average
Shares exercise price Shares exercise price
--------- -------------- --------- --------------
Balance, December 31, 2001.................... 1,575,294 $ 9.92 1,136,069 $ 9.66
Canceled...................................... (27,718) 13.73 (4,835) 12.09
Granted....................................... 273,621 15.92
Became exercisable............................ 170,340 10.37
Exercised..................................... (565,670) 8.84 (565,670) 8.84
--------- ---------
Balance, December 31, 2002.................... 1,255,527 11.64 735,904 10.44
Canceled...................................... (40,940) 14.19 (7,199) 9.23
Granted....................................... 446,933 17.70
Became exercisable............................ 348,496 13.10
Exercised..................................... (435,338) 10.73 (435,338) 10.73
--------- ----------- ---------
Balance, December 31, 2003.................... 1,226,182 14.10 641,863 11.47
Canceled...................................... (50,613) 18.26 (15,167) 10.69
Granted....................................... 450,258 24.90
Became exercisable............................ 353,039 17.95
Exercised..................................... (417,322) 13.03 (417,322) 13.03
--------- ---------
Balance, December 31, 2004.................... 1,208,505 18.31 562,413 14.51
========= =========
The range of exercise prices on options outstanding at December 31, 2004 is as
follows:
average average average
Price range Shares exercise price life of options Shares exercise price
- --------------- --------- -------------- --------------- -------- --------------
$ 6.49 - $8.73 98,450 $7.84 2.9 years 98,450 $ 7.84
$ 9.41 - $11.42 117,287 10.11 1.0 years 117,287 10.11
$12.73 - $14.25 52,563 12.82 2.4 years 52,563 12.82
$15.06 - $16.50 145,329 15.87 2.1 years 145,329 15.87
$17.59 - $20.70 385,177 17.84 3.1 years 74,253 18.26
$21.58 - $25.11 398,699 25.03 4.1 years 74,531 25.07
$25.95 - $35.44 11,000 31.49 7.8 years -- --
--------- -------
1,208,505 18.31 3.2 years 562,413 14.51
========= =======
The options exercised during the year ended December 31, 2004 were at prices
from $4.11 to $25.11.
59
16. PARENT COMPANY INFORMATION (CONDENSED)
The following condensed financial information is the unconsolidated (parent
company only) information for Glacier Bancorp, Inc.:
STATEMENTS OF FINANCIAL CONDITION December 31,
- ------------------------------------------------------------ -------------------------
(dollars in thousands) 2004 2003
- ------------------------------------------------------------ ----------- -------
Assets:
Cash.................................................... $ 3,500 3,011
Interest bearing cash deposits.......................... 40,088 7,152
----------- -------
Cash and cash equivalents 43,588 10,163
Investment securities, available-for-sale............... 19,337 1,360
Other assets ........................................... 3,427 4,057
Investment in subsidiaries.............................. 290,765 264,494
----------- -------
$ 357,117 280,074
=========== =======
Liabilities and Stockholders' Equity:
Dividends payable....................................... $ 4,176 3,878
Subordinated debentures................................. 80,000 35,000
Other liabilities....................................... 2,757 3,357
----------- -------
Total liabilities................................. 86,933 42,235
Common stock ........................................... 245 242
Paid-in capital......................................... 227,614 222,588
Retained earnings....................................... 36,391 8,393
Accumulated other comprehensive income.................. 5,934 6,616
----------- -------
Total stockholders' equity........................ 270,184 237,839
----------- -------
$ 357,117 280,074
=========== =======
STATEMENTS OF OPERATIONS Years ended December 31,
- ------------------------------------------------------------------------- ---------- ------- ------
(dollars in thousands) 2004 2003 2002
- ------------------------------------------------------------------------- ---------- ------- ------
Revenues
Dividends from subsidiaries.......................................... $ 21,300 17,400 13,232
Other income ........................................................ 1,088 288 178
Intercompany charges for services.................................... 7,406 6,652 5,381
---------- ------ ------
Total revenues.................................................. 29,794 24,340 18,791
Expenses
Employee compensation and benefits................................... 4,517 4,223 3,755
Other operating expenses............................................. 9,803 7,573 6,778
---------- ------ ------
Total expenses.................................................. 14,320 11,796 10,533
Earnings before income tax benefit and equity in undistributed
earnings of subsidiaries....................................... 15,474 12,544 8,258
Income tax benefit................................................... (2,316) (1,937) (1,984)
---------- ------ ------
Income before equity in undistributed earnings of subsidiaries....... 17,790 14,481 10,242
Subsidiary earnings in excess of dividends distributed............... 26,826 23,527 22,160
---------- ------ ------
Net earnings............................................................. $ 44,616 38,008 32,402
========== ====== ======
60
16. PARENT COMPANY INFORMATION (CONDENSED)...CONTINUED
STATEMENTS OF CASH FLOWS Years ended December 31,
- -------------------------------------------------------------------------- ------------------------------------
(dollars in thousands) 2004 2003 2002
- -------------------------------------------------------------------------- ---------- ------- -------
Operating Activities
Net earnings.......................................................... $ 44,616 38,008 32,402
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Loss on sale of investments available-for-sale........................ 274 -- 43
Subsidiary earnings in excess of dividends distributed................ (26,826) (23,527) (22,160)
Net increase in other assets and other liabilities.................... 2,359 4,973 1,761
---------- ------ ------
Net cash provided by operating activities................................. 20,423 19,454 12,046
---------- ------ ------
Investing activities
Purchases of investment securities available-for-sale................. (35,802) -- (1,261)
Proceeds from sales, maturities and prepayments of securities
available-for-sale.............................................. 17,227 54 234
Equity contribution to subsidiary..................................... -- (10,377) (1,000)
Net addition of premises and equipment................................ (430) (863) (700)
---------- ------ ------
Net cash used by investing activities..................................... (19,005) (11,186) (2,727)
---------- ------ ------
Financing activities
Proceeds from issuance of subordinated debentures..................... 45,000 -- --
Cash dividends paid................................................... (16,618) (14,572) (11,532)
Proceeds from exercise of stock options and other stock issued........ 5,439 5,665 6,041
Repurchase and retirement of stock.................................... (1,805) -- --
Cash paid for stock dividends......................................... (9) (15) --
---------- ------ ------
Net cash provided (used) by financing activities.......................... 32,007 (8,922) (5,491)
---------- ------ ------
Net increase (decrease) in cash and cash equivalents...................... 33,425 (654) 3,828
Cash and cash equivalents at beginning of year............................ 10,163 10,817 6,989
---------- ------ ------
Cash and cash equivalents at end of year.................................. $ 43,588 10,163 10,817
========== ====== ======
17. UNAUDITED QUARTERLY FINANCIAL DATA
Summarized unaudited quarterly financial data is as follows (in thousands except
per share amounts):
QUARTERS ENDED, 2004
---------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------- ------------- ------------- -------------
Interest income...................... $ 35,465 35,441 37,640 38,739
Interest expense..................... 9,076 9,662 10,255 10,899
------------- ------------- ------------- -------------
Net interest income.................. 26,389 25,779 27,385 27,840
Provision for loan losses............ 830 965 1,200 1,200
Income before income taxes........... 15,544 15,654 17,333 17,099
Net earnings......................... 10,610 10,763 11,680 11,563
Basic earnings per share............. 0.43 0.44 0.48 0.47
Diluted earnings per share........... 0.43 0.43 0.47 0.46
Dividends per share.................. 0.17 0.17 0.17 0.17
Market range high-low................ $27.04-$23.60 $28.25-$24.49 $30.35-$25.75 $35.89-$28.90
61
17. UNAUDITED QUARTERLY FINANCIAL DATA...CONTINUED
Quarters Ended, 2003
---------------------------------------------------------------------
March 31 June 30 September 30 December 31
------------- ------------- ------------- -------------
Interest income...................... $ 32,062 31,613 33,103 34,052
Interest expense..................... 10,230 9,644 9,439 9,165
------------- ------------- ------------- -------------
Net interest income.................. 21,832 21,969 23,664 24,887
Provision for loan losses............ 841 1,051 1,221 696
Income before income taxes........... 13,121 14,906 14,309 13,825
Net earnings......................... 8,848 9,932 9,697 9,531
Basic earnings per share............. 0.37 0.42 0.40 0.39
Diluted earnings per share........... 0.37 0.41 0.39 0.38
Dividends per share.................. 0.13 0.15 0.16 0.16
Market range high-low................ $21.59-$17.00 $20.96-$18.36 $23.72-$19.56 $26.40-$21.54
18. 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:
2004 2003
---------------------------- -------------------------
(dollars in thousands) AMOUNT FAIR VALUE Amount Fair Value
- ----------------------------------------------------- ----------- ----------- --------- ----------
Financial Assets:
Cash on hand and in banks............................ $ 79,300 79,300 77,093 77,093
Interest bearing cash deposits ...................... 13,007 13,007 9,047 9,047
Investment securities ............................... 321,234 321,234 321,266 321,266
Mortgage-backed securities .......................... 714,589 714,589 729,045 729,045
FHLB and FRB stock .................................. 49,803 49,803 46,643 46,643
Loans receivable, net................................ 1,701,805 1,704,351 1,430,365 1,450,052
Financial Liabilities:
Deposits ............................................ $ 1,729,708 1,731,843 1,597,625 1,602,619
Advances from the FHLB of Seattle.................... 818,933 811,837 777,294 780,647
Repurchase agreements and other borrowed funds....... 76,158 76,158 64,986 64,986
Subordinated debentures.............................. 80,000 81,502 35,000 37,660
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 is the book value of cash and
interest bearing cash deposits. For investment and mortgage-backed securities,
the fair value is based on quoted market prices. The fair value of Federal Home
Loan Bank of Seattle and Federal Reserve Bank stock is the book value, due to
the stocks being restricted because they may only be sold to another member
institution or the FHLB or FRB at their par values. The fair value of loans is
estimated by discounting future cash flows using current rates at which similar
loans would be made.
Financial Liabilities - The estimated fair value of demand and savings deposits
is the book value since rates are periodically adjusted to market rates.
Certificate accounts fair value is estimated by discounting the future cash
flows using current rates for similar deposits. Advances from the Federal Home
Loan Bank 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 book value approximates fair value. The subordinated
debentures' fair value is based on quoted market prices or comparison pricing to
a similar product issued at year-end.
18. FAIR VALUE OF FINANCIAL INSTRUMENTS...CONTINUED
62
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.
19. CONTINGENCIES AND COMMITMENTS
The company leases certain land, premises and equipment from third parties under
operating and capital leases. Total rent expense for the years ended December
31, 2004, 2003, and 2002 was approximately $1,151,000 $1,025,000, and $926,000,
respectively. The total future minimum rental commitments required under
operating and capital leases that have initial or remaining noncancelable lease
terms in excess of one year at December 31, 2004 are as follows (Dollars in
thousands):
Capital Operating
Years ended December 31, Leases Leases Total
- --------------------------------------- ------- --------- -----
2005 $ 81 1,171 1,252
2006 83 1,050 1,133
2007 84 861 945
2008 87 770 857
2009 89 685 774
Thereafter 1,258 2,950 4,208
------- ----- -----
Total minimum lease payments $ 1,682 7,487 9,169
===== =====
Less: Amounts representing interest 978
-------
Present Value of minimum lease payments 704
Less: Current portion of
obligations under capital leases 3
-------
Long-term portion of
obligations under capital leases 701
=======
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, results of operations or liquidity.
20. ACQUISITIONS
On June 4, 2004, the Company completed the acquisition of the AmericanWest
Bancorp.'s branch office in Ione, Washington. The branch had approximately $15
million in deposits, and became a branch of Mountain West Bank, the Company's
Idaho banking subsidiary. In consideration for the assumption of liabilities,
the Company received $14.5 million in cash. A portion of the purchase price was
allocated to core deposit intangible of $148 thousand and goodwill of $425
thousand.
On July 15, 2003, the Company completed the acquisition of Pend Oreille Bancorp,
and its subsidiary Pend Oreille Bank which operates from two locations in
Sandpoint, Idaho and one location in Newport, Washington. The locations became
additional branches of Mountain West Bank. The bank has approximately $66
million in total assets with deposits of $59 million and gross loans of $50
million. The Company paid $10.4 million and recorded $286 thousand in core
deposit intangible and $3.8 million in goodwill.
The two acquisitions were accounted for under the purchase method of accounting.
Accordingly, the assets and liabilities of the acquired branches were recorded
by the Company at their respective fair values at the date of the acquisition
and the results of operations have been included with those of the Company since
the date of acquisition. The excess of the Company's purchase price over the net
fair value of the assets acquired and liabilities assumed, including
identifiable intangible assets, was recorded as goodwill.
63
21. OPERATING SEGMENT INFORMATION
FASB Statement 131, Financial Reporting for Segments of a Business Enterprise,
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, non-bank
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.
The following is a summary of selected operating segment information for the
years ended and as of December 31, 2004, 2003, and 2002.
(Dollars in thousands)
First Mountain
2004 Glacier Security Western West Big Sky Valley Whitefish Other Consolidated
--------- -------- ------- -------- -------- ------- --------- ------- ------------
Net interest income.................... $ 24,541 24,372 15,663 22,552 9,361 8,959 6,393 (4,448) 107,393
Provision for loan losses.............. (1,075) (600) - (1,320) (510) (440) (250) - (4,195)
--------- ------- ------- ------- ------- ------- ------- ------- ---------
Net interest income after
provision for loan losses............ 23,466 23,772 15,663 21,232 8,851 8,519 6,143 (4,448) 103,198
Noninterest income..................... 8,652 3,684 3,583 12,315 2,249 2,940 1,419 (277) 34,565
Core deposit amortization.............. (276) (216) (279) (210) (33) (60) - - (1,074)
Other noninterest expense.............. (14,980) (10,184) (9,016) (21,290) (5,190) (6,020) (3,280) (1,099) (71,059)
--------- ------- ------- ------- ------- ------- ------- ------- ---------
Income before income taxes ............ 16,862 17,056 9,951 12,047 5,877 5,379 4,282 (5,824) 65,630
Income tax (expense) benefit........... (5,704) (5,572) (3,039) (3,769) (2,157) (1,632) (1,457) 2,316 (21,014)
--------- ------- ------- ------- ------- ------- ------- ------- ---------
Net income............................. $ 11,158 11,484 6,912 8,278 3,720 3,747 2,825 (3,508) 44,616
========= ======= ======= ======= ======= ======= ======= ======= =========
Assets................................. $ 646,523 626,341 446,502 629,205 241,056 241,518 169,411 10,181 3,010,737
Net loans.............................. 398,187 326,826 210,181 382,819 161,761 119,626 102,746 (341) 1,701,805
Goodwill............................... 4,084 4,657 3,848 21,005 1,752 1,770 260 - 37,376
Deposits............................... 393,655 359,918 207,711 431,662 132,853 146,660 98,605 (41,356) 1,729,708
Stockholders' equity................... 64,207 56,004 49,095 67,002 20,567 20,052 13,839 (20,582) 270,184
(Dollars in thousands)
First Mountain
2003 Glacier Security Western West Big Sky Valley Whitefish Other Consolidated
--------- -------- ------- -------- -------- ------- --------- ------- ------------
Net interest income.................... $ 22,565 22,246 13,670 17,061 7,264 7,845 5,194 (3,493) 92,352
Provision for loan losses.............. (375) (1,250) - (1,124) (250) (630) (180) - (3,809)
--------- ------- ------- ------- ------- ------- ------- ------ ---------
Net interest income after
provision for loan losses............ 22,190 20,996 13,670 15,937 7,014 7,215 5,014 (3,493) 88,543
Noninterest income..................... 8,184 4,392 4,043 10,206 1,729 3,730 1,273 5 33,562
Core deposit amortization.............. (304) (270) (348) (205) (41) (75) - - (1,243)
Other noninterest expense.............. (14,283) (9,766) (8,661) (17,958) (4,141) (5,471) (3,071) (1,350) (64,701)
--------- ------- ------- ------- ------- ------- ------- ------ ---------
Income before income taxes............. 15,787 15,352 8,704 7,980 4,561 5,399 3,216 (4,838) 56,161
Income tax (expense) benefit........... (5,437) (5,288) (2,604) (2,216) (1,730) (1,754) (1,054) 1,930 (18,153)
--------- ------- ------- ------- ------- ------- ------- ------ ---------
Net income............................. $ 10,350 10,064 6,100 5,764 2,831 3,645 2,162 (2,908) 38,008
========= ======= ======= ======= ======= ======= ======= ====== =========
Assets................................. $ 595,778 578,803 446,405 547,035 209,342 219,105 149,531 (6,366) 2,739,633
Net loans.............................. 330,012 295,195 196,732 313,021 125,664 97,292 72,800 (351) 1,430,365
Goodwill............................... 4,084 4,657 3,848 20,580 1,752 1,770 260 - 36,951
Deposits............................... 358,600 340,650 219,950 372,936 115,496 134,405 68,124 (12,536) 1,597,625
Stockholders' equity................... 58,703 49,334 47,242 61,031 17,882 18,176 12,126 (26,655) 237,839
64
21. OPERATING SEGMENT INFORMATION . . . CONTINUED
(Dollars in thousands)
First Mountain
2003 Glacier Security Western West Big Sky Valley Whitefish Other Consolidated
--------- -------- ------- ------- -------- ------- --------- ------- ------------
Net interest income.................... $ 22,787 20,596 13,699 13,629 6,860 7,522 4,901 (3,527) 86,467
Provision for loan losses.............. (1,080) (1,800) (325) (695) (330) (1,335) (180) - (5,745)
--------- ------- ------- ------- ------- ------- ------- ------ ---------
Net interest income after
provision for loan losses............ 21,707 18,796 13,374 12,934 6,530 6,187 4,721 (3,527) 80,722
Noninterest income..................... 7,554 3,880 2,782 6,392 1,591 2,641 1,096 (19) 25,917
Core deposit amortization.............. (332) (325) (419) (224) (49) (90) - - (1,439)
Other noninterest expense.............. (12,913) (9,192) (7,832) (13,439) (3,618) (5,371) (2,634) (1,375) (56,374)
--------- ------- ------- ------- ------- ------- ------- ------ ---------
Income before income taxes............. 16,016 13,159 7,905 5,663 4,454 3,367 3,183 (4,921) 48,826
Income tax (expense) benefit........... (5,763) (4,761) (2,432) (1,633) (1,705) (1,053) (1,040) 1,963 (16,424)
--------- ------- ------- ------- ------- ------- ------- ------ ---------
Net income............................. $ 10,253 8,398 5,473 4,030 2,749 2,314 2,143 (2,958) 32,402
========= ======= ======= ======= ======= ======= ======= ====== =========
Assets................................. $ 490,999 487,699 405,282 396,777 179,543 190,536 129,255 1,253 2,281,344
Net loans.............................. 319,906 300,481 188,793 214,453 111,378 97,937 68,066 (361) 1,300,653
Goodwill............................... 4,084 4,657 3,848 16,818 1,752 1,770 260 - 33,189
Deposits............................... 327,018 352,805 226,482 275,809 95,897 126,418 67,810 (12,316) 1,459,923
Stockholders' equity................... 53,492 44,678 46,647 44,429 16,439 17,038 11,078 (21,552) 212,249
22. SUBSEQUENT EVENTS
On November 22, 2004, the Company entered into a merger agreement to acquire
First National Banks - West Co. in an all cash transaction of $40.7 million. The
merger was completed on February 28, 2005 and is being accounted for under the
purchase method of accounting. Accordingly, the assets and liabilities of the
acquired bank are recorded by the Company at their respective fair values at the
date of the acquisition. The results of operations after February 28, 2005 will
be included with those of the Company. The excess of the Company's purchase
price over the net fair value of the assets acquired and liabilities assumed,
including identifiable intangible assets, is recorded as goodwill.
In addition to the completed acquisition, the Company has entered into a merger
agreement to acquire Citizens Bank Holding Company in Pocatello, Idaho, which is
expected to be completed by the end of the first quarter of 2005. The Company
has also entered into an agreement to acquire Zions First National Bank's office
in Bonners Ferry, Idaho, which is expected to be completed by the end of May
2005.
65
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with accountants on accounting
and financial disclosure.
ITEM 9A. DISCLOSURE OF CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. An evaluation was carried out
under the supervision and with the participation of the Company's management,
including the Chief Executive Officer ("CEO") and Chief Financial Officer
("CFO"), of the effectiveness of our disclosure controls and procedures. Based
on that evaluation, the CEO and CFO have concluded that as of the end of the
period covered by this report, our disclosure controls and procedures are
effective to provide reasonable assurance that information required to be
disclosed by us in reports that we file or submit under the Securities Exchange
Act of 1934 is recorded, processed, summarized and timely reported as provided
in the SEC's rules and forms. As a result of this evaluation, there were no
significant changes in our internal control over financial reporting during the
three months ended December 31, 2004 that have materially affected, or are
reasonable likely to materially affect, our internal control over financial
reporting.
Management's Report on Internal Control Over Financial Reporting Management is
responsible for establishing and maintaining effective internal control over
financial reporting as it relates to its financial statements presented in
conformity with U.S. generally accepted accounting principles. Glacier's
internal control system was designed to provide reasonable assurance to the
Company's management and Board of Directors regarding the preparation and fair
presentation of published financial statements in accordance with U.S. generally
accepted accounting principles. Internal control over financial reporting
includes self monitoring mechanisms and actions taken to correct deficiencies as
they are identified.
There are inherent limitations in any internal control, no matter how well
designed, misstatements due to error or fraud may occur and not be detected,
including the possibility of circumvention or overriding of controls.
Accordingly, even an effective internal control system can provide only
reasonable assurance with respect to financial statement preparation. Further,
because of changes in conditions, the effectiveness of an internal control
system may vary over time.
Management assessed its internal control structure over financial reporting as
of December 31, 2004. This assessment was based on criteria for effective
internal control over financial reporting described in "Internal Control -
Integrated Framework" issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this assessment, management asserts that Glacier
Bancorp, Inc. and subsidiaries maintained effective internal control over
financial reporting as it relates to its financial statements presented in
conformity with U.S. generally accepted accounting principles generally accepted
in the Unites States.
The registered public accounting firm that audited the financial statements,
KPMG LLP, included in the annual report has issued an attestation report on
management's assessment of the company's internal control over financial
reporting, which expresses unqualified opinions on management's assessment and
on the effectiveness of the Company's internal control over financial reporting
as of December 31, 2004.
ITEM 9 B. OTHER INFORMATION
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding "Directors and Executive Officers of the Registrant" is
set forth under the headings "Business of the Meeting - Election of Directors -
Information with Respect to Nominees and Other Directors - Background of
Directors" and "Security Ownership of Certain Beneficial Owners and Management -
Executive Officers who are not Directors" of the Company's 2005 Annual Meeting
Proxy Statement ("Proxy Statement") and is incorporated herein by reference.
Information regarding "Compliance with Section 16(a) of the Exchange Act" is set
forth under the section "Compliance with Section 16 (a) Filing Requirements" of
the Company's Proxy Statement and is incorporated herein by reference.
Information regarding the Company's audit committee financial expert is set
forth under the heading "Meetings and Committees of
66
Board of Directors-Committee Membership" in our Proxy Statement and is
incorporated by reference.
On February 25, 2004, consistent with the requirements of Sarbanes-Oxley, the
Company adopted a Code of Ethics applicable to senior financial officers
including the principal executive officer. The Code of Ethics was filed as
Exhibit 99 to our 2003 Annual Report and can be accessed electronically by
visiting the Company's website at www.glacierbancorp.com.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding "Executive Compensation" is set forth under the headings
"Meetings and Committees of the Board of Directors - Compensation of Directors"
and "Executive Compensation" of the Company's Proxy Statement and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding "Security Ownership of Certain Beneficial Owners and
Management" is set forth under the headings "Information with Respect to
Nominees and Other Directors," "Security Ownership of Certain Beneficial Owners
and Management - Executive Officers who are not Directors" and "Beneficial
Owners" of the Company's Proxy Statement and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding "Certain Relationships and Related Transactions" is set
forth under the heading "Transactions with Management" of the Company's Proxy
Statement and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information regarding "Principal Accounting Fees and Services" is set forth
under the heading "Auditors" of the Company's Proxy Statement and is
incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) and (2) Financial Statements and Financial Statement Schedules
The financial statements and related documents listed in the index set forth in
Item 8 of this report are filed as part of this report.
All other schedules to the consolidated financial statements required by
Regulation S-X are omitted because they are not applicable, not material or
because the information is included in the consolidated financial statements or
related notes.
67
(1) The following exhibits are included as part of this Form 10-K:
EXHIBIT NO. EXHIBIT
- ----------- -------
3(a) Amended and Restated Certificate of Incorporation (1)
3(b) Amended and Restated Bylaws (2)
10(a) 1989 Incentive Stock Option Plan (3)
10(b) Employment Agreement dated January 1, 2005 between the Company, Glacier
Bancorp, Inc. and Michael J. Blodnick
10(c) Employment Agreement dated January 1, 2005 between the Company, Glacier Bancorp,
Inc. and James H. Strosahl
10(d) Employment Agreement dated January 1, 2005 between First Security Bank of Missoula
and William L. Bouchee
10(e) 1994 Director Stock Option Plan and related agreements (4)
10(f) 1995 Employee Stock Option Plan and related agreements (4)
10(g) Deferred Compensation Plan effective January 1, 2005
10(h) Supplemental Executive Retirement Agreement
10(i) Employment agreement dated January 1, 2005, between Mountain West Bank and Jon
W. Hippler
14 Code of Ethics (5)
21 Subsidiaries of the Company (See item 1, "Subsidiaries")
23 Consent of KPMG LLP
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of
2002
(1) Incorporated by reference to exhibit 3.i.1 and 3.i.2
included in the Company's Quarterly Report on form 10-Q for
the quarter ended June 30, 2004.
(2) Incorporated by reference to Exhibit 3.ii included in the
Company's Quarterly Report on form 10-Q for the quarter ended
June 30, 2004.
(3) Incorporated by reference to exhibit 10 (a) included in the
Company's Registration Statement on Form S-4 (No. 33-37025),
declared effective on October 4, 1990.
(4) Incorporated by reference to Exhibit 99.1 of the
Company's S-8 Registration Statement (No. 333-105995).
(5) Incorporated by reference to Exhibit 14, included in the
Company's Form 10-K for the year ended December 31, 2003.
(6) Exhibit intentionally omitted.
68
SIGNATURES
PURSUANT to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on March 15, 2005.
GLACIER BANCORP, INC.
By: /s/ Michael J. Blodnick
----------------------------------
Michael J. Blodnick
President/CEO/Director
PURSUANT to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on March 15, 2005, by the following persons in the
capacities indicated.
/s/ Michael J. Blodnick President, CEO, and Director
- -----------------------
Michael J. Blodnick (Principal Executive Officer)
/s/James H. Strosahl Executive Vice President and CFO
- --------------------
James H. Strosahl (Principal Financial/Accounting Officer)
Majority of the Board of Directors
/s/ John S. MacMillan Chairman
- ---------------------
John S. MacMillan
/s/ William L. Bouchee Director
- ----------------------
William L. Bouchee
/s/ James M. English Director
- --------------------
James M. English
/s/ Allen Fetscher Director
- ------------------
Allen J. Fetscher
/s/ Fred J. Flanders Director
- --------------------
Fred J. Flanders
/s/ Jon W. Hippler Director
- ------------------
Jon W. Hippler
/s/ L. Peter Larson Director
------------------
L. Peter Larson
/s/ Everit A. Sliter Director
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Everit A. Sliter
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